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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, 1997
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: 650-428-1550
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 October 31,
1997: 10,896,814.
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MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 1997
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 1997
and December 31, 1996 3
Condensed Statements of Operations for the three
and nine months ended September 30, 1997 and
September 30, 1996 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and
September 30, 1996 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.
CONDENSED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996
------- -------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 6,849 $ 8,317
Short-term investments 34,770 39,191
Prepaid expenses and other current assets 1,366 334
------- -------
Total current assets 42,985 47,842
Property and equipment, net 9,102 8,825
Other assets 573 159
------- -------
Total assets $52,660 $56,826
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 957 $ 1,523
Construction payable 536 745
Accrued compensation 725 496
Current portion of capital lease obligations 778 1,110
Deferred revenue 1,044 1,189
Other accrued liabilities 558 237
------- -------
Total current liabilities 4,598 5,300
Long-term portion of capital lease obligations 300 811
Accrued rent 222 141
Stockholders' equity:
Common stock 66,605 66,314
Stockholder note receivable -- (35)
Deferred compensation (1,274) (1,577)
Net unrealized gain (loss) on securities (61) 9
available-for-sale
Accumulated deficit (17,730) (14,137)
------- -------
Total stockholders' equity 47,540 50,574
------- -------
Total liabilities and stockholders' equity $52,660 $56,826
======= =======
NOTE: The balance sheet at December 31, 1996 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.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
License, milestone and other
revenues $1,054 $ -- $2,054 $1,000
Research revenue 3,024 2,485 9,125 6,353
------ ------ ------ ------
Total revenues 4,078 2,485 11,179 7,353
Operating expenses:
Research and development 5,078 3,014 13,515 7,099
General and administrative 1,005 721 3,126 1,828
------ ------ ------ ------
Total operating expenses 6,083 3,735 16,641 8,927
------ ------ ------ ------
Loss from operations (2,005) (1,250) (5,462) (1,574)
Interest income 665 681 2,003 1,234
Interest expense (41) (64) (134) (187)
------ ------ ------ ------
Net loss $(1,381) $ (633) $(3,593) $ (527)
======= ====== ======= ======
Net loss per share $(0.13) $(0.06) $(0.33) $(0.08)
====== ====== ====== ======
Shares used in calculation of
net loss per share 10,843 10,677 10,800 6,301
====== ====== ====== ======
See Notes to Condensed Financial Statements.
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MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(Unaudited)
Nine Months Ended
September 30,
------------------
1997 1996
-------- ------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(3,593) $ (527)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,231 1,153
Amortization of deferred compensation 446 349
Accrued rent 81 (7)
Net unrealized gain (loss) on securities (70) 2
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,032) (58)
Other assets (414) 19
Accounts payable (566) 38
Construction payable (209) --
Accrued compensation and other accrued liabilities 550 143
Deferred revenue (145) 1,138
-------- ------
Net cash provided by (used in) operating activities (2,721) 2,250
------- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of short-term investments (21,289) --
Maturities of short-term investments 25,710 --
Capital expenditures (2,508) (1,964)
------- ------
Net cash provided by (used in) investing activities 1,913 (1,964)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (843) (829)
Repayment of shareholder note receivable 35 --
Net proceeds from issuance of common stock 148 36,529
Net proceeds from issuance of convertible
preferred stock -- 4,988
------- ------
Net cash provided by (used in) financing activities (660) 40,688
------- ------
Net increase (decrease) in cash and cash equivalents (1,468) 40,974
Cash and cash equivalents, beginning of period 8,317 8,517
------- ------
Cash and cash equivalents, end of period $ 6,849 $49,491
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 22 $ --
======= ======
Interest paid $ 116 $ 184
======= ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of convertible preferred stock to common stock $ -- $27,423
======= =======
See Notes to Condensed Financial Statements.
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MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(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 has
also extended its functional genomics technology platform into a program
designed to discover improved systemic antifungal agents.
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 and footnotes contained in the Company's annual report on
Form 10-K for the year ended December 31, 1996.
2. INVESTMENTS
Investment securities are classified as available-for-sale (estimated
fair value) and consist of the following investments (in thousands):
September 30, December 31,
1997 1996
------------ -----------
Cash equivalents and short-term investments:
Money market funds $ 1,956 $ 420
Corporate debt securities 38,481 44,174
----------- ----------
$ 40,437 $ 44,594
=========== ==========
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3. PER SHARE INFORMATION
Net income (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 for 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 income
(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.
In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings per Share", which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is not expected to
result in a change in primary earnings per share for the three and nine months
ended September 30, 1997 and September 30, 1996 as the Company incurred net
losses in these periods and, accordingly, the calculation of earnings per share
for these periods excluded stock options as their effect was antidilutive.
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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 milestone payments 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.
In June 1997, Microcide signed an agreement to provide Daiichi
Pharmaceutical Co., Ltd. with a subset of its synthetic molecular diversity
collection for use in Daiichi's own drug discovery screening programs in
consideration for future payments by Daiichi of $1.5 million. Delivery of the
compounds, receipt of the associated payments and recognition of related
revenues are expected to occur during the second half of 1997. In July 1997,
Microcide signed a one-year agreement to provide a minimum of 40,000 extracts
from its natural products diversity collection to Tularik Inc. for use in
Tularik's non-antimicrobial drug discovery screening programs. Pursuant to the
agreement, Microcide will receive payments for the extracts upon delivery to
Tularik, may provide refermentation of extracts for agreed upon amounts and may
potentially receive license fees and royalties on resulting products. Revenues
relating to these contracts have been partially recognized in the third quarter
ending September 30, 1997.
Through September 30, 1997, the Company had received in the aggregate
$27.3 million in license fees, milestone payments and 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 up to an additional $20.2 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.
In the event that the Company achieves the specified research and
product development milestones, the Company will be entitled to receive
milestone payments under its collaborative agreements with three major
pharmaceutical companies 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.
In July 1997, the Company signed a 30 month agreement to sublease two
buildings, each building consisting of approximately 18,000 square feet of
additional research and office space. The agreement calls for total minimum
monthly rental payments ranging from $62,000 to $64,000 beginning on November 1,
1997. In September 1997, the Company signed an agreement to sub-sublease one of
the buildings for a term of one year, subject to two three month optional
extension periods, for total minimum monthly rental payments of $35,000. The
Company intends to utilize the other building for additional research and
administrative space.
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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 support payments, milestone payments and royalties from the
Company's collaborative partners, payments related to delivering molecular
diversity samples to Daiichi and Tularik, and 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, expectations
concerning the Company's future research and development and general and
administrative expenses and future facility needs. 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 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. For a discussion of other risks
and uncertainties affecting the Company's business, see the Company's annual
report on Form 10-K for the year ended December 31, 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, 1997 AND 1996
Revenues. Total revenues for the third quarter of 1997 were $4.1 million, an
increase of 64% from the $2.5 million in revenues recognized in 1996. License,
milestone and other revenues earned for the third quarter included revenues of
$1.1 million in 1997 relating to the Daiichi and Tularik diversity agreements;
there were no license, milestone and other revenues in the third quarter of
1996. Research support revenue in the third quarter increased from $2.5 million
in 1996 to $3.0 million in 1997 due primarily to higher revenues earned from the
Pfizer and Daiichi collaborative agreements resulting from an increase in the
number of research personnel devoted to the collaborative projects, as well as
an increase in reimbursable research expenses, such as costs related to certain
equipment and outside consulting services.
Research and Development Expenses. Research and development expenses for the
third quarter increased approximately 68% from $3.0 million in 1996 to $5.1
million in 1997. The increases are due primarily to higher compensation and
other employee-related expenses associated with an increase in headcount to
support the Company's corporate collaborations and its internal programs, higher
spending for research supplies and materials, higher expenses related to
assembling the Company's molecular diversity collection, higher costs relating
to expanded research and development facilities and higher expenses for outside
consulting services.
General and Administrative Expenses. General and administrative expenses for the
third quarter increased 39% from $721,000 in 1996 to $1.0 million in 1997.
Increased expenses
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primarily consisted of higher compensation expenses due to an increase in
administrative personnel and higher costs for legal and other outside services.
Interest Income and Expense. Interest income for the third quarter decreased
slightly from $681,000 in 1996 to $665,000 in 1997, primarily due to a decrease
in average cash balances. Interest expense for the third quarter decreased from
$64,000 in 1996 to $41,000 in 1997 due to a decrease in capital lease balances
outstanding.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Total revenues for the first nine months of 1997 were $11.2 million,
an increase of 52% from the $7.4 million in revenues for 1996. License,
milestone and other revenues were $1.0 million for the first nine months of 1996
and $2.1 million in 1997; included in this figure for the first nine months of
1997 was $1.1 million of revenues related to the Daiichi and Tularik diversity
agreements. Research support revenue increased from $6.4 million in the first
nine months of 1996 to $9.1 million in 1997 due primarily to higher revenues
earned from the Pfizer and Daiichi collaborative agreements resulting from an
increase in the number of research personnel devoted to the collaborative
projects, as well as an increase in reimbursable research expenses, such as
costs related to certain equipment and outside consulting services.
Research and Development Expenses. Research and development expenses for the
first nine months of 1997 were $13.5 million, an increase of approximately 90%
from $7.1 million in the first nine months of 1996, primarily due to increased
compensation and other employee-related expenses associated with an increase in
headcount to support the Company's corporate collaborations and its internal
programs, higher spending for research supplies and materials, higher expenses
related to assembling the Company's molecular diversity collection, higher costs
relating to expanded research and development facilities and higher expenses for
outside consulting services.
General and Administrative Expenses. General and administrative expenses for the
first nine months of 1997 increased approximately 71% from $1.8 million in 1996
to $3.1 million in 1997. Increased expenses primarily consisted of higher
compensation expenses due to an increase in administrative personnel and higher
costs for legal and other outside services.
Interest Income and Expense. Interest income for the first nine months of 1997
increased from $1.2 million in 1996 to $2.0 million in 1997, primarily due to an
increase in average cash balances in 1997 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 nine months of 1997 decreased from $187,000 in 1996 to
$134,000 in 1997 due to a decrease in capital lease balances outstanding.
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, 1997 the Company
had received approximately $64.2 million in net proceeds from the sale of equity
and approximately $27.5 million from license, milestone and other revenues and
research support payments under collaborative agreements.
Cash, cash equivalents and short-term investments at September 30, 1997
were $41.6 million compared to $47.5 million at December 31, 1996. For the first
nine months of 1997, net cash of $2.7 million was used for operations, $2.5
million was used for
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capital expenditures and $843,000 was used for principal payments on capital
lease obligations.
The Company believes that its existing capital resources,
interest income and future payments due under collaborative agreements will
enable the Company to maintain current and planned operations at least through
1998.
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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:
10.19 Sublease agreement between the Registrant, Quickturn Design Systems,
Inc. and Portola Land Co. dated July 1997
10.20 Sub-sublease agreement between the Registrant, Alpha Blox Corporation,
Quickturn Design Systems, Inc. and Portola Land Co. dated September
1997
11.1 Calculation of Net Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
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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 14, 1997
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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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.19 Sublease agreement between the Registrant, Quickturn Design Systems,
Inc. and Portola Land Co. dated July 1997
10.20 Sub-sublease agreement between the Registrant, Alpha Blox Corporation,
Quickturn Design Systems, Inc. and Portola Land Co. dated September
1997
11.1 Calculation of Net Loss Per Share
27.1 Financial Data Schedule