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 September 30, 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 offices) (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 October 15, 1998, the
registrant had 31,283,000 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
September 30, 1998 and June 30, 1998
Consolidated Statement of Income - 4
Three Months Ended September 30, 1998 and 1997
Consolidated Statement of Cash Flows - 5
Three Months Ended September 30, 1998 and 1997
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
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 30, June 30,
1998 1998
ASSETS (unaudited)
- ------ ----------- -----------
Current assets:
Cash and cash equivalents $ 16,713 $ 19,098
Short-term investments 45,227 68,025
Accounts receivable, net 51,755 51,341
Inventories 106,638 103,706
Current deferred tax assets 564 564
Other current assets 3,868 5,247
-------------- -------------
Total current assets 224,765 247,981
Property and equipment, net of accumulated
depreciation and amortization of $27,187 and $24,321 45,670 47,212
Deferred tax assets 64,999 64,644
Purchased intangibles 3,350 3,500
-------------- -------------
$ 338,784 $ 363,337
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,854 $ 44,393
Accrued liabilities 36,747 35,356
Deferred revenue and advances 21,191 23,563
Current deferred tax liabilities 1,621 1,139
Loan payable and current portion of long-term debt 819 15,802
-------------- -------------
Total current liabilities 86,232 120,253
-------------- -------------
Long-term liabilities:
Long-term debt, less current portion 6,242 5,892
Accrued rent 938 1,023
-------------- -------------
Total long-term liabilities 7,180 6,915
-------------- -------------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized,
31,246,645 and 31,053,380 shares issued and outstanding 350,947 348,482
Accumulated other comprehensive income 232 384
Accumulated deficit (105,807) (112,697)
-------------- -------------
Total stockholders' equity 245,372 236,169
-------------- -------------
$ 338,784 $ 363,337
============== =============
See accompanying notes to consolidated financial statements.
3
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
September 30,
------------------------
1998 1997
--------- ---------
Revenues:
Product sales $ 133,870 $ 79,502
Contracts 6,017 10,003
License fees and royalties 5,050 2,352
--------- ---------
144,937 91,857
--------- ---------
Operating expenses:
Cost of product sales 57,045 34,073
Research and development 37,364 26,932
Selling, general and administrative 17,142 12,546
Royalties 25,893 13,376
--------- --------
137,444 86,927
--------- --------
Operating income 7,493 4,930
--------- --------
Other income (expense):
Interest and other income 1,036 1,281
Interest expense (423) (161)
--------- --------
613 1,120
--------- ---------
Income before income taxes 8,106 6,050
Income tax provision 1,216 2,420
--------- ---------
Net income $ 6,890 $ 3,630
========= =========
Earnings per share:
Basic $ .22 $ .12
========= =========
Diluted $ .21 $ .11
========= =========
Shares used in calculation of:
Basic 31,127 29,964
Diluted 33,179 33,158
See accompanying notes to consolidated financial statements.
4
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
--------------------------
September 30,
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Cash received from product sales, contracts, licenses fees and royalties $ 142,151 $ 81,701
Cash paid to suppliers, employees and service providers (152,857) (77,401)
Interest received 991 1,281
Interest paid (423) (161)
----------- -----------
Net cash provided (used) by operating activities (10,138) 5,420
------------ -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term investments 29,529 21,818
Purchases of short-term investments (6,883) (51,972)
Purchases of property and equipment (1,636) (3,846)
----------- -----------
Net cash provided (used) by investing activities 21,010 (34,000)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,376 6,211
Proceeds from credit line 8,000 0
Principal payments on credit line, long-term debt and capital leases (22,633) (237)
----------- -----------
Net cash provided (used) by financing activities (13,257) 5,974
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,385) (22,606)
Cash and cash equivalents at beginning of period 19,098 52,484
----------- -----------
Cash and cash equivalents at end of period $ 16,713 $ 29,878
=========== ===========
Reconciliation of net income to net cash provided (used) by operating
activities:
Net income $ 6,890 $ 3,630
Depreciation and amortization 3,328 1,893
Provision for deferred income taxes 1,216 2,420
Net (increase) decrease in accounts receivable
and other current assets 965 (11,151)
Net (increase) decrease in inventories (2,932) 889
Net increase (decrease) in accounts payable, accrued liabilities,
deferred revenue and advances, and other liabilities (19,605) 7,739
------------ -----------
Net cash provided (used) by operating activities $ (10,138) $ 5,420
=========== ===========
See accompanying notes to consolidated financial statements.
5
AGOURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(September 30, 1998)
Note 1 - The Company and its significant accounting policies
The Company
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized and
incorporated in California in June 1984. Agouron is an integrated pharmaceutical
company committed to the discovery, development, manufacturing and marketing of
innovative therapeutic products engineered to inactivate proteins which play key
roles in cancer, AIDS and other serious diseases. The Company, through its own
sales and marketing organization, is currently marketing in the United States
its first drug, VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV
infection. The Company is also conducting pivotal phase II/III clinical trials
for AG3340 for treatment of lung and prostate cancer. In addition, Agouron has
initiated a phase II/III pivotal clinical trial of REMUNE(TM) (AG1661), an
immune-based therapeutic agent for treatment of HIV infection and AIDS being
co-developed by Agouron and The Immune Response Corporation ("IRC"). Further,
the Company has a number of programs in progress for discovery or development of
other new drugs in the fields of cancer, viral disease and other serious
diseases. The Company is also using the proprietary core drug discovery
technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the
Company, to accelerate the steps necessary to discover small-molecule drug
candidates, from the initial identification of compounds that exhibit activity
against selected biological targets to the progression of these compounds to
drug candidates for human clinical trials.
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, 1998 and the consolidated
statements of income and cash flows for the three-month periods ended September
30, 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, 1998 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.
6
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.
Inventories
The inventories consist of the following components:
September 30, June 30,
1998 1998
------------- -------------
Raw materials and work in process $ 98,520 $ 95,517
Finished goods 8,118 8,189
------------- -------------
$ 106,638 $ 103,706
============= =============
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 certain provinces of Canada, 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-month periods ended September 30,
1998 and 1997 are approximately $26,683,000 and $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. The Company receives a
royalty on Roche's subsequent commercial sales of such drug supplies.
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 August 1998, the
Company and JT granted Roche certain exclusive rights to VIRACEPT in Mexico. For
such rights, the Company realized as revenue a license fee of $125,000 from
Roche.
Royalty revenues are recognized based on estimated and actual sales of licensed
products in licensed territories.
For the three-month periods ended September 30, 1998 and 1997, the Company has
accrued and/or received royalties of approximately $4,925,000 and $352,000
resulting from estimated and actual net sales of VIRACEPT by Roche within its
licensed territory.
7
Income tax provision
The Company records a provision for current and deferred income taxes using the
liability method.
Earnings per share
Basic earnings per share is based upon the weighted average number of common
shares outstanding during a period. Diluted earnings 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 2,052,000 and 3,194,000 shares for the
three-month periods ended September 30, 1998 and 1997 were used to calculate
diluted earnings per share. There are no reconciling items in calculating the
numerator for basic and diluted earnings 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 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.
Note 2 - Comprehensive income
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," which
establishes new rules for the reporting and display of comprehensive income and
its components. FAS 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income. The
Company presents such information in its statement of stockholders' equity on an
annual basis and in a footnote in its quarterly reports. During the three months
ended September 30, 1998 and 1997, total comprehensive income was $6,738,000 and
$3,630,000, respectively.
8
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, 1998 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 three-month periods ended September 30, 1998 and 1997
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 clearance from the United States Food and
Drug Administration to market VIRACEPT in the United States. In January 1998,
March 1998 and August 1998, VIRACEPT was approved for marketing in Europe, Japan
and Canada, respectively. For the three-month periods ended September 30, 1998
and 1997, due principally to the increasing product contribution from VIRACEPT
sales, license fees and royalties, the Company realized a net income of
$6,890,000 and $3,630,000.
Results of Operations
Product sales
Product sales for the three-month periods ended September 30, 1998 and 1997 were
approximately $133,870,000 and $79,502,000, which included sales in North
America of $107,187,000 and $75,374,000, respectively. The Company anticipates
that VIRACEPT sales in North America will approximate $430,000,000 to
$440,000,000 for fiscal 1999.
Contract revenues
Collaborative research and development agreements with Japan Tobacco Inc.
("JT"), Hoffman-La Roche Inc. and F. Hoffman-La Roche Ltd (collectively "HLR")
accounted for
9
substantially all of the Company's contract revenues for the three-month periods
ended September 30, 1998 and 1997. Total contract revenues for the three-month
periods decreased approximately 40% due principally to termination of the HLR
collaboration in fiscal 1998. The Company anticipates that contract revenues for
fiscal 1999 will approximate $30,000,000 to $35,000,000.
License fees and royalties
Royalty revenues of approximately $4,925,000 and $352,000 have been recognized
in the three-month periods ended September 30, 1998 and 1997 based on estimated
and actual Roche sales of VIRACEPT in its licensed territory. The Company
anticipates that license fees and royalties for fiscal 1999 will range from
$30,000,000 to $35,000,000.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales was
approximately 43% for the three-month periods ended September 30, 1998 and 1997.
Gross margins on United States commercial sales were approximately 70% and 60%
for the three-months ended September 30, 1998 and 1997.
Research and development
Research and development spending increased 39% from the prior year periods due
generally to costs associated with increasing average staff levels and staff
related spending, and increasing expenses associated with the clinical
development of certain of the Company's anti-cancer compounds.
Selling, general and administrative
Selling, general and administrative costs have increased by 37% from the prior
year periods due principally to 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 three-month periods ended September 30, 1998 and 1997
and represents approximately 24% and 18% 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 15%. 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).
10
Year 2000
The Year 2000 issue results from computer programs and systems that were created
to accept only two digit dates. Such systems may not be able to distinguish 20th
century dates from 21st century dates. This could result in miscalculations and
system failures that could inhibit the Company's ability to engage in normal
business activities.
The Company has established a Year 2000 project team that is currently reviewing
information technology ("IT") systems and non-IT systems that could be affected
by this issue. Additionally, the Company has made initial contact with all of
its significant external business partners to determine the extent to which the
Company is vulnerable to their failures and to ascertain Year 2000 compliance
and risk. The Company estimates that the inventory and assessment of IT systems,
non-IT systems, and material third parties will be completed by the end of
calendar 1998. The Company expects to complete remediation efforts by the end of
fiscal 1999, and to complete the validation phase by the end of calendar 1999.
At this time the Company has not initiated the formulation of contingency plans.
The determination of the necessity for contingency plans will be made by the end
of fiscal 1999.
While the total cost to obtain Year 2000 compliance is not known at this time,
the Company believes such cost will not have a material effect on the Company's
business, financial position, or results of operation. However, even though the
Company expects to have obtained Year 2000 compliance prior to the year 2000,
the inability of the Company or its business partners to remedy Year 2000 issues
could have a significant impact on the Company's business, financial position,
or results of operations.
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.
Beginning in fiscal 1998, the gross margin from commercial sales of VIRACEPT
contributed significantly to the Company's overall working capital requirements.
Commercial sales of VIRACEPT for the three-months ended September 30, 1998 and
1997 resulted in gross margins of approximately $76,825,000 and $45,429,000.
At September 30, 1998, the Company had net working capital of approximately
$138,533,000, an increase of $10,805,000 over June 30, 1998 levels due
principally to the Company's pre-tax profit of $8,106,000. Individual working
capital components significantly impacted by the commercialization of VIRACEPT
include trade accounts receivable (a decrease of $1,829,000), inventories (an
increase of $2,932,000), accounts payable (a decrease of $18,539,000) and
accrued liabilities (an increase of $1,391,000, primarily due 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 by VIRACEPT sales. At September 30, 1998, the Company had cash, cash
equivalents and short-term investments of approximately $61,940,000. The Company
believes that its current capital resources, existing contractual commitments
and anticipated VIRACEPT product sales are sufficient to maintain its current
operations through fiscal 1999. This belief is based
11
on current research and clinical development plans, anticipated working capital
requirementsassociated 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 after fiscal 1999 if significant and increasing positive
cash flows are not generated from commercial activities. 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 capabilities. 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, cancel licenses from third parties or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop or commercialize itself.
12
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:
10.1* Amended and Restated 1996 Stock Option Plan
10.2* Amended and Restated Employee Stock Purchase Plan
10.3* Form of 1998 Employee Stock Option Plan.
27. Financial Data Schedule for the quarter ended
September 30, 1998.
b. Reports on Form 8-K: None
* Incorporated by reference to Form S-4 dated August 13, 1998
13
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 20, 1998 /s/ Steven S. Cowell
----------------------------
Steven S. Cowell
Corporate Vice President, Finance
Chief Financial Officer
Chief Accounting Officer
14