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, 1996
COMMISSION FILE NO. 1-12210
HOUSTON BIOTECHNOLOGY INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0102032
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3608 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381 77381
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (713) 363-0999
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of March
31, 1996, was 5,638,707 shares.
HOUSTON BIOTECHNOLOGY INCORPORATED
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements ................................... 3
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 9
PART II OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K ...................... 11
SIGNATURE ................................................................... 12
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the annual report on
Form 10-K of the Company for its fiscal year ended December 31, 1995.
The information presented in the accompanying financial statements is
unaudited, but in the opinion of management, reflects all adjustments (which
include only normal recurring adjustments) necessary to present fairly such
information.
-3-
HOUSTON BIOTECHNOLOGY INCORPORATED
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 604,023 $ 572,058
Prepaid and other assets ........................................... 76,001 67,492
------------ ------------
Total current assets ........................................... 680,024 639,550
FIXED ASSETS, net of accumulated depreciation of
$2,212,119 and $2,165,254, respectively ............................ 410,659 457,523
OTHER ASSETS, net of accumulated amortization of
$62,609 and $62,146, respectively ................................. 13,025 13,489
------------ ------------
Total assets ................................................... $ 1,103,708 $ 1,110,562
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ........................... $ 702,519 $ 843,717
Deferred license and development revenue ........................... $ 375,000 --
Current portion of long-term debt
and capital lease obligations .................................. 249,749 255,538
------------ ------------
Total current liabilities ...................................... 1,327,268 1,099,255
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS .............................. 123,036 140,423
STOCKHOLDERS' INVESTMENT (DEFICIT):
Common stock, $0.01 par, 40,000,000 shares authorized,
5,638,707 shares issued and outstanding ........................ 56,387 56,387
Warrants to purchase 4,521,558 shares of common stock .............. 3,795,725 3,795,725
Additional paid-in capital ......................................... 21,847,646 21,847,646
Accumulated deficit ................................................ (26,046,354) (25,828,874)
------------ ------------
Total stockholders' investment (deficit) ....................... (346,596) (129,116)
------------ ------------
Total liabilities and stockholders' investment ................. $ 1,103,708 $ 1,110,562
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-4-
HOUSTON BIOTECHNOLOGY INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
----------------------------
1996 1995
----------- -----------
REVENUES:
License and development revenue ....... $ 300,000 $ --
Grant and other revenue ............... 27,096 11,339
Investment income ..................... 6,308 26,443
----------- -----------
Total revenues ................ 333,404 37,782
EXPENSES:
Research and development .............. 376,845 632,393
General, administrative, and other .... 174,039 251,083
----------- -----------
Total costs and expenses ....... 550,884 883,476
----------- -----------
Net loss ..................................... $ (217,480) $ (845,694)
=========== ===========
Net loss per common share .................... $ (0.04) $ (0.15)
=========== ===========
Weighted average shares used in
computing net loss per share .......... 5,638,707 5,638,707
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-5-
HOUSTON BIOTECHNOLOGY INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
--------------------------
1996 1995
----------- -----------
Cash flows provided (used) by operating activities:
Net loss ................................................ $ (217,480) $ (845,694)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization .................... 47,328 63,569
Writedown of capitalized construction costs ...... -- 17,433
(Increase) decrease in operating assets:
Other current assets ............................. (8,509) 10,171
Other assets ..................................... -- 1,202
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities ......... (141,198) 81,519
Deferred license and development revenue ......... 375,000 --
----------- -----------
Cash provided (used) by operating activities 55,141 (671,800)
Cash flows provided (used) by investing activities:
Purchases of fixed assets ............................... -- (3,500)
Cash flows provided (used) by financing activities:
Payments on debt and capital lease obligations .......... (23,176) (18,061)
----------- -----------
Increase (decrease) in cash and cash equivalents ............... 31,965 (693,361)
Cash and cash equivalents at beginning of period ............... 572,058 2,238,272
----------- -----------
Cash and cash equivalents at end of period ..................... $ 604,023 $ 1,544,911
=========== ===========
-6-
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
HOUSTON BIOTECHNOLOGY INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) ORGANIZATION
The accompanying financial statements and related notes should be read
in conjunction with the annual report on Form 10-K for the year ended December
31, 1995 of Houston Biotechnology Incorporated ("HBI" or the "Company"). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. In the
opinion of management of the Company, the accompanying financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly such information. The results of operations for the
period ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
Houston Biotechnology Incorporated, a Delaware corporation, was founded
in February 1984 and commenced substantial operations in May 1986. HBI is a
biotechnology company engaged in the development of biopharmaceutical products
to treat or prevent certain common ophthalmic diseases and disorders. The
principal objective of the Company is to develop products to treat conditions
for which no effective pharmaceutical treatment is currently available or for
which such products may provide advantages over existing treatments. The
Company's most advanced product is an immunotoxin for the prevention of
secondary cataract (the "4197X-RA Immunotoxin"), the most common complication
following primary cataract surgery.
(2) FINANCIAL CONDITION
The Company is engaged in research and development activities in
biotechnology, which involve a high degree of uncertainty and risk. Risks
include, but are not limited to, the following: the need for additional funding,
the early stage of development of the Company's products, the possibility of
competition and technological changes, uncertainties in the regulatory process,
uncertainties regarding product pricing and reimbursement, reliance on corporate
partners for funding, dependence on licenses, patents and know-how, possible
product liability and reliance on key personnel. The Company has not generated
any revenues from product sales and there is no assurance of any such revenues
in the future. HBI has experienced significant negative cash flow and must
either access additional sources of financing or consider some form of corporate
reorganization.
Periodic payments by Santen Pharmaceutical Co., Ltd. ("Santen") (see
Note 4) are currently funding HBI's activities, but such payments will fall
short of funding requirements for the second half of 1996. Accordingly, the
Company is seeking to secure additional funding by the third quarter 1996, and
is considering all of its financing alternatives, including: (i) a license, sale
or other disposition of the 4197X-RA Immunotoxin, or certain rights relating
thereto; (ii) a sale of stock or other securities in a public or private
offering; (iii) a sale or other reorganization of the Company; or (iv) the
combination of the Company with another entity.
The Company has incurred accumulated losses of $26,046,354, expects to
incur losses for the next several years, and there can be no assurance that it
will be successful in raising additional capital or in implementing one of its
financing alternatives. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements have
been prepared assuming the Company will continue as a going concern, and do not
include any adjustments relating to the recoverability and
-7-
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
The Company's Common Stock and Warrants are listed on the American
Stock Exchange ("AMEX"). At this time, the Company fails to meet certain of the
financial guidelines for continued listing. Accordingly, there can be no
assurance that the Company will be able to maintain the listing of its
securities on the AMEX. Delisting of the Common Stock and Warrants could have an
adverse effect on their liquidity and could increase the difficulty encountered
by the Company in obtaining future financing.
(3) RESEARCH AND LICENSE AGREEMENTS
Effective December 29, 1995, HBI and Santen entered into a
Codevelopment and License Agreement (the "Santen License") covering the
marketing in Japan of the 4197X-RA Immunotoxin. To maintain exclusive marketing
rights, Santen is required to provide $7,750,000 over six years to support HBI's
development of the Immunotoxin. HBI received $250,000 in November 1995 from
Santen under an Option Agreement related to the Santen License, and the payment
schedule for the $7,750,000 is as follows: $750,000 in five installments through
April 1996; $250,000 quarterly for 1996 through 2001, and $1 million within 60
days of delivery of an interim report on the Refined Product Safety Study or
within 30 days of enrollment of the first patient in U.S. Phase III trials. At
Santen's option, Santen may elect not to make any payment, but in such event,
the license may be made non-exclusive or terminated by HBI. Santen is obligated
to seek regulatory approval for the product in Japan and is responsible for the
development cost associated with these efforts. Upon the commencement of
commercial sales by Santen in Japan, Santen will pay HBI earned royalties based
on net sales. Commencing six months after approval of the Immunotoxin by
Japanese regulatory authorities, Santen is required to pay minimum royalties.
HBI retains all marketing rights and Santen is required to purchase the
Immunotoxin from HBI. Amounts paid by Santen to HBI, except those amounts
related to the purchase of the Immunotoxin, are subject to a 10% withholding tax
imposed by the Japanese government. HBI receives U.S. income tax credits equal
to the amounts withheld, but HBI is not currently able to utilize such credits.
-8-
HOUSTON BIOTECHNOLOGY INCORPORATED
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HBI commenced substantial operations in 1986 and, since
inception, has been primarily engaged in research and product development of its
lead product, the 4197X-RA Immunotoxin, an immunotoxin being developed for the
prevention of secondary cataract. In addition, the Company is researching
drug-conjugate products to enhance the success of glaucoma filtering surgery.
PRODUCT DEVELOPMENT
Development of biopharmaceutical products involves a high degree of
risk and uncertainty and requires a large investment of cash and technical
resources before commercialization. The Company's realization of its investment
in its research and development efforts will not occur unless and until
regulatory approval to market is obtained and profits are generated at a future
date. The FDA requires compliance with strict regulatory procedures before it
will grant approval for a pharmaceutical product to be marketed in the United
States. These regulatory procedures require, among other things: (i) preclinical
development and filing an IND with the FDA, (ii) Phase I human clinical trials
to test safety, which normally take from one to three years, (iii) Phase II and
III human clinical trials to confirm the results of Phase I safety studies,
prove efficacy and observe any low-incidence adverse effects, which normally
take from two to three years each, and (iv) filing a PLA with the FDA containing
the results of the human clinical trials for review and approval by the FDA, a
process which normally takes approximately two to three years. The time required
to comply with the regulatory procedures normally is longer for treatments
addressing slowly developing diseases, such as secondary cataract. There is no
assurance that FDA approval of the 4197X-RA Immunotoxin or any product candidate
can be obtained within these time frames, if at all.
With respect to the 4197X-RA Immunotoxin, the Company filed the IND in
August 1990, filed a Phase I report with the FDA in January 1992 and commenced a
Phase I/II human clinical study in March 1993. Patient enrollment in this study
was completed in July 1994. Interim analyses of the data from the Phase I/II
clinical trial have revealed statistically significant differences in rates of
lens capsule opacification between the 50-unit dose and placebo at six, twelve
and eighteen months post cataract surgery. Patient enrollment in a Phase II
human clinical study of patients requiring cataract surgery in both eyes was
completed in January 1996.
The Company currently estimates that it will cost approximately an
additional $25 million to complete the product development, manufacturing
requirements and clinical trials necessary to allow commercial sale of the
4197X-RA Immunotoxin, based on current estimates of the size of the Phase III
clinical trials. Additional capital will be required to market the 4197X-RA
Immunotoxin once the product is approved for sale in the United States. In
addition, other funds will be required to defray general and administrative
expenses and to support the Company's other projects. Since research and
development projects such as the 4197X-RA Immunotoxin involve a number of
uncertainties, there can be no assurance that the project costs will not exceed
the current estimates. In any event, additional funds will be necessary to
successfully complete development and commercialization of the 4197X-RA
Immunotoxin as well as any other products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $604,023 as of March 31,
1996, an increase of $31,965 over $572,058 as of December 31, 1995. The
principal factors affecting the change in cash for the three months ended March
31, 1996 were the operating expenses of $550,883, the reduction in accounts
payable and accrued liabilities of $141,198 and the net payments by Santen of
$675,000. All of the
-9-
Company's cash equivalents and short-term investments are invested in United
States government securities, high-grade corporate investments, commercial paper
and bankers acceptances.
Periodic payments by Santen are currently funding HBI's activities,
including payments to vendors which agreed to delayed payment terms in 1995.
However, scheduled payments by Santen for the second half of 1996 ($250,000 per
quarter less a 10% withholding tax imposed by the Japanese government) will fall
short of HBI's funding requirements. Accordingly, the Company is seeking to
secure additional funding by the third quarter 1996, and is considering all of
its financing alternatives, including: (i) a sale, license or other disposition
of the 4197X-RA Immunotoxin, or certain rights relating thereto; (ii) a sale of
stock or other securities in a public or private offering; (iii) a sale or other
reorganization of the Company; or (iv) the combination of the Company with
another entity.
The Company has incurred accumulated losses of $26,043,354, expects to
incur losses for the next several years, and there can be no assurance that HBI
will be successful in raising additional capital or in implementing one of its
financing alternatives. These factors raise substantial doubt about the
Company's ability to continue as going concern. As a result of the foregoing,
the Company's independent accountants have included an explanatory paragraph in
their report on the Company's financial statements at December 31, 1995, that
describes the uncertainty regarding the Company's ability to continue as a going
concern.
The Company's Common Stock and Warrants are listed on the American
Stock Exchange ("AMEX"). At this time, the Company fails to meet certain of the
financial guidelines for continued listing. Accordingly, there can be no
assurance that the Company will be able to maintain the listing of its
securities on the AMEX. Delisting of the Common Stock and Warrants could have an
adverse effect on their liquidity and could increase the difficulty encountered
by the Company in obtaining future financing.
RESULTS OF OPERATIONS
HBI had a net loss of $217,480 for the three months ended March 31,
1996 compared to a net loss of $845,694 for the same period in 1995. Revenues
from operations for the three months ended March 31, 1996 were $333,404 compared
to $37,782 generated in the same period in 1995. Santen made net payments of
$675,000 during the three months ended March 31, 1996, of which $300,000 was
recognized as revenue in the first quarter and $375,000 was deferred. Expenses
from operations for the three months ended March 31, 1996 were $550,884 as
compared to $883,476 incurred in the same period in 1995, a decrease of 38%. In
general, the decrease in expenses was due to ongoing cost containment efforts.
More specifically, the decrease in research and development expenses was due
primarily to reduced employment and reduced utilization of consultants and
contractors in connection with clinical studies. The decrease in general and
administrative expenses was due primarily to reduced utilization of legal and
professional services.
ITEM 3 - NOT APPLICABLE.
ITEM 4 - NOT APPLICABLE.
ITEM 5 - NOT APPLICABLE.
-10-
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed with this report.
(b) No reports on Form 8-K were filed during the three months
ended March 31, 1996.
-11-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant in the capacity and on the date indicated.
HOUSTON BIOTECHNOLOGY INCORPORATED
Dated: May 14 , 1996 By: /s/ J. RUSSELL DENSON
-----------------
J. Russell Denson
President and Chief Executive Officer
(Principal executive and financial officer)
-12-