SGXP Sgx Pharmaceuticals (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ		Preliminary Proxy Statement

o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o		Definitive Proxy Statement

o		Definitive Additional Materials

o		Soliciting Material Pursuant to Sec. 240.14a-12

SGX Pharmaceuticals, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.

þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	1)		Title of each class of securities to which transaction applies:
			Common Stock, par value $0.001 per share, of SGX Pharmaceuticals, Inc. (“Company Common Stock”)
	2)		Aggregate number of securities to which transaction applies:
			20,656,153 shares of Company Common Stock;
			749,267 shares of Company Common Stock issuable upon the exercise of options with an exercise price per share of less than $3.00 per share;
			56,251 shares of Company Common Stock issuable upon the settlement of restricted stock units; and
			115,000 shares of Company Common Stock issuable upon the exercise of warrants outstanding with an exercise price per share of less than $3.00 per share.
	3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
			The filing fee was determined based upon the sum of (A) 20,656,153 shares of Company Common Stock multiplied by $3.00 per share, (B) options to purchase 749,267 shares of Company Common Stock with exercise prices less than $3.00, multiplied by $1.94 per share (which is the difference between $3.00 and the weighted average exercise price per share of such options), (C) restricted stock units with respect to 56,251 shares of Company Common Stock, multiplied by $3.00 per share, and (D) warrants to purchase 115,000 shares of Company Common Stock with exercise prices less than $3.00 per share, multiplied by $2.00 per share (which is the difference between $3.00 and the exercise price per share of such warrants). In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.0000393 by the sum calculated in the preceding sentence.
	4)		Proposed maximum aggregate value of transaction:
			$63,820,789.98
	5)		Total fee paid:
			$2,508.16

o		Fee paid previously with preliminary materials.

o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	1)		Amount Previously Paid:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

 

SGX PHARMACEUTICALS, INC.
10505 Roselle Street
San Diego, California 92121

 

Dear Stockholder:

 

You are cordially invited to attend a special meeting of stockholders of SGX Pharmaceuticals, Inc., a Delaware corporation, referred to as “SGX,” the “Company,” “us,” or “we,” to be held at 9:00 a.m., California time, on          , 2008, at SGX’s corporate headquarters located at 10505 Roselle Street, San Diego, California 92121.

 

At the special meeting we will ask you to consider and to vote upon a proposal to adopt the merger agreement under which SGX would be acquired by Eli Lilly and Company, an Indiana corporation, or “Lilly”. We entered into the merger agreement on July 8, 2008. If the merger is completed, each of your shares of our common stock will be converted into the right to receive $3.00 in cash, without interest and less any applicable withholding taxes. The merger consideration of $3.00 per share of our common stock represents an approximately 110% premium over the closing price of our common stock on The Nasdaq Global Market on July 7, 2008, the day before we announced that we entered into the merger agreement. Upon completion of the merger, our common stock, which is listed on The Nasdaq Global Market under the symbol “SGXP,” will no longer be listed.

 

This proxy statement is furnished in connection with the solicitation by our board of directors, or our board, of proxies to be used at the special meeting of stockholders of SGX.

 

After careful consideration, our board unanimously approved the merger agreement and determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, the Company and our stockholders, and unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. Therefore, our board recommends that you vote “FOR” the adoption of the merger agreement.

 

Our board considered a number of factors in evaluating the merger, in consultation with our legal and financial advisors. Included in the enclosed proxy statement is the full text of the written opinion of our financial advisor, Lazard Frères & Co. LLC, to the effect that, as of July 8, 2008, and based upon and subject to the considerations set forth in its opinion, the merger consideration is fair to the stockholders of the Company from a financial point of view.

 

In connection with the merger agreement, certain SGX stockholders, including certain executive officers and directors, who beneficially owned, in the aggregate, approximately 26% of the outstanding shares of our common stock as of the record date, entered into a voting agreement with Lilly. Pursuant to the voting agreement, each stockholder party to such agreement has agreed, subject to limited exceptions, to vote all shares of our common stock that he, she or it owns as of the record date, in favor of adoption of the merger agreement.

 

Your vote is very important. Adoption of the merger agreement requires the affirmative vote of the holders of a majority of our common stock outstanding and entitled to vote at the special meeting.

 

Only holders of record of shares of our common stock at the close of business on July 16, 2008 will be entitled to vote at the special meeting. Whether or not you plan to attend the special meeting, it is important that your shares, regardless of the number, be represented. Accordingly, please complete, sign, date and return your proxy card in the envelope which has been enclosed for your convenience. If you hold your shares in “street name,” you should instruct your broker how to vote in accordance with your voting instruction form. Completing a proxy now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote. Failure to submit a signed proxy or to vote in person at the special meeting will have the same effect as a vote against the adoption of the merger agreement.

The enclosed proxy statement explains the proposed merger, the merger agreement and the transactions contemplated by the merger agreement and provides specific information concerning the special meeting. Please read the entire proxy statement carefully.

 

Sincerely,

 

Michael Grey

President and Chief Executive Officer

 

 

San Diego, California
          , 2008

 

This proxy statement is dated          , 2008, and is first being mailed to SGX stockholders on or about          , 2008.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT, PASSED UPON THE MERITS OR FAIRNESS OF SUCH TRANSACTIONS, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

SGX PHARMACEUTICALS, INC.
10505 Roselle Street
San Diego, California 92121

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

 

We cordially invite you to attend a special meeting of stockholders of SGX Pharmaceuticals, Inc., a Delaware corporation, referred to as “SGX,” the “Company,” “us,” or “we”. This special meeting will be held at 9:00 a.m., California time, on          , 2008, at SGX’s corporate headquarters located at 10505 Roselle Street, San Diego, California 92121, for the following purposes:

 

 

Our board of directors, or our board, has fixed July 16, 2008, as the record date, and only holders of record of SGX common stock at the close of business on that date will be entitled to notice of, and to vote at, the special meeting. In connection with the proposed merger, you may be entitled to assert dissenters’ rights under Delaware law.

 

After careful consideration, our board unanimously approved the merger agreement and determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, SGX and our stockholders, and unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. Therefore, our board recommends that you vote “FOR” the adoption of the merger agreement.

 

Your vote is very important. Adoption of the merger agreement requires the affirmative vote of the holders of a majority of our common stock outstanding and entitled to vote at the special meeting.

You are cordially invited to be present and to vote at the special meeting in person. Whether or not you plan to attend the special meeting, it is important that your shares, regardless of the number, be represented. Accordingly, you are requested to complete, sign, date and return the enclosed proxy in the enclosed postage-paid and addressed envelope. If you have returned a signed proxy but elect to attend the special meeting and vote in person, you will be entitled to vote. Failure to submit a signed proxy or to vote in person at the special meeting will have the same effect as a vote “AGAINST” the approval of the merger agreement.

 

By Order of the Board of Directors,

 

Michael Grey

President and Chief Executive Officer

 

 

San Diego, California

          , 2008

ADDITIONAL INFORMATION

 

This document incorporates important business and financial information about us from documents that are not included in or delivered with this document. See “Where You Can Find More Information” on page 65. You can obtain documents incorporated by reference in this document from us by requesting them in writing at 10505 Roselle Street, San Diego, California 92121, Attn: Corporate Secretary, or by calling 858-558-4850. You will not be charged for any of these documents that you request. If you wish to request documents, you should do so by          , 2008 in order to receive them before the special meeting.

 

If you have additional questions about the merger or require assistance in submitting proxies or voting shares of our common stock, or if you would like to receive additional copies of the proxy statement or the enclosed proxy card, please contact Georgeson Inc.:

 

Georgeson Inc.

199 Water Street

New York, NY 10038

 

Banks and Brokers Call: 212-440-9800

All Others Call Toll Free: 877-278-6774

TABLE OF CONTENTS

 

 

This summary term sheet highlights selected information from this proxy statement with respect to the merger and may not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the terms of the merger, you should read this entire proxy statement carefully, including the annexes, and the documents we refer to or incorporate by reference herein. We encourage you to read each of these documents, in particular the merger agreement.

 

Except as otherwise specifically noted in this proxy statement, “merger” refers to the merger contemplated by the merger agreement, and “transactions” refers to the transactions contemplated by the merger agreement.

 

The merger agreement provides that Merger Sub will merge with and into SGX, with SGX continuing after the merger as the surviving corporation. As a result of the merger, we will become a wholly-owned subsidiary of Lilly, shares of our common stock will no longer be listed on any stock exchange or quotation system and each outstanding share of our common stock will be converted into the right to receive $3.00 in cash, without interest, less any applicable withholding taxes.

 

SGX Pharmaceuticals, Inc.   We are a biotechnology company focused on the discovery, development and commercialization of novel, targeted therapeutics directed at addressing unmet medical needs in oncology. Our principal executive offices are located at 10505 Roselle Street, San Diego, California 92121, and our telephone number is 858-558-4850.

 

Eli Lilly and Company.   Eli Lilly and Company, a leading innovation-driven corporation, is developing a growing portfolio of first-in-class and best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Indiana, Lilly provides answers — through medicines and information — for some of the world’s most urgent medical needs. Lilly manufactures and distributes its products through owned or leased facilities in the United States, Puerto Rico, and 25 other countries. Lilly products are sold in approximately 135 countries. Lilly’s principal executive offices are located at Lilly Corporate Center, Indianapolis, Indiana 46285, and its telephone number is 317-276-2000.

 

REM Merger Sub, Inc.   REM Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Lilly, was organized solely for the purpose of entering into the merger agreement with us and completing the merger. Merger Sub was incorporated on July 3, 2008 and has not conducted any business operations. Merger Sub’s principal executive offices are located at Lilly Corporate Center, Indianapolis, Indiana 46285, and its telephone number is 317-276-2000.

 

We are furnishing this proxy statement to our stockholders as part of the solicitation of proxies by our board of directors, or our “board”, for use at the special meeting.

 

Date, Time and Place.   The special meeting will be held at 9:00 a.m., California time, on          , 2008, at our corporate headquarters located at 10505 Roselle Street, San Diego, California 92121.

 

Purpose.   You will be asked to consider and vote upon a proposal to adopt the merger agreement. You may also be asked to transact such other business as may properly come before the special meeting or any adjournment, postponement or continuance thereof.

 

Record Date; Stockholders Entitled to Vote.   Our board has fixed July 16, 2008, as the record date, and only those of our stockholders who are shown by our records to have owned shares of our common stock as of the close of business on the record date will be entitled to receive notice of, and to vote at, the special meeting. The only outstanding class of our stock is our common stock, par value $0.001 per share. As of the close of business on the record date,           shares of our common stock were outstanding. Each holder of record of our common stock

on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

 

Voting and Proxies.   You should complete, sign and date the accompanying proxy and promptly return it in the enclosed postage-paid return envelope. Brokers or banks holding shares in “street name” may vote your shares on the adoption of the merger agreement only if you provide instructions on how to vote. Brokers or banks will provide you with directions on how to instruct the broker or bank to vote your shares. All properly executed proxies that we receive prior to the vote at the special meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxies. If no direction is indicated on a properly executed proxy returned to us, the underlying shares will be voted “ FOR ” the adoption of the merger agreement and in the discretion of the proxy holder(s) on any other matter that may properly be brought before the special meeting.

 

Revocability of Proxy.   You may revoke your proxy prior to its exercise. You may do this by (i) delivering to our Corporate Secretary at 10505 Roselle Street, San Diego, California 92121, prior to the special meeting, an instrument of revocation or another proxy bearing a date or time later than the date or time of the proxy being revoked or (ii) voting in person at the special meeting. Mere attendance at the special meeting will not serve to revoke your proxy.

 

Quorum.   A quorum must be present to transact business at the special meeting. A quorum will be present at the special meeting if a majority of all of our shares of common stock issued and outstanding on the record date and entitled to vote at the special meeting are represented at the special meeting in person or by a properly executed proxy. If you submit a properly executed proxy card, even if you abstain from voting, your shares will be counted for purposes of determining whether a quorum is present at the special meeting. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

 

Vote Required.   Adoption of the merger agreement requires the affirmative vote of holders of a majority of our shares of common stock outstanding and entitled to vote at the special meeting. Any proposal to adjourn or postpone the special meeting or on any other matter to be voted upon at the special meeting requires the affirmative vote of a majority of the shares represented in person or by proxy entitled to vote on the matter and actually voted on the matter for approval. In connection with the merger agreement, certain SGX stockholders, including certain executive officers, who beneficially owned, in the aggregate, approximately 26% of the outstanding shares of our common stock as of the record date, entered into a voting agreement with Lilly. Pursuant to the voting agreement, each stockholder party to such agreement has agreed, subject to limited exceptions, to vote all shares of our common stock that he, she or it owns as of the record date, in favor of adoption of the merger agreement. For a description of the voting agreement, see “The Voting Agreement” below.

 

Effect of Abstentions and Broker Non-Votes.   Both abstentions and “broker non-votes” will be counted in determining whether a quorum is present at the special meeting. Abstentions, “broker non-votes” and shares not in attendance and not voted at the special meeting will have the same effect as a vote “ AGAINST ” the proposal to adopt the merger agreement. Abstentions and broker non-votes will have no effect on the outcome of any vote to adjourn or postpone the special meeting or any other matter properly brought before the special meeting. It is very important that as many stockholders as possible vote their shares, so please promptly complete, sign, date and return the enclosed proxy card.

 

Solicitation of Proxies and Expenses.   The solicitation of proxies is being made initially by mail. Directors, officers and other employees of the Company may solicit proxies in person, by telephone, electronically, by mail or other means, but they will not be specifically compensated for these services. We will reimburse brokers, banks and other persons for expenses they incur in forwarding proxy material to obtain voting instructions from beneficial stockholders. The total cost of solicitation of proxies will be borne by us. We have hired Georgeson Inc., a solicitation firm, to help facilitate the solicitation process. For a description of the costs and expenses to us of soliciting proxies, see “The Special Meeting — Solicitation Costs” below.

 

Stockholders Should Not Send In Their Stock Certificates with Their Proxies.   A transmittal form with instructions for the surrender of certificates representing shares of our common stock will be mailed to you if the merger is completed.

 

After careful consideration, our board unanimously approved the merger agreement and determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, SGX and our stockholders, and unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. Therefore, our board recommends that you vote “ FOR ” the adoption of the merger agreement and “ FOR ” the adjournment, postponement or continuation of the special meeting to a later date, if necessary or appropriate, to solicit additional proxies in favor of the proposal to adopt the merger agreement.

 

In connection with the merger, on July 8, 2008, our financial advisor, Lazard Frères & Co. LLC, which we refer to as “Lazard”, rendered its oral opinion to our board, subsequently confirmed in writing, that, as of such date, and based upon and subject to the assumptions, procedures, factors, qualifications and limitations set forth therein, the per share merger consideration to be paid to holders of our common stock (other than shares of our common stock held by holders who are entitled to and properly demand an appraisal of their shares of our common stock and shares of our common stock held in our treasury or owned by Merger Sub, Lilly or any wholly-owned subsidiary of us or of Lilly), in the merger was fair, from a financial point of view, to such holders.

 

The full text of Lazard’s written opinion, dated July 8, 2008, which sets forth the assumptions made, procedures followed, factors considered, and qualifications and limitations on the review undertaken by Lazard in connection with its opinion is attached to this proxy statement as Annex C and is incorporated into this proxy statement by reference. We encourage you to read Lazard’s opinion, and the section entitled “The Merger — Opinion of Lazard Frères & Co. LLC” beginning on page 25, carefully and in their entirety. Lazard’s opinion was directed to our board for the information and assistance of our board in connection with its evaluation of the consideration to be paid to the holders of our common stock in the merger. Lazard’s opinion did not address any other aspect of the merger and was not intended to and does not constitute a recommendation to any holder of our common stock as to how such holder should vote or act with respect to the merger or any matter relating thereto.

 

In making its recommendation that you vote “ FOR ” the proposal to adopt the merger agreement, our board considered a number of factors, including the following:

 

 

 

In the course of deliberations, our board also considered a variety of risks and potentially negative factors, including:

 

 

The rights and obligations of the parties to the merger agreement are governed by the specific terms and conditions of the merger agreement and not by any summary or other information in this proxy statement. Therefore, the information in this proxy statement regarding the merger agreement and the merger is qualified in its entirety by reference to the merger agreement, a copy of which is attached as Annex A to this proxy statement.

 

Structure of the Merger.   Upon the terms and conditions of the merger agreement, Merger Sub will merge with and into SGX, with SGX continuing after the merger as the surviving corporation. SGX will become a wholly-owned subsidiary of Lilly. You will have no equity interest in SGX or Lilly after the merger.

 

SGX Common Stock.   At the effective time of the merger, each share of our common stock will be converted into the right to receive $3.00 in cash, without interest and less any applicable withholding taxes.

 

SGX Stock Options.   In connection with the merger: (i) each option to purchase our common stock granted under our 2005 Equity Incentive Plan, or “2005 Plan”, that is outstanding immediately prior to the effective time of the merger, will be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding; and (ii) each option to purchase our common stock granted under our 2000 Equity Incentive Plan, or “2000 Plan”, or our 2005 Non-Employee Directors’ Stock Option Plan, or “NEDSOP”, to the extent not vested, will be accelerated in full to a date prior to the effective time of the merger (as determined by our board) and such options will terminate at the effective time of the merger if not exercised prior to the effective time; provided, that , each such option with an exercise price per share less than $3.00 that remains outstanding and unexercised immediately prior to the effective time of the merger, shall be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding.

 

No payment will be made with respect to stock options that have per share exercise prices above $3.00 and such options will be canceled and terminated in accordance with their terms.

 

SGX Restricted Stock and Restricted Stock Units.   In connection with the merger, each share of restricted stock and each restricted stock unit outstanding immediately prior to the effective time of the merger will be treated as the corresponding number of shares of common stock as of the effective time of the merger in the same manner as

other outstanding shares of common stock issued and outstanding as of immediately prior to the effective time of the merger.

 

SGX Warrants.   In connection with the merger, each warrant to purchase our common stock outstanding immediately prior to the effective time of the merger will cease to represent a right to acquire shares of our common stock and will be converted into the right to receive (upon surrender of the warrant) an amount in cash, without interest, equal to the product of the number of shares of our common stock subject to such warrant multiplied by the excess, if any, of (i) $3.00 per share over (ii) the exercise price per share of such warrant, subject to applicable tax withholding.

 

No payment will be made with respect to warrants that have per share exercise prices above $3.00.

 

SGX ESPP.   Immediately before the effective time of the merger, our 2005 Employee Stock Purchase Plan, or “ESPP”, will terminate. At such time, each right to purchase shares of our common stock under our ESPP will be automatically exercised by applying the payroll deductions of each participant in the ESPP for the applicable Purchase Period (as defined in the ESPP) to the purchase of a number of whole shares of our common stock at an exercise price per share of our common stock equal to 85% of the merger consideration, which shares will then be canceled, immediately prior to the effective time of the merger, and converted into the right to receive the merger consideration. Excess payroll deductions not used as a result of ESPP share limitations or fractional shares will be distributed to the holders without interest.

 

Dissenters’ Shares.   Shares of our common stock that are outstanding immediately prior to the merger and held by any dissenting stockholder who properly perfects his, her or its dissenters’ rights will not be converted into the right to receive the merger consideration. Instead, the dissenting stockholder will be entitled to an appraisal and payment for his, her or its dissenting shares in accordance with and subject to Section 262 of the Delaware General Corporation Law, or the “DGCL”. For more information regarding dissenters’ rights, see “Dissenters’ Rights” on page 55 of this proxy statement. In addition, a copy of Section 262 of the DGCL, is attached as Annex D to this proxy statement.

 

Directors and Officers of SGX Following the Merger.   Following the merger, none of our directors will serve as directors of the surviving corporation, and the directors and officers of Merger Sub will be the initial directors of the surviving corporation.

 

Employee Matters.   For a period of one year following the effective time of the merger, Lilly has agreed to provide our employees who are located in the United States and retained by Lilly with employee benefits that are substantially comparable in the aggregate to those benefits provided to such employees immediately prior to the merger. However, Lilly will be under no obligation to retain any of our employees other than as required by applicable law or an employment agreement.

 

Our Conduct Prior to the Merger.   The merger agreement subjects us to various affirmative and negative covenants until the earlier of the consummation of the merger and termination of the merger agreement. See “The Merger Agreement — Conduct of Our Business Prior to the Merger”.

 

Conditions of the Merger.   A number of conditions must be satisfied or waived before the merger can be completed. The most important of these include:

 

 

 

We cannot offer any assurance that all of the conditions will be satisfied or waived or that the merger will occur.

 

Termination of the Merger Agreement and Termination Fee.   The merger agreement contains provisions addressing the circumstances under which we or Lilly may terminate the merger agreement. See “The Merger Agreement — Termination”. Upon termination of the merger agreement under specified circumstances, we may be required to pay Lilly a $2.0 million termination fee, plus an additional amount not to exceed $250,000 for expenses of Lilly. See “The Merger Agreement — Termination Fee”.

 

As a condition of, and an inducement to, Lilly entering into the merger agreement, on the date the merger agreement was executed, each of Michael Grey, Stephen K. Burley, W. Todd Myers, Siegfried Reich, Karin Eastham, Christopher S. Henney, Atlas Venture Fund IV, L.P., and its affiliated entities that hold shares of our common stock, and BAVP, L.P. (which is an affiliate of Louis Bock, a member of our board), who collectively beneficially owned approximately 26% of the outstanding shares of our common stock as of the record date, entered into a voting agreement with Lilly to vote his, her or its shares of our common stock in favor of the adoption of the merger agreement and against any inconsistent proposals or transactions.

 

Pursuant to the voting agreement, each of these stockholders granted an irrevocable proxy to Lilly and irrevocably appointed Lilly as his, her or its proxy to vote his, her or its shares of our common stock in favor of the adoption of the merger agreement and against any inconsistent proposals or transactions.

 

The voting agreement, and the stockholders’ obligations thereunder, will terminate upon the earlier to occur of the consummation of the merger, the termination of the merger agreement, the amendment of the merger agreement in a way that adversely affects such stockholder without such stockholder’s consent or, with respect to any stockholder party to the voting agreement, the written agreement of such stockholder and Lilly.

 

The voting agreement is attached as Annex B to this proxy statement. For a more complete description of the voting agreement, see “The Voting Agreement” beginning on page 53.

 

If you are a U.S. holder of our common stock, the merger will be a taxable transaction to you. For U.S. federal income tax purposes, your receipt of cash in exchange for your shares of our common stock generally will cause you to recognize a gain or loss measured by the difference, if any, between the cash you receive in the merger and your adjusted tax basis in your shares.

 

You should read “The Merger — Material United States Federal Income Tax Consequences” below for a more complete discussion of the United States federal income tax consequences of the merger. Tax matters can be complicated and the tax consequences of the merger to you will depend on your particular circumstances. We urge you to consult your own tax advisor to understand fully the tax consequences of the merger to you (including the application and effect of any state, local, or foreign income and other tax laws).

 

When considering the recommendation of our board with respect to the adoption of the merger agreement, you should be aware that some of our directors and executive officers have interests in the merger that may be different from, and in addition to, their interests as stockholders and the interests of our stockholders generally. Our board was aware of these interests during its deliberations on the merits of the merger and in deciding to recommend that you vote for the adoption of the merger agreement at the special meeting. For a more detailed discussion of these interests, see “The Merger — Interests of Our Directors and Executive Officers in the Merger” below.

 

This proxy statement, and the documents to which we refer you in this proxy statement, include forward-looking statements based on estimates and assumptions. There are forward-looking statements throughout this proxy statement, including, without limitation, under the headings “Summary Term Sheet,” “The Special Meeting,” “The Merger,” “Opinion of Lazard Frères & Co. LLC” and in statements containing words such as “believes,” “estimates,” “anticipates,” “continues,” “predict,” “potential,” “contemplates,” “expects,” “may,” “will,” “likely,” “could,” “should” or “would” or other similar words or phrases. These statements are subject to risks, uncertainties, and other factors, including, among others:

 

 

We discuss some of the above risks in greater detail under the heading to this proxy statement titled “Risk Factors”. In addition, we are subject to risks and uncertainties and other factors detailed in our filings with the Securities and Exchange Commission, or “SEC”, including our annual report on Form 10-K for the fiscal year ended December 31, 2007 and our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2008 and in subsequent filings with the SEC, which should be read in conjunction with this proxy statement. See “Where You Can Find More Information” on page 65. Many of the factors that will impact the completion of the proposed merger are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained in this proxy statement, readers should not place undue reliance on forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made in this proxy statement remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements, except as required by law.

 

The following questions and answers are intended to address some commonly asked questions regarding the merger and the special meeting. These questions and answers may not address all questions that may be important to you as a SGX stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully.

 

 

 

To consummate the merger, the merger agreement must be adopted by the affirmative vote of the holders of a majority of the shares of our common stock outstanding at the close of business on the record date. Our board is providing this proxy statement to give you information for use in determining how to vote on the proposals submitted to the stockholders at the special meeting. You should carefully read this proxy statement, the attached annexes and the documents referred to in, or incorporated by reference into, this proxy statement. The enclosed proxy card and voting instructions allow you, as a stockholder, to vote your shares without attending the special meeting in person.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In connection with the merger agreement, certain SGX stockholders, including certain executive officers and directors, who beneficially owned, in the aggregate, approximately 26% of the outstanding shares of our common stock as of the record date, entered into a voting agreement with Lilly. Pursuant to the voting agreement, each stockholder party to such agreement has agreed, subject to limited exceptions, to vote all shares of SGX common stock that he, she or it owns as of the record date, in favor of adoption of the merger agreement.

 

 

 

Q: What is the opinion of the Company’s financial advisor?

 

 

 

 

 

 

If your shares of our common stock are held in “street name” by your broker, be sure to give your broker instructions on how you want to vote your shares because your broker will not be able to vote on the merger

proposal without instructions from you. See the question below “If my broker holds my shares in ‘street name,’ will my broker vote my shares for me?”

 

 

 

 

 

 

 

We urge you to complete, sign, date and return the enclosed proxy card as soon as possible, even if you plan to attend the special meeting, as it is important that your shares be represented and voted at the special meeting. If you attend the special meeting in person, you may vote by written ballot as you wish, even though you have previously returned your proxy card. See the question below “May I change my vote after I have mailed my signed proxy card?”

 

 

 

 

If you have instructed a broker to vote your shares, you must follow directions received from your broker to change those instructions. You cannot vote shares held in “street name” by returning a proxy card directly to us or by voting in person at the special meeting, unless you obtain a proxy card from your bank or broker.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Georgeson Inc.
199 Water Street
New York, NY 10038

Banks and Brokers Call: 212-440-9800
All Others Call Toll Free: 877-278-6774

 

We are furnishing this proxy statement to our stockholders as part of the solicitation of the enclosed proxy card by our board for use at the special meeting in connection with the proposed merger and any other items to be voted on at the special meeting. This proxy statement and the other documents attached to or incorporated by reference in this proxy statement provides our stockholders with information regarding the matters to be voted on at the special meeting.

 

We will hold the special meeting on          , 2008, at 9:00 a.m., California time at the Company’s corporate headquarters located at 10505 Roselle Street, San Diego, California 92121.

 

At the special meeting, we will ask holders of our common stock to (i) approve and adopt the merger agreement pursuant to which Merger Sub will merge with and into SGX and each share of our common stock you own at the effective time of the merger will be converted into the right to receive $3.00 in cash, without interest and less any applicable withholding taxes, (ii) vote on any proposal to adjourn, postpone or continue the special meeting to a later date to solicit additional proxies in favor of the proposal to approve and adopt the merger agreement and (iii) consider and act upon any other business that may properly come before the special meeting or any adjournments, postponements or continuations thereof.

 

After careful consideration, our board unanimously approved the merger agreement and determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, SGX and our stockholders, and unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. Therefore, our board recommends that you vote “ FOR ” the adoption of the merger agreement and “ FOR ” the adjournment, postponement or continuation of the special meeting to a later date, if necessary or appropriate, to solicit additional proxies in favor of the proposal to adopt the merger agreement.

 

Our board has fixed July 16, 2008 as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the special meeting. The only outstanding class of our stock is our common stock, par value $0.001 per share. As of the close of business on the record date,           shares of our common stock were outstanding and entitled to vote.

 

A quorum must be present to transact business at the special meeting. A quorum will be present at the special meeting if a majority of all shares of our common stock issued and outstanding on the record date and entitled to vote at the special meeting are represented at the special meeting in person or by a properly executed proxy. If you submit a properly executed proxy card, even if you abstain from voting or vote against the adoption of the merger agreement, your shares will be counted for purposes of calculating whether a quorum is present at the special meeting.

 

If a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies. If a new record date is set for the adjourned meeting, however, then a new quorum would have to be established at the adjourned meeting.

 

Adoption of the merger agreement requires the affirmative vote of holders of the majority of shares of our common stock outstanding and entitled to vote at the special meeting. If a stockholder abstains from voting or does not vote, either in person or by proxy, it will have the same effect as a vote “ AGAINST ” the proposal to adopt the merger agreement. If a broker holds a stockholder’s shares of our common stock in its name and the stockholder

does not give the broker voting instructions, the broker may not vote the shares on the proposal to adopt the merger agreement. If a stockholder does not give a broker voting instructions and the broker does not vote the shares, this is referred to as a “broker non-vote.” An abstention occurs when a stockholder attends the special meeting, either in person or by proxy, but abstains from voting or does not vote. Abstentions, broker non-votes and shares not present and not voted at the special meeting have the same effect as votes “ AGAINST ” the proposal to adopt the merger agreement.

 

Any proposal to adjourn or postpone the special meeting to permit further solicitation of proxies requires the affirmative vote of a majority of the shares represented in person or by proxy, entitled to vote on the matter and actually voted on the matter for approval. Abstentions, broker non-votes and shares not voted will have no effect on the outcome of any proposal to adjourn or postpone the special meeting.

 

You are requested to complete, sign and date the enclosed proxy card and promptly return it in the enclosed postage-paid return envelope. There are two ways to vote our common stock at the special meeting:

 

 

You may revoke your proxy prior to its exercise. You may do this by (i) delivering to our Corporate Secretary a written notice stating that you would like to revoke your proxy (the written notice must bear a date later than the proxy card and be received before the taking of the vote at the special meeting); (ii) completing, executing and delivering to our Corporate Secretary a new, later-dated proxy card for the same shares, provided the new proxy card is received before the taking of the vote at the special meeting; or (iii) attending the special meeting and voting in person. Your attendance alone at the special meeting will not revoke your proxy.

 

We will pay the expenses of soliciting proxies for the special meeting. Solicitation of proxies may be made by means of personal calls upon, or telephonic or electronic communications with, stockholders or their personal representatives by our directors, officers and employees who will not be specially compensated for such services. Although there is no formal agreement to do so, we may reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding this proxy statement to stockholders whose common stock is held of record by such entities. We have retained Georgeson Inc., a proxy solicitation firm, to solicit proxies in connection with the special meeting at a cost of $15,000 plus expenses.

 

Holders of our common stock should not send stock certificates with their proxies. Separate transmittal documents for the surrender of our common stock certificates in exchange for the merger consideration will be mailed to holders of our common stock if and when the merger is completed.

 

SGX Pharmaceuticals, Inc.   We are a biotechnology company focused on the discovery, development and commercialization of novel, targeted therapeutics directed at addressing unmet medical needs in oncology. Our most advanced drug development programs target the c-MET receptor tyrosine kinase, or “MET”, an enzyme implicated in a broad array of cancers, and the BCR-ABL tyrosine kinase enzyme, for treatment of Chronic Myelogenous Leukemia, a cancer of the bone marrow. Our earlier stage drug discovery activities are focused on a portfolio of other protein and enzyme targets that have been implicated in human cancers. Our principal executive offices are located at 10505 Roselle Street, San Diego, California 92121, and our telephone number is 858-558-4850.

 

Eli Lilly and Company.   Lilly, a leading innovation-driven corporation, is developing a growing portfolio of first-in-class and best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Indiana, Lilly provides answers — through medicines and information — for some of the world’s most urgent medical needs. Lilly manufactures and distributes its products through owned or leased facilities in the United States, Puerto Rico, and 25 other countries. Lilly products are sold in approximately 135 countries. Lilly’s principal executive offices are located at Lilly Corporate Center, Indianapolis, Indiana 46285, and its telephone number is 317-276-2000.

 

REM Merger Sub, Inc.   REM Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Lilly, or “Merger Sub”, was organized solely for the purpose of entering into the merger agreement with us and completing the merger. Merger Sub was incorporated on July 3, 2008 and has not conducted any business operations. Merger Sub’s principal executive offices are located at Lilly Corporate Center, Indianapolis, Indiana 46285, and its telephone number is 317-276-2000.

 

The discussion in this proxy statement of the merger and the principal terms of the merger agreement is subject to, and is qualified in its entirety by reference to, the merger agreement, a copy of which is attached to this proxy statement as Annex A . You should read the entire merger agreement carefully.

 

As a part of the ongoing evaluation of our business, our board and members of our senior management regularly review and assess opportunities to achieve long-term strategic goals. During this ongoing review process, members of our senior management, in conjunction with our board, have considered potential opportunities for business combinations, acquisitions, dispositions, internal restructurings and other strategic alternatives.

 

Following the announcement in August 2006 of the termination of our Phase II/III clinical trial for Troxatyl, our board explored a number of strategic alternatives. At a regularly scheduled board meeting on September 28, 2006, our board agreed to retain Canadian Imperial Bank of Commerce, or CIBC, to provide financial advisory services in connection with our board’s review of a range of strategic and financial alternatives, including to help us identify potential merger and acquisition opportunities.

 

Between the third quarter of 2006 and May 2007, CIBC and our board considered more than 60 potential merger and acquisition candidates, and ultimately focused on approximately 30 companies, including Lilly. Most of the companies considered were merger of equals candidates. Included in these 30 companies were seven larger companies which, in varying degrees of detail, evaluated the possibility of acquiring SGX. Members of our management team and CIBC engaged in preliminary exploratory discussions with several of these larger companies as well as other parties. During this period, our board’s most extensive discussions were with a large biotechnology company in the first quarter of 2007. Ultimately, however, this party decided not to move forward with an acquisition of SGX for its own strategic reasons.

 

Aside from the more extensive discussions with the large biotechnology company described above, none of the merger opportunities that our board considered through May 2007 were pursued due to inadequate valuation and/or

product opportunities and none of the discussions led to an acquisition or merger proposal. Some of the larger companies we had discussions with expressed interest in exploring potential partnering opportunities with respect to one of our most advanced drug development programs targeting the MET receptor tyrosine kinase, an enzyme implicated in a broad array of solid and blood tumors, rather than acquiring SGX. At its meeting on May 17, 2007, our board resolved to discontinue proactively seeking merger and acquisition opportunities and to focus on MET program partnering opportunities. Our engagement with CIBC was terminated on May 18, 2007.

 

From mid-May to October 2007, our board focused on partnering opportunities for our MET program. Our board retained Lazard on July 16, 2007 to provide further assistance in connection with exploring such opportunities. During this period, we received multiple term sheets with respect to partnering our MET program, including from Lilly, and ultimately entered into separate contract discussions with two companies as potential partners for our MET program. While our separate discussions with each of these companies progressed to near final agreement, in September and October 2007, respectively, both potential partners decided not to move forward on the terms that were being negotiated at that time. During a telephonic meeting on October 31, 2007, our board decided to delay the further exploration of partnering opportunities for our MET program until Phase I clinical data was available. In addition, our board decided to evaluate the possibility of raising capital through a private investment in public equity, or “PIPE,” transaction.

 

In November 2007, we completed a PIPE transaction pursuant to which we raised approximately $25.0 million in gross proceeds. In connection with the PIPE transaction, Lazard served as our exclusive placement agent and received a fee of approximately $1.6 million, commensurate with amounts typically paid to placement agents in PIPE transactions.

 

On December 3, 2007, we announced that we had submitted an investigational new drug, or “IND,” application to the U.S. Food and Drug Administration for SGX523, our lead MET product candidate at that time.

 

On January 16, 2008, we announced that we had opened enrollment in two Phase I studies designed to evaluate the safety, tolerability and pharmacokinetic profile of our lead MET product candidate, and treated the first patient.

 

On March 27, 2008, we announced that we had observed dose limiting toxicity earlier than anticipated in the Phase I studies of our lead MET product candidate and that its future development path was uncertain. Following this announcement, we and our board evaluated a number of potential strategic alternatives, including renewed focus on partnering activities, evaluating standalone financing opportunities and an exploration of potential merger and acquisition opportunities.

 

On April 8, 2008, our Chief Executive Officer, Mike Grey, received a call from representatives of Lilly, during which the representatives of Lilly indicated interest in strategic discussions between SGX and Lilly, including discussions with respect to a potential acquisition of SGX.

 

Our board held a conference call on April 11, 2008 to review our strategic alternatives. Our board, taking into consideration the financing environment, general market conditions, our cash position and projected cash requirements, the status of partnering discussions and revenue expectations, the stage of our discovery and development programs and the prospects for financing our continuing discovery and product development activities through partnering or financing alternatives, determined that a merger or acquisition transaction should be explored. In light of the prior strategic discussions during late 2006 and 2007, our board directed our management and Lazard to conduct a focused process to identify potential merger or acquisition candidates. Following this authorization, we began working with Lazard to compile an initial list of potential merger and acquisition candidates and to contact the companies that we believed might have an interest in pursuing a potential transaction based on our prior discussions during late 2006 and 2007. This list included, among other companies, Lilly, Company A, a mid-cap publicly-traded biotechnology company, Company B, another mid-cap publicly-traded biotechnology company, and Company C, a large publicly-traded biotechnology company. All of the companies on the list, except one, had previously been contacted in connection with the strategic process conducted by CIBC during the third quarter of 2006 and through May 2007 and/or by Lazard during the MET partnering discussions during the latter half of 2007.

 

On April 11, 2008, following the meeting of our board, Mr. Grey called a representative of Lilly to discuss a potential merger or acquisition. During the call, we agreed to proceed with exploratory meetings with Lilly regarding a merger or acquisition.

On April 14, 2008, the first scientific meeting between members of our management team and Lilly took place in San Diego. Lilly attendees included representatives from various disciplines and organizations within Lilly.

 

On April 15, 2008, Mr. Grey called a representative of Company A to explore interest in a merger or acquisition transaction between SGX and Company A. Company A had previously conducted extensive due diligence on our drug discovery and development programs in connection with partnering discussions and expressed potential interest in exploring a broader strategic relationship.

 

During the week of April 14, 2008, representatives of Lazard called representatives of Company B to explore interest in a possible merger or acquisition transaction between SGX and Company B. Mr. Grey followed up with a call during the same week to a representative of Company B to express interest in a strategic transaction and to arrange a meeting with members of our management team to review our programs.

 

In mid April 2008, Mr. Grey and representatives of Lazard had initial discussions with Company A to further explore potential synergies between the companies. Representatives of Company A ultimately contacted representatives of Lazard and, in late May 2008, Company A declined to pursue strategic discussions. No particular reason for the decline was provided by Company A.

 

During the week of April 14, 2008, representatives of Lazard approached representatives of Company C and expressed interest in exploring a merger or acquisition transaction between Company C and SGX.

 

On April 17, 2008, Mr. Grey received a call from a representative of Company D, a small cap biotechnology company, expressing interest in exploring a transaction between SGX and Company D. Mr. Grey held a follow up call on April 18, 2008 with representatives of Company D, and agreed to a scientific meeting between the companies to review our programs.

 

On April 23, 2008, members of our management team met with representatives of Lilly and on April 24, 2008, members of our management team gave a presentation reviewing our programs to Lilly Research Laboratories executives.

 

On April 29, 2008, Mr. Grey held discussions regarding a potential transaction with representatives of Company C. Representatives of Company C informed Mr. Grey that Company C was not interested in pursuing discussions with respect to a potential transaction with SGX at that time because of the preclinical stage of our drug development programs.

 

On May 1, 2008, members of our management team and Lazard held a meeting with representatives of Company D to review our programs in connection with a potential merger or acquisition transaction between Company D and SGX. From approximately May 1 through May 10, 2008, members of our management team and representatives of Lazard engaged in numerous follow up discussions with representatives of Company D relating to diligence questions from Company D.

 

On May 2, 2008, members of our management team and representatives of Lazard held a meeting with Company B’s scientific team to present our drug discovery and development programs in connection with discussions regarding a potential merger or acquisition transaction between Company B and SGX.

 

On May 5, 2008, a member of our management team received a call from representatives of Company B, confirming Company B’s interest in conducting more diligence on our drug discovery and development programs.

 

On May 9, 2008, Mr. Grey held a call with a Lilly executive. The Lilly executive conveyed Lilly’s interest in proceeding with discussions regarding the acquisition of SGX and undertook to provide a letter confirming Lilly’s interest.

 

On May 13, 2008, we established a virtual data room, which included documents with respect to our research and development programs, in order to facilitate due diligence by Lilly and Company B. In connection with this process, our representatives responded to numerous follow up questions from Lilly and Company B as well as periodic diligence requests from Company D.

 

On May 14, 2008, we received a letter from Lilly confirming its interest in pursuing an acquisition of SGX but which did not indicate the terms pursuant to which it would be willing to proceed.

On May 14, 2008, Mr. Grey met with a representative of Company D, during which the representative of Company D expressed Company D’s interest in a possible transaction following its diligence and Company D undertook to provide a written proposal to us.

 

On May 19, 2008, we received a letter from Company D proposing a stock-for-stock acquisition at a price range between $1.35 and $1.59 per share based upon a fixed exchange ratio depending on SGX’s net cash balance as of the completion of the transaction.

 

Between May 19 and June 1, 2008, representatives of Lazard and various members of our management team had telephone discussions with representatives of Lilly and its financial advisor, during which Lilly was informed of our regularly scheduled board meeting on June 5, 2008 and our board’s expectation of reviewing competing acquisition proposals at that meeting, and encouraged Lilly to submit an acquisition proposal by June 4, 2008. During this period, representatives of Lazard and Lilly’s financial advisor had further discussions regarding a potential acquisition.

 

On June 1, 2008, Mr. Grey held a meeting with representatives of Company B to discuss the terms of a potential acquisition. The representative of Company B indicated Company B’s interest in proceeding with discussions but that Company B would only be able to submit a proposal following Company B’s board meeting on June 10, 2008.

 

On June 4, 2008, we received a non-binding letter from Lilly which proposed a merger for the acquisition of SGX at $2.62 per share in cash. The letter was accompanied by a request for a 30-day exclusivity period for negotiating a definitive agreement.

 

On June 5, 2008, during a board meeting, our board, together with its legal and financial advisors, reviewed various strategic alternatives, including our prospects for financing our continuing discovery and development activities through partnering opportunities and the potential stockholder value that could be created through our continued operation as a standalone company. Our board also assessed the acquisition proposals submitted by Lilly and Company D, considered preliminary financial analysis and metrics with respect to SGX and reviewed the potential benefits and risks of a sale of SGX for cash as compared to a sale for stock of a small cap pharmaceutical company as contemplated by the Company D proposal. Thereafter, our board instructed our management and representatives of Lazard to seek a better price from Lilly and to obtain a formal proposal from Company B as soon as possible. Following the board meeting, on June 5, 2008, Mr. Grey called a representative of Lilly, and a representative of Lazard called Lilly’s financial advisor to solicit a revised offer. Also on June 5, 2008, representatives of Lazard called representatives of Company B and informed Company B that Company B had until June 10, 2008 to submit a proposal, as SGX otherwise intended to enter into an exclusivity agreement with a competing third party.

 

On June 6, 2008, members of our management team and representatives of Lazard participated in calls with representatives of Lilly during which the members of our management team presented updated data with respect to certain of our research and development programs and provided an analysis supporting a higher price. Later on June 6, 2008, we received a revised and improved proposal with a price per share of $2.76 in cash and a revised exclusivity letter from Lilly. Also on June 6, 2008, Mr. Grey placed a call to a representative of Lilly during which Mr. Grey indicated that the timing of our board meeting scheduled for June 9, 2008 would preclude SGX from responding by the deadline set forth in Lilly’s exclusivity letter. The representative of Lilly indicated that a response on the morning of June 10, 2008 would be acceptable.

 

Between June 6 and June 9, 2008, members of our management team responded to various due diligence requests from Company B.

 

During the weekend of June 7 and June 8, 2008, representatives of Lazard held additional discussions with representatives of Company B with respect to a proposed offer from Company B.

 

On June 9, 2008, we provided a revised version of the exclusivity letter to Lilly and its financial advisor incorporating our proposed changes.

 

On June 9, 2008, representatives of Lazard held separate discussions with representatives of Lilly’s financial advisor and representatives of Company B. During these discussions, representatives of Company B indicated that Company B had a board call on June 10, 2008 and that Company B intended to provide an acquisition proposal to us

that day and that the proposal would likely be a stock-for-stock transaction with a valuation at or above $3.00 per share, although no specific price was proposed by Company B.

 

On June 9, 2008, our board, together with our legal and financial advisors, held a call to review Lilly’s revised proposal and receive an update with respect to the progress of discussions with Company B, including a discussion of the potential terms of a proposal from Company B. Our board instructed management and representatives of Lazard to seek to increase the Lilly offer price in light of the discussion regarding the potential Company B proposal. We scheduled a board meeting at 10:00 A.M. Pacific Time on June 10, 2008 to review the status of a potential offer from Company B. Lazard subsequently held further discussions with representatives of Lilly’s financial advisor in an attempt to increase the offer price from Lilly. Lilly revised its offer to increase the offer price to $3.00 per share in cash.

 

On June 10, 2008, representatives of Lazard held further discussions with representatives of Lilly’s financial advisor regarding Lilly’s revised proposal. Mr. Grey also held discussions with representatives of Lilly regarding the terms of the exclusivity agreement between SGX and Lilly. Just prior to our board meeting on June 10, 2008, representatives of Company B contacted representatives of Lazard and indicated that Company B would not be submitting a proposal to acquire SGX at that time, indicating a desire to review additional preclinical data with respect to one of our development programs that was not yet available. Thereafter, at its meeting on June 10, 2008, our board reviewed the revised terms proposed by Lilly and the terms proposed by Company D and decided to move forward with Lilly’s proposal. Our board determined that the Lilly offer was superior to the Company D offer in terms of price (with the Lilly price being substantially higher than the price proposed by Company D), and consideration (with the Lilly offer being a cash offer as compared to an offer for stock of a small-cap pharmaceutical company) and certainty of closing (with SGX having a 5-year history of working with Lilly in connection with collaboration and other activities) and reaffirmed that proceeding with the sale was the best alternative available to SGX to maximize stockholder value. Our board authorized SGX to enter into the revised exclusivity agreement with Lilly.

 

On June 10, 2008, we and Lilly executed an exclusivity agreement.

 

On June 16, 2008, we and Lilly entered into an additional confidentiality agreement that included a standstill provision.

 

On June 18, 2008, Lilly distributed the draft merger agreement and on June 19, 2008, Lilly distributed the form of stockholder voting agreement to us.

 

Between June 18, 2008 and the signing of the merger agreement, SGX and Lilly and their respective outside counsel spent considerable time negotiating the terms of the merger agreement, including the conditions to closing, non-solicitation provisions, termination provisions and termination fees, and exchanged multiple drafts of the merger agreement in the process of these negotiations.

 

On July 8, 2008, our board held a special telephonic meeting. Members of our senior management, together with representatives of Lazard and representatives of Cooley Godward Kronish LLP, our outside legal counsel, participated in the meeting. At this meeting, representatives of Cooley discussed with our board the key terms of the proposed merger agreement. Representatives of Lazard reviewed with our board its financial analysis of the per share merger consideration to be received by the holders of shares of our common stock in the merger, and Lazard rendered its opinion to our board, to the effect that, as of July 8, 2008, and subject to certain assumptions, qualifications and limitations, the per share merger consideration to be paid to holders of our common stock (other than shares of our common stock held by holders who are entitled to and properly demand an appraisal of their shares of common stock and shares of our common stock held in treasury of SGX or owned by Merger Sub, Lilly or any wholly-owned subsidiary of Lilly or of SGX), in the merger was fair, from a financial point of view, to such holders. There was an extended discussion among the participants in the board meeting. Following the discussion, our board, by unanimous vote, approved the merger agreement and the transactions contemplated by the merger agreement. Our board determined that the merger agreement, the merger and the transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, SGX and our stockholders and recommended that that our stockholders adopt the merger agreement. Later in the day, we, Merger Sub and Lilly executed the merger agreement. Concurrently with the execution of the merger agreement, and as a condition to

Lilly’s willingness to enter into the merger agreement, certain of our stockholders, including certain executive officers and directors, entered into the voting agreement with Lilly.

 

On July 8, 2008, we and Lilly issued a joint press release announcing the transaction.

 

The following describes material reasons, factors and information taken into account by our board in deciding to approve the merger agreement and the transactions contemplated by the merger agreement and to recommend that our stockholders adopt the merger agreement:

 

 

 

In the course of its deliberations, our board also considered a variety of risks and other potentially negative factors, including the following:

 

 

Our board carefully considered these factors as a whole in reaching its determination and recommendation. Our board concluded that, overall, the risks, uncertainties, restrictions and potentially negative factors associated with the merger were outweighed by the potential benefits of the merger. In addition, our board considered the interests that certain of our directors and executive officers may have with respect to the merger, in addition to their interests as our stockholders generally.

The foregoing discussion of factors considered by our board is not meant to be exhaustive but includes the material factors considered by our board (i) in declaring that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to, and in the best interests of, SGX and our stockholders, (ii) in approving the merger agreement, the merger and the other transactions contemplated by the merger agreement and (iii) in recommending that our stockholders adopt the merger agreement. In view of the wide variety of factors considered by our board in connection with the evaluation of the merger and the complexity of these matters, our board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. Rather, the directors made their determinations and recommendations based on the totality of the information presented to them, and the judgments of individual members of our board may have been influenced to a greater or lesser degree by different factors.

 

After careful consideration, our board, based in part on consultations with our legal and financial advisors, unanimously approved the merger agreement and determined that the merger agreement, the merger, and the transactions contemplated by the merger agreement are advisable and fair to, and in the best interests of, SGX and our stockholders and unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement. Accordingly, our board unanimously recommends that you vote “FOR” the adoption of the merger agreement and “ FOR ” the adjournment, postponement or continuation of the special meeting to a later date, if necessary or appropriate, to solicit additional proxies in favor of the proposal to adopt the merger agreement.

 

We retained Lazard to act as our financial advisor and to render an opinion to our board as to the fairness, from a financial point of view, to holders of our common stock of the consideration to be paid to such holders in the merger. On July 8, 2008, Lazard rendered its oral opinion to our board, subsequently confirmed in writing, that, as of such date, and based upon and subject to the assumptions, procedures, factors, qualifications and limitations set forth therein, the consideration to be paid to holders of our common stock (other than shares of our common stock held by holders who are entitled to and properly demand an appraisal of their shares of our common stock and shares of our common stock held in our treasury or owned by Merger Sub, Lilly or any wholly-owned subsidiary of us or of Lilly, which holders, together with their respective affiliates, we collectively refer to in this section as “excluded holders”) in the merger was fair, from a financial point of view, to such holders.

 

The full text of Lazard’s written opinion, dated July 8, 2008, which sets forth the assumptions made, procedures followed, factors considered, and qualifications and limitations on the review undertaken by Lazard in connection with its opinion is attached to this proxy statement as Annex C and is incorporated into this proxy statement by reference. The description of Lazard’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of Lazard’s written opinion attached as Annex C . We encourage you to read Lazard’s opinion and this section of this proxy statement carefully and in their entirety.

 

Lazard’s opinion was directed to our board for the information and assistance of our board in connection with its evaluation of the merger and only addressed the fairness, from a financial point of view, to holders of our common stock (other than excluded holders) of the consideration to be paid to such holders in the merger as of the date of Lazard’s opinion. We did not request Lazard to consider, and Lazard’s opinion did not address, the relative merits of the merger as compared to any other transaction or business strategy in which we might engage or the merits of the underlying decision by us to engage in the merger. Lazard’s opinion was not intended to and does not constitute a recommendation to any holder of our common stock as to how such holder should vote or act with respect to the merger or any matter relating thereto. Lazard’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, the date of Lazard’s opinion. Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of Lazard’s opinion. Lazard’s opinion did not express any opinion as to the price at which shares of our common stock may trade at any time subsequent to the announcement of the merger.

The following is a summary of Lazard’s opinion. Lazard has consented to the inclusion of its written opinion in this proxy statement. We encourage you to read Lazard’s written opinion carefully in its entirety.

 

In connection with its opinion, Lazard:

 

 

Lazard assumed and relied upon the accuracy and completeness of the foregoing information, without independent verification of such information. Lazard did not conduct any independent valuation or appraisal of any of the assets or liabilities (contingent or otherwise) of SGX or concerning the solvency or fair value of SGX, and Lazard was not furnished with such valuation or appraisal. With respect to the financial forecasts that Lazard reviewed, Lazard assumed, with our consent, that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of our management as to our future financial performance. Lazard has relied on the assessments of our management as to the validity of, and risks associated with, our product candidates (including without limitation, the timing and probability of successful development, testing and marketing, and of approval by appropriate governmental authorities, of such product candidates). Lazard assumed no responsibility for and expressed no view as to such forecasts or the assumptions on which they are based.

 

In rendering its opinion, Lazard assumed, with our consent, that the merger would be consummated on the terms described in the merger agreement, without any waiver or modification of any material terms or conditions. Representatives of SGX advised Lazard, and Lazard assumed, that the merger agreement, when executed, would conform to the draft reviewed by Lazard in all material respects. Lazard also assumed, with our consent, that obtaining the necessary regulatory or third party approvals and consents for the merger would not have an adverse effect on us or the combined company. Lazard’s opinion did not address any legal, tax, regulatory or accounting matters, as to which Lazard understood that we obtained such advice as we deemed necessary from qualified professionals. Lazard did not express any view or opinion as to any terms or other aspects of the merger (other than the consideration to the extent expressly specified herein), including the voting agreement between certain of our stockholders and Lilly. In addition, Lazard expressed no view or opinion as to the fairness of the amount or nature of, or any other aspects relating to, the compensation to any officers, directors or employees of any parties to the merger, or class of such persons, relative to the per share merger consideration to be paid to holders of our common stock (other than excluded holders) or otherwise.

 

The following is a brief summary of the material financial analyses and reviews that Lazard deemed appropriate in connection with rendering its opinion. The brief summary of Lazard’s analyses and reviews provided below is not a complete description of the analyses and reviews underlying Lazard’s opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of analysis and review and the application of those methods to particular circumstances, and, therefore, is not readily susceptible to summary description. Considering selected portions of the analyses and reviews or the summary set forth below, without considering the analyses and reviews as a whole, could create an incomplete or misleading view of the analyses and reviews underlying Lazard’s opinion.

 

In arriving at its opinion, Lazard considered the results of all of its analyses and reviews and did not attribute any particular weight to any factor, analysis or review considered by it; rather, Lazard made its determination as to

fairness on the basis of its experience and professional judgment after considering the results of all of its analyses and reviews.

 

For purposes of its analyses and reviews, Lazard considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond our control. No company, business or transaction used in Lazard’s analyses and reviews as a comparison is identical to us or the proposed merger, and an evaluation of the results of those analyses and reviews is not entirely mathematical. Rather, the analyses and reviews involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the merger, public trading or other values of the companies, businesses or transactions used in Lazard’s analyses and reviews. The estimates contained in Lazard’s analyses and reviews and the ranges of valuations resulting from any particular analysis or review are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by Lazard’s analyses and reviews. In addition, analyses and reviews relating to the value of companies, businesses or securities do not purport to be appraisals or to reflect the prices at which companies, businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Lazard’s analyses and reviews are inherently subject to substantial uncertainty.

 

The summary of the analyses and reviews provided below includes information presented in tabular format. In order to fully understand Lazard’s analyses and reviews, the tables must be read together with the full text of each summary. The tables alone do not constitute a complete description of Lazard’s analyses and reviews. Considering the data in the tables below without considering the full description of the analyses and reviews, including the methodologies and assumptions underlying the analyses and reviews, could create a misleading or incomplete view of Lazard’s analyses and reviews.

 

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before July 7, 2008 and is not necessarily indicative of current market conditions.

 

Financial Analyses

 

Discounted Cash Flow Sum-of-the-Parts Analysis

 

Lazard performed a discounted cash flow analysis on a risk-adjusted basis of SGX to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that SGX could generate during fiscal years 2008 through 2023 (or, in certain cases, 2012, based on estimates of our management) of each of our major product candidates, the value of our net operating losses, internal research and development expense and corporate general and administrative expenses, utilizing both internal estimates of our management, which were probability adjusted for clinical and regulatory risk based on our management estimates, and certain industry related studies. ¹ The unlevered, after-tax free cash flows were discounted to present value using a weighted average cost of capital ranging from 14.0% to 16.0%. This calculation is referred to as the Sum-of-the-Parts DCF. The assumed discount rate range was derived from the weighted average cost of capital analysis that Lazard calculated for us based on comparable public companies. Based on this analysis, Lazard arrived at an implied value per share range for SGX of $1.39 to $3.39. Lazard noted that this range is inclusive of the per share consideration of $3.00.

 

Public Company Comparables Analysis

 

Lazard reviewed and analyzed selected publicly available financial and other data of the following companies having businesses and trading characteristics that it viewed as reasonably comparable to SGX.

 

The companies included in this analysis were:

 

 

 

¹   Cumulative probabilities of marketing approval based on the Journal of Clinical Pharmacology & Therapeutics, May 2001, “Risks in New Drug Development Approval Success Rates for Investigational Drugs,” published by the Tufts Center for the Study of Drug Development, Tufts University.

 

 

Lazard reviewed, among other things, technology value per expected product candidate of the selected companies, which was calculated as the equity value of such company based on the closing stock price on July 7, 2008, plus debt, less cash, divided by the expected number of marketed products (with the number of marketed product candidates calculated by multiplying the number of product candidates of the selected companies by the probability of success for clinical and regulatory risk of such product candidates). ² Lazard then applied a range of technology values per expected product candidate derived from the selected companies to our expected number of marketed products. Financial data of the selected companies were based on publicly available information. Financial data of SGX were based on internal estimates provided by our management. This analysis indicated an implied technology value of SGX from $1.0 million to $24.0 million, an implied equity value of SGX from $23.0 million to $46.0 million and an implied per share value of SGX from $1.08 to $2.17. Lazard noted that this range is below the per share consideration of $3.00.

 

Selected Precedent Transactions Analysis

 

Lazard reviewed, to the extent publicly available, financial information relating to the following six selected transactions involving bio-pharmaceutical companies developing oncology products:

 

 

Lazard reviewed, among other things, transaction value per expected product candidate of the target companies, which was calculated as the equity value of such company based on the offer price on the date of announcement, plus debt, less cash, divided by the expected number of marketed products (with the number of marketed product candidates calculated by multiplying the number of product candidates of the selected companies by the probability of success for clinical and regulatory risk of such product candidates). ³ These transaction values per expected product candidate ranged from $119.0 million to $406.0 million. Lazard then applied a range of transaction values per expected product candidate derived from the selected transactions to our expected number of marketed products. Financial data of the selected transactions were based on public filings, publicly available research analysts’ estimates and other publicly available information. Financial data of SGX were based on internal estimates of our management. This analysis indicated a range of implied transaction value of SGX of $30.0 million

 

 

²   Cumulative probabilities of marketing approval based on the Journal of Clinical Pharmacology & Therapeutics, May 2001, “Risks in New Drug Development Approval Success Rates for Investigational Drugs,” published by the Tufts Center for the Study of Drug Development, Tufts University.

³   Cumulative probabilities of marketing approval based on the Journal of Clinical Pharmacology & Therapeutics, May 2001, “Risks in New Drug Development Approval Success Rates for Investigational Drugs,” published by the Tufts Center for the Study of Drug Development, Tufts University.

to $101.0 million, an implied equity value of SGX of $51.0 million to $122.0 million, and an implied per share range for SGX of $2.44 to $5.85. Lazard noted that this range is inclusive of the per share consideration of $3.00.

 

Premia Analysis-Life Sciences Transactions

 

Lazard also performed a premia paid analysis, analyzing the premia paid in selected bio-pharmaceutical transactions involving all cash mergers of public company targets with a transaction value of less than $2.0 billion since 2005. Lazard’s analysis was based on the one-day, one-week and four-week implied premia paid in such transactions. The implied premia in this analysis were calculated comparing the transaction price prior to the announcement of the transaction to the target company’s stock price one day, one week and four-weeks prior to the announcement of the transaction. The results of these calculations are as follows:

 

 

From these premia, Lazard, based on its experience with mergers and acquisitions, derived a reference range for SGX common stock as of July 7, 2008 of $1.80 to $2.88. Lazard noted that the market price of $1.43 per share as of July 7, 2008 was below this range and the per share consideration of $3.00 was above the range.

 

Miscellaneous

 

In connection with Lazard’s services as our financial advisor, we agreed to pay Lazard an aggregate fee of $1.5 million, a portion of which was payable upon the rendering of Lazard’s written opinion (as fully set forth in Annex C ) and a significant portion of which is contingent upon the closing of the merger. We have also agreed to reimburse Lazard for certain expenses incurred in connection with Lazard’s engagement and to indemnify Lazard and certain related parties against certain liabilities that may arise out of the rendering of the advice, including certain liabilities under U.S. federal securities laws.

 

Lazard, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, leveraged buyouts, and valuations for estate, corporate and other purposes. Lazard in the past has provided investment banking services to us and certain of our affiliates, for which Lazard has received compensation, and certain affiliates of Lazard in the past have provided, currently provide, and in the future may provide, financial services to Lilly, for which such affiliates have received, and may in the future receive, compensation. In the past two years Lazard has provided services to us related to a private investment in public equity offering in 2007, for which Lazard received compensation. In addition, in the ordinary course of their respective businesses, affiliates of Lazard and LFCM Holdings LLC (an entity indirectly owned in large part by managing directors of Lazard) may actively trade our securities and/or the securities of Lilly and certain of their respective affiliates for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. The issuance of Lazard’s opinion was approved by the Opinion Committee of Lazard.

 

Lazard is an internationally recognized investment banking firm providing a full range of financial advisory and other services. Lazard was selected to act as our financial advisor because of its qualifications, expertise and reputation in investment banking and mergers and acquisitions, as well as its familiarity with our business.

 

We and Lilly determined the per share merger consideration to be paid to the holders of our common stock (other than excluded holders) in the merger through arm’s-length negotiations, and our board approved the per share merger consideration. Lazard conducted the analyses and reviews summarized above for the purpose of providing an opinion to our board as to the fairness, from a financial point of view, to the holders of our common stock (other than excluded holders) of the per share merger consideration to be paid to such holders in the merger. Lazard did not recommend any specific consideration to our board or any other person or indicate that any given consideration constituted the only appropriate consideration for the merger.

 

Lazard’s opinion and analyses were only one of many factors taken into consideration by our board in its evaluation of the merger. Consequently, the summary of the analyses and reviews provided above should not be viewed as determinative of the opinion of our board or our management with respect to the per share merger

consideration or as to whether our board would have been willing to recommend a different transaction or determine that a different per share merger consideration was fair. Additionally, Lazard’s opinion is not intended to confer any rights or remedies upon any of our employees or creditors.

 

If the merger agreement is adopted by our stockholders and the other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into SGX, with SGX being the surviving corporation. Following the merger, SGX will be a wholly-owned subsidiary of Lilly.

 

When the merger is completed, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $3.00 in cash, without interest and less any applicable withholding taxes.

 

The merger agreement provides that immediately prior to the effective time of the merger, each option to purchase our common stock granted under our 2005 Plan that is outstanding immediately prior to the effective time of the merger will be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding. In addition, each option to purchase our common stock granted under our 2000 Plan or NEDSOP with an exercise price per share less $3.00 that is not exercised and remains outstanding and unexercised immediately prior to the effective time of the merger shall be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding. No payment will be made with respect to stock options that have per share exercise price above $3.00 and such options will be canceled and terminated in accordance with their terms.

 

The merger agreement also provides that immediately prior to the effective time of the merger, each share of restricted stock and each share of common stock subject to restricted stock units will be treated as the corresponding number of shares of common stock as of the effective time of the merger in the same manner as other outstanding shares of common stock issued and outstanding as of immediately prior to the effective time of the merger. In addition, the merger agreement provides that at the effective time of the merger, each warrant to purchase our common stock that is outstanding immediately prior to the effective time of the merger will cease to represent a right to acquire shares of our common stock and will be converted into the right to receive (upon surrender of the warrant) an amount in cash, without interest, equal to the product of the number of shares of our common stock subject to such warrant multiplied by the excess, if any, of (i) $3.00 per share over (ii) the exercise price per share of such warrant, subject to applicable tax withholding. No payment will be made with respect to warrants that have per share exercise prices above $3.00.

 

After the merger is completed, our stockholders will have the right to receive the merger consideration but will no longer have any rights as SGX stockholders and will have no rights as either Lilly or Merger Sub stockholders. Therefore, such stockholders will not participate in any future earnings or growth of SGX or Lilly, and will not benefit from any appreciation in value of SGX or Lilly.

 

Our common stock is currently registered under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, and is listed on The Nasdaq Global Market under the symbol “SGXP.” As a result of the merger, we will become a privately held corporation, our common stock will cease to be listed on The Nasdaq Global Market and there will be no public market for our common stock. In addition, registration of our common stock under the Exchange Act will be terminated. This termination will make certain provisions of the Exchange Act, such as the requirement of furnishing a proxy or information statement in connection with stockholders’ meetings, no longer applicable to us. After the effective time of the merger, we will also no longer be required to file periodic reports with the SEC on account of our common stock.

 

The directors and officers of Merger Sub will be the initial directors of the surviving corporation following the merger. As of the effective time of the merger, the certificate of incorporation of Merger Sub as in effect

immediately before the effective time of the merger will be the surviving corporation’s certificate of incorporation. In addition, the bylaws of Merger Sub as in effect immediately before the effective time of the merger will be the surviving corporation’s bylaws.

 

The benefit of the merger to our stockholders is the right to receive the merger consideration. The primary detriments are that our stockholders will cease to participate in our future earnings and growth, if any, and that the receipt of the payment for their shares generally will be a taxable transaction for United States federal income tax purposes. See “The Merger — Material United States Federal Income Tax Consequences” below.

 

If the merger agreement is not adopted by our stockholders or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and we anticipate that our common stock will continue to be listed and traded on The Nasdaq Global Market.

 

If the merger is not consummated, our board will evaluate and review our business operations, financial condition, research and development programs, and partnering and financing opportunities, among other things, and make such changes as are deemed appropriate. If the merger agreement is not adopted by our stockholders or if the merger is not consummated for any other reason, we cannot assure you that any other transaction acceptable to us will be offered, or that our business, prospects or results of operations will not be adversely impacted.

 

Under certain circumstances, we may be required to pay Lilly a termination fee of $2.0 million and reimburse Lilly for up to $250,000 of certain expenses incurred by it in connection with the merger upon the termination of the merger agreement. See “The Merger Agreement — Termination” and “The Merger Agreement — Termination Fee” below.

 

The total amount of funds required by Merger Sub to pay all the merger consideration and related fees and expenses in connection with the merger and the related transactions is estimated to be approximately $       . Lilly expects to finance the merger with cash on hand.

 

In considering the recommendation of our board to vote for the proposal to adopt the merger agreement, you should be aware that some of our directors and executive officers have interests in the merger that are different from, and in addition to, the interests of our stockholders generally and that may create potential conflicts of interest. The members of our board are aware of and considered the interests of our directors and executive officers, among other matters, when they considered and approved the merger agreement, the merger and the other transactions and determined to recommend to our stockholders that they vote for the proposal to adopt the merger agreement.

 

Equity and Long-Term Incentive Awards.

 

Stock Options.   The merger agreement provides that each option to purchase our common stock granted under our 2005 Plan that is outstanding immediately prior to the effective time of the merger will be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding. The merger agreement also provides that each option to purchase our common stock granted under our 2000 Plan or our NEDSOP shall be accelerated in full to a date prior to the effective time of the merger (as determined by our board) and such options shall terminate at the effective time of the merger if not exercised prior to the effective time; provided, that each option with an exercise price per share less than $3.00 that remains outstanding and unexercised immediately prior to the effective time of the merger, shall be canceled and terminated and converted into a right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares

underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding.

 

Restricted Stock and Restricted Stock Units.   The merger agreement provides that each share of our restricted stock and each of our restricted stock units will be treated as the corresponding number of shares of common stock as of the effective time of the merger in the same manner as other outstanding shares of our common stock issued and outstanding as of immediately prior to the effective time of the merger.

 

The following table lists, with respect to each of our executive officers, all of our executive officers as a group and all of our non-management directors as a group, the total cash to be received under the merger agreement for the stock options, restricted stock and restricted stock units held by such individual or group (assuming vesting through July 8, 2008).

 

 

Change of Control and Severance Arrangements.   We are party to change of control and severance arrangements with each of Michael Grey, Stephen K. Burley, W. Todd Myers, Siegfried Reich, Terence Rugg and Annette North. The potential payments payable to these individuals upon termination of their employment, including in connection with a change of control, under severance and change in control agreements are set out below. The consummation of the merger will constitute a change of control within the meaning of these agreements. Payments due by us to our executive officers pursuant to the agreements will not be “grossed up” to reduce or eliminate the effect of the “golden parachute” or other tax provisions of the Internal Revenue Code. Any obligation to pay taxes remains an obligation of the executive officer.

 

Michael Grey.   Upon a change in control, all unvested equity awards held by Mr. Grey that would have otherwise been vested on the date that is 12 months after such change in control will immediately become vested. In addition, if his employment is terminated without “Cause” (as defined in the change in control severance agreement) at any time, Mr. Grey will receive 12 months salary continuation and, other than in connection with a change of control, 12 months accelerated vesting of stock options or other equity awards. If Mr. Grey’s employment is terminated without “Cause” or he resigns for “Good Reason” (as defined in the change in control

severance agreement) within three months prior to or 12 months following a change of control, then he is entitled to the following benefits (in lieu of 12 months salary continuation):

 

 

Stephen Burley.   Upon a change in control, all unvested equity awards held by Dr. Burley that would have otherwise been vested on the date that is 12 months after such change in control will immediately become vested. In addition, if his employment is terminated without “Cause” (as defined in the change in the control severance agreement) at any time, Dr. Burley will receive 12 months salary continuation and, other than in connection with a change of control, 12 months accelerated vesting of stock options or other equity awards. If Dr. Burley’s employment is terminated without “Cause” or he resigns for “Good Reason” (as defined in the change in control severance agreement) within three months prior to or 12 months following a change of control, then he is entitled to the following benefits (in lieu of 12 months salary continuation):

 

 

W. Todd Myers, Siegfried Reich, Terence Rugg and Annette North.   Upon a change in control, all unvested equity awards held by each of Mr. Myers, Dr. Reich, Dr. Rugg and Ms. North that would have otherwise been vested on the date that is 12 months after such change in control will immediately become vested. In addition, if any of these executive officers’ employment is terminated without “Cause” (as defined in each change in control severance agreement) at any time, the executive will receive 12 months salary continuation. If the executive’s employment is terminated without “Cause” or the executive resigns for “Good Reason” (as defined in the change in control severance agreement) within three months prior to or 12 months following a change of control, then the executive is entitled to the following benefits (in lieu of 12 months salary continuation):

 

 

In addition, if Dr. Rugg resigns for Good Reason within three months prior to or within 12 months following the occurrence of the Change in Control, then Dr. Rugg will have no obligation to reimburse the Company for any relocation assistance provided to him.

The following table illustrates the payments and benefits to which the above-named executive officers would be entitled pursuant to their change of control employment agreements if the merger were consummated on July 8, 2008 and a qualifying termination of employment without “Cause” (as defined in each change in control severance agreement) occurred on such date.

 

 

 

 

Acceleration of Vesting of Director Stock Options.   All stock options held by the members of our board will accelerate in full upon the closing of the merger, and the options will be paid out, as noted above.

 

Our Management Following the Merger.   As of the date of this proxy statement, no member of our management team has entered into any employment, retention or other similar agreement with Lilly or any of its affiliates with respect to the terms and conditions of his or her employment, contingent upon and assuming closing of the merger. Although certain members of our management team are discussing employment arrangements with Lilly, which may include the right to purchase or participate in the equity of Lilly, there can be no assurance that any such arrangement will be agreed upon. These matters are subject to negotiation and discussion. Any new arrangements may be entered into at or prior to the completion of the merger.

 

Our Directors Following the Merger.   Following the merger, none of our directors will serve as directors of the surviving corporation, and the directors and officers of Merger Sub will be the initial directors and officers, respectively, of the surviving corporation.

 

Indemnification; Directors’ and Officers’ Insurance.   The merger agreement provides that all rights to indemnification in favor or any person who is, or has been, or becomes prior to the effective time an officer or director of SGX, as provided in our certificate of incorporation and bylaws, or pursuant to agreements, will be assumed by the surviving corporation. For six years after the merger, Lilly and Merger Sub will indemnify the officers and directors described above to the full extent permitted under applicable law.

 

In addition, under the merger agreement, Lilly will cause the surviving corporation to maintain our officers’ and directors’ liability insurance policies in effect on the date of the merger agreement for a period of not less than six years after the effective time of the merger, but only to the extent related to actions or omissions prior to the effective time of the merger. The surviving corporation may substitute policies of at least the same coverage and amounts containing terms no less advantageous to such former directors or officers and such substitution must not result in gaps or lapses of coverage with respect to matters occurring prior to the effective time of the merger. In no event will Lilly or the surviving corporation be required to expend more than an amount per year equal to 300% of the last annual aggregate premium paid by us prior to the date of the merger agreement for such insurance to

maintain or procure insurance coverage pursuant to the merger agreement. If the amount of the annual premiums necessary to maintain or procure such insurance coverage exceeds 300% of the last annual aggregate premium paid by us, Lilly and the surviving corporation must procure and maintain for such six-year period as much coverage as reasonably practicable for such amount. Lilly will have the option to cause coverage to be extended under our officers’ and directors’ liability insurance policies by obtaining a six-year “tail” policy or policies on terms and conditions no less advantageous than our existing officers’ and directors’ liability insurance policies.

 

Lilly will account for the merger as a “purchase,” as that term is used under U.S. generally accepted accounting principles, for accounting and financial reporting purposes. Under purchase accounting, our assets (including identifiable intangible assets) and liabilities (including contracts and other commitments) as of the effective time of the merger will be recorded at their respective fair values and added to those of Lilly. Any excess of purchase price over the fair value is recorded as goodwill. Financial statements of Lilly issued after the merger would reflect these fair values and would not be restated retroactively to reflect our historical financial position or results of operations.

 

The following is a summary of the material United States federal income tax consequences of the merger to our stockholders. This summary is limited to stockholders who hold their shares of our common stock as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This summary is based upon the provisions of the Code, treasury regulations promulgated thereunder, judicial decisions and administrative rulings currently in effect, all of which are subject to change, possibly with retroactive effect. Any such change could alter the tax consequences to our stockholders. This summary does not address all of the United States federal income tax consequences that may be relevant to particular stockholders in light of their individual circumstances or to stockholders who are subject to special rules, including: United States expatriates, insurance companies, dealers or brokers in securities or currencies, tax-exempt organizations, financial institutions, mutual funds, pass-through entities and investors in such entities, stockholders who hold their shares of our common stock as a hedge or as part of a hedging, straddle, conversion, synthetic security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or stockholders who acquired their shares of our common stock upon the exercise of employee stock options or otherwise as compensation. In the case of a stockholder that is a partnership, the tax treatment of a partner generally will depend on the status of the partner and on the activities of the partnership. Partners of partnerships holding our common stock are encouraged to consult their tax advisors. Further, this discussion does not address any United States federal estate and gift tax consequences or any state, local or foreign tax consequences relating to the merger.

 

Consequences of the Merger to Stockholders

 

The following describes the material tax consequences of the merger to our stockholders who receive cash for their shares in connection with the merger:

 

Consequences of the Merger to U.S. Holders. A “U.S. holder” means:

 

 

The receipt of cash pursuant to the merger will be a taxable transaction for United States federal income tax purposes. Generally, for United States federal income tax purposes, a stockholder will recognize capital gain or loss equal to the difference between the amount of cash received by the stockholder in the merger and the stockholder’s adjusted tax basis in the shares of our common stock exchanged for cash in the merger. The capital gain or loss will be long-term if the stockholder’s holding period for the shares of our common stock exceeds one year at the effective time of the merger. Capital gains recognized by an individual upon exchange of a share of our common stock that has been held for more than one year generally will be subject to a maximum United States federal income tax rate of 15% or, in the case of a share that has been held for one year or less, will be subject to tax at ordinary income tax rates. In addition, there are limits on the deductibility of capital losses. The amount and character of gain or loss must be determined separately for each block of our common stock ( i.e. , shares acquired at the same cost in a single transaction) exchanged for cash in the merger.

 

Backup Withholding.   A stockholder (other than exempt stockholders, including, among others, all corporations and certain foreign individuals) whose shares of our common stock are exchanged for the merger consideration may be subject to backup withholding at the backup withholding rate of 28% unless the stockholder provides the stockholder’s taxpayer identification number and otherwise complies with the applicable backup withholding rules and certification requirements. Corporations are generally exempt from backup withholding. Each non-corporate stockholder should complete and sign the Substitute Form W-9 included as part of the letter of transmittal that will be sent to stockholders promptly following closing of the merger so as to provide the information and certification necessary to avoid backup withholding. In order for a foreign individual to qualify as an exempt recipient, he or she must submit a signed statement (such as a Certificate of Foreign Status on IRS Form W-8 BEN) attesting to his, her or its exempt status. Backup withholding is not an additional tax. Rather, the amount of the backup withholding can be credited against the United States federal income tax liability of the person subject to the backup withholding, provided that the required information is given to the IRS. If backup withholding results in an overpayment of tax, a refund can be obtained by the stockholder by filing a United States federal income tax return.

 

Consequences of the Merger to Non-U.S. Holders.   For purposes of this description, a “non-U.S. holder” is any person (other than a partnership) that is not a “U.S. holder” for U.S. federal income tax purposes.

 

Non-U.S. holders who are stockholders of SGX will generally not be subject to United States federal income tax on the receipt of cash as a result of the merger. This general rule, however, is subject to some exceptions. For example, the gain would be subject to United States federal income tax if:

 

 

A non-U.S. holder with gain effectively connected with the conduct of a trade or business in the United States is encouraged to consult his, her or its own tax advisor regarding the United States federal income tax consequences of the merger. An individual who is present in the United States for 183 days or more in the taxable year in which our common stock is disposed of in the merger is encouraged to consult his, her or its own tax advisor regarding the United States federal income tax consequences of the merger.

 

Dissenters’ Rights.   Under specified circumstances, stockholders may be entitled to appraisal rights in connection with the Merger. See “Dissenters’ Rights” below. If a stockholder receives cash pursuant to the exercise of appraisal rights, such stockholder generally will recognize gain or loss, measured by the difference between the cash received and such holder’s tax basis in such stock. Interest, if any, awarded in an appraisal proceeding by a court would be included in such stockholder’s income as ordinary income for federal income tax purposes. Stockholders who exercise appraisal rights are urged to consult their own tax advisors.

 

THE SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS BASED ON THE LAW IN EFFECT ON THE DATE HEREOF. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR

TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE MERGER.

 

Completion of the merger is subject to certain governmental or regulatory clearance procedures, including the termination or expiration of the waiting period under the HSR Act. We and Lilly filed our respective notification and report forms pursuant to the HSR Act with the Antitrust Division of the United States Department of Justice, or “DOJ”, or the United States Federal Trade Commission, or “FTC”, on July   , 2008. Under the HSR Act, the merger may not be consummated until 30 days after the latter of the initial filings (unless early termination of this waiting period is granted) or, if the Antitrust Division of the DOJ or the FTC issues a request for additional information, 30 days after SGX and Lilly have each substantially complied with such request for additional information (unless this period is shortened pursuant to a grant of earlier termination).

 

As of the date of this proxy statement, we and Lilly have not yet obtained any governmental or regulatory clearances that may be required to complete the merger. There can be no assurance that the governmental reviewing authorities will terminate or permit any applicable waiting periods to expire, or approve or clear the merger at all or without restrictions or conditions. We and Lilly have agreed to use reasonable best efforts to take such actions as are necessary or advisable to obtain prompt approval of the transactions contemplated by the merger agreement.

 

The following description sets forth the material provisions of the merger agreement but does not purport to describe all of the terms of the merger agreement. The full text of the merger agreement is attached to this proxy statement as Annex A . You are urged to read the merger agreement in its entirety because it is the legal document that governs the merger. The merger agreement should be read in conjunction with the disclosures in our filings with the SEC available at the SEC’s website, www.sec.gov. The provisions contained in the merger agreement are intended to govern the contractual rights and relationships, and to allocate risks, between us and Lilly with respect to the merger.

 

At the effective time of the merger, Merger Sub will merge with and into SGX. SGX will continue as the surviving corporation and will become a wholly-owned subsidiary of Lilly. Lilly, as the sole stockholder of SGX following the merger, will have the corporate power and authority to control all aspects of the corporate and business affairs of SGX following the merger. Merger Sub was created solely for purposes of the merger, has no material assets or operations of its own, and will cease to exist following the merger.

 

The consummation of the merger will occur within two business days after all of the conditions to the consummation of the merger contained in the merger agreement are satisfied or waived. The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware. Although we expect to complete the merger as soon as reasonably practicable after the special meeting and the receipt of any required regulatory approvals or consents, we cannot assure you that the conditions to the merger will be satisfied (or waived, to the extent permitted) or, if satisfied or waived, the date by which they will be satisfied or waived. In addition, because the merger is subject to closing conditions, we cannot predict the exact timing of the effective time of the merger. See “The Merger Agreement — Conditions to the Merger” beginning on page 50 of this proxy statement.

 

At the effective time of the merger, each issued and outstanding share of our common stock (other than shares of common stock owned by us, Lilly, Merger Sub, any other wholly-owned subsidiary of Lilly or an SGX stockholder properly exercising dissenters’ rights) will be converted into the right to receive $3.00 in cash, without interest and less any applicable withholding taxes.

 

Each share of our common stock owned by us, Lilly, Merger Sub or any other wholly-owned subsidiary of Lilly immediately prior to the effective time of the merger will be automatically cancelled and retired and will not be entitled to any merger consideration.

 

Shares of our common stock that are outstanding immediately prior to the merger and held by any dissenting stockholder who properly perfects his, her or its dissenters’ rights will not be converted into the right to receive the merger consideration. Instead, the dissenting stockholder will be entitled to an appraisal and payment for his, her or its dissenting shares in accordance with and subject to Section 262 of the DGCL. See “Dissenters’ Rights” below.

 

At the effective time:

 

(i) each option to purchase our common stock granted under our 2005 Plan that is outstanding immediately prior to the effective time of the merger, will be canceled and terminated and converted into the right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the

option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding; and

 

(ii) each option to purchase our common stock granted under our 2000 Plan or our NEDSOP shall be accelerated in full to a date prior to the effective time of the merger (as determined by our board) and such options shall terminate at the effective time of the merger if not exercised prior to the effective time; provided, that each option with an exercise price per share less than $3.00 that remains outstanding and unexercised immediately prior to the effective time of the merger, shall be canceled and terminated and converted into a right to receive, as of the effective time of the merger, an amount in cash equal to the product of (A) the number of shares underlying the option multiplied by (B) the excess, if any, of (1) $3.00 per share over (2) the exercise price per share of such option, subject to applicable tax withholding.

 

No payment will be made with respect to stock options that have per share exercise prices above $3.00 and such options will be canceled and terminated in accordance with their terms.

 

At the effective time of the merger, each holder of our restricted stock and our restricted stock units will be treated as a holder of the corresponding number of shares of our common stock as of the effective time of the merger in the same manner as other outstanding shares of our common stock issued and outstanding as of immediately prior to the effective time of the merger.

 

Immediately prior to effective time of the merger our ESPP will terminate. On such date each right to purchase our common stock under our ESPP will be automatically exercised by applying the payroll deductions of each participant in the ESPP for the applicable Purchase Period (as defined in the ESPP) for the purchase of a number of whole shares of our common stock at an exercise price per share of our common stock equal to 85% of the merger consideration, which shares will then be canceled, immediately prior to the effective time of the merger, and converted into the right to receive the merger consideration. Excess payroll deductions not used as a result of ESPP share limitations or fractional shares will be distributed to the holders without interest.

 

At the effective time, each warrant to purchase our common stock outstanding immediately prior to the effective time of the merger, will cease to represent a right to acquire shares of our common stock and will be converted into the right to receive (upon surrender of the warrant) an amount in cash, without interest, equal to the product of the number of shares of our common stock subject to such warrant multiplied by the excess, if any, of (i) $3.00 per share over (ii) the exercise price per share of such warrant, subject to applicable tax withholding.

 

No payment will be made with respect to warrants that have per share exercise prices above $3.00.

 

Lilly will select a payment agent in connection with the merger. The payment agent will make payment of the merger consideration in exchange for certificates representing the outstanding shares of our common stock. Lilly will deposit sufficient cash with the payment agent at or promptly following the effective time of the merger in order to permit the payment of the merger consideration. As soon as reasonably practicable following the effective time of the merger, the payment agent will send to our stockholders a letter of transmittal and instructions explaining how to send their stock certificates to the payment agent. The payment agent will mail checks or effect wire transfers for the appropriate merger consideration, without interest, less any applicable withholding taxes, to our stockholders promptly following the payment agent’s receipt and processing of our stock certificates and properly completed transmittal documents.

 

In the event of a transfer of ownership of our common stock that is not registered in our transfer records, payment of the merger consideration will be made to the applicable transferee if the stock certificate is presented to

the payment agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.

 

Lilly may cause the payment agent to deliver to Lilly any funds undistributed to holders of certificates formerly representing shares of our common stock as of the date that is one year after the effective date of the merger. Any holders of certificates who have not surrendered such certificates in compliance with the above-described procedures, may thereafter look only to Lilly for payment of the merger consideration to which they are entitled.

 

If any certificate formerly representing shares of our common stock is lost, stolen, mutilated or destroyed, then upon receipt of an affidavit of that fact from the holder to that effect and the posting of a bond as an indemnity to Lilly, the payment agent will issue to such holder the merger consideration into which the shares represented by such lost, stolen, mutilated or destroyed certificate were converted.

 

Stock certificates should not be surrendered by our stockholders before the effective time of the merger and should be sent only pursuant to instructions set forth in the letters of transmittal to be mailed to our stockholders following the effective time of the merger. In all cases, the merger consideration will be provided only in accordance with the procedures set forth in the merger agreement and such letters of transmittal.

 

The merger consideration paid to you upon exchange of your shares of our common stock, restricted stock and restricted stock units, in-the-money stock options or in-the-money warrants will be paid in full satisfaction of all rights relating to the shares of our common stock, restricted stock and restricted stock units, stock options or warrants.

 

The certificate of incorporation of the surviving corporation shall be amended at the effective time to be in the form of the certificate of incorporation of Merger Sub in effect immediately prior to the effective time, except that the name of the surviving corporation may be changed to a name designated by Lilly. As of the effective time of the merger, the bylaws of Merger Sub as in effect immediately before the effective time of the merger will be the surviving corporation’s bylaws.

 

Following the merger, none of our directors will serve as directors of the surviving corporation and the directors and officers of Merger Sub will be the initial directors and officers of the surviving corporation. If requested by Lilly prior to the effective time of the merger, SGX will use its reasonable best efforts to cause the directors of SGX to tender their resignations as directors, effective as of the effective time of the merger and to deliver to Lilly written evidence of such resignations at or prior to the effective time of the merger.

 

The merger agreement contains customary representations and warranties that we, on the one hand, and Lilly and Merger Sub, on the other hand, made to, and solely for the benefit of, each other. Our representations and warranties to Lilly and Merger Sub relate to, among other things:

 

 

 

Lilly’s and Merger Sub’s representations and warranties to us relate to, among other things:

 

 

The representations and warranties expire at the effective time of the merger. The assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules that we delivered to Lilly in connection with signing the merger agreement. Accordingly, you should not rely on the representations and warranties as unqualified characterizations of the actual state of facts or circumstances, since they were only made as of the date of the merger agreement and are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the merger agreement, which subsequent information may or may not be fully reflected in our public disclosures.

 

Certain representations and warranties in the merger agreement provide exceptions for items that are not reasonably likely to have a “Company Material Adverse Effect.” For purposes of the merger agreement, a “Company Material Adverse Effect” means: any event, condition, change, occurrence or development of a state of facts that, individually or in the aggregate with all other events, conditions, changes, occurrences or developments

of a state of facts, or “Effect”, is or would reasonably likely be expected to (A) be materially adverse to our business, operations, properties, assets, liabilities, condition (financial or otherwise) or results of operations or (B) materially impact or delay, prevent or materially impede our ability to perform our obligations under the merger agreement in compliance with its terms or to consummate the transactions contemplated by the merger agreement; provided, however, that no such Effect shall be considered in determining whether a Company Material Adverse Effect has occurred to the extent that it is proximately caused by:

 

 

Affirmative Covenants.   We have agreed that, until the earlier of the effective time of the merger or the termination of the merger agreement, we will:

 

 

Negative Covenants.   We have agreed that, until the earlier of the effective time of the merger or the termination of the merger agreement, except with the prior written consent of Lilly, we will not, among other things:

 

 

 

 

We agreed to file this proxy statement with the SEC as promptly as practicable following the date of the merger agreement, respond promptly to any comments made by the SEC with respect to this proxy statement and cause this proxy statement and form of proxy to be mailed to our stockholders as promptly as reasonably practicable after its clearance by the SEC. Under the merger agreement, subject to the ability of our board to change its recommendation in favor of the merger pursuant to the merger agreement, we are required to use our reasonable best efforts to solicit proxies from our stockholders and take all other action reasonably necessary or advisable to secure the approval of our stockholders, and through our board, recommend to our stockholders the approval of the merger agreement. In addition, under the merger agreement we are required to call and hold a meeting of our stockholders, for the purpose of obtaining the stockholder approval for the merger agreement and the transactions contemplated thereby, including the merger, as soon as practicable.

 

For a period of one year following the effective time of the merger, Lilly has agreed to provide our employees who are located in the United States and retained by Lilly with employee benefits that are substantially comparable in the aggregate to those benefits provided to such employees immediately prior to the merger. However, Lilly will be under no obligation to retain any employee or group of employees of ours other than as required by applicable law or an employment agreement.

 

For purposes of all employee benefit plans, programs and arrangements maintained by or contributed to by Lilly, Lilly has agreed to cause each such plan, program or arrangement to treat the prior service with SGX of each person who is an employee or former employee of ours immediately prior to the effective time of the merger (to the same extent such service is recognized under our existing analogous plans, programs or arrangements) as service rendered to Lilly or its subsidiaries, as the case may be, for purposes of eligibility to participate in and vesting under such plans, programs and arrangements (but not benefit accrual), provided, however , that such crediting of service shall not operate to duplicate any benefit or the funding of such benefit or provide any benefit not currently provided to such employee. Our employees will also be given credit for any deductible or co-payment amounts paid in respect of the plan year in which the closing of the merger occurs, to the extent that, following the closing of the merger, they participate in any other plan for which deductibles or co-payments are required. Lilly has also agreed to use reasonable best efforts to cause each of its employee benefit plans in which our employees participate to waive any preexisting condition that was waived under the terms of any of our employee benefit plans immediately prior to the

closing of the merger or waiting period limitation which would otherwise be applicable to an employee of ours on or after the closing of the merger.

 

Furthermore, Lilly has agreed to recognize any accrued but unused vacation and sabbatical time of our employees as of the closing of the merger, in accordance with the terms of our policies and Lilly will provide such vacation and sabbatical time in accordance with the terms of our policies. However, Lilly will not be obligated to extend or enlarge the benefits available under our policies.

 

We, Lilly and Merger Sub have each agreed, as promptly as practicable after the date of the merger agreement (and in any event within 10 business days after the date of the merger agreement), to file or cause to be filed with the FTC, the DOJ or any comparable foreign antitrust or competition authority, any notifications required to be filed under the HSR Act with respect to the transactions contemplated by the merger agreement.

 

We, Lilly and Merger Sub have each agreed to not issue any public release or announcement concerning the merger without the prior written consent of us and Lilly, unless such release or announcement is permitted by the merger agreement or required by law or the rules or regulations of any applicable governmental authority.

 

We, Lilly and Merger Sub have each agreed to use our respective reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective in the most expeditious manner practicable, the merger, including:

 

 

Furthermore, we, Lilly and Merger Sub have each agreed to use our respective reasonable best efforts to respond promptly to any requests for additional information made by the FTC, the DOJ or any other governmental authority, and to cause the waiting period under the HSR Act to terminate or expire at the earliest possible date.

 

We have agreed to give prompt written notice to Lilly of:

 

 

We have agreed to give Lilly and Merger Sub reasonable access to our officers, employees, agents, properties, facilities, books, records, contracts and other assets and to furnish Lilly and Merger Sub all financial, operating and other data and information as they may reasonably request. Lilly and Merger Sub have the right to make such due diligence investigations as they deem necessary or reasonable, upon reasonable notice to us and without significant interference to our operations or properties.

 

The merger agreement contains detailed provisions prohibiting us from seeking an alternative transaction to the merger. Under these “no solicitation” and related provisions, subject to specific exceptions described below, we have agreed that, prior to the earlier of the consummation of the merger and the termination of the merger agreement, we will not, and we will not permit any of our representatives to directly or indirectly:

 

 

For these purposes, “takeover proposal” means any inquiry, proposal or offer from any person (other than Lilly, Merger Sub or any of their affiliates) or “group” (as defined in Section 13(d) of the Exchange Act) relating to:

 

 

Notwithstanding the above-described restrictions, the merger agreement provides that, if we receive an unsolicited bona fide written takeover proposal after the date of the merger agreement that did not result from a breach of the merger agreement and our board reasonably determines in good faith (after consultation with outside counsel and receiving the advice of its financial advisor of nationally recognized reputation) that such takeover proposal constitutes, or is reasonably likely to lead to, a superior proposal and our board determines in good faith,

after consulting with and receiving the advise of outside counsel, that the failure to take such action does or would constitute a breach of its fiduciary obligations to our stockholders under Delaware law, then we may, prior to receipt of our stockholders’ approval of the merger agreement (but in no event after such approval):

 

 

Under the merger agreement, a “superior proposal” is any bona fide written offer obtained after the date of the merger agreement and not in breach of the merger agreement to acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than 50% of our outstanding voting equity securities or all or substantially all of our assets on a consolidated basis, and is on terms that our board determines in its good faith judgment (after consultation with outside counsel and receiving the advice of its financial advisor of nationally recognized reputation), taking into account all relevant factors (including the terms and conditions of the takeover proposal, including price, form of consideration, closing conditions, the ability to fully finance the transaction and such other aspects of the takeover proposal as our board in good faith deems relevant), (A) would, if consummated, result in a transaction that is more favorable to the holders of our common stock from a financial point of view than the transactions contemplated by the merger agreement (including the terms of any proposal by Lilly to modify the terms of the transactions contemplated by the merger agreement) and (B) is reasonably capable of being completed on the terms proposed.

 

We have agreed to provide notice to Lilly within 24 hours after receipt if any proposal, offer, inquiry or other contact is received by, any information is requested from, or any discussions or negotiations are sought to be initiated or continued with, us in respect of any takeover proposal, and we will be required, in any such notice to Lilly, to indicate the identity of the person making such proposal, offer, inquiry or other contact (and include any written materials received from or on behalf of such person relating to such proposal, offer, inquiry or request), and we have agreed to promptly keep Lilly informed of all material developments affecting the status and terms of any such proposals, offers, inquiries or requests (and provide Lilly with copies of any additional written materials received that relate to such proposals, offers, inquiries or requests) and of the status of any such discussions or negotiations.

 

In the merger agreement, we have agreed that neither our board nor any committee thereof will:

 

 

Any failure or action described in the three bullets above is referred to as a “Company adverse recommendation change.”

Notwithstanding the foregoing, our board may, at any time prior to the stockholder vote adopting the merger agreement:

 

 

provided that, among other things:

 

 

None of the foregoing restrictions will prohibit us or our board from (A) taking and disclosing to our stockholders our position with respect to any tender or exchange offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act, or (B) making any required disclosure to our stockholders, if in each case our board determines in good faith, after consultation with outside counsel, that the taking of such position or the making of such disclosure is necessary in order for our board to comply with its fiduciary duties to our stockholders under Delaware law.

 

The merger agreement provides that all rights to indemnification in favor or any person who is, or has been, or becomes prior to the effective time an officer or director of SGX, as provided in our certificate of incorporation and bylaws, or pursuant to agreements, will be assumed by the surviving corporation. For six years after the merger, Lilly and Merger Sub will indemnify the officers and directors described above to the full extent permitted under applicable law.

 

Under the merger agreement, Lilly will cause the surviving corporation to maintain our officers’ and directors’ liability insurance policies in effect on the date of the merger agreement for a period of not less than six years after the effective time of the merger, but only to the extent related to actions or omissions prior to the effective time of the merger. The surviving corporation may substitute policies of at least the same coverage and amounts containing terms no less advantageous to our former directors or officers provided that the substitution does not result in gaps or lapses of coverage with respect to matters occurring prior to the effective time of the merger. In no event will Lilly or the surviving corporation be required to expend more than an amount per year equal to 300% of the last annual aggregate premium paid by us for such insurance. If the amount of the annual premiums necessary to maintain or procure such insurance coverage exceeds 300% of the last annual aggregate premium paid by us, Lilly and the surviving corporation must procure and maintain for such six-year period as much coverage as reasonably practicable for such amount. Lilly has the option to extend coverage under our current officers’ and directors’ liability insurance policies by obtaining a six-year “tail” policy or policies on terms and conditions no less advantageous than our existing officers’ and directors’ liability insurance policies.

 

We have agreed to give Lilly the opportunity to participate in the defense or settlement of any stockholder litigation against us or our directors relating to the merger or any of the other transactions contemplated by the merger agreement. We have also agreed not to settle any such litigation without Lilly’s prior written consent.

 

The obligation of each of us, Lilly and Merger Sub to complete the merger is subject to the satisfaction or waiver of the following additional conditions:

 

 

The obligation of Lilly and Merger Sub to complete the merger are also subject to the satisfaction or waiver of the following additional conditions:

 

 

Our obligation to complete the merger is also subject to the satisfaction or waiver of the following additional conditions:

 

 

The merger agreement may be terminated and the merger may be abandoned by any of the following means, at any time prior to the effective time of the merger, whether before or after the merger agreement has been adopted by our stockholders:

 

 

 

If the merger agreement is terminated by either us or Lilly in accordance with its terms, the merger agreement will immediately become void and have no effect, without any liability or obligation on the part of us, Lilly or Merger Sub, other than certain provisions relating to broker’s or finder’s fees, public announcements, notifications, availability of information, availability of remedies, confidentiality agreements, termination fees and expenses, and

other miscellaneous provisions. However, no party will be relieved from any liability for any willful breach of the merger agreement prior to such termination.

 

In the event that:

 

 

 

then we must pay to Lilly a termination fee of $2.0 million, plus an additional amount not to exceed $250,000 for the expenses of Lilly.

 

The merger agreement may be amended by a writing signed by each of the parties. However, after the adoption of the merger agreement by our stockholders at the special meeting, there will be no amendment made that in any way materially adversely affects the rights of such stockholders (other than a termination of the merger agreement in accordance with its terms) without the further approval of such stockholders.

 

The following description sets forth the material provisions of the voting agreement but does not purport to describe all of the terms of the voting agreement. The full text of the voting agreement is attached to this proxy statement as Annex B . You are urged to read the voting agreement in its entirety .

 

As a condition of, and an inducement to, Lilly entering into the merger agreement, on the date the merger agreement was executed, each of Michael Grey, Stephen K. Burley, W. Todd Myers, Siegfried Reich, Karin Eastham, Christopher S. Henney, Atlas Venture Fund IV, L.P., and its affiliated entities that hold shares of our common stock, and BAVP, L.P. (which is an affiliate of Louis Bock, a member of our board) who collectively beneficially owned approximately 26% of the outstanding shares of our common stock as of the record date, entered into a voting agreement with Lilly.

 

Under the terms of the voting agreement, each of the above stockholders irrevocably appointed Lilly as its proxy to vote all shares of our outstanding common stock held by that stockholder as of the record date:

 

 

During the term of the voting agreement, except as otherwise provided therein, each stockholder agrees not to:

 

 

Under the terms of the voting agreement, each stockholder agrees not to exercise any appraisal rights or any dissenters’ rights that such stockholder may have or could potentially have in connection with the merger agreement and the transactions contemplated by the merger agreement.

 

The voting agreement will terminate on the earliest of (i) the termination of the merger agreement in accordance with its terms, (ii) with respect to any stockholder, the written agreement of such stockholder and Lilly to terminate the voting agreement, (iii) the consummation of the merger, and (iv) the date of any amendment of the merger agreement to alter the merger consideration in a manner adverse to the stockholders without the stockholders’ consent.

 

If at the special meeting the number of shares of our common stock present or represented and voting in favor of the approval of the merger agreement is insufficient to approve the merger agreement under Delaware law and under our certificate of incorporation, our management may move to adjourn, postpone or continue the special meeting in order to enable our board to continue to solicit additional proxies in favor of the approval of the merger agreement. In that event, we will ask you to vote only upon the adjournment, postponement or continuation proposal and not the merger proposal.

 

In this proposal, we are asking you to authorize the holder of any proxy solicited by our board to vote in favor of adjourning, postponing or continuing the special meeting and any later adjournments. If our stockholders approve the adjournment, postponement or continuation proposal, we could adjourn, postpone or continue the special meeting, and any adjourned session of the special meeting, to use the additional time to solicit additional proxies in favor of the proposal to approve the merger agreement, including the solicitation of proxies from our stockholders that have previously voted against the merger proposal. Among other things, approval of the adjournment, postponement or continuation proposal could mean that, even if we had received proxies representing a sufficient number of votes against the proposal to approve the merger agreement, we could adjourn, postpone or continue the special meeting without a vote on the proposal to approve the merger agreement and seek to convince the holders of those shares to change their votes to votes in favor of the approval of the merger agreement.

 

The adjournment, postponement or continuation proposal requires that holders of more of our shares vote in favor of the adjournment, postponement or continuation proposal than vote against the proposal. Accordingly, abstentions and broker non-votes will have no effect on the outcome of this proposal. No proxy that is specifically marked AGAINST the proposal to approve the merger agreement will be voted in favor of the adjournment, postponement or continuation proposal, unless it is specifically marked FOR the discretionary authority to adjourn, postpone or continue the special meeting to a later date.

 

Our board believes that if the number of shares of our common stock present or represented at the special meeting and voting in favor of the proposal to approve the merger agreement is insufficient to approve the merger agreement, it is in the best interests of our stockholders to enable the board, for a limited period of time, to continue to seek to obtain a sufficient number of additional votes to approve the merger agreement.

 

Under Delaware law, you have the right to dissent from the merger and to receive payment in cash for the fair value of your shares of our common stock as determined by the Delaware Court of Chancery, together with interest, if any, as determined by the court, in lieu of the consideration you would otherwise be entitled to pursuant to the merger agreement. These rights are known as appraisal rights. Stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. We will require strict compliance with the statutory procedures.

 

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the merger and perfect appraisal rights.

 

This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the DGCL, the full text of which appears in Annex D to this proxy statement. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL may result in a termination or waiver of your appraisal rights. All references in this summary to a “stockholder” are to the record holder of shares of our common stock unless otherwise indicated.

 

Section 262 requires that stockholders for whom appraisal rights are available be notified not less than 20 days before the stockholders’ meeting to vote on the merger that appraisal rights will be available. A copy of Section 262 must be included with such notice. This proxy statement constitutes our notice to our stockholders of the availability of appraisal rights in connection with the merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Annex D to this proxy statement since failure to timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under Delaware law.

 

If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:

 

 

If you fail to comply with any of these conditions and the merger is completed, you will be entitled to receive the merger consideration, but you will have no appraisal rights with respect to your shares of our common stock. All demands for appraisal should be addressed to SGX Pharmaceuticals, Inc., 10505 Roselle Street, San Diego, California 92121 Attn: Corporate Secretary, Telephone (858) 558-4850, and must be delivered before the vote on the merger agreement is taken at the special meeting and should be executed by, or on behalf of, the record holder of the shares of common stock. The demand must reasonably inform us of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

 

To be effective, a demand for appraisal by a holder of common stock must be made by, or in the name of, such registered stockholder, fully and correctly, as the stockholder’s name appears on his or her stock certificate(s).

Beneficial owners who do not also hold the shares of record may not directly make appraisal demands to us. The beneficial holder must, in such cases, have the registered owner, such as a broker, bank or other nominee, submit the required demand in respect of those shares. If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may exercise his or her right of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner.

 

If you hold your shares of common stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your brokerage firm, bank, trust or other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

 

Within 10 days after the effective date of the merger, the surviving corporation must give written notice that the merger has become effective to each stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the merger agreement and the merger. At any time within 60 days after the effective time of the merger, any stockholder who has demanded an appraisal, and who has not commenced an appraisal proceeding or joined that proceeding as a named party, has the right to withdraw the demand and to accept the cash payment specified by the merger agreement for his or her shares of common stock; after this period, the stockholder may withdraw such demand for appraisal only with the consent of the surviving corporation. Within 120 days after the effective date of the merger, any stockholder who has complied with Section 262 will, upon written request to the surviving corporation, be entitled to receive a written statement setting forth the aggregate number of shares not voted in favor of the merger agreement and the merger and with respect to which demands for appraisal rights have been received and the aggregate number of holders of such shares. A person who is the beneficial owner of shares of common stock held in a voting trust or by a nominee on behalf of such person may, in such person’s own name, request from the surviving corporation the statement described in the previous sentence. Such written statement will be mailed to the requesting stockholder within 10 days after such written request is received by the surviving corporation or within 10 days after expiration of the period for delivery of demands for appraisal, whichever is later. Within 120 days after the effective time, either the surviving corporation or any stockholder who has complied with the requirements of Section 262 and who is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. A person who is the beneficial owner of shares of our common stock held in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file the petition described in the previous sentence. Upon the filing of the petition by a stockholder, service of a copy of such petition will be made upon SGX, as the surviving corporation. The surviving corporation has no obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previously written demand for appraisal. There is no present intent on our part to file an appraisal petition, and stockholders seeking to exercise appraisal rights should not assume that we will file such a petition or that we will initiate any negotiations with respect to the fair value of such shares. Accordingly, stockholders who desire to have their shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262.

 

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Register in Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached by the surviving corporation. After notice to dissenting stockholders who demanded appraisal of their shares, the Delaware Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal

rights provided thereby. The Delaware Court of Chancery may require the stockholders who have demanded appraisal for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

 

After determination of the stockholders entitled to appraisal of their shares of common stock, the Delaware Court of Chancery will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. When the value is determined, the Delaware Court of Chancery will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding, if the Delaware Court of Chancery so determines, to the stockholders entitled to receive the same, upon surrender by such holders of the certificates representing those shares.

 

In determining fair value, and, if applicable, interest, the Delaware Court of Chancery is required to take into account all relevant factors. In Weinberger v. UOP, Inc ., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.”

 

Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc. , the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger , the Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”

 

Although we believe the merger consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery, and you should be aware that the fair value of your shares as determined under Section 262 could be more than, the same as, or less than the value that you are entitled to receive under the terms of the merger agreement. Moreover, the surviving corporation does not anticipate offering more than the value that you are entitled to receive under the terms of the merger agreement to any stockholder exercising appraisal rights and reserves the right to assert, in any appraisal proceeding, that, for purposes of Section 262, the “fair value” of a share of our common stock is less than the merger consideration.

 

Costs of the appraisal proceeding may be imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Delaware Court of Chancery as the Court deems equitable in the circumstances. Upon the application of a stockholder, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective time of the merger, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior to the effective time; however, if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the terms of the merger within 60 days after the effective time of the merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the cash payment for shares of his, her or its shares of our common stock pursuant to the merger agreement. No appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the prior approval of the Court, and such approval may be conditioned upon such terms as the Delaware Court of Chancery deems just; provided, however , that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party

will maintain the right to withdraw its demand for appraisal and to accept the cash that such holder would have received pursuant to the merger agreement within 60 days after the effective date of the merger.

 

Failure to comply with all of the procedures set forth in Section 262 will result in the loss of a stockholder’s statutory appraisal rights. In view of the complexity of Section 262, stockholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

MARKET PRICE OF COMMON STOCK

 

Our common stock is listed on The Nasdaq Global Market under the symbol “SGXP.” The following table sets forth the high and low sales prices of our common stock for the periods indicated.

 

 

On July 7, 2008, the last full day of trading before the day of our public announcement of our execution of the merger agreement, the closing price of our common stock reported was $1.43 per share. On          , 2008, the last full day of trading before this proxy statement was first mailed to our stockholders, the closing price of our common stock reported was $      per share.

 

In addition to the other information included in this proxy statement, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Information,” you should carefully consider the following risks before deciding whether to vote for approval and adoption of the merger agreement.

 

We will incur substantial expenses related to the merger, and the merger might not be completed if we or Lilly are unable to fulfill all of the closing conditions.

 

We estimate that we will incur aggregate costs of approximately $6.0 million associated with the merger, of which up to approximately $      million has been paid as of     , 2008, as well as severance costs relating to our employees of approximately $3.3 million. The consummation of the merger is conditioned upon the fulfillment of certain conditions by each of the parties, including our obligation to obtain all licenses, permits, consents and approvals in connection with the merger. Although we intend to obtain all such approvals, it is possible that we may not be able to obtain all such approvals. It is not certain if the transaction would proceed in the event that certain of our or Lilly’s closing conditions cannot be satisfied. For example, if any required third party consent is not received, it is possible that Lilly might not consummate the merger.

 

The announcement of the merger could harm us, and failure to complete the merger could negatively affect our stock price and future business and operations.

 

The announcement of the merger could have a negative effect on our business relationships, operating results and business generally. In addition, if the merger is not completed for any reason, the price of our common stock may decline to the extent that the current market price of our common stock reflects a positive market assumption that the merger will be completed. Furthermore, if the merger agreement is terminated, we may be unable to find a third party willing to engage in a similar transaction on terms as favorable as those set forth in the merger agreement, or at all. In addition, we may not be able to enter into partnering arrangements or successfully pursue financing activities, or obtain adequate funding through other strategic opportunities. This could limit our ability to merge with another entity, continue as a stand alone entity or otherwise pursue our strategic goals in an atmosphere of increased uncertainty. Speculation regarding the likelihood of the closing of the merger could increase the volatility of our stock price.

 

Some of our officers and directors have interests in the merger that may influence them to support or approve the merger in a manner different than other stockholders.

 

Some of the directors who recommend that you vote in favor of the merger, and the officers who provided information to our board relating to the merger, have employment, indemnification, stock option and bonus arrangements that provide them with interests in the merger that may differ from yours. The receipt of compensation or other benefits in the merger may have influenced our directors in making their recommendation that you vote in favor of the transactions called for by the merger agreement, and the officers in making recommendations to the our board relating to the merger.

 

We will no longer exist as an independent public company following the merger and our stockholders will forego any increase in our value.

 

If the merger is successful, we will no longer exist as an independent public company and our stockholders will forego any increase in our value that might have otherwise resulted from our possible growth.

Upon termination of the merger agreement under specified circumstances, we may be required to pay a termination fee to Lilly.

 

Upon termination of the merger agreement under specified circumstances, we may be required to pay Lilly a $2.0 million termination fee, plus an additional amount not to exceed $250,000 for expenses of Lilly, at a time when such a payment could materially and adversely affect our liquidity and our ability to continue our business operations or otherwise continue as a going concern.

 

If the merger is not consummated, we may run out of cash and ultimately end up with no alternative other than to liquidate or seek protection under U.S. bankruptcy laws.

 

If the merger is not consummated, based on our existing cash, cash equivalents and short term investments, together with cash from existing and new collaborations, commercial agreements and grants, and anticipated cash needs, we, absent new financing or funding through partnering or financing activities or through other strategic opportunities, are projected to require additional cash infusion in the second half of 2009, or potentially sooner, and could ultimately end up with no alternative other than to liquidate or to seek protection under U.S. bankruptcy laws.

 

If the merger is consummated, we will not have public stockholders, and there will be no public participation in any future meetings of stockholders. However, if the merger is not consummated, we expect to hold our annual meeting of stockholders in 2009.

 

Stockholder Proposals.   To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 17, 2008, to Annette North, Esq.; 10505 Roselle Street, San Diego, California 92121. If you wish to submit a proposal that is to be included in next year’s proxy materials or nominate a director, you must do so by February 5, 2009. Stockholders are advised to review our Bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and director nominations. Our current Bylaws are available at the SEC’s website, www.sec.gov, or upon written request to Investor Relations, SGX Pharmaceuticals, Inc., at 10505 Roselle Street, San Diego, California 92121.

 

The following table sets forth certain information regarding the ownership of our common stock as of July 8, 2008 by all persons who, to our knowledge, were the beneficial owners of more than 5% of the outstanding shares of our common stock, each of our directors, each of our current named executive officers (as defined in Item 402(a)(3) of Regulation S-K) and all directors and executive officers as a group.

 

 

 

 

 

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

 

In connection with this proxy solicitation, a number of brokers with account holders who are SGX stockholders will be “householding” our proxy materials. A single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent with your broker. If, at any time, you would prefer to receive a separate proxy statement, please send a request in writing to SGX Pharmaceuticals, Inc., Annette North, Corporate Secretary, 10505 Roselle Street, San Diego, California 92121 at 858-558-4850. Stockholders who currently receive multiple copies of the proxy statement at their addresses and would like to request “householding” of their communications should contact their brokers.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.

 

Statements contained in this proxy statement, or in any document incorporated by reference in this proxy statement regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC. The SEC allows us to “incorporate by reference” into this proxy statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and before the date of the special meeting (other than Current Reports or portions thereof furnished under Item 2.02 or Item 7.01 of Form 8-K):

 

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of reports, proxy statements or other information concerning us, without charge, by written or telephonic request directed to us at 10505 Roselle Street, San Diego, California 92121 Attn: Corporate Secretary, or from the SEC through the SEC’s website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

 

THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE YOUR SHARES AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED          , 2008. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN

THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

 

By Order of the Board of Directors,

 

 

Michael Grey

President and Chief Executive Officer

San Diego, California

          , 2008

 

ANNEX A

PRIVILEGED AND CONFIDENTIAL

 

Agreement and Plan of Merger

dated as of July 8, 2008

among

Eli Lilly and Company,

REM Merger Sub, Inc.

and

SGX Pharmaceuticals, Inc.

 

Table of Contents

		Page
ARTICLE 1 DEFINITIONS			A-5
ARTICLE 2 THE MERGER			A-15
SECTION 2.1. The Merger			A-15
SECTION 2.2. Effects of the Merger			A-15
SECTION 2.3. Closing			A-15
SECTION 2.4. Consummation of the Merger			A-15
SECTION 2.5. Organizational Documents; Directors and Officers			A-16
ARTICLE 3 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES			A-16
SECTION 3.1. Conversion of Merger Sub Capital Stock			A-16
SECTION 3.2. Conversion of Company Common Stock			A-16
SECTION 3.3. Exchange of Certificates			A-17
SECTION 3.4. Company Options; Restricted Stock; ESPP			A-19
SECTION 3.5. Warrants			A-21
SECTION 3.6. Taking of Necessary Action; Further Action			A-21
SECTION 3.7. Adjustments to Prevent Dilution			A-21
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY			A-21
SECTION 4.1. Organization			A-22
SECTION 4.2. Capitalization			A-22
SECTION 4.3. Authorization; No Conflict			A-24
SECTION 4.4. Subsidiaries			A-25
SECTION 4.5. SEC Reports and Financial Statements			A-26
SECTION 4.6. Absence of Material Adverse Changes, etc.			A-28
SECTION 4.7. Litigation			A-28
SECTION 4.8. Information Supplied			A-29
SECTION 4.9. Broker’s or Finder’s Fees			A-29
SECTION 4.10. Employee Plans			A-29
SECTION 4.11. Opinion of Financial Advisor			A-32
SECTION 4.12. Taxes			A-32
SECTION 4.13. Environmental Matters			A-33
SECTION 4.14. Compliance			A-34
SECTION 4.15. Intellectual Property			A-38
SECTION 4.16. Material Contracts			A-41
SECTION 4.17. Government Contract Regulatory Matters			A-44
SECTION 4.18. Employment Matters			A-46

		Page
SECTION 4.19. Real Property			A-47
SECTION 4.20. Insurance			A-48
SECTION 4.21. Affiliate Transactions			A-48
SECTION 4.22. State Takeover Statutes			A-48
SECTION 4.23. Assets			A-49
SECTION 4.24. Foreign Corrupt Practices Act			A-49
SECTION 4.25 No Other Representation or Warranty			A-49
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB			A-49
SECTION 5.1. Organization			A-49
SECTION 5.2. Merger Sub			A-50
SECTION 5.3. Authorization; No Conflict			A-50
SECTION 5.4. Information Supplied			A-51
SECTION 5.5. Available Funds			A-51
SECTION 5.6. Litigation			A-51
ARTICLE 6 CONDUCT OF BUSINESS PENDING THE MERGER			A-51
SECTION 6.1. Conduct of Business by the Company Pending the Merger			A-51
ARTICLE 7 ADDITIONAL AGREEMENTS			A-55
SECTION 7.1. Preparation of Proxy Statement; Stockholders Meeting			A-55
SECTION 7.2. Employee Matters			A-57
SECTION 7.3. Regulatory Filings			A-58
SECTION 7.4. Public Statements			A-58
SECTION 7.5. Standard of Efforts			A-58
SECTION 7.6. Notification of Certain Matters			A-59
SECTION 7.7. Access to Information; Confidentiality			A-59
SECTION 7.8. No Solicitation			A-60
SECTION 7.9. Indemnification and Insurance			A-62
SECTION 7.10. Section 16 Matters			A-63
SECTION 7.11. Stockholder Litigation			A-64
ARTICLE 8 CONDITIONS			A-64
SECTION 8.1. Conditions to Each Party’s Obligation To Effect the Merger			A-64
SECTION 8.2. Conditions to Obligations of Parent and Merger Sub			A-64
SECTION 8.3. Conditions to Obligation of the Company			A-65
SECTION 8.4. Frustration of Closing Conditions			A-66
ARTICLE 9 TERMINATION, AMENDMENT AND WAIVER			A-66
SECTION 9.1. Termination			A-66
SECTION 9.2. Effect of Termination			A-68
SECTION 9.3. Fees and Expenses			A-68
SECTION 9.4. Amendment			A-70
SECTION 9.5. Waiver			A-70