UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15609
AGOURON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0061928
(State or other jurisdiction of I.R.S. employer identification no.)
incorporation or organization)
10350 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037-1020
(Address and zip code of principal executive offices)
(619) 622-3000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
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 ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Approximately
13,563,000 shares of the Company's Common Stock, no par value, were
outstanding as of January 8, 1997.
AGOURON PHARMACEUTICALS, INC.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet - 3
December 31, 1996 and June 30, 1996
Statement of Operations - Three and Six 4
Months Ended December 31, 1996 and 1995
Statement of Cash Flows- 5
Six Months Ended December 31, 1996 and 1995
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGOURON PHARMACEUTICALS, INC.
BALANCE SHEET
(Dollars in thousands)
December 31, June 30,
1996 1996
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,827 $ 16,451
Short-term investments 92,071 74,424
Accounts receivable 6,151 2,966
Inventory 21,400 0
Other current assets 1,370 1,800
------------ -----------
Total current assets 137,819 95,641
Property and equipment, net of
accumulated depreciation and
amortization of $15,241 and $13,710 9,405 6,936
----------- ----------
$ 147,224 $ 102,577
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,895 $ 6,659
Accrued liabilities 4,951 4,327
Deferred revenue 9,085 13,788
Current portion of long-term debt 348 486
------------ -----------
Total current liabilities 18,279 25,260
------------ -----------
Long-term liabilities:
Long-term debt, less current portion 441 501
Accrued rent 1,183 1,233
----------- -----------
Total long-term liabilities 1,624 1,734
------------ -----------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares
authorized, 13,558,840 and 10,731,687 shares
issued and outstanding 237,369 158,628
Accumulated deficit (110,048) (83,045)
----------- -----------
Total stockholders' equity 127,321 75,583
----------- -----------
$ 147,224 $ 102,577
=========== ===========
See accompanying notes to financial statements.
3
AGOURON PHARMACEUTICALS, INC.
STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
-------- ------- -------- --------
Revenues:
Contracts and licenses $ 15,109 $ 9,592 $ 32,623 $ 20,555
-------- ------- -------- --------
Operating expenses:
Research and development 23,302 14,188 52,936 26,716
Selling, general and
administrative 5,786 977 9,522 2,083
-------- ------- -------- --------
29,088 15,165 62,458 28,799
-------- ------- -------- --------
Operating loss (13,979) (5,573) (29,835) (8,244)
-------- ------- -------- --------
Other income and expenses:
Interest, net 1,729 1,556 3,444 1,847
Taxes (306) (115) (612) (258)
-------- ------- -------- --------
1,423 1,441 2,832 1,589
-------- ------- -------- --------
Net loss $(12,556) $(4,132) $(27,003) $(6,655)
======== ======= ======== ========
Net loss per common share $ (0.93) $ (0.40) $ (2.07) $ (0.73)
======== ======= ======== ========
Shares used in computing net
loss per common share 13,524 10,432 13,050 9,076
======== ======= ======== ========
See accompanying notes to financial statements.
4
AGOURON PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
------------------------------
December 31,
------------------------------
1996 1995
------------ -------------
Cash flows from operating activities:
Cash received from contracts
and licenses $ 24,735 $ 31,990
Cash paid to suppliers, employees
and service providers (84,701) (24,039)
Interest received 3,524 1,994
Interest paid (80) (147)
------------ ------------
Net cash provided (used) by
operating activities (56,522) 9,798
------------ ------------
Cash flows from investing activities:
Net (increase) decrease
in short-term investments (17,647) (82,248)
Expenditures for property and equipment (3,937) (905)
------------ ------------
Net cash provided (used) by
investing activities (21,584) (83,153)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 78,741 80,105
Principal payments under equipment leases (76) (218)
Increase (decrease) in long-term debt, net (183) (261)
------------ ------------
Net cash provided (used) by
financing activities 78,482 79,626
------------ ------------
Net increase (decrease) in cash and
cash equivalents 376 6,271
Cash and cash equivalents at
beginning of period 16,451 4,358
------------ ------------
Cash and cash equivalents at end of period $ 16,827 $ 10,629
============ ============
Reconciliation of net loss to net cash
provided (used) by operating activities:
Net loss $ (27,003) $ (6,655)
Depreciation and amortization 1,529 1,102
Net (increase) decrease in
accounts receivable (3,185) 130
Net (increase) decrease in inventory (21,400) 0
Net (increase) decrease in other
current assets 430 (48)
Net increase (decrease) in accounts
payable, accrued liabilities,
and accrued rent (2,190) 3,964
Net increase (decrease) in
deferred revenue (4,703) 11,305
------------ ------------
Net cash provided (used)
by operating activities $ (56,522) $ 9,798
============ ============
See accompanying notes to financial statements.
5
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Nature of operations
Agouron Pharmaceuticals, Inc. is involved in the research and development
of novel synthetic drugs for the treatment of cancer, AIDS and other
serious diseases. The Company intends to commercialize any successfully
developed products through its own direct sales and marketing activities in
certain markets or, when appropriate, through manufacturing and marketing
relationships with other pharmaceutical companies.
2. Financial statements and estimates
The balance sheet as of December 31, 1996 and the statements of operations
and cash flows for the three-month and six-month periods ended December 31,
1996 and 1995 have been prepared by the Company and have not been audited.
Such financials, in the opinion of management, include all adjustments
(consisting only of normal, recurring accruals) necessary to present fairly
the financial position, results of operations and cash flows for all
periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 1996 Annual Report on Form 10-K. Certain June 30, 1996
and December 31, 1995 amounts have been reclassified to conform with the
current year presentation. Interim operating results are not necessarily
indicative of operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures as of the date of the
financial statements. Actual results could differ from such estimates.
At December 31, 1996, it has been assumed that the existing collaborations
with Japan Tobacco Inc. ("JT") and Hoffmann-La Roche Inc. and F. Hoffmann-
La Roche Ltd ("Roche") will continue in accordance with their agreement
terms. As such, approximately $9,034,000 of cash received from JT and
Roche has been classified as deferred contract revenue, is non-refundable
and is being recognized as revenue on a prospective basis as collaborative
program expenses are incurred. Should any of the underlying collaborations
be terminated in advance of their contract terms, any deferred contract
revenues related to such collaborations would immediately be recognized as
revenue by the Company.
In December 1996, the Company filed a New Drug Application ("NDA") with the
United States Food and Drug Administration ("FDA") for its anti-HIV drug,
VIRACEPT(R) (nelfinavir mesylate). In anticipation of the approval of such
NDA by the FDA, the Company is manufacturing commercial quantities of
VIRACEPT and has capitalized approximately $21,400,000 of work-in-process
inventory at December 31, 1996. If the FDA does not approve the NDA or it
becomes likely that the FDA will not approve the NDA, any capitalized
VIRACEPT inventory will be expensed.
6
3. Short-term investments
Included in short-term investments at December 31, 1996 and June 30, 1996
is $1,360,000 and $1,156,000 of accrued interest receivable. Included in
short-term investments at December 31, 1996 is $3,400,000 which has been
pledged as collateral for certain commercial letters of credit or long-term
debt obligations. At December 31, 1996, the Company's short-term
investments are generally available for sale, are carried at amortized cost
which approximates market, consist principally of United States government
securities (64%) and corporate obligations (29%), and have average
maturities of less than one year.
Inventory
Inventory is stated at the lower of cost or market and, at December 31,
1996, consists of work-in-process at contract manufacturers.
5. Statement of cash flows
Non-cash financing activities were comprised of capital lease obligations
of $61,000 and $457,000 in the six-month periods ended December 31, 1996
and 1995.
Certain concentrations
A significant portion of the Company's research and development
expenditures are related to programs funded in whole or in part by JT and
Roche. The termination of such collaborative research and development
programs could result in the absence of any prospective funding for such
programs and the need to evaluate the level of future program spending, if
any.
7. Subsequent event
On January 17, 1997, pursuant to a binding letter of intent, the Company
and JT granted F. Hoffmann-La Roche Ltd ("Roche") exclusive marketing
rights for VIRACEPT in Europe and other countries outside North America,
Japan and Asia. For the marketing rights, Roche has paid to Agouron and JT
an initial license fee of $18,000,000 and will pay an additional
$22,000,000 when VIRACEPT is first approved in Europe. Roche will also pay
royalties based on Roche's sales of VIRACEPT or, under certain conditions,
on combined sales of VIRACEPT and INVIRASE, Roche's HIV protease inhibitor.
On January 24, 1997, the Company received its share of the initial license
fee, $9,000,000.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
When used in this discussion, the words "believes", "anticipated" and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. See
"Important Factors Regarding Forward-Looking Statements" attached as
Exhibit 99 to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996 and incorporated herein by reference. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak
only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Financial Condition
The Company relies principally on equity financings and corporate
collaborations to fund its operations and capital expenditures. At
December 31, 1996, the Company had increased its net working capital
position by $49,159,000 over June 30, 1996 levels to $119,540,000. The
increase is due principally to the net proceeds of approximately
$77,347,000 from a public offering of common stock in July 1996, which
contributed, in part, to an $18,023,000 increase in cash, cash equivalents
and marketable securities, the purchase of $21,400,000 of inventory and
satisfying the cash requirements associated with the Company's year-to-date
net loss of $27,003,000. At December 31, 1996, the Company had cash, cash
equivalents and short-term investments of approximately $108,898,000. The
Company believes that its current capital resources and existing
contractual commitments are sufficient to maintain its current and planned
operations through fiscal 1998. This belief is based on current research
and clinical development plans, anticipated working capital requirements
associated with the planned commercial launch of VIRACEPT during fiscal
1997, anticipated VIRACEPT product contribution subsequent to its
commercial launch, the current regulatory environment, historical industry
experience in the development of therapeutic drugs and general economic
conditions. The Company believes that additional financing may be required
to meet the planned operating needs of fiscal 1999 if significant positive
cash flows are not generated from commercial activities. Such needs would
include the expenditure of substantial funds to continue research and
development activities, conduct existing and planned preclinical studies
and tests, conduct human clinical trials and to support a growing
commercial infrastructure including certain manufacturing, sales and
marketing capabilities. As a result, the Company anticipates pursuing
various financing alternatives such as collaborative arrangements and
additional public offerings or private placements of Company securities.
If such alternatives are not available, the Company may be required to
delay or eliminate expenditures for certain of its potential products under
development or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop or
commercialize itself.
8
Results of Operations
The Company is engaged in the research and development of human
pharmaceuticals utilizing protein structure-based drug design. Such
research and development has been funded from the Company's equity-derived
working capital and through various collaborative arrangements. The
Company's net operating losses reflect primarily the result of its
independent research and continued increasing investment in clinical and
commercial development activities concentrated on the Company's lead
compounds in cancer and AIDS. As product sales may not begin prior to
fiscal 1998 and certain programs are expanding their preclinical, clinical,
and commercial development activities, it is anticipated that quarterly net
losses will continue into fiscal 1998.
The increases in the net losses for the three and six months ended December
31, 1996 compared to the year-earlier periods are due principally to the
Company's ongoing commitment to support significant clinical testing and
development activities to facilitate an approvable VIRACEPT NDA during
fiscal 1997, and to establish a commercial infrastructure to achieve a
timely commercial launch of VIRACEPT subsequent to the anticipated approval
of the NDA. These spending increases were only partially offset by
increased revenues from the JT collaboration and new revenues from the
Roche collaboration.
Contract revenues in the current three and six-month periods have increased
compared to the year-earlier periods due mainly to expanding clinical trial
activities on the anti-HIV collaboration with JT and the new (June 1996)
development collaboration with Roche.
Research and development expenses increased from the prior-year periods due
generally to increasing average research and development staff levels
(approximately 42% in the three and six month periods) and staff-related
expenditures, including occupancy, and significantly increased expenditures
for human clinical trial activities associated with the Company's leading
product development program, VIRACEPT.
The increase in selling, general and administrative expenses in the current
three and six-month periods is due chiefly to increasing average staff
levels (approximately 207% in the three month period and 171% in the six
month period) and staff related expenditures, certain premarketing costs
associated with the anticipated launch of VIRACEPT during fiscal 1997 and
other costs associated with a growing sales and marketing infrastructure.
Interest (net) has increased in the current-year periods due principally to
a higher average investment portfolio balance resulting from the previously
described public offering. Taxes have increased due to certain foreign
taxes paid in conjunction with the JT collaboration.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The Company is involved in certain legal or administrative proceedings
generally incidental to its normal business activities. While the outcome
of any such proceedings cannot be accurately predicted, the Company does
not believe the ultimate resolution of any such existing matters should
have a material adverse effect on its financial position or results of
operations.
Item 2. Changes in Securities:
On November 7, 1996, the Board of Directors of the Company adopted a
Stockholder Rights Plan. Under the terms of the Rights Plan, stockholders
of record as of November 21, 1996, received a dividend of one Preferred
Stock Purchase Right for each share of Common Stock held on that date. The
Rights will expire 10 years after issuance, and will be exercisable only if
a person or group becomes the beneficial owner of 15% or more of the Common
Stock (such person or group, a "15% holder") or commences a tender or
exchange offer which would result in the offeror beneficially owning 15% or
more of the Common Stock. Each Right will entitle stockholders to buy one
one-ten thousandth of a share of Series B Participating Preferred Stock of
the Company at an exercise price of $500.00 per share subject to certain
antidilution adjustments.
If a person or group accumulates 15% or more of the Common Stock, each
Right (other than Rights held by a 15% holder and certain related parties,
which will be voided) will be adjusted so that upon exercise the holder
will have the right to receive that number of shares of Common Stock (or in
certain circumstances, a combination of securities and/or assets) having a
value of twice the exercise price of the Right. In addition, if following
the public announcement of the existence of a 15% holder the Company is
involved in a merger or business combination or a sale of 50% or more of
the Company's assets or earning power, each Right (other than Rights held
by a 15% holder and certain related parties, which will be voided) will
represent the right to purchase, at the exercise price, common stock of the
acquiring entity having a value of twice the exercise price at the time.
The Board of Directors will also have the right, following the public
announcement of the existence of a 15% holder, to cause each Right (other
than rights held by the 15% holder) to be exchanged for one share of Common
Stock.
The Board of Directors is entitled to redeem the Rights at $0.001 per Right
at any time prior to the public announcement of the existence of a 15%
holder.
Item 3. Defaults Upon Senior Securities: None.
Item 4. Submission of Matters to a Vote of Security Holders:
The Company held its Annual Meeting of Shareholders on November 7,
1996 and proxies for such meeting were solicited pursuant to Regulation
14A. There was no solicitation in opposition to management's nominees for
directors as listed in the proxy statement and all such nominees were
elected. The names of directors elected at the meeting are: John N.
Abelson, Patricia M. Cloherty, A. E. Cohen, Gary E. Friedman, Michael E.
Herman, Irving S. Johnson, Peter Johnson, Antonie T. Knoppers and Melvin I.
Simon. Each director received at least 12,132,574 votes in favor of their
election.
In addition, the shareholders voted on and approved two other
proposals as listed in the proxy statement and summarized below.
1. The shareholders approved the Company's 1996 Stock Option Plan. The
vote was 5,048,130 for, 2,780,424 against, 49,863 abstained and 4,352,669
not voted.
2. The shareholders ratified the selection of Price Waterhouse as
certified public accountants. The vote was 12,198,258 for, 14,305 against
and 18,523 abstained.
Item 5. Other Information:
On January 17, 1997, pursuant to a binding letter of intent, the Company
and JT granted F. Hoffmann-La Roche Ltd ("Roche") exclusive marketing
rights for VIRACEPT in Europe and other countries outside North America,
Japan and Asia. For the marketing rights, Roche has paid to Agouron and JT
an initial license fee of $18,000,000 and will pay an additional
$22,000,000 when VIRACEPT is first approved in Europe. Roche will also pay
royalties based on Roche's sales of VIRACEPT or, under certain conditions,
on combined sales of VIRACEPT and INVIRASE, Roche's HIV protease inhibitor.
On January 24, 1997, the Company received its share of the initial license
fee, $9,000,000.
10
Item 6. Exhibits and Reports on Form 8-K:
Exhibits:
4.4** Rights Agreement dated November 7, 1996, as amended on November
27, 1996, between the Company. and Chase Mellon Shareholder Services,
L.L.C., which includes, as Exhibit A, the Certificate of Determination,
Preferences and Rights of Series B Participating Preferred Stock as filed
with the California Secretary of State on November 20, 1996.
10.63 Lease Amendment No. 3 dated October 16, 1996 between John Hancock
Life Insurance Company and the Company
10.64 Sublease between The Scripps Research Institute and the Company dated
November 4, 1996.
10.65 Premises Modification Agreement dated November 4, 1996 between
The Scripps Research Institute and the Company
10.66 Lease dated October 25, 1996 between Scripps Jack, Ltd. and the
Company
10.67 Form of 1990 Incentive Stock Option Agreement
10.68 Form of 1990 Non-Statutory Stock Option Agreement for
Employees/Officers/Directors
10.69 Form of 1990 Non-Statutory Stock Option Agreement for Consultants
10.70* 1996 Stock Option Plan
10.71( Form of 1996 Incentive Stock Option Agreement.
10.72( Form of 1996 Non-Statutory Stock Option Agreement for
Employees/Officers/Directors
10.73( Form of 1996 Stock Option Agreement for Consultants
10.74 Letter of Intent between F. Hoffmann-La Roche Ltd of Basel,
Switzerland, Japan Tobacco Inc., and the Company dated January 17, 1997.
(Confidential treatment has been requested for portions of this agreement
pursuant to an application dated January 27, 1997, as separately filed with
the Securities and Exchange Commission)
27 Financial Data Schedule. (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form 10-Q
submitted to the Securities and Exchange Commission)
27A Financial Data Schedule (amended) for fiscal year ended June 30,
1996
27B Financial Data Schedule (amended) for the quarter ended September
30,1996
b. Reports on Form 8-K:
A report on Form 8-K dated November 7, 1996 was filed on November 8,
1996. Such report related to the adoption by the Board of Directors of the
Company of a stockholder rights plan contemplating the issuance of rights
to purchase Series B Participating Preferred Stock to the Company's common
shareholders of record as of November 21, 1996.
* Incorporated by reference to Form S-8 dated November 26, 1996.
** Incorporated by reference to Form 8-A/A filed December 20, 1996,
File No. 001-12445.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGOURON PHARMACEUTICALS, INC.
Date: January 28, 1997 /s/ Steven S. Cowell
-------------------------------------------
Steven S. Cowell
Vice President, Finance and Chief Financial
Officer and Chief Accounting Officer
12
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