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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 MARCH 31, 1997 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
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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 18,518,079
(Class) (Outstanding at April 30, 1997)
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CORTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements and Notes
Balance Sheets -- March 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations --
for the three months ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows --
for the three months ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Default upon Senior Securities. . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
PART I
ITEM 1. FINANCIAL STATEMENTS AND NOTES.
CORTECH, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
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CURRENT ASSETS
Cash and cash equivalents........................... $ 6,634 $ 7,792
Short-term investments.............................. 13,878 13,186
Prepaid expenses and other.......................... 156 845
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Total current assets.............................. 20,668 21,823
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PROPERTY AND EQUIPMENT, at cost
Laboratory and pilot production equipment........... 7,112 7,101
Leasehold improvements.............................. 8,027 8,026
Office furniture and equipment...................... 2,500 2,483
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17,639 17,610
Less -- Accumulated depreciation and amortization... (14,409) (13,950)
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3,230 3,660
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$ 23,898 $ 25,483
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................... $ 498 $ 680
Accrued vacation and other compensation............. 222 185
Unearned income..................................... 1,352 1,323
Advances from corporate partners.................... 436 964
Other............................................... 148 206
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Total current liabilities......................... 2,656 3,358
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STOCKHOLDERS' EQUITY
Preferred stock, $.002 par value,
2,000,000 shares authorized, none issued........... -- --
Common stock, $.002 par value, 50,000,000
shares authorized 18,518,079 shares issued
and outstanding.................................... 37 37
Warrants............................................ 2,330 2,330
Additional paid-in capital.......................... 97,659 97,659
Deferred compensation............................... (26) (40)
Accumulated deficit................................. (78,758) (77,861)
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Total stockholders' equity........................ 21,242 22,125
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$ 23,898 $ 25,483
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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
--------------------------
MARCH 31, MARCH 31,
1997 1996
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REVENUES:
Sponsored research and development
Corporate partners........................ $ 1,881 $ 3,238
Related party............................. -- 337
Interest income............................. 313 302
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2,194 3,877
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EXPENSES:
Research and development.................... 2,334 3,430
General and administrative.................. 757 1,008
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3,091 4,438
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NET LOSS...................................... $ (897) $ (561)
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Net loss per share.......................... $ (0.05) $ (0.03)
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Weighted average common shares
outstanding................................ 18,518,079 17,947,754
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The accompanying notes to financial statements are an
integral part of these statements.
4
CORTECH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1997 1996
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CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.............................................. $ (897) $ (561)
Adjustments to reconcile net loss
to net cash used in operations --
Depreciation and amortization....................... 459 397
Amortization of deferred compensation............... 14 14
Increase in research and development receivable..... -- (3,137)
Decrease in prepaid expenses and other.............. 689 101
(Decrease) increase in accounts payable............. (182) 298
Increase in unearned income......................... 29 687
(Decreases) increase in advances from
corporate partners................................. (528) 1,450
Increase in accrued vacation and other
compensation....................................... (21) 229
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Net cash used in operating activities............. (437) (522)
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CASH FLOWS (USED IN) INVESTING ACTIVITIES
Purchases of property and equipment................... (29) (325)
Purchases of short-term investments................... (7,042) (7,956)
Sales of short-term investments....................... 6,350 8,000
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Net cash (used in) investing
activities......................................... (721) (281)
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CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from exercise of options..................... -- 496
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Net cash provided by financing activities........... -- 496
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS............. (1,158) (307)
CASH AND CASH EQUIVALENTS, beginning of period.......... 7,792 6,194
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CASH AND CASH EQUIVALENTS, end of period................ $ 6,634 $ 5,887
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The accompanying notes to financial statements are an
integral part of these statements.
5
CORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at March 31, 1997, the related statements of operations
and statements of cash flows for the three-month periods ended March 31, 1997
and 1996 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, 1996.
(2) SHORT-TERM INVESTMENTS
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," 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 August
1997. As of March 31, 1997, these securities had an amortized cost of
$13.8 million, which approximated market value.
(3) RESEARCH AND DEVELOPMENT AGREEMENTS
In November 1995, Cortech entered into a worldwide product development and
license agreement with SmithKline Beecham ("SB") for the development of
Bradycor. In March 1997, SB and the Company agreed to terminate their
collaboration when a Phase II trial of Bradycor in patients with traumatic brain
injury failed to demonstrate a significant effect of the compound on
intracranial pressure, the primary endpoint. SB made a one-time payment to
Cortech of $1.0 million for an exclusive license to Bradycor in 1995, and paid
$4.0 million in milestone payments during 1996.
During the first quarter of 1997, Cortech received $1.5 million from Ono
Pharmaceutical Co., Ltd. ("Ono") for work to be performed over the next six
months under a contract signed in March of 1995 and amended in April 1997 to
develop an oral elastase inhibitor. Of this amount, $1.4 million has been
recorded as unearned income and will be recognized as revenue over the next six
months. Under the terms of the amended agreement, Ono will now assume all
responsibilities for research activities during the final six-month period of
the collaboration established by the agreement. As a result of this
reallocation of responsibilities, Ono will no longer be required to pay the
Company $1.5 million in research funding to offset the cost that the Company
would otherwise have incurred under the agreement during the final six-month
period which starts September 14, 1997.
6
(4) SUBSEQUENT EVENT
In April 1997, the Company announced a significant corporate-wide
downsizing, which will reduce the Company's full time staff from 75 to
approximately 30 by the end of the second quarter of 1997. This downsizing
follows the Company's announcement that it was planning an aggressive
restructuring after receiving disappointing results from a Phase II clinical
trial of Bradycor, a bradykinin antagonist, in patients with traumatic brain
injury. Cortech's continuing research efforts will be directed principally to
the discovery and early preclinical development of orally bioavailable
inhibitors of the protease neutrophil elastase. The Company expects to record a
charge of approximately $700,000 in the second quarter of 1997 for costs related
to the downsizing.
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. 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 UNDER THE CAPTION "ADDITIONAL RISKS"
AND IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K.
GENERAL
Cortech, Inc. (the "Company") is a biopharmaceutical company whose focus
has been the discovery and development of novel therapeutics for the treatment
of inflammatory disorders. The Company has directed its research and development
efforts principally toward protease inhibitors and bradykinin antagonists.
Currently, the Company's research efforts are focused primarily in the
area of protease inhibition. One of the Company's research programs has been
the discovery and development of inhibitors of human neutrophil elastase
("HNE"), a potent serine protease. Initially, parenteral inhibitors were
developed. Later this evolved into work on inhibitors for oral administration
and subsequently to the establishment of a collaboration with Ono Pharmaceutical
Co., Ltd. ("Ono") of Osaka, Japan, to support this work. In October 1996, the
Company announced that based on progress to date, it was increasing staffing on
the oral elastase project and that its partner, Ono, was accelerating funding.
As a result, the Company received $4.3 million in 1996 and $1.5 million in the
first quarter of 1997.
In 1995, the Company entered into an agreement with SmithKline Beecham
("SB") focused on the development of a bradykinin antagonist, Bradycor-TM-,
for traumatic brain injury. This relationship was terminated in the first
quarter of 1997 after disappointing results of a clinical trial were
obtained. In 1987, the Company entered into a collaborative relationship
with the precedcessor of Hoechst Marion Rousell, Inc. ("HMRI") aimed at the
development of an elastase inhibitor. Clinical development of CE-1037, the
Company's parenteral HNE inhibitor in Phase II clinical trials for acute
respiratory distress syndrome, has been suspended pending further
investigation of recent preclinical findings. The research agreement with
HMRI pursuant to which HMRI provided funding, has been terminated.
In related research, the Company has also demonstrated that its proprietary
technology has the potential to be applied to the discovery of a broader range
of therapeutically interesting protease inhibitors.
RESULTS OF OPERATIONS
REVENUES
Revenues from research and development were $1,881,000 and $3,575,000 in
the three month periods ended March 31, 1997 and 1996, respectively. The
decrease in revenues resulted primarily from a $2.1 million decrease in
milestone payments from SB that was partially offset by an increase in revenues
from Ono. The Company expects no payments from SB or from HMRI due to the
cancellation of the agreements with these collaborators. There can be no
assurance that new corporate arrangements can be found to replace the lost
revenues.
During the first quarter of 1997, Cortech received $1.5 million from Ono
for work to be performed over the next six months under a contract signed in
March of 1995 and amended in April 1997 to develop
8
an oral elastase inhibitor. Of this amount, $1.4 million has been recorded
as unearned income and will be recognized as revenue over the next six
months. Under the terms of the amended agreement, Ono will now assume all
responsibilities for research activities during the final six month period of
the collaboration established by the agreement. As a result of this
reallocation of responsibilities, Ono will no longer be required to pay the
Company $1.5 million in resesarch funding to offset the cost that the Company
would otherwise have incurred under the agreement during the final six-month
period which starts September 14, 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Expenses for research and development decreased from $3.4 million in the
first quarter of 1996 to $2.3 million in the first quarter of 1997. This
decrease is due primarily to the elimination of clinical, regulatory and
manufacturing operations formerly conducted by the Company in support of
Bradycor.
In April 1997, the Company announced a significant corporate-wide
downsizing, which will reduce the Company's full time staff from 75 to
approximately 30 by the end of the second quarter of 1997. This downsizing
follows the Company's announcement that it was planning an aggressive
restructuring after receiving disappointing results from a Phase II clinical
trial of Bradycor in patients with traumatic brain injury. Cortech's continuing
research efforts will be directed principally to the discovery and early
preclinical development of orally bioavailable inhibitors of the protease
neutrophil elastase. The Company expects to record a charge of approximately
$700,000 in the second quarter of 1997 for costs related to the downsizing.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased from $1.0 million in the
first quarter of 1996 to $757,000 in the first quarter of 1997. This decline
resulted from decreases in staffing and general business activity. The Company
expects its general and administrative expenses to follow a trend similar to
that of research and development.
NET LOSS
The net loss for the quarter ended March 31, 1997 increased to $897,000
from $561,000 for the quarter ended March 31, 1996. This increase was due
principally to the decreased revenues described above. Cortech expects to
continue to report substantial losses for the foreseeable future, including a
restructuring charge of $700,000 in the second quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash, cash equivalents and short-term
investments totaling $20.5 million, compared to $21.0 million at December 31,
1996. The Company's net cash used in operating activities, including purchases
of property, plant and equipment, totaled $466,000 and $847,000 for the three
months ended March 31, 1997, and March 31, 1996, respectively. The Company's
expenditures for the three months ending March 31, 1997, net of depreciation and
non-cash charges were $2.6 million compared with $4.4 million in the first
quarter of 1996. This reduction reflects the
9
Company's continued monitoring of expenditures and its efforts to focus
resources on the projects with the greatest potential value.
From its inception through March 31, 1997, the Company raised cash totaling
$96.7 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.
During the first quarter of 1997, Cortech received $1.5 million from Ono
Pharmaceutical Co., Ltd. for work to be performed over the next six months under
a contract signed in March of 1995 to develop an oral elastase inhibitor. Of
this amount, $1.4 million has been recorded as unearned income and will be
recognized as revenue over the next six months. No additional payments are
expected.
The Company has experienced net losses and negative cash flows from
operations each year since inception and has incurred an accumulated deficit of
$78.8 million through March 31, 1997. The Company expects to continue to incur
substantial expenses in the pursuit of its research and development programs.
The expenses may include costs of research and development, clinical trials and
administrative activities. In order to fund such expenses, the Company
anticipates that it would have to seek additional arrangements with
collaborative partners and/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 will be available under
favorable terms or that the Company will not be required to downsize in the
future and incur related restructuring charges.
ADDITIONAL RISKS
The Company's projects are in early stages of research and development and
face a high degree of technological, regulatory and competitive risk. The
regulatory approval process for any new drug is arduous, 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. The Company has discontinued its
development of Bradycor, based on the results of clinical data to date.
Clinical development of CE-1037, the Company's parenteral HNE inhibitor in Phase
II clinical trials for acute respiratory distress syndrome has been suspended
pending further investigation of recent preclinical findings.
At present, the Company is allocating a substantial amount of its resources
to projects in the research and early development stages. Such projects by
their nature carry high risk and are difficult to plan for. There can be no
assurance that any of these projects will be continued or that if continued,
will lead to products that can be commercialized or that they will attract and
maintain the support of a collaborative partner.
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 entering into new arrangements with
collaborative partners for necessary future funding. There can be no assurance
that success in any phase of development will result in an enhanced ability to
raise capital or that the Company will be successful in establishing and
maintaining any additional collaborative arrangements.
The risks discussed herein largely reflect the Company's early stage of
development. Inherent in this stage 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
10
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.
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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27.1 Financial Data Schedule
b. Reports on Form 8-K
Not applicable.
12
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 May, 1997.
CORTECH, INC.
(Registrant)
Date: May 13, 1997 By: /s/ JOSEPH L. TURNER
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Joseph L. Turner
VICE PRESIDENT OF FINANCE AND ADMINISTRATION
AND PRINCIPAL ACCOUNTING OFFICER
13