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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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. Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, $0.001
par value, was 30,147,403 as of October 31, 1998.
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AXYS PHARMACEUTICALS, INC.
INDEX
PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)*
Condensed Consolidated Balance Sheets -- September 30, 1998
and December 31,1997........................................ 3
Condensed Consolidated Statements of Operations -- Three and
nine months ended September 30, 1998 and 1997............... 4
Condensed Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1998 and 1997.................... 5
Notes to Condensed Consolidated Financial
Statements -- September 30, 1998............................ 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
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults Upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURE................................................... 17
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* 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 with the Securities and Exchange Commission on March 31, 1998.
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AXYS PHARMACEUTICALS, INC.
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997(1)(2)
------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 35,446 $ 22,938
Short-term marketable investments......................... 40,249 30,470
Accounts receivable, trade................................ 3,206 1,301
Prepaid expenses and other current assets................. 4,597 2,802
-------- --------
Total current assets.............................. 83,498 57,511
Property and equipment, net................................. 21,799 14,454
Investment in joint venture................................. 2,591 --
Note receivable from officer................................ 956 775
Other assets................................................ 4,203 844
-------- --------
TOTAL ASSETS...................................... $113,047 $ 73,584
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,057 $ 1,622
Accrued compensation...................................... 2,439 1,793
Other accrued liabilities................................. 2,551 2,148
Current portion of deferred revenue....................... 7,468 5,410
Current portion of capital lease and debt obligations..... 8,760 3,390
-------- --------
Total current liabilities......................... 25,275 14,363
Deferred revenue, noncurrent................................ -- 726
Capital lease and debt obligations, net of current
portion................................................... 20,910 14,605
Minority interest in Xyris Corporation...................... 500 --
Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 289,866 117,786
Note receivable from officer.............................. -- (125)
Net unrealized gain on available-for-sale securities...... 145 --
Accumulated deficit....................................... (223,649) (73,771)
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Total stockholders' equity........................ 66,362 43,890
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $113,047 $ 73,584
======== ========
See accompanying notes to condensed consolidated financial statements.
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(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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1998 1997* 1998 1997*
------- ------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.......................................... $14,274 $ 5,548 $ 31,805 $18,413
Operating expenses:
Research and development........................ 16,101 7,527 45,475 22,841
General and administrative...................... 4,480 1,930 11,602 5,132
Acquired in-process research and development.... -- -- 124,888 --
------- ------- --------- -------
Total operating expenses................ 20,581 9,457 181,965 27,973
------- ------- --------- -------
Operating loss.................................... (6,307) (3,909) (150,160) (9,560)
Interest income................................... 990 745 3,659 2,513
Interest expense.................................. (580) (325) (1,687) (707)
Equity interest in loss of joint venture.......... (788) (1,690)
------- ------- --------- -------
Net loss.......................................... $(6,685) $(3,489) $(149,878) $(7,754)
======= ======= ========= =======
Basic and diluted net loss per share.............. $ (0.22) $ (0.23) $ (5.06) $ (0.52)
======= ======= ========= =======
Shares used in computing basic and diluted net
loss per share.................................. 30,095 15,070 29,625 14,978
======= ======= ========= =======
See accompanying notes to condensed consolidated financial statements.
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* Reflects the results of Arris Pharmaceutical Corporation only.
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AXYS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997*
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(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(149,878) $ (7,754)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Depreciation and amortization............................. 7,210 3,212
Loss on disposal of property and equipment................ 44 --
Equity interest in loss of joint venture.................. 1,690 --
Forgiveness of note receivable from officer............... 125 --
Acquired in-process research and development.............. 124,888 --
Changes in assets and liabilities:
Prepaid expenses, accounts receivable, trade and other
current assets........................................ (1,711) 602
Other assets........................................... (3,138) (398)
Accounts payable, accrued liabilities and deferred
revenue............................................... (9,091) (6,269)
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Net cash and cash equivalents used in operating
activities................................................ (29,861) (10,607)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases................................................. (33,969) (4,999)
Maturities................................................ 66,247 749
Held-to-maturity securities:
Purchases................................................. -- (9,683)
Maturities................................................ -- 37,906
Purchase of restricted cash................................. -- (4,000)
Release on restrictions on cash............................. 11,250
Sequana acquisition, net of cash............................ 13,270 --
Investment in joint venture................................. (2,000) --
Proceeds from sale of property and equipment................ 119 --
Purchase of property and equipment.......................... (5,925) (5,394)
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Net cash and cash equivalents provided by investing
activities................................................ 37,742 25,829
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 2,350 1,506
Proceeds from note receivable............................... 252 --
Proceeds from notes payable and lease financing............. 6,174 16,150
Proceeds from minority interest............................. 500 --
Principal payments on notes payable and capital leases...... (4,649) (12,062)
--------- --------
Net cash and cash equivalents provided by financing
activities................................................ 4,627 5,594
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Net increase in cash and cash equivalents................... 12,508 20,816
Cash and cash equivalents, beginning of period.............. 22,938 10,822
--------- --------
Cash and cash equivalents, end of period.................... $ 35,446 $ 31,638
========= ========
See accompanying notes to condensed consolidated financial statements.
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* Reflects the results of Arris Pharmaceutical Corporation only.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 life science technologies with a focus on
transforming gene discoveries into drugs. Axys has research collaborations with
world-class pharmaceutical companies, covering a broad range of therapeutic
areas, including respiratory, cardiovascular 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") (See "Acquisition of
Sequana", Note 2) and its wholly owned subsidiary NemaPharm, Inc. and includes
the accounts of Xyris Corporation, the Company's majority owned joint venture
(See "Formation of Xyris Corporation", Note 4). All significant intercompany
accounts and transactions have been eliminated.
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform to the September 30,
1998 presentations.
BASIS OF PRESENTATION
The unaudited condensed 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 and nine
month periods ended September 30, 1998 are not necessarily indicative of the
results to be expected for subsequent quarters or the full fiscal year. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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.
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 14,618,013 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 $174.1 million consisted of (i) the issuance of 14,618,013
shares of Company common stock valued at $168.1 million, in exchange for all
outstanding Sequana capital stock, (ii) the issuance of Company warrants valued
at $1.6 million in exchange for all of the outstanding Sequana warrants, (iii)
severance costs totaling $1.2 million, and (iv) transaction costs totaling $3.2
million.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
The allocation of the purchase price was determined as follows:
Net tangible assets acquired........................... $ 45,882,000
Intangible assets acquired:
Workforce in place................................... 3,300,000
In-process technology.................................. 124,888,000
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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 and to in-process
research and development which has been charged as an expense in the Axys
consolidated financial statements for the nine months ended September 30, 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
September 30, 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 (the 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
(i.e. for all of the year ended December 31, 1997). 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 $124.9 million are not
reflected in the following pro forma financial summary.
PRO FORMA FINANCIAL SUMMARY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
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Contract Revenues......................... $ 9,948 $ 31,379
Loss from operations...................... (7,974) (22,755)
Basic and diluted net loss per share...... $ (0.26) $ (0.75)
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
owns 50% of Genos and was committed to make a capital contributions of
approximately $5 million to fund their portion of the initial operations. As of
September 30, 1998, the Company had invested $5.2 million in Genos, which
investment 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
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
acquisition of Sequana on January 8, 1998, and was converted to a warrant to
purchase an aggregate of 472,500 shares of Axys common stock at a price of
$12.87 per share.
4. FORMATION OF XYRIS CORPORATION
In June 1998, in connection with the formation of Xyris Corporation, a
California corporation and majority-owned subsidiary of the Company ("Xyris"),
the Company and Bay City Capital LLC, a San Francisco based private merchant
bank ("BCC"), each received Series A Preferred Stock of Xyris. Xyris was
established in May 1998 to leverage Axys' existing pharmaceutical technology in
the agricultural market. In exchange for 2,050,000 shares of Xyris' Series A
Preferred Stock, representing 82% of the total outstanding shares of Xyris
capital stock, the Company granted to Xyris the right, for a limited period to
negotiate an exclusive license in the field of agriculture to all Axys
technology, including its genomics, combinatorial chemistry and small molecule
drug discovery technology. BCC purchased Xyris Series A Preferred Stock for
cash. In connection with BCC's purchase, the Company issued an option (the "Put
Option") to BCC, granting BCC the right to require the Company to purchase from
BCC all of the 150,000 shares of Series A Preferred Stock of Xyris (the "Xyris
Stock") held by BCC. If the Put Option is exercised, the Company would purchase
the Xyris Stock with shares of the Company's Common Common Stock, at its then
market price, with an aggregate market value on the date the Put Option is
exercised equal to $499,500, rounded down to the nearest whole number of shares.
The Put Option will terminate upon the earlier of January 5, 1999 or the
occurrence of certain other events, including the execution of an exclusive
license in the field of agriculture to all Axys technology.
5. NOTES PAYABLE
The Company has two lines of credit, one with Sumitomo Bank, Limited
("Sumitomo") and one with Sumitomo and Silicon Valley Bank jointly, to provide
an aggregate of up to $27 million 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 range from 7.3% to 7.9%
at September 30, 1998. Interest and principal payments are due monthly over a
term of up to 48 months. The Company was in compliance with all covenants at
September 30, 1998. The balance outstanding on these loans at September 30, 1998
was $25.5 million.
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.
There are no material differences between comprehensive income and net income
for the three and nine month periods ended September 30, 1998. 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 for the year
ended December 31, 1997.
7. RECENT ACCOUNTING PRONOUNCEMENTS
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
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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 of the Company, but may
affect the disclosure of the segment information that will be provided in the
annual report disclosed on Form 10-K at December 31, 1998.
8. SUBSEQUENT EVENT
On October 8, 1998, the Board of Directors adopted a Preferred Share
Purchase Rights Plan ("the "Plan") designed to enable all stockholders to
realize the full value of their investment and to provide for fair and equal
treatment for all stockholders in the event an unsolicited attempt is made to
acquire the Company. In connection with the Plan, the Board declared a dividend
of one preferred share purchase right (a "Right") for each share of common stock
of the Company outstanding on October 28, 1998 and further directed the issuance
of one such right with respect to each share of the Company's common stock that
is issued after the Record Date. If a person, entity or group of affiliated or
associated persons acquires beneficial ownership of 15% or more of the Company's
common stock, or announces a tender offer for 15% or more of the Company's
common stock, the rights will be distributed. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, at a price of $35.00 per one one-hundredth
of a Preferred Share subject to adjustment. The Rights are redeemable prior to
any person's acquisition of more than 15% of the Company's common stock and will
expire on October 7, 2008.
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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 expressly disclaims any obligation to update this information or
publicly release any revisions or reflect events or circumstances after the date
of this report. 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
below under "Certain Business Risks" 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
with the Securities and Exchange Commission on 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. The Company's
revenue has been generated since inception through its corporate collaborations
and licensing agreements with Pharmacia & Upjohn, Inc. and its predecessors
("PNU"), Amgen, Inc. ("Amgen"), Bayer AG ("Bayer"), SmithKline Beecham
Corporation ("SB"), Merck & Co. ("Merck"), Abbott Laboratories ("Abbott"),
Bristol-Myers Squibb ("BMS") and Parke-Davis ("PD"). In addition, through its
acquisition of Sequana Therapeutics, Inc. ("Sequana") on January 8, 1998, the
Company added the additional corporate collaborations with Boehringer Ingelheim
International GmbH ("BI"), Corange International Ltd. ("Corange"),
Glaxo-Wellcome ("Glaxo") and PD. These agreements have taken a variety of forms
including some 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, payments for compounds, 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
September 30, 1998, the Company's accumulated deficit was approximately $224
million. Included in the Company's accumulated deficit at September 30, 1998 was
approximately $147 million of acquired in-process research and development from
the acquisition of Khepri Pharmaceuticals, Inc. in 1995 and the acquisition of
Sequana in January 1998.
RESULTS OF OPERATIONS
The following discussion on results of operations is based on the combined
pro forma operating results for the three- and nine-months ended September 30,
1997 (see table below) of the Company and Sequana as if the acquisition had been
effective as of December 31, 1996 and the Company's consolidated operating
results for the three- and nine-month periods ended September 30, 1998.
PRO FORMA OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
(AMOUNTS IN THOUSANDS)
Revenues.................................. $ 9,948 $ 31,379
Operating expenses:
Research and development................ 14,647 45,133
General and administrative.............. 3,275 9,001
------- --------
Total operating expenses........ 17,922 54,134
------- --------
Operating Loss............................ $(7,974) $(22,755)
======= ========
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REVENUES
The Company's revenues on a pro forma basis increased to $14.3 million and
$31.8 million for the three and nine-month periods ended September 30, 1998,
respectively, compared to $9.9 million and $31.4 million, respectively, for the
comparable periods in 1997. All of the Company's 1998 revenues (through
September 30) are attributable to existing or concluded collaborations or
licensing agreements with PNU, Merck, BMS, BI, Corange, PD, Glaxo and RBS. The
net change in 1998 was primarily due to: (i) 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;
(ii) 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; (iii) the recognition during the three
month period ended September 30, 1998, of two separate research milestones in
its genomics collaboration from PD, as well as a separate research milestone in
its development of antivirals against hepatitis C virus in the collaboration
with BMS and (iv) the shipment of small molecule synthetic organic compounds
under two of the Company's combinatorial chemistry licensing agreements with PNU
and PD. Under the existing licensing agreement with PNU, the Company has shipped
approximately one-half of the compounds called for in the agreement. The Company
started shipping to PD under its licensing agreement in June 1998. These revenue
increases were offset by (i) the ending of the research funded portion of a
tryptase inhibitor collaboration with Bayer during the fourth quarter of 1997
and (ii) a planned reduction in support with Merck to develop small molecular
inhibitors of proteases involved in osteoporsis.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $16.1 million and $45.5
million for the three and nine-month periods ended September 30, 1998,
respectively, from $14.6 and $45.1 million in the comparable periods in 1997.
The expense increase for the three months ended September 30, 1998 was primarily
due to increased chemical consumption used in the production of small molecule
synthetic organic compounds, increased costs to support the research efforts in
new and existing programs and higher expenditures associated with clinical
trials of APC-366 which were ended by the Company in September 1998. The slight
increase for the nine months ended September 30, 1998 reflects lower than
comparable period costs in these same areas.
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 decreased to approximately 78% and 80% of total
expenses for the three- and nine-months ended September 30, 1998, respectively
compared to 82% and 83% for the comparable periods in 1997. The percentage
decrease is due to an increase in general and administrative expenses as
discussed below. The Company expects that its research and development costs
will increase for the remainder of 1998 in absolute dollars when compared to pro
forma amounts in 1997, as a result of further expansion of its proprietary
research programs and the conduct of preclinical studies and clinical trials.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses increased to $4.5 million
and $11.6 million, respectively, for the three- and nine-month periods ended
September 30, 1998, from $3.3 and $9.0 million in the comparable periods in
1997. The increase in expenses was primarily due to transition costs resulting
from the acquisition of Sequana (see "Acquired in-process research and
development" below), and administrative costs of closing down the Cambridge,
Massachusetts operation of Sequana's NemaPharm, Inc. subsidiary and relocating
the NemaPharm personnel and activities to South San Francisco, California, as
well as an increase in headcount and facilities required to support additional
research programs. However, some of the recurring administrative costs common to
both companies were eliminated by combining the two companies. 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, represent approximately 22% and 20% for the three-and nine-month period
ended September 30, 1998, compared to 18% and 17% for the comparable periods in
1997. The Company expects its general and administrative costs for the remainder
of 1998 will reflect an
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increase in absolute dollars when compared to pro forma amounts in 1997,
reflecting additional corporate support resulting from the expansion of the
Company's programs.
EQUITY INTEREST IN LOSS OF JOINT VENTURE
The equity interest in loss of joint venture at September 30, 1998
represents the Company's portion of the losses for the three- and nine-months
ended September 30, 1998 of Genos Biosciences, Inc. ("Genos"). The Company holds
a 50% interest in Genos. Genos expects to incur increased operating losses in
future periods in connection with its research and development activities. Such
losses will result in corresponding increases in the Company's equity in 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 Common
Stock in exchange for all the outstanding common stock of Sequana, on the basis
of 1.35 shares of 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.
INTEREST INCOME AND EXPENSE
Interest income increased to $990,000 and $3.7 million, respectively, for
the three- and nine-months ended September 30, 1998, compared to $745,000 and
$2.5 million, respectively, for the comparable periods in 1997. The increases
were primarily due to the increased average cash balances, 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 collaborations with PNU and PD, and reimbursement of patient
collection fees by the Company's collaborators have contributed to the Company's
cash levels. Interest expense increased to $580,000 and $1.7 million,
respectively for the three- and nine-month periods ended September 30, 1998,
from $325,000 and $707,000, respectively, for the comparable periods in 1997.
The increases are primarily due to the result of higher debt balances, primarily
from the combination of the Company's and Sequana's debt financing and an
additional draw down of $4.2 and $6.2 million on the line of credit with
Sumitomo Bank during the three- and nine-months ended September 30, 1998,
respectively. The Company has primarily used draw downs from its lines of credit
to purchase equipment and make leasehold improvements.
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 September 30, 1998, the Company had realized approximately
$96 million in net proceeds from offerings of its capital stock. In addition,
the Company had realized $102.6 million since inception from its corporate
collaborations.
The Company's principal sources of liquidity are its cash and investments,
which totaled $75.7 million as of September 30, 1998. The Company has two lines
of credit totaling up to $27 million in debt financing. As of September 30, 1998
the Company had borrowed a total of $25.9 million under the agreements. The
Company has no additional borrowing capacity under these agreements. The Company
is presently engaged in certain discussions to refinance these borrowings.
Net cash used in operating activities during the nine-month period ended
September 30, 1998 was $29.9 million compared to $10.6 million in the same
period in 1997. The increase was primarily due to the increase in net loss for
the nine months ended September 30, 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
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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 $5.9 million for the purchase of
property, plant and equipment during the nine months ended September 30, 1998.
Additional equipment is expected to be acquired or leased in connection with the
Company's continuing research and development activities.
The Company's revenues presently are attributable to collaborations with
PNU, Merck, BMS, BI, Corange, PD, Glaxo, and RBS. The research support for the
Factor Xa program with PNU ended in July 1998 as the Company has been
negotiating the early termination of this collaboration and an effort is being
made to repartner this program. The osteoporosis program with Merck extends
through the fourth quarter of 1998. The research support from Corange for the
osteoporosis collaboration will continue through mid-February 1999, at which
time it will end. The Combinatorial Chemistry collaborations and licensing
agreements with PNU and PD, 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 approximately three years. The
Company will need to raise substantial additional capital to fund its operations
beyond the end of such period. The Company plans to seek such additional funding
through use of various financing mechanisms that may then be available to the
Company.
There can be no assurance that the Company will be able to enter into new
collaborations on acceptable terms or 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 and licensing agreements.
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 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.
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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
with the Securities and Exchange Commission on March 31, 1998.
IMPACT OF THE YEAR 2000
The Year 2000 problem or the "Y2K problem" is a problem that may arise at
the turn of the century in computers or other equipment that utilize
microprocessor technology. Some computer software programs and computer
equipment, as well as other equipment using embedded microprocessors, use two
digit date fields rather than four date digit fields (that is, "98" in the
computer code refers to the year "1998"). As a result, time-related functions in
such software and equipment may misinterpret dates after January 1, 2000 to
refer to the twentieth century rather than the twenty-first century (that is,
"02" could be interpreted as "1902" rather than "2002"). This could potentially
cause system or equipment shutdowns, failures or miscalculations resulting in
inaccuracies in computer output. The Y2K problem is a global problem and has the
potential to impact virtually every company, including the Company, to one
degree or another.
The Company is addressing the Y2K problem by reviewing its core information
technology systems, including its servers, databases, desktop computers,
significant applications (whether licensed from third parties or developed
internally) and significant microprocessor-controlled equipment for Y2K
readiness. Because the Y2K problem potentially affects many other companies, the
Company has also initiated a review of the Y2K readiness of its vendors, service
providers and other companies (including its collaboration partners and
customers) with whom the Company has significant business relationships
("Important Third Parties").
As the Company completes these internal and external reviews, the Company
intends to prioritize the responses it needs to take to address the Y2K problem,
to address the highest priorities first and to develop by the end of the third
quarter of 1999 such contingency plans as management believes to be prudent.
With respect to the Company's core information technology systems and desktop
computers, the Company expects to have completed its review and to have made any
necessary modifications or replacements by the end of the second quarter of
1999. With respect to third party software applications, the Company expects to
complete its review and to replace or upgrade such applications by the end of
the third quarter of 1999. In this regard, the Company is currently in the final
stages of replacing its enterprise management information system with a new
system that will be Y2K ready. With respect to the few software applications the
Company has developed and licensed to third parties, the Company has completed
its review of certain of these applications and believes them to be Y2K ready.
The remaining applications are being tested and if determined not to be Y2K
ready, the Company expects to provide upgrades to such applications to make them
Y2K ready by the third quarter of 1999. With respect to other
internally-developed software applications, the Company has compiled a list of
such applications and has initiated the design of appropriate tests. The Company
expects to complete its review and replacement or upgrade of these applications
by the end of the third quarter of 1999. Finally, with respect to other
significant microprocessor-controlled equipment, the Company has identified such
equipment and is in the process of testing it. The Company expects to complete
its test of such equipment and to have made any necessary upgrades or
replacements by the end of the third quarter of 1999. The review of the Y2K
readiness of Important Third Parties has just begun and is expected to be
substantially completed by the end of the second quarter of 1999. Following
completion, the Company expects to assess the nature and extent of the risk from
non-readiness by such third parties and to either cease doing business with such
third parties, locate back-up businesses who are Y2K ready, obtain reasonable
assurances of Y2K readiness, or implement other appropriate contingency plans,
by the end of 1999.
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The total costs associated with the Company's Y2K readiness efforts is not
known. Expenditures to date with respect to the Y2K problem have not been
material and have largely consisted of the time of certain Company personnel.
Until the reviews described above are completed, the Company is unable to
estimate the extent of the expenditures that will be necessary to address the
Y2K problem. However, based on the partial reviews completed by the Company as
of September 30, 1998 , the Company does not expect to incur material
expenditures in 1998 or 1999 with respect to the Y2K problem.
The Company believes that its Y2K readiness review and the actions it
intends to take prior to the end of 1999 should result in the absence of
significant Y2K-related problems for the Company's computer systems,
applications and microprocessor-controlled equipment. However, there can be no
assurances that the Company will be able to complete its review of various
systems within the time frames indicated, that the Company, will be completely
Y2K ready by the end of 1999 or that the Company will not encounter Y2K-related
problems that could have a material adverse affect on the Company's results of
operations and financial condition. In addition, the Company cannot guarantee
the Y2K readiness of Important Third Parties and certain business disruptions
could occur, such as a financial institution's inability to process checks drawn
on bank accounts, to accept deposits or process wire transfers, an Important
Third Party's business failure, interruption in deliveries of equipment,
supplies and services from Important Third Parties, loss of voice and/or data
connections, loss of power to electrical facilities and other business
interruptions which cannot be predicted. Accordingly, there can be no assurance
that Y2K-related problems of Important Third Parties will not have a material
adverse affect on the Company's results of operations and financial condition.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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3.3 Registrant's Certificate of Designation of Series A Junior
Participating Preferred Stock, incorporated by reference to
Exhibit 99.3 filed on Form 8-K dated October 8, 1998.
4.1 Rights Agreement dated as of October 8, 1998, among Axys
Pharmaceuticals, Inc. and ChaseMellon Shareholders Services,
LLC, incorporated by reference to Exhibit 99.2 filed on Form
8-K dated October 8, 1998.
4.2 Form of Rights Certificate, incorporated by reference to
Exhibit 99.4 filed on Form 8-K dated October 8, 1998.
10.90* Amendment dated September 21, 1998 to the Collaboration
Agreement between Warner-Lambert Company and Sequana
Therapeutics, Inc. dated October 31, 1997.
10.91 Amendment to the 1997 Non-Officer Equity Incentive Plan.
27 Financial Data Schedule
(b)REPORTS ON FORM 8-K
On October 8, 1998, the Company filed with the Commission a Current
Report on Form 8-K relating the adoption of a Rights Plan.
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* Confidential treatment has been requested with respect to certain portions of
this exhibit.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXYS PHARMACEUTICALS, INC.
Date: November 16, 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)
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