UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 of principal executive (Zip Code)
(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: As of April 10, 1998, the
registrant had 30,866,764 shares of Common Stock, no par value, outstanding.
AGOURON PHARMACEUTICALS, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - 3
March 31, 1998 and June 30, 1997
Consolidated Statement of Income (Loss) - 4
Three and Nine Months Ended
March 31, 1998 and 1997
Consolidated Statement of Cash Flows- 5
Nine Months Ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
March 31, June 30,
1998 1997
ASSETS (unaudited)
-------------- -------------
Current assets:
Cash and cash equivalents $ 29,927 $ 52,484
Short-term investments 87,019 38,833
Accounts receivable, net 55,940 31,375
Inventories 91,000 58,800
Current deferred tax assets 1,654 500
Other current assets 2,777 2,209
-------------- -------------
Total current assets 268,317 184,201
Property and equipment, net of accumulated
depreciation and amortization of $21,890 and $16,161 40,998 22,613
Deferred tax assets 52,011 56,000
Purchased intangibles 3,650 4,100
-------------- -------------
$ 364,976 $ 266,914
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,434 $ 28,833
Accrued liabilities 30,401 8,889
Deferred revenue and advances 32,379 27,567
Current deferred tax liabilities 154 600
Loan payable and current portion of long-term debt 3,530 2,526
-------------- -------------
Total current liabilities 121,898 68,415
-------------- -------------
Long-term liabilities:
Long-term debt, less current portion 5,330 5,940
Accrued rent 1,085 1,277
-------------- -------------
Total long-term liabilities 6,415 7,217
-------------- -------------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized,
30,854,475 and 29,429,920 shares issued and outstanding 340,437 317,133
Accumulated deficit (103,774) (125,851)
-------------- -------------
Total stockholders' equity 236,663 191,282
-------------- -------------
$ 364,976 $ 266,914
============== =============
See accompanying notes to consolidated financial statements.
3
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
--------------------------- --------------------------
March 31, March 31,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues:
Product sales $ 111,950 $ 13,401 $ 283,252 $ 13,401
Contracts 8,608 16,212 31,073 48,835
License fees and royalties 13,900 9,000 16,652 9,000
----------- ----------- ----------- ----------
134,458 38,613 330,977 71,236
----------- ----------- ----------- ----------
Operating expenses:
Cost of product sales 49,220 6,023 121,235 6,023
Research and development 31,859 28,431 89,113 81,367
Selling, general and administrative 14,168 10,280 40,759 19,802
Royalties 18,081 0 46,889 0
----------- ----------- ----------- ----------
113,328 44,734 297,996 107,192
----------- ----------- ----------- ----------
Operating income (loss) 21,130 (6,121) 32,981 (35,956)
----------- ----------- ----------- ----------
Other income (expense):
Interest and other income 1,624 1,441 4,393 4,965
Interest expense (212) (13) (579) (93)
----------- ----------- ----------- ----------
1,412 1,428 3,814 4,872
----------- ----------- ----------- ----------
Income (loss) before income taxes 22,542 (4,693) 36,795 (31,084)
Income tax provision 9,017 306 14,718 918
----------- ----------- ----------- ----------
Net income (loss) $ 13,525 $ (4,999) $ 22,077 $ (32,002)
=========== =========== =========== ==========
Earnings (loss) per share:
Basic $ .44 $ (.18) $ .73 $ (1.21)
=========== ========== =========== ==========
Diluted $ .41 $ (.18) $ .66 $ (1.21)
=========== =========== =========== ==========
Shares used in calculation of:
Basic 30,757 27,230 30,414 26,478
Diluted 32,956 27,230 33,251 26,478
See accompanying notes to consolidated financial statements.
4
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
--------------------------
March 31,
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Cash received from product sales, contracts, license fees
and royalties $ 311,174 $ 51,422
Cash paid to suppliers, employees and service providers (277,073) (137,043)
Interest received 4,443 4,965
Interest paid (579) (93)
----------- -----------
Net cash provided (used) by operating activities 37,965 (80,749)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term investments 102,113 82,898
Purchases of short-term investments (150,299) (83,806)
Purchases of property and equipment (23,200) (7,016)
----------- -----------
Net cash provided (used) by investing activities (71,386) (7,924)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,411 80,271
Proceeds from credit line 22,600 0
Principal payments on credit line, long-term debt,
and capital leases (23,147) (454)
------------ ------------
Net cash provided (used) by financing activities 10,864 79,817
----------- -----------
Net increase (decrease) in cash and cash equivalents (22,557) (8,856)
Cash and cash equivalents at beginning of period 52,484 16,451
----------- -----------
Cash and cash equivalents at end of period $ 29,927 $ 7,595
=========== ===========
Reconciliation of net income (loss) to net cash provided (used) by operating
activities:
Net income (loss) $ 22,077 $ (32,002)
Depreciation and amortization 6,206 2,475
Provision for deferred income taxes 14,282 0
Net (increase) decrease in accounts receivable
and other current assets (25,133) (12,721)
Net (increase) decrease in inventories (32,200) (42,657)
Net increase (decrease) in accounts payable, accrued liabilities,
deferred revenue and advances, and other liabilities 52,733 4,156
----------- -----------
Net cash provided (used) by operating activities $ 37,965 $ (80,749)
=========== ===========
See accompanying notes to consolidated financial statements.
5
AGOURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(March 31, 1998)
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), an 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
subsequent 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 March 31, 1998 and the consolidated
statements of income (loss) and cash flows for the three and nine-month periods
ended March 31, 1998 and 1997 have been prepared by the Company and have not
been audited. Such financial statements, in the opinion of management, include
all adjustments 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 March 31, 1998, it has been assumed that the existing collaborations with
Japan Tobacco Inc. ("JT") will continue in accordance with their agreement
terms. As such, approximately $30,089,000 of cash received from JT has been
classified as deferred contract revenue and advances. Approximately $25,030,000
of the cash received from JT represents JT's advance
6
of the Company's VIRACEPT development funding obligation which was completed in
March 1998. 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 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 with JT be terminated in advance of
their contract terms, any deferred contract revenues related to such
collaborations would be recognized as revenue by the Company.
In December 1997, Agouron and Hoffmann-La Roche Inc. and F. Hoffmann-La Roche
Ltd ("Roche") agreed to end their anti-cancer research and development
collaboration which began in June 1996. Agouron has regained all marketing
rights to its anti-cancer drugs previously within the scope of the
collaboration. Included in deferred contract revenue at March 31, 1998 is
approximately $1,821,000 of cash received from Roche which will be recognized as
contract revenue by the end of fiscal 1998.
Inventories
The inventories consist of the following components:
March 31, June 30,
1998 1997
------------- -------------
Raw materials and work in process $ 85,428 $ 57,883
Finished goods 5,572 917
------------- -------------
$ 91,000 $ 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 the United States and Canada. 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 three and nine-month periods ended March
31, 1998 are approximately $18,942,000 and $30,362,000 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, the non-refundable nature of
such fees, and the satisfaction of any performance obligations. In July 1997,
the Company and JT granted Roche certain exclusive rights to VIRACEPT in several
Asian countries. For such rights, the Company received a license fee of
$2,000,000 from Roche. In January 1998, the European Commission authorized
VIRACEPT to be marketed in Europe. Upon such approval, the
7
Company recognized as revenue a license fee of $11,000,000 from Roche, which is
responsible for the sales and marketing of VIRACEPT in Europe. In March 1998,
the Japanese Ministry of Health and Welfare authorized VIRACEPT to be marketed
in Japan. Upon such approval, the Company recognized as revenue a license fee of
$1,000,000 from Roche, which is responsible for the sales and marketing of
VIRACEPT in several Asian territories including parts of Japan.
For the three and nine-month periods ended March 31, 1998, the Company has
accrued and/or received royalties of approximately $1,900,000 and $2,652,000
resulting from estimated and actual net sales of VIRACEPT by Roche within its
licensed territory.
Income tax provision
The Company records a provision for current and deferred income taxes using the
liability method.
Earnings (loss) per share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." Basic earnings
(loss) per share is based upon the weighted average number of common shares
outstanding during a period. Diluted earnings (loss) per share is based upon the
weighted average number of common shares outstanding and dilutive common stock
equivalents during a period. 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 and common shares expected to be
issued under the Company's employee stock purchase plan.
Common stock equivalents of approximately 2,199,000 and 2,837,000 shares for the
three and nine-month periods ended March 31, 1998 were used to calculate diluted
earnings per share. For the three and nine-month periods ended March 31, 1997,
common stock equivalents of approximately 3,415,000 and 2,778,000 shares were
not used to calculate diluted earnings (loss) per share because of their
anti-dilutive effect. There are no reconciling items in calculating the
numerator for basic and diluted earnings (loss) per share for any of the periods
presented.
Certain concentrations
A portion of the Company's research and development expenditures are related to
programs funded in whole or in part by corporate partners. 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.
8
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 March 31, 1998, borrowings under this line of
credit were approximately $2,600,000.
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.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
When used in this discussion, the words "believes," "anticipates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties (including those associated with
continued growth of VIRACEPT sales, the impact of competitive products and
regulatory approvals) 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, VIRACEPT. The
net income reported in the current three and nine-month periods 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 the clinical and commercial development of VIRACEPT and certain
anti-cancer compounds.
In March 1997, the Company received approval from the FDA to market VIRACEPT in
the United States. For the current three and nine-month periods, due principally
to the increasing product contribution from VIRACEPT sales, license fees and
royalties, the Company realized net income of $13,525,000 and $22,077,000.
Results of Operations
Product sales
Product sales for the current three and nine-month periods were approximately
$111,950,000 and $283,252,000, which included sales in the United States of
$92,806,000 and $252,688,000, respectively. The Company anticipates that
VIRACEPT sales in the United States will approximate $350,000,000 to
$360,000,000 for fiscal 1998.
Contract revenues
Collaborative research and development agreements with Japan Tobacco Inc. ("JT")
and Roche accounted for substantially all of the Company's contract revenues for
the three and nine-month periods ended March 31, 1998 and 1997. Total contract
revenues for the three and nine-month periods decreased approximately 47% and
36% due principally to decreased
10
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.
In December 1997, the Company agreed to end its collaboration with Roche in the
field of cancer. As a result of the termination agreement, Agouron has regained
all marketing rights to its anti-cancer drugs previously within the scope of the
Roche collaboration. The Company does not foresee any significant impact on its
financial results for the current fiscal year due to termination of the Roche
collaboration since a substantial portion of the anticipated fiscal 1998
anti-cancer research and development costs of such collaboration will have been
offset by contract funding received from Roche. The Company anticipates that
contract revenues for fiscal 1998 will approximate $40,000,000.
License fees and royalties
In January and March 1998, VIRACEPT was approved for marketing in Europe and
Japan, respectively. Upon such approvals, the Company recognized as revenue
license fees totaling $12,000,000.
Royalty revenues of approximately $1,900,000 and $2,652,000 have been recognized
in the current three and nine-month periods based on estimated and actual Roche
sales of VIRACEPT in its licensed territory. The Company anticipates that
license fees and royalties for fiscal 1998 will approximate $20,000,000.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales was
approximately 44% and 43% for the three and nine-month periods ended March 31,
1998. Gross margins on United States commercial sales were approximately 66%
during the current quarter and 63% for the nine months ended March 31, 1998. The
Company anticipates that gross margins on United States commercial sales will
approximate 64% for fiscal 1998.
Research and development
Research and development spending increased from the prior year periods due
generally to costs associated with increasing average staff levels and staff
related spending, 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 anti-cancer compounds. The Company anticipates that
total research and development expenses will approximate $120,000,000 in fiscal
1998.
In December 1997, the Company discontinued further development of its
anti-cancer drug AG337 (THYMITAQ(TM), nolatrexed dihydrochloride) on the basis
of its interim analysis of results from phase II/III trials of the drug and in
order to concentrate available resources on
11
the development of two earlier-stage anti-cancer agents that the Company
believes have greater commercial potential. The Company believes that the
termination of the THYMITAQ development program will not have a significant
impact on current year operating results.
Selling, general and administrative
Selling, general and administrative costs have increased substantially from the
prior year periods 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 approximate $58,000,000 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.
Royalties
The Company's obligation to share VIRACEPT profits with JT is reflected in
royalty expense for the current three and nine-month periods and represents
approximately 20% and 19% of United States product sales. It is anticipated that
royalty expense for the fourth quarter of fiscal 1998 will range from 20% to 21%
of United States product sales.
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 mostly offset by the utilization of deductions generated by
the exercise of stock options and/or the utilization of deferred tax benefits
(comprised mostly of net operating loss carryforwards and research tax credits).
The Company's accumulated net deferred tax assets have decreased to
approximately $53,511,000 at March 31, 1998.
Liquidity and Capital Resources
Prior to fiscal 1998, the Company has relied principally on equity financings
and corporate collaborations to fund its operations and capital expenditures. In
fiscal 1998, due to the successful commercialization of VIRACEPT, operating
activities have provided $37,965,000 of cash. Commercial sales of VIRACEPT for
the three and nine-months ended March 31, 1998 resulted in gross margins of
approximately $62,730,000 and $162,017,000.
At March 31, 1998, the Company had net working capital of approximately
$146,419,000, an increase of $30,633,000 over June 30, 1997 levels due
principally to the Company's pre-tax profit of $36,795,000. Individual working
capital components significantly impacted by the commercialization of VIRACEPT
include trade accounts receivable (an increase of $25,232,000), inventories (an
increase of $32,200,000), accounts payable (an increase of $26,601,000) and
accrued liabilities (an increase of $21,512,000, primarily due to accrued
royalties payable to JT). It is anticipated that these working capital
components and cash and
12
short-term investments will continue to be significantly impacted as VIRACEPT
sales increase. At March 31, 1998, the Company had cash, cash equivalents and
short-term investments of approximately $116,946,000. 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 operating
needs beyond 1998 if its commercial activities do not generate significant,
positive operating results on a consistent and timely basis or if the scope of
its research, development, manufacturing or commercial operations is
substantially increased. 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 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.
13
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:
10.42 Form of 1998 Employee Stock Option Plan.
10.43* Form of 1998 Employee Non-Statutory Stock Option
Agreement.
27.** Financial Data Schedule for the quarter ended March
31, 1998.
27A.** Financial Data Schedule (restated for the effect of
FAS128) for the quarter ended September 30, 1997.
b. Reports on Form 8-K: None
* Incorporated by reference to Form S-8 dated February 19, 1998
** Exhibits 27 and 27A are submitted as exhibits only in the electronic format
of this Quarterly Report on Form 10-Q submitted to the Securities and
Exchange Commission
14
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: April 14, 1998 /s/ Steven S. Cowell
----------------------
Steven S. Cowell
Corporate Vice President, Finance
Chief Financial Officer
Chief Accounting Officer
15