1
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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________.
Commission File Number: 0-22788
AXYS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2969941
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices)
(650) 829-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 29,998,477 at April 30, 1998.
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AXYS PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) *
Consolidated Balance Sheets - March 31, 1998 and December 31,1997..................................... 3
Consolidated Statements of Operations - Three months ended March 31, 1998 and 1997.................. 4
Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997.................... 5
Notes to Consolidated Financial Statements............................................................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 15
PART II: OTHER INFORMATION.......................................................................... 16
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon 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........................................................................................... 18
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed
on March 31, 1998.
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AXYS PHARMACEUTICALS, INC.
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (1)(2)
--------- ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 35,867 $ 22,938
Short-term marketable investments 56,783 30,470
Prepaid expenses and other current assets 4,788 4,103
--------- ---------
Total current assets 97,438 57,511
Property and equipment, net 21,326 14,454
Investment in joint venture 1,844 --
Note receivable from officer 615 775
Other assets 4,536 844
--------- ---------
TOTAL ASSETS $ 125,759 $ 73,584
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,471 $ 1,622
Accrued compensation 2,083 1,793
Other accrued liabilities 2,999 2,148
Current portion of deferred revenue 8,205 5,410
Current portion of capital lease and debt obligations 7,636 3,390
--------- ---------
Total current liabilities 26,394 14,363
Deferred revenue, noncurrent 222 726
Capital lease and debt obligations, net of current portion 18,880 14,605
Stockholders' equity:
Preferred stock -- --
Common stock 289,051 117,786
Note receivable from officer -- (125)
Accumulated deficit (208,788) (73,771)
--------- ---------
Total stockholders' equity 80,263 43,890
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,759 $ 73,584
========= =========
See accompanying notes to consolidated financial statements.
(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statement at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
(2) Represents the balances of Arris Pharmaceutical Corporation only.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
--------------------------
1998 1997*
--------- ---------
(in thousands, except per
share amounts)
Revenues $ 8,434 $ 6,689
Operating expenses:
Research and development 15,487 7,847
General and administrative 3,432 1,615
Acquired in-process
research and development 124,888 --
--------- ---------
Total operating expenses 143,807 9,462
--------- ---------
Operating loss (135,373) (2,773)
Interest income 1,381 949
Interest expense (568) (222)
Equity interest in loss of joint
venture (457) --
--------- ---------
Net loss $(135,017) $ (2,046)
========= =========
Basic and diluted net loss per share $ (4.69) $ (0.14)
========= =========
Shares used in computing basic and
diluted net loss per share 28,782 14,898
========= =========
See accompanying notes to consolidated financial statements.
* Reflects the results of Arris Pharmaceutical Corporation only.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
March 31,
-----------------------------
1998 1997
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(135,017) $(2,046)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 2,072 1,052
Equity interest in loss on joint venture 457
Forgiveness of note receivable from officer 125
Acquired in-process research and development 124,888
Changes in assets and liabilities:
Prepaid expenses and other current assets 1,305 (1,091)
Other assets (2,791) (89)
Accounts payable, accrued liabilities and
deferred revenue (6,647) (2,189)
--------- -------
Net cash and cash equivalents (used in) operating activities (15,608) (4,363)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases (8,206) (9,683)
Maturities 23,805 12,220
Purchase of restricted cash (2,000)
Acquisition, net of cash balances 13,270
Purchase of property and equipment (830) (1,860)
-------- -------
Net cash and cash equivalents provided by (used in)
investing activities 28,039 (1,323)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,535 428
Proceeds from note receivable 593
Proceeds from notes payable and lease financing 2,000
Principal payments on notes payable and capital leases (1,630) (398)
-------- -------
Net cash and cash equivalents provided by financing
activities 498 2,030
-------- --------
Net increase (decrease) in cash and cash equivalents 12,929 (3,656)
Cash and cash equivalents, beginning of period 22,938 10,822
-------- -------
Cash and cash equivalents, end of period $35,867 $ 7,166
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock and value of options and
warrants issued in acquisition $ 169,730 $ --
========= ========
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the "Company"),
formerly known as Arris Pharmaceutical Corporation ("Arris"), is a leader in the
integration of drug discovery technologies from gene identification through
clinical development. Axys has research collaborations with world-class
pharmaceutical companies that are focused on the discovery of small molecule
therapeutics and cover a broad range of therapeutic areas, including
respiratory, cardiovascular, metabolic and infectious diseases, as well as
oncology and central nervous system disorders.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Arris Protease, Inc., Arris Pharmaceuticals
Canada, Inc., Sequana Therapeutics, Inc. ("Sequana") and its wholly owned
subsidiary NemaPharm, Inc., (see "Acquisition of Sequana", Note 2). All
significant intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company according to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to state fairly the financial position and results of operations as of
and for the periods indicated. The results of operations for the three-month
period ended March 31, 1998 are not necessarily indicative of the results to be
expected for subsequent quarters or the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF SEQUANA
On January 8, 1998, the Company acquired all of the outstanding capital stock of
Sequana, a genomics company that uses industrial-scale gene discovery technology
and functional genomics to discover and characterize genes that cause certain
common diseases. The Company issued approximately 14,620,000 shares of Axys
Common Stock in exchange for all the outstanding common stock of Sequana, on the
basis of 1.35 shares of Arris' Common Stock for one share of Sequana common
stock. The purchase price of $174,070,000 consisted of (i) the issuance of
14,618,013 shares of Company common stock valued at $168,107,000, in exchange
for all outstanding Sequana capital stock, (ii) the issuance of Company warrants
valued at $1,623,000 in exchange for all of the outstanding Sequana warrants,
(iii) severance costs totaling $1,162,000, and (iv) transaction costs totaling
$3,178,000.
The allocation of the purchase price was determined as follows:
Net tangible assets acquired $ 45,882,000
Intangible assets acquired:
Workforce 3,300,000
In-process technology 124,888,000
-----------
Total $174,070,000
===========
The acquisition has been accounted for as a purchase, and accordingly, the
original purchase price was allocated to acquired assets and assumed liabilities
based upon their fair value at the date of acquisition. The purchase price has
been allocated to assets acquired and to in-process research and development
which has been charged as an expense in the Axys consolidated financial
statements for the three months ended March 31, 1998. Intangibles arising from
the acquisition are being amortized on a straight line basis over 36 months. The
operating results of Sequana from January 1, 1998 to March 31, 1998 have been
included in the Company's consolidated results of operations. The operating
results of Sequana from January 1, 1998 to January 8, 1998 (date of acquisition)
are considered immaterial.
As part of the Company's acquisition of Sequana, the Company also obtained 50%
ownership of Genos Biosciences, Inc. ("Genos") (see "Investment in Joint
Venture", note 3).
The following unaudited pro forma financial summary is presented as if the
operations of the Company and Sequana were combined as of December 31, 1996. The
unaudited pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the acquisition been consummated at
that date, or of the future operations of the combined entities. Nonrecurring
charges, such as the acquired in-process research and development charge of
$124.8 million are not reflected in the following pro forma financial summary.
(In thousands, except
PRO FORMA FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED per share amount)
MARCH 31, 1997 (UNAUDITED)
- ------------------------------------------------------------------------------------
Contract Revenues $9,198
Net Loss (7,678)
Basic and diluted net loss per share $(0.27)
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN JOINT VENTURE
In January 1997, Sequana and Memorial Sloan-Kettering Cancer Center ("MSKCC")
formed Genos, a joint venture focused on the research and identification of
genes and related genetic information of value in the prognosis, diagnosis and
positive treatment of certain common cancers. Sequana and MSKCC each own 50% of
Genos and have committed to make capital contributions of approximately $5
million each to fund its initial operations. As of March 31, 1998, the Company
had invested $3.2 million in Genos, with the remaining capital contribution of
approximately $2.0 million expected to be funded in the first half of 1998. The
investment in Genos is accounted for under the equity method.
Under terms of the agreement, Sequana licensed certain of its technology to
Genos and has contracted with Genos to conduct research and provide certain
other services to the joint venture. Payments to date for such research and
services have not been material.
In connection with the formation of Genos, Sequana sold a warrant to MSKCC to
purchase 350,000 shares of the Sequana's common stock. That warrant was assumed
by the Company as part of the acquisition of Sequana on January 8, 1998, and was
converted to a warrant to purchase an aggregate of 472,500 shares at a price of
$12.87 per share.
4. NOTE PAYABLE
The Company has two lines of credit, one with the Sumitomo Bank, Limited
("Sumitomo") and one with Sumitomo and Silicon Valley Bank jointly, to provide
up to $27 million dollars in debt financing. The loans are subject to certain
financial covenants over the course of the agreements. Interest is computed at
various rates based on a Eurodollar rate and the bank's prime rate, and range
from 7.3% to 7.9%, and 8.5%, respectively at March 31, 1998. Interest and
principal payments are due monthly on $6.1 million of the balance, and interest
only payments are due quarterly on $13.8 million of the balance until September
30, 1998, at which time principal and interest will be payable in 48 monthly
installments. The Company was in compliance with all covenants at March 31,
1998. The balance outstanding on these loans at March 31, 1998 was $19.9
million.
5. STOCK OPTION PLANS
On January 7, 1998, the stockholders of the Company approved: (i) an amendment
to the Company's Certificate of Incorporation to (a) change the corporation's
name from Arris to Axys, and (b) increase the number of authorized shares of the
Company's capital stock to 60 million, and the Common Stock to 50 million; (ii)
the adoption of the 1997 Stock Option Plan; (iii) an increase of 350,000 shares
of common stock authorized for issuance under the 1994 Non-Employee Directors'
Stock Option Plan; and (iv) an increase of 400,000 shares of Common Stock
authorized for issuance under the Employee Stock Purchase Plan.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement No. 130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components, accordingly, the adoption of this
statement had no impact on the Company's net income or stockholders' equity.
Comprehensive income is the same as net income as there are no adjustments
reported in stockholders' equity which are to be included in the computation.
7. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board's Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement 131). Statement 131 superseded Statement No. 14,
Financial Reporting for Segments of an Business Enterprise. Statement 131
established standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect the results of operations or
financial position, but may affect the disclosure of the segment information
that will be disclosed in the annual report on Form 10-K.
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
under "Certain Business Risks" below as well as elsewhere herein, together with
those discussed in "Item 1. Business" and "Additional Risk Factors" in the
Company's report on Form 10-K for the fiscal year ended December 31, 1997, filed
March 31, 1998.
OVERVIEW
Since its inception in April 1989, the Company has devoted substantially all of
its resources to its research and development programs. To date, the Company's
only source of revenue has been its corporate collaborations with Pharmacia &
Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"), Bayer AG
("Bayer"), SmithKline Beecham Corporation ("SB"), Merck & Co. ("Merck"), Abbott
Laboratories ("Abbott"), and Bristol-Myers Squibb ("BMS"). In addition, through
its acquisition of Sequana Therapeutics, Inc. ("Sequana") on January 8, 1998,
the following corporate collaborations are included with the revenue sources
listed above, Boehringer Ingelheim International GmbH ("BI"), Corange
International Ltd. ("Corange"), Parke-Davis ("PD"), and Glaxo-Wellcome
("Glaxo"). These collaborations have taken a variety of forms including, in each
case, certain of the following elements: payments to the company of an up-front
commitment and license fees, purchase of the company's common stock, research
funding payments, purchase of compounds produced, reimbursement of patient
collection costs, milestone payments when milestones are achieved, and royalties
upon the sale of any resulting products. Where appropriate, the up-front
commitment fees have been recorded as deferred revenue until earned.
The Company has not been profitable since inception and expects to incur
substantial losses for at least the next several years, primarily due to the
cost of its research and development programs, including preclinical studies and
human clinical trials. The Company expects that losses will fluctuate from
quarter to quarter, that such fluctuations may be substantial, and that results
from prior quarters may not be indicative of future operating results. As of
March 31, 1998, the Company's accumulated deficit was approximately $208.4
million.
RESULTS OF OPERATIONS
The following discussion on results of operations is based on the combined pro
forma operating results (see table below) of the Company and Sequana as if the
acquisition had been effective as of December 31, 1996.
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRO FORMA OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(In thousands)
---------------------------------------------------------------------
Revenues $9,198
Operating expenses:
Research and development 15,361
General and administrative 2,832
---------------
Total operating expenses 18,193
---------------
Operating Loss $(7,678)
===============
Revenues
The Company's revenues on a pro forma basis were $8.4 million for the
three-month period ended March 31, 1998 compared to $9.1 million for the same
period in 1997. All of the Company's revenues presently are attributable to
collaborations with PNU, Merck, BMS, BI, Corange, PD, and Glaxo. The change in
1998 was primarily due to: (i) the inclusion of the full effects of the research
funding for the collaboration with BMS to develop small molecule inhibitors of
proteases involved in hepatitis C virus infection; and (ii) the inclusion of the
full effects of the research funding for the collaboration with PD to develop
novel therapeutic products for the treatment of schizophrenia and bipolar
disorder; offset by the following: (i) timing of the shipments of small molecule
synthetic organic compounds under the combinatorial chemistry collaboration with
P&U, (250,000 total compounds are due under the three-year agreement, of which
103,602 have been shipped to date); (ii) the ending of the research funded
portion of a tryptase inhibitor collaboration with Bayer during the fourth
quarter of 1997; and (iii) the transfer of the remaining proof-of-concept phase
of the SB collaboration to their internal resources, to develop inhibitors using
Axys' proprietary Delta Technology to target intracellular viral proteases.
Research and development
Research and development expenses were $15.5 for the three-month period ended
March 31, 1998, compared to $15.4 million in the same period in 1997. The change
was primarily due to the continued investment in the Company's research efforts
in new and existing programs and the expenses of programs and facilities added
as part of the January 8, 1998 acquisition of Sequana (see "Acquired in-process
research and development" below). Research and development expenses as a
percentage of total expenses, without the consideration of acquired in-process
research and development expenses of $124.9 million, has remained relatively
constant at approximately 82% of total expenses for the three-months ended March
31, 1998, compared to 84% in the same period in 1997. The Company expects that
its research and development costs will increase for the remainder of 1998 in
absolute dollars when compared
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
to pro forma amounts in 1997, as a result of further expansion of its
proprietary research programs and conduct of preclinical studies and clinical
trials.
General and administrative
The Company's general and administrative expenses increased to $3.4 million for
the three-month period ended March 31, 1998, compared to $2.8 million in the
same period in 1997. The increase in expenses was primarily due to additional
headcount and facilities acquired to support the additional research programs
obtained through the acquisition of Sequana (see "Acquired in-process research
and development" below). However, some of the administrative costs common to
both companies were eliminated by combining the two companies. In spite of the
overall increase, general and administrative expenses as a percentage of total
expenses, without the consideration of acquired in-process research and
development expenses of $124.9 million, remained relatively constant at
approximately 18% for the three-month period ended March 31, 1998, compared to
16% for the same period in 1997. The Company expects its general and
administrative costs will increase for the remainder of 1998 in absolute dollars
when compared to pro forma amounts in 1997 in order to provide corporate support
for expanding research and development efforts.
Equity interest in loss of joint venture
The equity interest in loss of joint venture at March 31, 1998 represents the
Company's portion of the losses for the quarter ended March 31, 1998 of Genos
Biosciences, Inc. ("Genos"). The Company holds a 50% interest in this joint
venture, which is made up of Sequana and Memorial Sloan-Kettering Cancer Center.
Genos expects to incur increased operating losses in future periods as it
expands its research and development activities. Such losses will result in
corresponding increases in the Company's equity in net loss of joint venture.
Acquired in-process research and development
On January 8, 1998 the Company acquired Sequana, a genomics company based in La
Jolla, California. The acquisition was a tax-free reorganization accounted for
as a purchase. The Company issued approximately 14,620,000 shares of Arris
Common Stock in exchange for all the outstanding common stock of Sequana, on the
basis of 1.35 shares of Arris' Common Stock for one share of Sequana common
stock. The costs associated with the acquisition were approximately $5 million.
The total purchase price of approximately $174 million was allocated to the
assets acquired and liabilities assumed based upon the fair value on the date of
the acquisition. Approximately $125 million of the purchase price was allocated
to in-process research and development and charged to expense at March 31, 1998.
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest income and expense
Interest income increased to $1.4 million for the three-months ended March 31,
1998, compared to $949,000 for the same period in 1997. The increase was
primarily due to the average cash balances between the periods, resulting from
the combination of the Company's cash and Sequana's cash. In addition, the
receipt of proceeds from research funding, collection of revenues from the
shipment of compounds under the collaboration with PNU, and reimbursement of
patient collection fees have helped to sustain the cash levels. Interest expense
increased to $568,000 for the three-month period ended March 31, 1998, from
$222,000 for the same period in 1997. The increase for the three-month period
was the result of higher debt balances, primarily from the combination of the
Company's and Sequana's debt financing. The Company has primarily used draw
downs from its lines of credit for capital acquisitions. The Company expects
interest expense to fluctuate as financing needs change for further expansion of
the Company's facilities and acquisition of laboratory equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of its capital stock and through corporate
collaborations. As of March 31, 1998, the Company had realized approximately $95
million in net proceeds from offerings of its capital stock. In addition, the
Company had realized $84.1 million since inception from its corporate
collaborations.
The Company's principal sources of liquidity are its cash and investments, which
totaled $92.6 million as of March 31, 1998. The Company has two lines of credit
totaling up to $27 million in debt financing. As of March 31, 1998 the Company
had borrowed a total of $19.9 million and had $6.1 million remaining available
under the agreements.
Net cash used in operating activities during the three-month period ended March
31, 1998 was $15.6 million, compared to $4.4 million in the same period in 1997.
The increase was primarily due to the increase in net loss for the three months
ended March 31, 1998 and the timing of cash received under the Company's
collaboration agreements. Cash used in operating activities is expected to
fluctuate from quarter to quarter depending, in part, upon the timing and
amounts, if any, of cash received from existing and any new collaboration
agreements.
The Company also spent approximately $830,000 for the purchase of property,
plant and equipment during the three months ended March 31, 1998. Additional
equipment will be needed as the Company increases its research and development
activities.
The Company's revenues presently are attributable to collaborations with PNU,
Merck, BMS, BI, Corange, PD, and Glaxo. The agreement with Glaxo is currently
under revision. The research support for the Factor Xa program with PNU and the
osteoporosis program with Merck extend through the third and fourth quarters of
1998, respectively. The Combinatorial
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Chemistry collaboration with PNU, and all other collaborations extend beyond the
next 12 months. If the Company is unable to renew or replace any of these
collaborations, such events may have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects that its existing capital resources, including research and
development revenues from existing collaborations, will enable the Company to
maintain current and planned operations for at least three years. The Company
will need to raise substantial additional capital to fund its operations beyond
the end of such period. The Company expects that it will seek such additional
funding through new collaborations, through the extension of existing
collaborations or through public or private equity or debt financing.
There can be no assurance that additional financing will be available to the
Company on acceptable terms or at all. Any additional funds raised by issuing
equity securities may result in further dilution to stockholders. If adequate
funds are not available, the Company may be required to delay, to reduce the
scope of or to eliminate one or more of its research or development programs or
to obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies or
products that the Company would otherwise seek to develop or commercialize
itself.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development. The Company's technologies are,
in many cases, new and all are still under development. All of the Company's
proposed products are in research or development and will require significant
additional research and development efforts prior to any commercial use,
including extensive preclinical and clinical testing, as well as lengthy
regulatory approval. There can be no assurance that the Company's research and
development efforts will be successful, that any of its proposed products will
prove to be safe and efficacious in clinical trials or that any commercially
successful products will ultimately be developed by the Company. In addition,
many of the Company's currently proposed products are subject to development and
licensing arrangements with the Company's collaborators. Therefore, the Company
is dependent on the research and development efforts of these collaborators.
Moreover, the Company is entitled only to a portion of the revenues, if any,
realized from the commercial sale of any of the proposed products covered by the
collaborations. The Company has experienced significant operating losses since
its inception and expects to incur significant operating losses over at least
the next several years. The development of the Company's technology and proposed
products will require a commitment of substantial funds to conduct these costly
and time consuming activities. All of the Company's revenues to date have been
received pursuant to the Company's collaborations. Should the Company or its
collaborators fail to perform in accordance with the terms of their agreements,
any consequent loss of revenue under the agreements could have a material
adverse effect on the Company's business, financial condition and results of
operations. The
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AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
proposed products under development by the Company have never been manufactured
on a commercial scale and there can be no assurance that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. The Company has no sales, marketing or distribution capability. If any
of its products subject to collaborative agreements are successfully developed,
the Company must rely on its collaborators to market such products.
If the Company develops any products which are not subject to collaborative
agreements, it must either rely on other pharmaceutical companies to market such
products or must develop a marketing and sales force with technical expertise
and supporting distribution capability in order to market such products
directly.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and products. Also inherent in the Company's
stage of development is a range of additional risks, including competition,
uncertainties regarding protection of patents and proprietary rights, government
regulation and uncertainties related to clinical trials and regarding health
care reform. These risks and uncertainties are discussed further in "Item 1. -
Business - Additional Risk Factors" on the Company's report on Form 10-K for the
year ended December 31, 1997, filed by the Company March 31, 1998.
IMPACT OF THE YEAR 2000
The Company has initiated modification of its information technology systems to
recognize the year 2000 and has begun converting critical hardware and data
processing systems. The Company expects the project to be substantially complete
by early 1999. The Company does not expect this project to have a significant
effect on operations, and the costs of modification are expected to be
insignificant. The Company is in the process of replacing its finance
information system which will be year 2000 compliant. In addition, the Company
is evaluating significant vendors and other third parties which could have an
effect on the Company's operations to ensure Year 2000 compliance by such
vendors and third parties.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
15
16
AXYS PHARMACEUTICALS, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) During the first quarter ended March 31, 1998, the Company
has sold the following unregistered securities:
In January 1998, the Company granted Comdisco, Inc. a
warrant to purchase up to 17,896 shares of Common Stock in
exchange for a warrant previously granted to Comdisco by
Sequana. The warrant is exercisable until December 16,
2003 at a price of $6.67 per share.
The issuance and sale of all such securities was intended to be
exempt from registration and prospectus delivery requirements
under the Securities Act of 1933, as amended (the "Securities
Act"), by virtue of Section4(2) thereof due to, among other
things, (i) the limited number of persons to whom the securities
were issued, (ii) the distribution of disclosure documents to the
investor, (iii) the fact that such person represented and
warranted to the Company, among other things, that such person
was acquiring the securities for investment only and not with a
view to the resale or distribution thereof, and (iv) the fact
that a certificate representing the securities was issued with a
legend to the effect that such securities had not been registered
under the Securities Act or any state securities laws and could
not be sold or transferred in the absence of such registration or
an exemption therefrom.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of a Special Meeting of Stockholders, held on January
7, 1998 were reported on the Company's annual report on Form 10-K
for the fiscal year ended December 31, 1997.
ITEM 5. OTHER INFORMATION
None
16
17
AXYS PHARMACEUTICALS, INC.
PART II: OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.83 Amendment to the Collaborative Research Agreement
between Sequana and Corange International Ltd. Effective
June 30, 1995, dated January 9, 1998.
10.84* Amendment No. 2 to the Collaborative Research Agreement
between Sequana and Corange International Ltd. Dated
June 30, 1995, effective February 23, 1998.
10.85 Employment Agreement by and between Tim Harris and the
Company, dated as of January 8, 1998.
10.86 Lease Agreement between Sequana Therapeutics, Inc. and
ARE-John Hopkins Court, LLC, dated as of January 7, 1998
27 Financial Data Schedule
b) Reports on Form 8-K
On January 23, 1998, the Company filed with the Commission a
Current Report on Form 8-K regarding the Merger.
- --------------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit.
17
18
AXYS PHARMACEUTICALS, INC.
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.
AXYS PHARMACEUTICALS, INC.
Date: May 15, 1998 By: /s/ John P. Walker
-------------------------------------------------
John P. Walker
President, Chief Executive Officer and Director
Date: May 15, 1998 By: /s/ Frederick J. Ruegsegger
-------------------------------------------------
Frederick J. Ruegsegger
Senior Vice President Finance and Corporate
Development and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.83 Amendment to the Collaborative Research Agreement
between Sequana and Corange International Ltd. Effective
June 30, 1995, dated January 9, 1998.
10.84* Amendment No. 2 to the Collaborative Research Agreement
between Sequana and Corange International Ltd. Dated
June 30, 1995, effective February 23, 1998.
10.85 Employment Agreement by and between Tim Harris and the
Company, dated as of January 8, 1998.
10.86 Lease Agreement between Sequana Therapeutics, Inc. and
Are-John Hopkins Court, LLC, dated as of January 7, 1998.
27 Financial Data Schedule
- --------------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit.