La Jolla Pharmaceutical (LJPC) 10-Q 2001 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Mark One

[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2001

or

[   ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From          to           

Commission File Number: 0-24274

LA JOLLA PHARMACEUTICAL COMPANY

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	33-0361285 (I.R.S. Employer Identification No.)
6455 Nancy Ridge Drive San Diego, CA (Address of Principal Executive Offices)	92121 (Zip Code)

Registrant’s Telephone Number, Including Area Code:(858) 452-6600

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X]    No [    ]

The number of shares of the Registrant’s common stock, $.01 par value, outstanding at July 31, 2001 was 35,223,433.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		Balance Sheets
		Statements of Operations
		Statements of Cash Flows
		Notes to Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 10.41
EXHIBIT 10.42
EXHIBIT 10.43

LA JOLLA PHARMACEUTICAL COMPANY
FORM 10-Q
QUARTERLY REPORT

INDEX

PART I. FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	Balance Sheets as of June 30, 2001 (Unaudited) and December 31, 2000	1
	Statements of Operations (Unaudited) for the three months and six months ended June 30, 2001 and 2000	2
	Statements of Cash Flows (Unaudited) for the six months ended June 30, 2001 and 2000	3
	Notes to Financial Statements (Unaudited)	4
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	7
PART II. OTHER INFORMATION
	ITEM 4. Submission of Matters to a Vote of Security Holders	7
	ITEM 6. Exhibits and Reports on Form 8-K	8
SIGNATURES		10

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LA JOLLA PHARMACEUTICAL COMPANY

Balance Sheets
(in thousands)

			June 30,			December 31,
			2001			2000
			(Unaudited)			(Note)
ASSETS
Current assets:
	Cash and cash equivalents		$	20,623		$	8,061
	Short-term investments			37,902			31,838
	Other current assets			1,483			590
		Total current assets		60,008			40,489
Property and equipment, net				1,430			780
Patent costs and other assets, net				1,884			1,747
		Total assets	$	63,322		$	43,016
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	620		$	468
	Accrued clinical expenses			1,113			1,914
	Accrued expenses			510			560
	Accrued payroll and related expenses			397			288
	Current portion of obligations under capital leases			256			44
		Total current liabilities		2,896			3,274
Commitments
Stockholders’ equity:
	Common stock			352			294
	Additional paid-in capital			158,134			124,909
	Other comprehensive income			161			105
	Accumulated deficit			(98,221	)		(85,566	)
		Total stockholders’ equity		60,426			39,742
		Total liabilities and stockholders’ equity	$	63,322		$	43,016

Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete balance sheets.

See accompanying notes.

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LA JOLLA PHARMACEUTICAL COMPANY

Statements of Operations
(Unaudited)
(in thousands, except per share amounts)

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2001			2000			2001			2000
Revenue			$	—		$	—		$	—		$	—
Expenses:
	Research and development			5,949			2,708			12,414			5,143
	General and administrative			1,024			585			1,908			1,304
		Total expenses		6,973			3,293			14,322			6,447
Loss from operations				(6,973	)		(3,293	)		(14,322	)		(6,447	)
Interest expense				(13	)		(2	)		(13	)		(5	)
Interest income				880			301			1,680			581
Net loss			$	(6,106	)	$	(2,994	)	$	(12,655	)	$	(5,871	)
Basic and diluted net loss per share			$	(.17	)	$	(.12	)	$	(.37	)	$	(.25	)
Shares used in computing basic and diluted net loss per share				35,150			24,401			33,926			23,320

See accompanying notes.

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LA JOLLA PHARMACEUTICAL COMPANY

Statements of Cash Flows
(Unaudited)
(in thousands)

			Six Months Ended
			June 30,
			2001			2000
Operating activities
Net loss			$	(12,655	)	$	(5,871	)
Adjustments to reconcile net loss to net cash used for operating activities:
	Depreciation and amortization			258			199
	Accretion of interest income			(107	)		—
	Change in operating assets and liabilities:
		Other current assets		(893	)		(197	)
		Accounts payable and accrued expenses		102			161
		Accrued clinical expenses		(801	)		—
		Accrued payroll and related expenses		109			40
		Net cash used for operating activities		(13,987	)		(5,668	)
Investing activities
Increase in short-term investments				(5,901	)		(1,966	)
Additions to property and equipment				(506	)		(128	)
Increase in patent costs and other assets				(168	)		(143	)
		Net cash used for investing activities		(6,575	)		(2,237	)
Financing activities
Net proceeds from issuance of common stock				33,283			12,988
Payments on obligations under capital leases				(159	)		(104	)
		Net cash provided by financing activities		33,124			12,884
Net increase in cash and cash equivalents				12,562			4,979
Cash and cash equivalents at beginning of period				8,061			4,409
Cash and cash equivalents at end of period			$	20,623		$	9,388
Supplemental disclosure of cash flow information:
Interest paid			$	13		$	5
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations incurred for property and equipment			$	371		$	—
Net unrealized gains on available-for-sale investments			$	56		$	—

See accompanying notes.

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LA JOLLA PHARMACEUTICAL COMPANY

Notes to Financial Statements
(Unaudited)

June 30, 2001

1. Basis of Presentation

The accompanying unaudited financial statements of La Jolla Pharmaceutical Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for other quarters or the year ended December 31, 2001. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2000, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

2. Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.

Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted-average number of common shares outstanding during the periods in accordance with Statement of Financial Accounting Standard No. 128, “Earnings per Share.” As the Company has incurred a net loss for both periods presented, stock options and warrants are not included in the computation of net loss per share since their effect is anti-dilutive.

Comprehensive Loss

In accordance with Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income (Loss)” (“SFAS 130”), unrealized gains and losses on available-for-sale securities are included in other comprehensive income (loss). The Company’s comprehensive loss totaled $6,141,000 and $2,994,000 for the three-month period and $12,599,000 and $5,871,000 for the six-month period ended June 30, 2001 and 2000, respectively.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), “Business Combinations” and “Goodwill and Other Intangible Assets.” FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Companies are required to adopt FAS 142 for fiscal years beginning after December

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15, 2001, but early adoption is permitted under certain circumstances. The adoption of these standards will not have a material impact on the Company’s financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

     Statements regarding our drug development plans, clinical trials and other matters described in terms of our plans and expectations are forward-looking statements involving risks and uncertainties, and a number of factors, both foreseen and unforeseen, could cause actual results to differ materially from our current expectations. Our analysis of clinical results of LJP 394, our drug candidate for the treatment of systemic lupus erythematosus (“lupus”), is ongoing and future analyses could result in a finding that LJP 394 is not effective in large patient populations or does not provide a meaningful clinical benefit. Our blood test to measure binding affinity for LJP 394 is experimental and has not been validated by independent laboratories. Our other potential drug candidates are at earlier stages of development and involve comparable risks. Analysis of our clinical trials could have negative or inconclusive results. Even if results are promising, the Food and Drug Administration may require additional clinical trials. Additional risk factors include the uncertainty of: obtaining required regulatory approvals; successfully marketing products; receiving future revenue from product sales or other sources such as collaborative relationships; future profitability; the need for additional financing; our dependence on patents and other proprietary rights; our limited manufacturing capabilities and our lack of marketing experience. Readers are cautioned not to place undue reliance upon forward-looking statements, which speak only as of the date hereof, and we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date hereof. Interested parties are urged to review the risks described below and in other reports and registration statements of La Jolla Pharmaceutical Company filed with the Securities and Exchange Commission from time to time.

Overview

     Since our inception in May 1989, we have devoted substantially all of our resources to the research and development of technology and potential drugs to treat antibody-mediated diseases. We have never generated any revenue from product sales and have relied upon private and public investors, revenue from collaborative agreements, equipment lease financings and interest income on invested cash balances for our working capital. We have been unprofitable since our inception and we expect to incur substantial additional expenses and net operating losses for at least the next several years as we increase our clinical trial and manufacturing scale-up activities including the production of LJP 394 for clinical trials, increase our research and development expenditures on additional drug candidates, and incur general and administrative expenditures to support increased clinical trial, research and development and manufacturing scale-up activities. Our activities to date are not as broad in depth or scope as the activities we must undertake in the future and our historical operations and the financial information reported below are not necessarily indicative of our future operating results or financial condition.

     We expect that losses are likely to fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and potential revenues from collaborative arrangements. Some of these fluctuations may be significant. As of June 30, 2001, our accumulated deficit was approximately $98.2 million.

Results of Operations

     For the three and six months ended June 30, 2001, research and development expenses increased to $5.9 million and $12.4 million, respectively, from $2.7 million and $5.1 million for the same periods in 2000. The increase was due to an increase in expenses associated with the ongoing Phase III clinical trial of our lupus drug candidate, LJP 394, which was initiated in September 2000. Our research

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and development expenses are expected to increase significantly in the future as clinical trial and manufacturing scale-up activities, including the production of LJP 394 for clinical trials, are increased, efforts to develop additional drug candidates are intensified and other potential products progress into and through clinical trials.

     General and administrative expenses increased to $1.0 and $1.9 million for the three and six months ended June 30, 2001, respectively, from $585,000 and $1.3 million for the same periods in 2000. The increase was due to additional administrative expenditures to support the increased clinical and research and development activities. We expect general and administrative expenses to increase in the future in order to support increased clinical trial, manufacturing scale-up and research and development activities.

     Interest income increased to $880,000 and $1.7 million for the three and six months ended June 30, 2001, respectively, from $301,000 and $581,000 for the same periods in 2000. The increase in interest income was due to higher investment balances as a result of the sale of 5,700,000 shares of our common stock in February 2001 to private investors for net proceeds of $33.1 million. For both the three and six months ended June 30, 2001, interest expense was $13,000 compared to $2,000 and $5,000 for the same periods in 2000. The increase in interest expense was the result of increases in our capital lease obligations.

Liquidity and Capital Resources

     From inception through June 30, 2001, we have incurred a cumulative net loss of approximately $98.2 million and have financed our operations through private and public offerings of our securities, revenues from collaborative agreements, capital and operating lease transactions, and interest income on our invested cash balances. From inception through June 30, 2001, we have raised approximately $157.7 million in net proceeds from sales of our equity securities.

     At June 30, 2001, we had $58.5 million in cash, cash equivalents and short-term investments, as compared to $39.9 million at December 31, 2000. Our working capital at June 30, 2001 was $57.1 million, as compared to $37.2 million at December 31, 2000. The increase in cash, cash equivalents and short-term investments as well as working capital resulted from the sale of 5,700,000 shares of our common stock to private investors for net proceeds of $33.1 million in February 2001 offset by the continued use of our cash towards operating activities, patent expenditures and the purchase of property and equipment. We invest our cash in corporate and United States Government-backed debt instruments.

     As of June 30, 2001, we had acquired an aggregate of $5.5 million in property and equipment, of which approximately $371,000 of equipment is financed under capital lease obligations. In addition, we lease our office and laboratory facilities and certain equipment under operating leases. We have no material commitments for the acquisition of property and equipment. However, we anticipate increasing our investment in property and equipment in connection with the enhancement of our research and development and manufacturing facilities and capabilities.

     We intend to use our financial resources to fund clinical trials and manufacturing scale-up activities including the production of LJP 394 for clinical trials, research and development efforts, and for working capital and other general corporate purposes. The amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the results of clinical trials, the timing of regulatory applications and approvals, and technological developments. Expenditures will also depend upon the establishment and progression of collaborative arrangements and contract research as well as the availability of other financings. There can be no assurance that these funds will be available on acceptable terms, if at all.

     We anticipate that our existing capital and interest earned thereon will be sufficient to fund our operations as currently planned through 2002. Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the size and

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complexity of these programs, the scope and results of clinical trials, the analysis of data from the Phase II/III clinical trial, the time and costs involved in applying for any regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, ability to establish and maintain collaborative relationships, and the cost of manufacturing scale-up and effective commercialization activities and arrangements. We expect to incur significant net operating losses each year for at least the next several years as we expand our current research and development programs, including clinical trials and manufacturing scale-up activities, and increase our general and administrative expenses to support a larger, more complex organization. It is possible that our cash requirements will exceed current projections and that we will therefore need additional financing sooner than currently expected.

     We have no current means of generating cash flow from operations. Our lead drug candidate, LJP 394, will not generate revenues, if at all, until it has been proven safe and effective, has received regulatory approval and has been successfully commercialized, a process that is expected to take at least the next several years. Our other drug candidates are at ealier stages of development than LJP 394. There can be no assurance that our product development efforts with respect to LJP 394 or any other drug candidate will be successfully completed, that required regulatory approvals will be obtained, or that any product, if introduced, will be successfully marketed or achieve commercial acceptance. Accordingly, we must continue to rely upon outside sources of financing to meet our capital needs for the foreseeable future.

     We will continue to seek capital through any appropriate means, including issuance of our securities and establishment of additional collaborative arrangements. However, there can be no assurance that additional financing will be available on acceptable terms and our negotiating position in our capital-raising efforts may worsen as we continue to use our existing resources. There is no assurance that we will be able to enter into further collaborative relationships.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We invest our excess cash in interest-bearing investment-grade securities that we hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market-risk-sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices or other market changes that affect market-risk-sensitive instruments.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Annual Meeting of Stockholders was held on May 18, 2001. All of the Company’s directors nominated for election as stated in the Company’s Proxy Statement were elected as follows:

Director Nominee	Term	Votes in Favor		Votes Withheld
Robert A. Fildes, Ph.D.	Three years		24,878,602		612,289
Steven M. Martin	Three years		24,879,602		611,289

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     All of the Company’s proposals as stated in the Company’s Proxy Statement were approved as follows:

Proposal Description	Votes in Favor		Votes Against		Abstaining		Broker Non-Votes
Amendment to the 1994 Stock Incentive Plan to increase by 1,700,000 the number of shares of the Company’s Common Stock available under the Plan		17,321,102		1,472,205		445,342		6,252,242
Amendment to the 1994 Stock Incentive Plan to increase the annual limit on the amount of shares available under certain awards granted to a participant to 600,000		24,553,945		500,247		436,699		—
Amendment to the 1995 Employee Stock Purchase Plan to increase by 300,000 the number of shares of the Company’s Common Stock available under the Plan.		18,236,183		564,595		427,871		6,262,242

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

Exhibit Number	Description
3.1	Intentionally omitted
3.2	Amended and Restated Bylaws of the Company (1)
3.3	Amended and Restated Certificate of Incorporation of the Company (2)
4.0	Rights Agreement, dated as of December 3, 1998, between the Company and American Stock Transfer & Trust Company (3)
4.1	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company (4)
4.2	Amendment to Rights Agreement, effective as of July 21, 2000, between the Company and American Stock Transfer & Trust Company (5)
10.41	Supplement to employment offer letter for William J. Welch*
10.42	Supplement to employment offer letter for Theodora Reilly*
10.43	Supplement to employment offer letter for Paul Jenn, Ph.D*

*	This exhibit is a management contract or compensatory plan or arrangement.
(1)	Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated by reference herein.
(2)	Previously filed with the Company’s Quarterly Report Form 10-Q for the quarter ended September 30, 1999 and incorporated by reference herein.
(3)	Previously filed with the Company’s Registration Statement on Form 8-A (No. 000-24274) as filed with the Securities and Exchange Commission on December 4, 1998.

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(4)	Previously filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated by reference herein.
(5)	Previously filed with the Company’s Current Report on Form 8-K filed on January 26, 2001 and incorporated by reference herein. The changes effected by the Amendment are also reflected in the Amendment to Application for Registration on Form 8-A/A filed in January 26, 2001.

     (b)  Reports on Form 8-K

     None

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LA JOLLA PHARMACEUTICAL COMPANY

SIGNATURES

June 30, 2001

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	La Jolla Pharmaceutical Company
Date: August 14, 2001	By:	/s/ Steven B. Engle
		Steven B. Engle Chairman and Chief Executive Officer Signed on behalf of the Registrant
	By:	/s/ Gail A. Sloan
		Gail A. Sloan Signed as Principal Accounting Officer

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LA JOLLA PHARMACEUTICAL COMPANY

INDEX TO EXHIBITS

Exhibit Number	Description
10.41	Supplement to employment offer letter for William J. Welch
10.42	Supplement to employment offer letter for Theodora Reilly
10.43	Supplement to employment offer letter for Paul Jenn, Ph.D.

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