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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-28006
MICROCIDE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3186021
(State or other jurisdiction of (I.R.S.Employer
incorporation of organization) Identification Number)
850 MAUDE AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 415-428-1550
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 / /
Number of shares of Common Stock, no par value, outstanding as of September 30,
1996: 10,682,019.
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MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 1996
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 1996 and 3
December 31, 1995
Condensed Statements of Operations for the three and nine
months ended September 30, 1996 and September 30, 1995 4
Condensed Statements of Cash Flows for the three and nine
months ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 13
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MICROCIDE PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
1996 1995
-------- --------
(unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 49,491 $ 8,517
Prepaid expenses and other current assets 196 138
-------- --------
Total current assets 49,687 8,655
Property and equipment, net 5,417 4,606
Other assets 213 232
-------- --------
Total assets $ 55,317 $ 13,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 501 $ 463
Accrued compensation and other accrued liabilities 416 273
Current portion of capital lease obligations 1,077 1,118
Deferred revenue 1,551 413
-------- --------
Total current liabilities 3,545 2,267
Long-term portion of capital lease obligations 1,132 1,920
Accrued rent 148 155
Stockholders' equity:
Preferred stock -- 22,435
Common stock 66,239 632
Stockholder note receivable (35) (35)
Deferred compensation (1,718) (412)
Net unrealized loss on securities available-for-sale -- (2)
Deficit accumulated during the development stage (13,994) (13,467)
-------- --------
Total stockholders' equity 50,492 9,151
-------- --------
Total liabilities and stockholders' equity $ 55,317 $ 13,493
======== ========
NOTE: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements.
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MICROCIDE PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
License fees $ -- $ -- $ 1,000 $ --
Research revenue 2,485 -- 6,353 --
-------- --------
Total revenues 2,485 -- 7,353 --
Operating expenses:
Research and development 3,014 1,516 7,099 4,242
General and administrative 721 428 1,828 1,291
-------- -------- -------- --------
Total operating expenses 3,735 1,944 8,927 5,533
-------- -------- -------- --------
Loss from operations (1,250) (1,944) (1,574) (5,533)
Interest income 681 23 1,234 156
Interest expense (64) (69) (187) (210)
-------- -------- -------- --------
Net loss $ (633) $ (1,990) $ (527) $ (5,587)
======== ======== ======== ========
Net loss per share $ (0.06) $ (0.86) $ (0.08) $ (2.41)
======== ======== ======== ========
Shares used in calculation of
net loss per share 10,677 2,322 6,301 2,314
Pro forma net loss per share $ (0.06) $ (0.25) $ (0.06) $ (0.69)
======== ======== ======== ========
Shares used in calculation of
pro forma net loss per share 10,677 8,058 9,334 8,050
See notes to condensed financial statements.
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MICROCIDE PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (633) $ (1,990) $ (527) $ (5,587)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 415 336 1,153 974
Amortization of deferred compensation 140 -- 349 --
Accrued rent (2) 34 (7) 41
Net unrealized gain on securities 2 -- 2 --
Changes in assets and liabilities:
Prepaid expenses and other current assets 96 (48) (58) 178
Other assets (54) 28 19 (23)
Accounts payable (257) 104 38 (56)
Accrued compensation and other accrued liabilities 46 (13) 143 37
Deferred revenue 8 -- 1,138 --
-------- -------- -------- --------
Net cash provided by (used in) operating activities (239) (1,549) 2,250 (4,436)
-------- -------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (235) (52) (1,964) (76)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (327) (213) (829) (687)
Net proceeds from issuance of common stock (89) 5 36,529 5
Net proceeds from issuance of convertible
preferred stock -- -- 4,988 --
-------- -------- -------- --------
Net cash provided by (used in) financing activities (416) (208) 40,688 (682)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (890) (1,809) 40,974 (5,194)
Cash and cash equivalents, beginning of period 50,381 2,425 8,517 5,810
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 49,491 $ 616 $ 49,491 $ 616
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 64 $ 71 $ 184 $ 215
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible preferred
stock to common stock $ -- $ -- $ 27,423 $ --
======== ======== ======== ========
Equipment purchased under capital leases $ -- $ 231 $ -- $ --
======== ======== ======== ========
See notes to condensed financial statements.
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MICROCIDE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Microcide Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical
company founded to discover, develop and commercialize novel antibiotics for the
treatment of serious bacterial infections. The Company's discovery and
development programs address the growing problem of antibiotic resistance in
certain bacteria through two principal themes: (i) Targeted Antibiotics, which
focuses on developing novel antibiotics and antibiotic potentiators, and (ii)
Targeted Genomics, which utilizes bacterial genetics to discover new classes of
antibiotics and other novel treatments for bacterial disease.
The Company's activities to date have consisted principally of raising
capital, arranging for facilities, acquiring equipment and intellectual
property, recruiting managerial and technical personnel, and conducting research
and development. Accordingly, the Company is classified as a development stage
enterprise.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire year.
This unaudited financial data should be read in conjunction with the
financial statements contained in the Company's final prospectus included in its
Registration Statement on Form S-1 (Registration No. 333-02400).
2. INVESTMENTS
Investment securities are classified as available-for-sale and consist
of the following investments due within three months:
September 30, December 31,
1996 1995
------- -------
Cash equivalents:
Money market funds $49,491 $ 1,039
Commercial paper -- 7,478
------- -------
$49,491 $ 8,517
======= =======
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3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the periods presented. Common
equivalent shares are included in the computation for income periods and
excluded from the computation in loss periods as their effect is antidilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares (stock options, warrants, and
convertible preferred stock) issued during the 12 month period prior to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods through March 31, 1996 (using the treasury
stock method for stock options and warrants and the if-converted method for
convertible preferred stock).
The pro forma calculation of net loss per share has been computed as
described above but also gives retroactive effect from the date of issuance to
the conversion of the convertible preferred stock which automatically converted
to common shares upon closing of the Company's initial public offering in May
1996.
4. COMMITMENT
In August 1996, the Company signed an eight year, eleven month
agreement to lease approximately 31,000 square feet of additional research and
office space. The agreement calls for minimum monthly rental payments ranging
from approximately $33,000 to $45,000 beginning on November 1, 1996. The
agreement also provides the Company with one five-year option to extend the term
of the lease.
5. SUBSEQUENT EVENT
On October 23, 1996, the Company received a $1,000,000 milestone
payment, following the joint selection, with the R.W. Johnson Pharmaceutical
Research Institute (an affiliate of Johnson & Johnson), of a development
candidate in its collaboration on Gram-positive bacterial infections. This
payment will be recognized as revenue in the fourth quarter and is thus not
reflected in the financial statements presented.
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MICROCIDE PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
As part of the Company's strategy to enhance its research and
development capabilities and to fund, in part, its capital requirements,
Microcide has entered into collaborative agreements with three major
pharmaceutical companies. The Company has received license fees, research
support payments and a milestone payment pursuant to these agreements and can
potentially receive additional research support payments, additional milestone
payments and royalty payments. License payments are typically nonrefundable
up-front payments for licenses to develop, manufacture and market products, if
any, that are developed as a result of the collaboration. Research support
payments are typically contractually obligated payments to fund research and
development over the term of the collaboration. Milestone payments are payments
contingent upon the achievement of specified milestones, such as selection of
candidates for drug development, the commencement of clinical trials or receipt
of regulatory approvals. If drugs are successfully developed and commercialized
as a result of the collaborative agreements, the Company will receive royalty
payments based upon the net sales of such drugs.
Through September 30, 1996, the Company had received in the aggregate
$4.0 million in license fees and $9.8 million in research support payments under
the collaborative agreements. Assuming none of the existing collaborative
agreements is terminated prior to its scheduled expiration, the Company will be
entitled to receive an additional $31.6 million of research support payments. In
addition, in the event that any of the collaborative agreements are extended
beyond their current terms, the Company will be entitled to receive additional
research support payments.
The Company received its first milestone payment in October 1996
triggered by the selection of a development candidate in its Gram-positive
collaboration with the R.W. Johnson Pharmaceutical Research Institute (an
affiliate of Johnson & Johnson); this payment is not reflected in the financial
statements presented herein but will be recorded in the Company's fourth
quarter. In the event that the Company achieves additional specified research
and product development milestones, the Company will be entitled to receive
milestone payments ranging from $13.0 million to $32.5 million per product. No
royalty payments have yet been received and the Company does not expect to
receive royalties based upon the net sales of drugs for a significant number of
years, if ever.
Quarterly results of operations are subject to significant fluctuations
based on the timing and amount of certain revenues earned under the
collaborative agreements. The Company expects to incur operating losses in the
future.
This Form 10-Q contains forward-looking statements based upon current
expectations, including statements with regard to the potential receipt of
additional research and support payments, milestone payments and royalties from
the Company's collaborative partners, the period of time the Company's existing
capital resources and future payments under collaborative agreements will be
sufficient to satisfy the Company's funding requirements, and the Company's
space requirements. Such forward-looking statements involve risk and
uncertainties, including without limitation, the risk that the Company's
collaborations will be terminated, development candidates will not be
identified, development candidates which are selected will not proceed through
pre-clinical trials or
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will not prove safe and effective for treatment of humans in clinical trials, or
that the identification, selection, pre-clinical, and clinical testing of
development candidates will take substantially longer or be substantially more
expensive than contemplated by the Company, or that the Company will not be able
to obtain on a timely basis government regulatory clearance required for
clinical testing, manufacturing, and marketing of its products, and the other
risk factors set forth in "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 and the Prospectus dated May 14, 1996
constituting a part thereof and the Company's quarterly report on Form 10-Q for
the quarter ending June 30, 1996. Actual results and timing of certain events
could differ materially from those indicated in the forward-looking statements
as a result of these or other factors.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Total revenues for the third quarter of 1996 were $2.5 million,
consisting of revenues earned for research performed under collaborative
agreements. Research revenues in the third quarter increased 11% over that
earned in the second quarter of 1996 due to an increase in the number of
research personnel devoted to collaborative projects. No revenues were
recognized for the third quarter of 1995 as no collaborative agreements were in
effect at that time. Revenues are expected to increase in the fourth quarter
relative to the third quarter, principally as a result of the $1 million
milestone payment earned and received in October 1996. The foregoing is a
forward-looking statement.
Research and Development Expenses. Research and development expenses for the
third quarter increased approximately 99% from $1.5 million in 1995 to $3.0
million in 1996 primarily due to increased compensation expenses, supplies and
other expenses related to an increase in the number of research personnel,
largely to support the Company's new collaborative programs. Additionally,
expenditures for research materials, outside research services and amortization
of deferred compensation contributed to the increase in expense. Research and
development expenses are expected to further increase in the fourth quarter as
the Company adds research personnel to support its corporate collaborations and
internal programs.
General and Administrative Expenses. General and administrative expenses for the
third quarter increased 68% from $428,000 in 1995 to $721,000 in 1996 primarily
due to increased compensation expenses resulting from an increase in the number
of administrative personnel and amortization of deferred compensation. General
and administrative expenses are expected to increase in the fourth quarter as
the Company adds administrative personnel and infrastructure commensurate with
the growth of the business.
Interest Income and Expense. Interest income for the third quarter increased
from $23,000 in 1995 to $681,000 in 1996, primarily due to an increase in
average cash balances in 1996 related to proceeds received from the Company's
initial public offering in May 1996, proceeds received from the sale of other
equity and cash received under collaborative agreements. Interest expense for
the third quarter decreased 7% from $69,000 in 1995 to $64,000 in 1996 due to a
decrease in capital lease balances outstanding.
Net Loss. Net loss for the third quarter decreased $1.4 million from a loss of
$2.0 million in 1995 to a loss of $633,000 in 1996, primarily as a result of the
items discussed above.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Revenues for the first three quarters of 1996 were $7.4 million,
consisting of $1.0 million in license fees and $6.4 million in revenues earned
for research performed under collaborative agreements. No revenues were
recognized for the first three quarters of 1995 as no collaborative agreements
were in effect at that time.
Research and Development Expenses. Research and development expenses for the
first three quarters of 1996 increased approximately 67% from $4.2 million in
1995 to $7.1 million in 1996 primarily due to increased compensation expenses,
supplies and other expenses related to an increase in the number of research
personnel, largely to support the Company's new collaborative programs.
Additionally, expenditures for research materials, outside research services and
amortization of deferred compensation contributed to the increase.
General and Administrative Expenses. General and administrative expenses for the
first three quarters of 1996 increased approximately 42% from $1.3 million in
1995 to $1.8 million in 1996 primarily due to increased compensation expenses
resulting from an increase in the number of administrative personnel and
amortization of deferred compensation.
Interest Income and Expense. Interest income for the first three quarters of
1996 increased from $156,000 in 1995 to $1.2 million in 1996, primarily due to
an increase in average cash balances in 1996 related to proceeds received from
the Company's initial public offering in May 1996, proceeds received from the
sale of other equity and cash received under collaborative agreements. Interest
expense for the first three quarters of 1996 decreased 11% from $210,000 in 1995
to $187,000 in 1996 due to a decrease in capital lease balances outstanding.
Net Loss. Net loss for the first three quarters of 1996 decreased $5.1 million
from a loss of $5.6 million in 1995 to a loss of $527,000 in 1996, primarily as
a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through the sale of equity, through funds provided under collaborative
agreements and through equipment financing. As of September 30, 1996 the Company
had received approximately $64.0 million in net proceeds from the sale of equity
and approximately $13.9 million in cash for license fees and research support
payments under collaborative agreements.
Cash and cash equivalents at September 30, 1996 were $49.5 million
compared to $8.5 million at December 31,1995. The increase during the first nine
months of 1996 was due primarily to proceeds received from the Company's initial
public offering, the sale of other equity and payments received under
collaborative agreements.
Net cash provided by the Company's operations was $2.3 million for the
nine months ended September 30, 1996 and was primarily due to receipt of a
license fee and receipt of research support payments in excess of research
revenue earned during the nine month period. Net cash used in the Company's
operations was $239,000, $1.5 million and $4.4 million for the three months
ended September 30, 1996, the three months ended September 30, 1995 and the nine
months ended September 30, 1995, respectively. Net cash used in operations was
primarily used to fund research and development expenses and for general and
administrative expenses to support the Company's activities.
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From inception through September 30, 1996, the Company had invested
approximately $8.7 million in property and equipment, including $4.6 million in
equipment and leasehold improvements under capital leases. For the first nine
months of 1996, $2.0 million was invested in property and equipment.
In August 1996, the Company signed an eight year, eleven month
agreement to lease approximately 31,000 square feet of additional research and
office space. The agreement calls for minimum monthly rental payments ranging
from approximately $33,000 to $45,000 beginning on November 1, 1996. The
agreement also provides the Company with one five-year option to extend the term
of the lease. The additional space is located within walking distance of the
Company's existing facility and is expected to augment and provide expansion for
the Company's research and office needs through 1997. The foregoing is a
forward-looking statement.
The Company believes that its existing capital resources, interest
income and future payments due under collaborative agreements will be sufficient
to satisfy its funding requirements at least through 1998. The foregoing is a
forward-looking statement.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in 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) The following exhibits have been filed with this report:
10.17 Lease agreement commencing November 1, 1996 between Microcide
Pharmaceuticals, Inc. and Logue Investments, L.P., a California limited
partnership.
11.1 Calculation of Net Loss Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September
30, 1996.
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SIGNATURES
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.
Dated: November 8, 1996
MICROCIDE PHARMACEUTICALS, INC.
-------------------------------
(Registrant)
/s/ James E. Rurka
------------------
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Matthew J. Hogan
--------------------
Chief Financial Officer
(principal financial and accounting officer)
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