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 September 30, 1997
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 30,332,000 shares
of the Company's Common Stock, no par value, were outstanding as of October 3,
1997.
AGOURON PHARMACEUTICALS, INC.
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - 3
September 30, 1997 and June 30, 1997
Consolidated Statement of Income (Loss) - 4
Three Months Ended September 30, 1997 and 1996
Consolidated Statement of Cash Flows- 5
Three Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 30, June 30,
1997 1997
------------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 29,878 $ 52,484
Short-term investments 68,987 38,833
Accounts receivable, net 42,187 31,375
Inventories 57,911 58,800
Current deferred tax assets 459 500
Other current assets 2,548 2,209
-------------- -------------
Total current assets 201,970 184,201
Property and equipment, net of accumulated
depreciation and amortization of $17,884 and $16,161 24,716 22,613
Deferred tax assets 56,600 56,000
Purchased intangibles 3,950 4,100
-------------- -------------
$ 287,236 $ 266,914
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,712 $ 28,833
Accrued liabilities 24,138 8,889
Deferred revenue 28,223 27,567
Current deferred tax liabilities 704 600
Current portion of long-term debt 2,506 2,526
-------------- -------------
Total current liabilities 76,283 68,415
-------------- -------------
Long-term liabilities:
Long-term debt, less current portion 5,723 5,940
Accrued rent 1,232 1,277
-------------- -------------
Total long-term liabilities 6,955 7,217
-------------- -------------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized,
30,329,454 and 29,429,920 shares issued and outstanding 326,219 317,133
Accumulated deficit (122,221) (125,851)
-------------- -------------
Total stockholders' equity 203,998 191,282
-------------- -------------
$ 287,236 $ 266,914
============== =============
See accompanying notes to consolidated financial statements.
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AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30,
-----------------------------------
1997 1996
-------------- -------------
Revenues:
Product sales $ 79,502 $ 0
Contract 10,003 17,514
License fees and royalties 2,352 0
-------------- -------------
91,857 17,514
-------------- -------------
Operating expenses:
Cost of product sales 34,073 0
Research and development 26,932 29,634
Selling, general and administrative 12,546 3,736
Royalties 13,376 0
-------------- -------------
86,927 33,370
-------------- -------------
Operating income (loss) 4,930 (15,856)
-------------- -------------
Other income (expense):
Interest and other income 1,281 1,779
Interest expense (161) (64)
-------------- --------------
1,120 1,715
-------------- -------------
Income (loss) before income taxes 6,050 (14,141)
Income tax provision 2,420 306
-------------- -------------
Net income (loss) $ 3,630 $ (14,447)
============== =============
Earnings (loss) per share:
Primary $ .11 $ (.57)
============= =============
Fully diluted $ .11 $ (.57)
============= =============
Shares used in calculation of:
Primary 33,158 25,152
Fully diluted 33,194 25,152
See accompanying notes to consolidated financial statements.
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AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
---------------------------
September 30,
---------------------------
1997 1996
----------- ------------
Cash flows from operating activities:
Cash received from product sales, contracts and licenses $ 81,701 $ 14,177
Cash paid to suppliers, employees and service providers (77,401) (38,925)
Interest received 1,281 1,779
Interest paid (161) (64)
----------- -----------
Net cash provided (used) by operating activities 5,420 (23,033)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term investments 21,818 9,863
Purchases of short-term investments (51,972) (62,236)
Purchases of property and equipment (3,846) (1,233)
----------- -----------
Net cash provided (used) by investing activities (34,000) (53,606)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 6,211 77,677
Principal payments under equipment leases (159) (42)
Increase (decrease) in long-term debt, net (78) (92)
----------- -----------
Net cash provided (used) by financing activities 5,974 77,543
----------- -----------
Net increase (decrease) in cash and cash equivalents (22,606) 904
Cash and cash equivalents at beginning of period 52,484 16,451
----------- -----------
Cash and cash equivalents at end of period $ 29,878 $ 17,355
=========== ===========
Reconciliation of net income (loss) to net cash provided (used
by operating activities:
Net income (loss) $ 3,630 $ (14,447)
Depreciation and amortization 1,893 778
Provision for deferred income taxes 2,420 0
Net (increase) decrease in accounts receivable
and other current assets (11,151) (9,378)
Net (increase) decrease in inventories 889 0
Net increase (decrease) in accounts payable, accrued liabilities,
deferred revenue and other liabilities 7,739 14
----------- -----------
Net cash provided (used) by operating activities $ 5,420 $ (23,033)
=========== ===========
See accompanying notes to consolidated financial statements.
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AGOURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(September 30, 1997)
Note 1 - The Company and its significant accounting policies
The Company
Agouron Pharmaceuticals, Inc. is an integrated pharmaceutical company committed
to the discovery, development, manufacturing and marketing of small molecule
drugs engineered to inactivate proteins which play key roles in cancer, AIDS,
and other serious diseases. The Company, through its own sales and marketing
force, is currently marketing VIRACEPT(R) (nelfinavir mesylate, a potent HIV
protease inhibitor), which was cleared for marketing by the United States Food
and Drug Administration ("FDA") in March 1997. The Company intends to
commercialize any subsequently developed products through its own direct sales
and marketing force in certain markets or, when appropriate, through
manufacturing and marketing relationships with other pharmaceutical companies.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Financial statements and estimates
The consolidated balance sheet as of September 30, 1997 and the consolidated
statements of income (loss) and of cash flows for the three-month periods ended
September 30, 1997 and 1996 have been prepared by the Company and have not been
audited. Such financial statements, in the opinion of management, include all
adjustments (consisting only of normal, recurring items) necessary for their
fair presentation in conformity with generally accepted accounting principles.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1997 Annual
Report on Form 10-K. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission rules and regulations. Interim results are not
necessarily indicative of 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 September 30, 1997, 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 $24,658,000 of cash received from JT and $2,785,000 of cash
received from Roche has been classified as deferred contract revenue.
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Approximately $22,300,000 of the cash received from JT represents JT's advance
of the Company's VIRACEPT development funding obligation through December 1997.
Such amounts are to be repaid by the Company out of future profits, if any,
generated by sales of VIRACEPT in the United States. The balance of the payments
from JT and Roche are non-refundable and are being recognized as contract
revenue on a prospective basis generally 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.
Inventories
The components of inventories consist of the following:
September 30, June 30,
1997 1997
Raw materials $ 12,704 $ 18,462
Work in process 43,345 39,421
Finished goods 1,862 917
-------------- -------------
$ 57,911 $ 58,800
============== =============
Product sales
In March 1997, the Company received clearance from the FDA to market its
anti-HIV drug, VIRACEPT. The Company has the exclusive right to market VIRACEPT
in North America. Accordingly, the Company ships VIRACEPT to wholesalers
throughout the United States, and recognizes sales revenue upon shipment. Sales
are reported net of discounts, rebates, chargebacks and product returns.
Also included in product sales for the quarter ending September 30, 1997 are
approximately $4,128,000 of sales (at cost plus contractually determined
mark-ups) to Roche of clinical and commercial drug supplies to be used by Roche
in its licensed territory.
License fees and royalties
License fees are recognized as revenue when earned as generally evidenced by
certain factors including: receipt of such fees, satisfaction of any performance
obligations and the non-refundable nature of such fees. In July 1997, the
Company and JT granted Roche certain exclusive rights to VIRACEPT in several
Asian countries. For such rights, the Company has received a license fee of
$2,000,000 and will, upon approval in one of the Asian territories, receive an
additional license fee of $1,000,000 and subsequent royalties.
For the first quarter, the Company has accrued and/or received approximately
$352,000 of royalties on Roche's sales of VIRACEPT in certain countries within
their licensed territory. Royalties are accrued on the basis of reports of
estimated net sales of licensed product by licensees.
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Income tax provision
The Company records a provision for current and deferred income taxes using the
liability method.
Earnings (loss) per share
Primary and fully diluted earnings (loss) per share are based upon the weighted
average number of common shares and dilutive common stock equivalents during the
period in which they were outstanding. Common stock equivalents are options
under the Company's stock option plans which are included in the earnings per
share computation under the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"), which
establishes new standards for computing earnings per share and which will be
effective for financial statements for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted. Under the new
requirements, primary and fully diluted earnings per share will be replaced with
basic and diluted earnings per share. Basic earnings per share excludes the
dilutive effect of stock options and will therefore be higher than primary
earnings per share. Basic earnings (loss) per share for the three months ended
September 30, 1997 and 1996 were $.12 and $(.57). Diluted earnings per share
under the new standard is expected to be essentially the same as primary
earnings per share amounts calculated under principles currently used.
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.
Note 2 - Commitments
During the first quarter of fiscal 1998, the Company secured a commitment from a
commercial bank for a $20,000,000 revolving line of credit to be used for
general corporate purposes. As of September 30, 1997, no borrowings on this line
of credit were outstanding.
Note 3 - Stockholders' equity
In August 1997, outstanding shares of common stock were split two-for-one. All
prior period share and per share amounts have been restated to reflect the stock
split.
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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, 1997 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.
Overview
The Company is committed to the discovery, development, manufacturing and
marketing of human pharmaceuticals targeting cancer, AIDS, and other serious
diseases. Operations to date have been principally funded from the Company's
equity-derived working capital, various collaborative arrangements and, most
recently, from the gross margin contribution of its first product, VIRACEPTAE
(nelfinavir mesylate, a potent HIV protease inhibitor). The net income reported
in the current quarter is principally due to the commercialization of VIRACEPT
while the Company's prior net operating losses reflect primarily the result of
its independent research and substantial investment in clinical and commercial
development activities associated with VIRACEPT and the Company's lead compounds
in cancer.
In March 1997, the Company received approval from the FDA to market VIRACEPT in
the United States. For the first quarter of fiscal 1998, due principally to the
increasing product contribution from VIRACEPT sales, the Company realized a net
income of $3,630,000.
Results of Operations
Product sales
In March 1997, the Company received clearance from the FDA to market its
anti-HIV drug, VIRACEPT. Product sales for the quarter ended September 30, 1997
were approximately $79,502,000, an 82% increase from the immediately preceding
quarter. The Company anticipates continuing growth in VIRACEPT sales during
fiscal 1998 and that VIRACEPT product sales in the United States will exceed
$300,000,000 in fiscal 1998.
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Contract revenues, license fees and royalties
Collaborative research and development agreements with Japan Tobacco Inc. ("JT")
and Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. (collectively "Roche")
accounted for substantially all of the Company's total contract revenues and
license fees for the quarters ended September 30, 1997 and 1996. Total contract
revenues and license fees for first quarter 1998 decreased approximately 31%
from first quarter 1997 due principally to decreased VIRACEPT program spending
by Agouron, which was partially funded by JT, and increased spending by JT and
Roche on the VIRACEPT and AG3340 development programs, which was partially
funded by Agouron. Additionally, the amortization to revenue over a 24 month
period of JT's $24,000,000 milestone payment, which was received in August 1995,
was completed in June 1997. Partially offsetting these decreases was a
$2,000,000 license fee from Roche as partial consideration for the grant of
VIRACEPT marketing rights in certain Asian territories. The Company anticipates
that contract revenues and license fees for fiscal 1998 will approximate
$60,000,000.
Royalty revenues of approximately $352,000 have been recognized in the current
quarter based on Roche's sales of VIRACEPT in certain countries in their
licensed territory.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales was
approximately 43% for the quarter ended September 30, 1997. Gross margins on
United States commercial sales were approximately 60% during the quarter.
Royalties
The Company's obligation to share VIRACEPT profits with JT is reflected in
royalty expense for the first quarter of fiscal 1998 and represents
approximately 18% of United States product sales. It is anticipated that royalty
expense for fiscal 1998 will range from 18% to 21% of United States product
sales.
Research and development
Research and development spending decreased by approximately 9% from first
quarter 1997 to first quarter 1998 due generally to a decline in the level of
third party costs associated with the VIRACEPT development program subsequent to
its approval in the United States. Such spending decreases have been partially
offset by costs associated with increasing average staff levels and staff
related spending (reflecting principally the acquisition of Alanex during the
fourth quarter of fiscal 1997) and increasing expenses associated with the
clinical development of certain of the Company's cancer compounds including
THYMITAQ(TM) (nolatrexed dihydrochloride), AG2034 and AG3340.
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Selling, general and administrative
Selling, general and administrative costs have increased substantially from
first quarter 1997 to first quarter 1998 due principally to increasing staff
levels (notably the sales force and other marketing personnel) and staff-related
expenditures in support of ongoing VIRACEPT sales and marketing activities
subsequent to its approval and commercial launch in March 1997. The Company
anticipates that total selling, general and administrative expenses will exceed
$54,000,000 in fiscal 1998 due to the full-year effect of fiscal 1997 staff
additions, additional occupancy costs, increasing sales and marketing activities
and the support of VIRACEPT Phase IV marketing studies.
Other income (expense)
Interest income has decreased by approximately 28% from first quarter 1997 to
first quarter 1998 due principally to a lower average investment portfolio
balance. The prior year's first quarter portfolio balance was favorably impacted
by the July 1996 public offering of $77,000,000 and receipt of $15,000,000 in
license fees from Roche in June 1996.
Income tax provision
The income tax provision in the current quarter has been computed using an
effective, combined federal and state rate of 40%. The cash obligation of such
provision has been offset by the utilization of deductions generated by the
exercise of stock options and/or the utilization of deferred taxes (comprised
mostly of net operating loss carryforwards and research tax credits). The
Company's accumulated net deferred tax assets have increased during the current
quarter to approximately $56,400,000 at September 30, 1997 due to the
realization of stock option exercise deductions. As required, the benefit of
stock option exercise deductions has been recorded to stockholders' equity.
Liquidity and Capital Resources
The Company has relied principally on equity financings and corporate
collaborations to fund its operations and capital expenditures. In March 1997,
the Company received clearance from the FDA to market its anti-HIV drug,
VIRACEPT. Commercial sales of VIRACEPT for the quarters ending June 30, 1997 and
September 30, 1997 resulted in gross margins of approximately $24,992,000 and
$45,429,000. The Company anticipates that net sales of VIRACEPT will steadily
increase through at least fiscal 1998 and provide an increasingly significant
contribution toward funding the Company's operations.
At September 30, 1997, the Company had net working capital of approximately
$125,687,000, an increase of $9,901,000 over June 30, 1997 levels due
principally to the Company's pre-tax profit of $6,050,000 and $6,211,000 in
proceeds from employees' exercise of stock options, partially offset by
$3,846,000 in purchases of property and equipment. Individual working capital
components significantly impacted by the commercialization of VIRACEPT include
trade accounts receivable (an increase of $11,584,000), inventories (a decrease
of $889,000), accounts payable (a decrease of $8,121,000) and accrued
-11-
liabilities (an increase of $15,249,000, mostly attributed to accrued royalties
payable to JT). It is anticipated that these working capital components and cash
and short-term investments will continue to be significantly impacted as
VIRACEPT sales increase. At September 30, 1997, the Company had cash, cash
equivalents and short-term investments of approximately $98,865,000. The Company
believes that its current capital resources, anticipated VIRACEPT product sales
contribution, existing contractual commitments and established credit facilities
are sufficient to maintain its current operations through fiscal 1998. This
belief is based on current research and clinical development plans, anticipated
working capital requirements associated with the expanding commercialization of
VIRACEPT, 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 beyond 1998 if significant positive cash flows are not
generated from commercial activities on a timely basis. Such needs would include
the expenditure of substantial funds to continue and expand research and
development activities, conduct existing and planned preclinical studies and
human clinical trials and to support the increasing working capital requirements
of a growing commercial infrastructure including manufacturing, sales and
marketing. 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 defer or restrict certain commercial
activities, 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.
Capital Expenditures
During the first quarter of fiscal 1998, capital expenditures totaled $3,846,000
compared with $1,233,000 during the first quarter of fiscal 1997. Capital
expenditures during 1998 are expected to be approximately $14,000,000 to support
continued product commercialization, development and research activities. The
Company may utilize lease or debt financing for certain expenditures if
available on acceptable terms.
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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: None
Item 3. Defaults Upon Senior Securities: None.
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
11. Computation of Earnings (Loss) Per Share.
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).
b. Reports on Form 8-K: A report on Form 8-K dated July 30,
1997 was filed on August 1, 1997. The report related to
the approval by the Company's Board of Directors of a
two-for-one stock split in the form of a stock dividend of
one share of common stock for each share of the Company's
common stock outstanding. The distribution date of the
stock split was August 26, 1997.
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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: October 8, 1997 /s/ Steven S. Cowell
----------------------
Steven S. Cowell
Corporate Vice President, Finance
Chief Financial Officer
Chief Accounting Officer
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