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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1996
OR
- ---------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO ____________________.
COMMISSION FILE NUMBER 0-20726
CORTECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0894091
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6850 N. BROADWAY, SUITE G 80221
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
(303) 650-1200
(Registrant's telephone number, including area code)
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK $0.002 PAR VALUE 18,512,794
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(Class) (Outstanding at October 31, 1996)
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CORTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements and Notes
Balance Sheets -- September 30, 1996
and December 31, 1995. . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations --
for the three and nine months ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows --
for the nine months ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .11
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . .11
Item 3. Default upon Senior Securities . . . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . . . .11
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2
PART I
ITEM 1. FINANCIAL STATEMENTS AND NOTES.
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 8,974 $ 6,194
Short-term investments..................................................... 13,239 16,953
Prepaid expenses and other................................................. 668 410
--------- ---------
Total current assets................................................... 22,881 23,557
--------- ---------
PROPERTY AND EQUIPMENT, at cost
Laboratory and pilot production equipment.................................. 6,925 6,643
Leasehold improvements..................................................... 8,019 7,880
Office furniture and equipment............................................. 2,442 2,462
--------- ---------
17,386 16,985
Less -- Accumulated depreciation and amortization.......................... (13,489) (11,899)
--------- ---------
3,897 5,086
--------- ---------
$ 26,778 $ 28,643
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................... $ 466 $ 605
Accrued compensation, payroll taxes and other.............................. 195 218
Unearned income............................................................ 1,260 573
Advances from corporate partners........................................... 1,194 --
Other 163 270
--------- ---------
Total current liabilities.............................................. 3,278 1,666
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $.002 par value,
2,000,000 shares authorized, none issued................................. -- --
Common stock, $.002 par value, 50,000,000 shares authorized
18,505,994 and 17,823,456 shares issued and outstanding, respectively ... 37 36
Warrants................................................................... 3,407 3,407
Additional paid-in capital................................................. 96,533 95,153
Deferred compensation...................................................... (55) (97)
Accumulated deficit........................................................ (76,422) (71,522)
--------- ---------
Total stockholders' equity............................................. 23,500 26,977
--------- ---------
$ 26,778 $ 28,643
--------- ---------
--------- ---------
The accompanying notes to financial statements are an
integral part of these statements.
3
CORTECH, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------ ------------------ ------------------
REVENUES
Sponsored research and development
Corporate partners.................. $ 688 $ 175 $ 4,613 $ 804
Related parties..................... 340 687 1,014 1,990
Interest income....................... 293 393 904 1,351
----------- ---------- ----------- -----------
1,321 1,255 6,531 4,145
----------- ---------- ----------- -----------
EXPENSES
Research and development.............. 2,795 3,921 8,808 15,123
General and administrative............ 756 979 2,623 3,452
----------- ---------- ----------- -----------
3,551 4,900 11,431 18,575
----------- ---------- ----------- -----------
NET LOSS................................ $ (2,230) $ (3,645) $ (4,900) $ (14,430)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net loss per share.................... $ (0.12) $ (0.21) $ (0.27) $ (0.81)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average common shares
outstanding.......................... 18,127,000 17,779,115 18,289,344 17,744,650
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
The accompanying notes to financial statements are an
integral part of these statements.
4
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss................................................... $ (4,900) $(14,430)
Adjustments to reconcile net loss
to net cash used in (used in) operations --
Depreciation and amortization............................ 1,590 3,142
Issuance of common stock in exchange for
termination of right of first offer..................... 486 --
Issuance of common stock for services.................... -- 25
Research and compensation expense related to grant
of options, including amortization
of deferred compensation................................ 92 121
(Increase) in prepaid expenses and other................. (258) (79)
(Decrease) in accounts payable........................... (139) (1,567)
Increase in unearned income.............................. 687 1,573
Increase in advances from corporate partners............. 1,194 --
(Decrease) increase in accrued compensation,
payroll taxes and other................................. (130) 373
-------- --------
Net cash provided (used in) operating activities... (1,378) (10,842)
-------- --------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Purchases of property and equipment........................ (401) (369)
Purchases of short-term investments........................ (16,037) (27,000)
Sales of short-term investments............................ 19,751 33,990
-------- --------
Net cash provided by investing activities................ 3,313 6,621
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from the issuance of common stock................. 29 57
Proceeds from exercise of options.......................... 816 28
-------- --------
Net cash provided by financing activities................ 845 85
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 2,780 (4,136)
CASH AND CASH EQUIVALENTS, beginning of period............... 6,194 12,327
-------- --------
CASH AND CASH EQUIVALENTS, end of period..................... $ 8,974 $ 8,191
-------- --------
-------- --------
The accompanying notes to financial statements are an
integral part of these statements.
5
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at September 30, 1996, the related statements of
operations and statements of cash flows for the three and nine-month periods
ended September 30, 1996 and 1995 are unaudited, but in management's opinion
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such financial statements. Interim
results are not necessarily indicative of results for a full year. The
accompanying financial statements should be read in conjunction with the
financial statements as of, and for the year ended, December 31, 1995.
(2) SHORT-TERM INVESTMENTS
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," Cortech, Inc.'s (the
"Company's") short-term investments, which consisted entirely of government
securities, were classified as available-for-sale. These securities mature
on various dates through May 1997. As of September 30, 1996, these
securities had an amortized cost of $13.2 million, which approximated fair
market value.
(3) RESEARCH AND DEVELOPMENT AGREEMENTS
In the first nine months of 1996, the Company has received $4.0 million
in milestone payments under an agreement with SmithKline Beecham plc ("SB")
for the development of Bradycor. On October 23, 1996 the Company announced
that SB had elected to suspend the trials of Bradycor in response to
anomalous results from pharmacokinetic studies in rats in which unexplained
mortality was seen in the test animals. The suspension of the trials was not
based on any adverse findings in the human clinical studies. SB is
conducting additional animal studies, and until the effect is more fully
understood, the clinical trials will remain suspended. There can be no
assurance that the trials will resume.
Under an agreement signed in March 1995 to develop an oral elastase
inhibitor, Cortech received $1.4 million from Ono Pharmaceutical Co., Ltd.
("Ono") in the third quarter of 1996. Of the $1.4 million, $115,000 has been
recognized as revenue for work performed in the third quarter and $688,000
will be recognized in the fourth quarter. The remainder will be recognized
as revenue in the first quarter of 1997.
In October 1996, Cortech received an additional $1.5 million of funding
from Ono to be applied to the second year of the collaboration, bringing
total funding received in 1996 to $4.3 million as compared to the $2.8
million originally planned for the calendar year. To balance this
accelerated payment schedule, Ono's projected funding for the third year of
the collaboration will decrease from $3.5 million to $3.0 million, and
Cortech has agreed to waive a $1.0 million milestone payment scheduled to be
made at the end of the three year research collaboration in the event Ono
selects a lead compound for continued preclinical development.
6
In August, the Company purchased the "right of first offer" it had
previously granted to Marion Laboratories, a predecessor to Hoechst Marion
Roussel Incorporated ("HMRI"). The right of first offer, granted as part of
a transaction between the parties entered into in February 1988, covered all
new technologies developed by the Company. Cortech bought back the right in
exchange for 200,000 shares of unregistered common stock.
In the third quarter of 1996, Cortech received $50,000 and has
recognized $290,000 as revenue from HMRI for work completed in the third
quarter of 1996 under the December 1995 extension of a research and
development contract dated June 30, 1987.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
CORTECH, INC.'S (THE "COMPANY'S") ACTUAL RESULTS MAY 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 AND IN THE COMPANY'S 1995 ANNUAL REPORT ON FORM
10-K.
GENERAL
Since its inception in 1982, Cortech has devoted a substantial portion
of its resources to the discovery and development of novel compounds for the
treatment of inflammatory disorders. The Company currently has research and
development programs focused primarily on two types of compounds, bradykinin
antagonists and proteinase inhibitors, each of which has generated a lead
compound that is in early stage clinical trials.
Because the Company's products are in an early stage of development, by
their nature they face a high degree of technological, regulatory and
competitive risk. The regulatory approval process for any new drug is
arduous. Commencement of any trial or any phase of development does not
provide assurance that such trial or phase will be successfully completed,
and successful completion of any trial or any phase of development does not
provide assurance that future phases will also be successfully completed or
that marketing approval will ultimately be obtained. There can be no
assurance that any of the Company's compounds will successfully lead to
products that can be commercialized.
In the first nine months of 1996, the Company has received $4.0 million
in milestone payments under an agreement with SmithKline Beecham plc ("SB")
for the development of Bradycor. On October 23, 1996 the Company announced
that SB had elected to suspend the trials of Bradycor in response to
anomalous results from pharmacokinetic studies in rats in which unexplained
mortality was seen in the test animals. The suspension of the trials was not
based on any adverse findings in the human clinical studies. SB is
conducting additional animal studies and until the effect is more fully
understood, the clinical trials will remain suspended. There can be no
assurance that the trials will resume.
Drug discovery and drug development programs are capital intensive.
Management believes that raising funds in the public capital markets may
remain unattractive for the Company at least for the near term. Therefore,
the Company will likely be dependent in large part upon maintaining existing
relationships and upon entering into new arrangements with collaborative
partners for necessary future funding and product development support. There
can be no assurance that success in any phase of development will result in
an enhanced ability to raise capital nor that the Company will be successful
in establishing and maintaining any additional collaborative arrangements.
8
Also inherent in the Company's early stage of development is a range of
additional risks, including the Company's history of losses and the
uncertainty of future financing. The Company also faces risks stemming from
the nature of the biopharmaceutical industry including, among others, the
risk of competition; the risk of regulatory change including potential
changes in health care coverage; and uncertainties associated with obtaining
and enforcing patents and proprietary technology. In addition, the Company's
stock price, like that of many publicly-traded biotechnology companies, has
in the past been highly volatile and may in the future experience significant
volatility.
RESULTS OF OPERATIONS
REVENUES
Revenues from research and development increased from $862,000 in the
third quarter of 1995 to $1.0 million in the third quarter of 1996 and
increased from $2.8 million to $5.6 million in the nine month periods ending
September 30, 1995 and 1996, respectively. The increase in revenues for the
nine-month period resulted primarily from milestone payments in accordance
with the SB contract dated November 1, 1995 of which $2.6 million has been
recorded as revenue.
The agreements between the Company and each of its corporate partners
provide for payments to the Company based upon the achievement of
predetermined milestones. The agreements currently are in their research and
development phases, during which payments generally are tied to specific
milestones of a non-recurring nature. Thus, the payments received during the
first nine months of 1996 are not predictive of future revenue levels. These
agreements provide for early termination under certain circumstances. There
can be no assurance that any of these collaborations will not be discontinued
in accordance with their terms.
RESEARCH AND DEVELOPMENT EXPENSES
Expenses for research and development decreased from $3.9 million in the
third quarter of 1995 to $2.8 million in the third quarter of 1996 and
decreased from $15.1 million in the nine months ended September 30, 1995 to
$8.8 million in the nine months ended September 30, 1996. This decrease is
due primarily to restructurings announced in March and August 1995.
Management expects that the Company's near term rate of research and
development expenses will level off at or below the rate experienced for the
first nine months of 1996. Expenditures will continue to depend upon numerous
factors, including the progress of research and development programs. The
Company continues to review carefully all of its planned and current
expenditures on these programs. Such review can lead to either increases or
decreases in project-related spending.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased from $979,000 in the third
quarter of 1995 to $756,000 in the third quarter of 1996 and decreased from
$3.5 million in the nine months ended September 30, 1995 to $2.6 million in
the nine months ended September 30, 1996. This decline resulted from
decreases in staffing, office space and business activity. In general, the
Company expects its general and administrative expenses to follow a trend
similar to that noted above for research and development.
9
NET LOSS
The net loss decreased from $3.7 million in the third quarter of 1995 to
$2.2 million in the third quarter of 1996 and from $14.4 million in the nine
months ended September 30, 1995 to $4.9 million in the nine months ended
September 30, 1996. This decrease was due principally to the decreased
expenses and increased revenues described above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash, cash equivalents and
short-term investments totaling $22.2 million, compared to $23.1 million at
December 31, 1995. The Company's net cash used in operating activities,
including purchases of property, plant and equipment, totaled $1.8 million
and $1.5 million for the three and nine months ended September 30, 1996,
respectively. The Company's expenditures, net of depreciation and non-cash
charges, decreased from $3.9 million in the third quarter of 1995 to $2.6
million in the third quarter of 1996 and decreased from $15.7 million in the
nine months ended September 30, 1995 to $9.7 million in the nine months ended
September 30, 1996. This reduction reflects the Company's continued
monitoring of expenditures and its efforts to focus resources on the projects
with the greatest expected value.
From its inception through September 30, 1996, the Company raised cash
totaling $97.8 million from the sale of equity securities, including $33.6
million in net proceeds from its November 1992 initial public offering and
$37.7 million in net proceeds from its November 1993 follow-on public
offering.
Under an agreement signed in March 1995 to develop an oral elastase
inhibitor, Cortech received $1.4 million from Ono in the third quarter of
1996. Of the $1.4 million, $115,000 has been recognized as revenue for work
performed in the third quarter and $688,000 will be recognized in the fourth
quarter. The remainder will be recognized in the first quarter of 1997.
In October 1996, Cortech received an additional $1.5 million of funding
from Ono to be applied to the second year of the collaboration, bringing
total funding received in 1996 to $4.3 million as compared to the $2.8
million originally planned for the calendar year. To balance this
accelerated payment schedule, Ono's projected funding for the third year of
the collaboration will decrease from $3.5 million to $3.0 million, and
Cortech has agreed to waive a $1.0 million milestone payment scheduled to be
made at the end of the three year research collaboration in the event Ono
selects a lead compound for continued preclinical development.
In the third quarter of 1996, Cortech received $50,000 and has recognized
$290,000 as revenue from Hoechst Marion Roussel Incorporated ("HMRI") for
work completed in the third quarter of 1996 under the December 1995 extension
of a research and development contract dated June 30, 1997.
In August, the Company purchased the "right of first offer" it had
previously granted to Marion Laboratories, a predecessor to Hoechst Marion
Roussel Incorporated ("HMRI"). The right of first offer, granted as part
of a transaction between the parties entered into in February 1988, covered
all new technologies developed by the Company. Cortech bought back the right
in exchange for 200,000 shares of unregistered common stock.
The Company has experienced net losses and negative cash flows from
operations each year since inception and has incurred an accumulated deficit
of $76.4 million through September 30, 1996. The Company expects to incur
substantial additional expenses in the pursuit of its research and product
development programs, either alone or in collaboration with partners. The
expenses may include costs of expanded research and development, clinical
trials, construction of manufacturing facilities, establishment of a
marketing and sales organization and additional administrative activities.
In order to
10
fund such expenses, the Company anticipates that it will have to seek
additional research, development and marketing arrangements with
collaborative partners and/or additional private or public financing. There
can be no assurance that such agreements will be concluded or that the
Company will be able to raise additional capital when required or that such
capital would be available under favorable terms.
11
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
ITEM DESCRIPTION
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10.54 Buy-Out Agreement, dated September 9, 1996 between the
Company and Hoechst Marion Roussel, Inc.
27.1 Financial Data Schedule
b. Reports on Form 8-K
Not applicable.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 13th day
of November, 1996.
CORTECH, INC.
(Registrant)
Date: November 13, 1996 By: /s/ JOSEPH L. TURNER
-------------------------- --------------------------------
Joseph L. Turner
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND PRINCIPAL
ACCOUNTING OFFICER
12