================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ____________________
Commission file number 0-28150
NEUROCRINE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0525145
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10555 SCIENCE CENTER DRIVE
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
(619) 658-7600
(Registrant's telephone number, including area code)
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
The number of outstanding shares of the registrant's Common Stock, par value
of $0.001, was 18,984,198 as of July 31, 1999.
================================================================================
NEUROCRINE BIOSCIENCES, INC
FORM 10-Q INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements ........................................... 3
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ..................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998 ............... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 ....................... 5
Notes to the Condensed Consolidated Financial Statements ....... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 7
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk ..... 12
PART II OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders ............ 12
ITEM 5: Other Information .............................................. 13
ITEM 6: Exhibits and Reports on Form 8-K ............................... 13
SIGNATURES ..................................................... 13
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEUROCRINE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Jun 30, Dec 31,
1999 1998
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 11,900 $ 11,708
Short-term investments, available-for-sale ....... 41,198 50,962
Receivables under collaborative agreements ....... 1,689 863
Receivables from related parties ................. 1,045 544
Other current assets ............................. 687 1,556
-------- --------
Total current assets ............................. 56,519 65,633
Property and equipment, net ...................... 11,100 10,899
Other assets ..................................... 2,964 3,997
-------- --------
Total assets ..................................... $ 70,583 $ 80,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 1,237 $ 2,481
Accrued liabilities .............................. 1,471 2,077
Deferred revenues and current
portion of long-term obligations ............... 986 1,011
-------- --------
Total current liabilities ........................ 3,694 5,569
Long-term debt and capital lease obligations ..... 2,287 2,247
Other liabilities ................................ 1,268 755
-------- --------
Total liabilities ................................ 7,249 8,571
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding ... -- --
Common Stock, $0.001 par value; 100,000,000 shares
authorized; issued and outstanding shares were
18,962,083 in 1999 and 18,930,865 in 1998 ...... 19 19
Additional paid in capital ....................... 97,325 97,064
Deferred compensation and shareholder notes ...... (315) (306)
Accumulated other comprehensive income ........... (119) 31
Accumulated deficit .............................. (33,576) (24,850)
-------- --------
Total stockholders' equity ....................... 63,334 71,958
-------- --------
Total liabilities and stockholders' equity ....... $ 70,583 $ 80,529
======== ========
See accompanying notes to the condensed consolidated financial statements.
Page 3
NEUROCRINE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands except loss per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Sponsored research and development ... $ 2,762 $ 1,976 $ 5,551 $ 4,637
Sponsored research and development
from related party ................... -- -- 494 --
Milestones ........................... 750 -- 750 1,250
Grant income and other revenues ...... 298 315 566 540
------- ------- ------- -------
Total revenues ....................... 3,810 2,291 7,361 6,427
Operating expenses:
Research and development ............. 7,182 4,423 13,562 9,064
General and administrative ........... 2,008 1,339 3,705 2,867
Write-off of acquired in-process research
and development and licenses ......... -- 4,910 -- 4,910
------- ------- ------- -------
Total operating expenses ............. 9,190 10,672 17,267 16,841
Loss from operations .................. (5,380) (8,381) (9,906) (10,414)
Other income and (expenses):
Interest income ...................... 694 1,000 1,586 2,119
Interest expense ..................... (64) (30) (110) (64)
Equity in NPI loss and other ......... (141) (1,043) (890) (1,443)
Other income ......................... 254 478 594 641
------- ------- ------- -------
Loss before income taxes ............. (4,637) (7,976) (8,726) (9,161)
Income taxes ......................... -- -- -- --
------- ------- ------- -------
Net loss ............................. $(4,637) $(7,976) $(8,726) $(9,161)
======== ======== ======== ========
Loss per common share:
Basic and Diluted .................... $ (0.24) $ (0.45) $ (0.46) $ (0.51)
Shares used in the calculation of
loss per common share:
Basic and Diluted .................... 18,958 18,961 17,874 17,790
See accompanying notes to condensed consolidated financial statements.
Page 4
NEUROCRINE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
Six Months Ended
June 30,
-------------------
1999 1998
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss .............................................. $ (8,726) $ (9,161)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Acquisition of NNL .................................... -- 4,200
Equity in NPI losses and other adjustments ............ 890 600
Depreciation and amortization ......................... 959 781
Deferred revenues ..................................... 43 (1,750)
Deferred expenses ..................................... 504 241
Change in operating assets and liabilities,
net of acquired business:
Accounts receivable and other current assets ........ (458) (61)
Other non-current assets ............................ 33 (567)
Accounts payable and accrued liabilities ............ (1,850) (2,066)
--------- ---------
Net cash flows used in operating activities ........... (8,605) (7,783)
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments ................... (5,890) (27,063)
Sales/maturities of short-term investments ............ 15,504 31,833
Purchases of property and equipment ................... (1,050) (1,679)
--------- ---------
Net cash flows provided by investing activities ....... 8,564 3,091
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock .............................. 261 109
Proceeds from capital lease financing ................. 437 --
Principal payments on long-term obligations ........... (465) (546)
Payments received on notes receivable
from stockholders ................................... -- 1
--------- ---------
Net cash flows provided by (used in)
financing activities .................................. 233 (436)
--------- ---------
Net increase (decrease) in cash and cash equivalents .. 192 (5,128)
Cash and cash equivalents at beginning of the period .. 11,708 15,771
--------- ---------
Cash and cash equivalents at end of the period ........ $ 11,900 $ 10,643
========= =========
See accompanying notes to the condensed consolidated financial statements.
Page 5
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited. These financial statements include the accounts of Neurocrine
Biosciences, Inc. ("Neurocrine" or the "Company") and its wholly owned
subsidiary, Northwest NeuroLogic, Inc. ("NNL"). All significant intercompany
transactions have been eliminated in consolidation. The Company's minority
ownership interest in Neuroscience Pharma, Inc. ("NPI") has been accounted for
under the equity method. Certain reclassifications have been made to prior year
amounts to conform to the presentation for the three and six months ended June
30, 1999.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of the Securities and Exchange Commission
on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
these financial statements include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented.
The results of operations for the interim periods shown in this report are
not necessarily indicative of results expected for the full year. The financial
statements should be read in conjunction with the audited financial statements
and notes for the year ended December 31, 1998, included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
2. NET INCOME PER SHARE
In accordance with Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share", basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of the Company such as common stock which may
be issuable upon exercise of outstanding common stock options, warrants and
preferred stock. These shares are excluded when their effects are antidilutive.
For the three and six months ended June 30, 1999 and 1998, potentially dilutive
securities were excluded from the diluted earnings per share calculation as
their effects were antidilutive.
3. COMPREHENSIVE INCOME
Financial Accounting Standards Board Statement No. 130, "Comprehensive
Income", requires the disclosure of all components of comprehensive income,
including net income and changes in equity during a period from transactions and
other events and circumstances generated from non-owner sources. Other
comprehensive income consisted of gains (losses) on short-term investments of
($115,000) and ($150,000) for the three and six months ended June 30, 1999; and
($12,000) and 5,000 for the same periods in 1998, respectively.
4. SEGMENT INFORMATION
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. The Company is engaged in the discovery and
development of prescription drugs and considers its operations to be a single
reportable segment. Financial results of this reportable segment are presented
in the accompanying financial statements. The Company has no foreign operations.
Page 6
5. SUBSEQUENT EVENTS
On July 7, 1999, Novartis Pharma A.G. ("Novartis"), the successor in rights
of Ciba-Geigy, Limited, exercised its right to terminate the Development and
Commercialization Agreement, effective January 7, 2000. As a result, Neurocrine
will reacquire the worldwide rights to its multiple sclerosis compound, MSP771.
On July 20, 1999, the Data and Safety Monitoring Board for the MSP771 Phase
II trials recommended that the administration of the drug be stopped due to a
number of patients reporting hypersensitivity-type reactions. As defined in the
protocol, all patients treated with MSP771 will be followed to establish a
complete safety and efficacy database. The results of the analysis should be
completed by year-end 1999.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company contain forward-looking statements
which involve risks and uncertainties, pertaining generally to the expected
continuation of the Company's collaborative agreements, the receipt of research
payments thereunder, the future achievement of various milestones in product
development and the receipt of payments related thereto, the potential receipt
of royalty payments, pre-clinical testing and clinical trials of potential
products, the period of time the Company's existing capital resources will meet
its funding requirements, and financial results and operations. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below and
those outlined in the Company's 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
OVERVIEW
Since the founding of the Company in January 1992, Neurocrine has been
engaged in the discovery and development of novel pharmaceutical products for
diseases and disorders of the central nervous and immune systems. To date,
Neurocrine has not generated any revenues from the sale of products, and does
not expect to generate any product revenues in the foreseeable future. The
Company has funded its operations primarily through public offering and payments
under research and development agreements. The Company is developing a number of
products with corporate collaborators and will rely on those collaborators and
new collaborators to meet funding requirements. Revenues are expected to come
from the Company's strategic alliances. The Company expects to generate future
net losses in anticipation of significant increases in operating expenses as
products are advanced through the various stages of clinical development. As of
June 30, 1999, Neurocrine has incurred a cumulative deficit of $33.6 million and
expects to incur operating losses in the future, which may be greater than
losses in prior years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues for the second quarter of 1999 were $3.8 million compared to $2.3
million for the respective period in 1998. The increase in revenues primarily
resulted from the 1999 collaboration with Wyeth-Ayerst. This agreement included
a number of milestone payments, one of which was achieved during the second
quarter earning a $750,000 payment in addition to quarterly sponsored research
payments of $750,000.
Page 7
Research and development expenses increased to $7.2 million for the second
quarter of 1999 compared to $4.4 million for the same period in 1998. The
increase reflects higher costs associated with increased scientific personnel
and related expenditures as the Company advances its drug candidates through
clinical testing. Currently, the Company has five compounds in clinical
development.
General and administrative expenses increased to $2.0 million during the
second quarter of 1999 compared to $1.3 million for the same period in 1998. The
increase resulted primarily from additional administrative personnel, business
development and professional service expenses to support the expanded clinical
development efforts.
During 1998, the Company wrote-off acquired in-process research and
development fees of $4.9 million. Of that total, $4.2 million were non-cash
charges relating to the acquisition of NNL.
Interest income decreased to $694,000 during the second quarter of 1999
compared to $1.0 million for the same period last year. The decrease was
primarily due to a decline in investment balances. The Company anticipates
further decline in interest income as cash reserves are used to fund progressive
clinical trials.
Net loss for the second quarter of 1999 was $4.6 million or $0.24 per share
compared to $8.0 million or $0.45 per share for the same period in 1998. The
decrease in net loss resulted from higher revenues primarily associated with the
Wyeth-Ayerst collaboration offset by the write-off of acquired in-process
research and development during 1998.
To date, the Company's revenues have come from funded research and
achievements of milestones under corporate collaborations. The nature and amount
of these revenues from period to period may lead to substantial fluctuations in
the results of quarterly revenues and earnings. Accordingly, results and
earnings of one period are not predictive of future periods.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues for the six months ended June 30, 1999 were $7.4 million compared
to $6.4 million for the same period in 1998. The 15% increase in revenues
included $2.3 million in milestones and development funding from the 1999
collaboration with Wyeth-Ayerst, and $540,000 of development funding from the
Company's Canadian affiliate, NPI. The 1998 revenues under the Novartis and
Janssen collaborations exceed those earned in 1999 by $1.6 million and $250,000,
respectively.
Research and development expenses increased to $13.6 million for the
six months ended June 30, 1999 compared to $9.1 million for the same period in
1998. The increase reflects higher costs associated with increased scientific
personnel and development costs as the Company advances its drug candidates
through the clinical testing The Company has five compounds in clinical
development.
General and administrative expenses increased to $3.7 million during the six
months ended June 30, 1999 compared to $2.9 million for the same period last
year. The increase is attributable to additional administrative personnel,
business development and professional service expenses to support the expanded
clinical development efforts.
During 1998, the Company wrote-off acquired in-process research and
development fees of $4.9 million. Of that total, $4.2 million were non-cash
charges relating to the acquisition of NNL.
Interest income decreased to $1.6 million during the six months ended June
30, 1999 compared to $2.1 million for the same period last year. The decline in
interest income resulted from lower investment balances. The Company anticipates
further decline in interest income as cash reserves are used to fund progressive
clinical trials.
Page 8
Net loss for the six months ended June 30, 1999 was $8.7 million or $0.46
per share compared to $9.1 million or $0.51 per share for the same period in
1998. The decrease in net loss resulted from higher revenues associated with the
1999 collaboration with Wyeth-Ayerst, net of the increased funding of
progressive clinical trials and the write-off of acquired in-process research
and development during 1998.
To date, the Company's revenues have come from funded research and
achievements of milestones under corporate collaborations. The nature and amount
of these revenues from period to period may lead to substantial fluctuations in
the results of year-to-date revenues and earnings. Accordingly, results and
earnings of one period are not predictive of future periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's cash, cash equivalents, and short-term
investments totaled $53.1 million compared with $62.7 million at December 31,
1998. The decline in cash balances during 1999 reflects the increased losses
associated with the increasing costs of clinical development and the addition of
scientific personnel.
Net cash used in operating activities during the first half of 1999 was
$8.6 million compared with $7.8 million for the same period last year. Net cash
used during 1999 and 1998 reflects the payment of clinical development expenses
and other accrued liabilities. The Company anticipates further funding of
clinical trials to use cash in future periods.
Net cash provided by investing activities during 1999 was $8.5 million
compared with $3.1 million during 1998. The increase in cash provided was
primarily the result of timing differences in the investment purchases and
sales/maturities and the fluctuations in the Company's portfolio mix between
cash equivalents and short-term investment holdings.
Net cash provided by financing activities during the first half of 1999 was
$233,000 compared with net cash used of $436,000 during the same period in 1998.
Proceeds capital lease financing provided cash during 1999. Payment on long-term
debts used cash during 1998.
The Company believes that its existing capital resources, together with
interest income and future payments due under the strategic alliances, will be
sufficient to satisfy its current and projected funding requirements at least
through the year 2001. However, no assurance can be given that such capital
resources and payments will be sufficient to conduct its research and
development programs as planned. The amount and timing of expenditures will vary
depending upon a number of factors, including progress of the Company's research
and development programs. Failure of a corporate collaborator to meet its
contractual obligations could have a material adverse effect on the Company's
financial position and results of operations.
INTEREST RATE RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt. The Company believes that a hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially effect the fair value of interest sensitive financial instruments nor
the costs associated with the long-term debt.
Interest risk exposure on long-term debt relates to the Company's note
payable which bears a floating interest rate of prime plus one quarter percent
(8.00% at June 30, 1999 and December 31, 1998). At June 30, 1999 and December
31, 1998, the note balance was $535,000 and $610,000, respectively. This note is
payable in equal monthly installments through January 2003.
Page 9
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will not be
required to modify or replace significant portions of hardware and software so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications and replacement of existing
hardware and software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date the
Company has completed its assessment of all systems that could be significantly
affected by the Year 2000. The completed assessment indicated that most of the
Company's significant information technology systems are Year 2000 compliant.
That assessment did, however, indicated that software and hardware (embedded
chips) used in some scientific equipment were at risk. The Company is currently
assessing cost comparisons on whether to remediate or replace this equipment and
expects to have the equipment corrected and re-tested by September 30, 1999. The
Company has gathered information about the Year 2000 compliance status of its
significant suppliers and contractors and continues to monitor their compliance.
For its information technology exposures, to date the Company is 99%
complete on the remediation phase and expects to complete software reprogramming
and replacement by September 30, 1999. To date, the Company has completed 100%
of its testing and has implemented 95% of its remediated systems for its
scientific equipment. The remediation phase for all significant systems is
expected to be complete and fully tested by September 30, 1999.
The Company has queried its important suppliers and contractors that do not
share information systems with the Company (external agents). To date, the
Company is not aware of any external agent Year 2000 issue that would materially
impact the company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test and implement the software and scientific equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
approximately $175,000 and is being funded through operating cash flows and
capital equipment financing. To date, the Company has incurred approximately
$140,000 related to all phases of the Year 2000 project. Of the total remaining
project costs, approximately $25,000 is for the replacement scientific capital
equipment and $10,000 for the remediation of other hardware and software.
Page 10
The Company's plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company has not completed a formal contingency plan for non-compliance,
but it is developing a plan based on the information obtained from third parties
and an on-going evaluation of the Company's own systems. The Company anticipates
having a contingency plan in place by September 30, 1999, which will include
development of backup procedures, identification of alternate suppliers and
possible increases in supplies inventory levels. The Company has not identified
its most likely worst case scenario with respect to possible losses in
connection with Year 2000 related problems. The Company plans on completing this
analysis by October 30, 1999.
The information above contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements about
the Year 2000 should be read in conjunction with the Company's disclosures under
the heading: "Caution on forward-looking statements".
CAUTION ON FORWARD-LOOKING STATEMENTS
The Company's business is subject to significant risks, including but not
limited to, the risks inherent in its research and development activities,
including the successful continuation of the Company's strategic collaborations,
the successful completion of clinical trials, the lengthy, expensive and
uncertain process of seeking regulatory approvals, uncertainties associated both
with the potential infringement of patents and other intellectual property
rights of third parties, and with obtaining and enforcing its own patents and
patent rights, uncertainties regarding government reforms and of product pricing
and reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if the Company's product
candidates appear promising at an early stage of development, they may not reach
the market for numerous reasons. Such reasons include the possibilities that the
product will be ineffective or unsafe during clinical trials, will fail to
receive necessary regulatory approvals, will be difficult to manufacture on a
large scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
Neurocrine will require additional funding for the continuation of its
research and product development programs, for progress with preclinical testing
and clinical trials, for operating expenses, for the pursuit of regulatory
approvals for its product candidates, for the costs involved in filing and
prosecuting patent applications and enforcing or defending patent claims, if
any, for the cost of product in-licensing and any possible acquisitions, and may
require additional funding for establishing manufacturing and marketing
capabilities in the future. The Company may seek to access the public or private
equity markets whenever conditions are favorable. The Company may also seek
additional funding through strategic alliances and other financing mechanisms,
potentially including off-balance sheet financing. There can be no assurance
that adequate funding will be available on terms acceptable to the Company, if
at all. If adequate funds are not available, the Company may be required to
curtail significantly one or more of its research or development programs or
obtain funds through arrangements with collaborative partners or others. This
may require the Company to relinquish rights to certain of its technologies or
product candidates.
Page 11
The Company believes that its existing capital resources will be adequate
to satisfy its current and planned operations through the year 2000. The
Company's operating expenses are anticipated to rise significantly in future
periods as products are advanced through the various development and clinical
stages. Neurocrine expects to incur additional operating expenses over the next
several years as its research, development, preclinical testing and clinical
trial activities increase. To the extent that the Company is unable to obtain
third party funding for such expenses, the Company expects that increased
expenses will result in increased losses from operations. There can be no
assurance that the Company's products under development will be successfully
developed or that its products, if successfully developed, will generate
revenues sufficient to enable the Company to earn a profit.
For a further discussion of the risks assoicaited with an investment in the
Company, please see the section entitled "Risk Factors" in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A discussion of the Company's exposure to, and management of, market risk
appears in Part 1, Item 2 of this Quarterly Report on Form 10-Q under the
heading "Interest Rate Risk".
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on May 21, 1999
(the "Annual Meeting").
(b) The following Class III Directors were elected at the Annual Meeting:
Name Position Term Expires
---- -------- ------------
Gary A. Lyons Class III Director 2002
Harry F. Hixson, Jr. Class III Director 2002
The following Class I and II Directors continue to serve their respective
terms which expire on the Company's Annual Meeting of Stockholders in the year
as noted:
Name Position Term Expires
---- -------- ------------
Joseph A. Mollica Class I Director 2000
Wylie W. Vale Class I Director 2000
Stephen A. Sherwin Class II Director 2001
Richard F. Pops Class II Director 2001
(c) At the Annual Meeting, stockholders voted on three matters: (i) the
election of two Class III directors for a term of three years expiring in 2002,
(ii) the amendment of the 1992 Incentive Stock Plan (the "1992 Plan") to
increase the number of shares of Common Stock reserved for issuance thereunder
from 4,700,000 to 5,300,000 shares, and (iii) the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors. The
voting results were as follows:
(i) The election of Gary A. Lyons and Harry F. Hixson, Jr. as Class III
Directors for a term of three years:
For 13,502,854 Withhold 408,452
(ii) Approval to amend the Company's 1992 Incentive Stock Plan, increasing
the number of shares of Common Stock reserved for issuance from
4,700,000 to 5,300,000 Shares:
For 13,027,929 Against 853,922 Abstain 29,455
(iii)Ratification of the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1999:
For 13,886,053 Against 16,993 Abstain 8,260
Page 12
ITEM 5. OTHER INFORMATION
On July 7, 1999, Novartis exercised its right to terminate the Development
and Commercialization Agreement, effective January 7, 2000. Please see note 5 to
Item 1 for discussion of this event.
On July 19, 1999, the Board of Directors of the Company amended and
restated the Rights Agreement by and between the Company and American Stock &
Trust Company (as amended and restated, the "Rights Agreement") to, among other
things, remove both the continuing director provisions and the 10-day redemption
window following the Shares Acquisition Date (as defined in the Rights
Agreement). The Rights Agreement is attached hereto as Exhibit 4.1 and is
incorporated herein by reference.
On July 20, 1999, the Data and Safety Monitoring Board for the MSP771 Phase
II trials recommended that the administration of the drug be stopped due to a
number of patients reporting hypersensitivity-type reactions. Please see note 5
to Item 1 for discussion of this event.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits. The following exhibits are filed as part of this report:
4 Amended and Restated Rights Agreement by and between the
Company and American Stock Transfer & Trust Company, as
Rights Agent, dated as of July 19, 1999.
10 Amended 1992 Incentive Stock Plan, as amended May 27, 1997,
May 27, 1998 and May 21, 1999.
27 Financial Data Schedule.
(B) Reports on Form 8-K. During the quarter ended June 30, 1999, the
Company filed no current reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 08/11/99 /s/ Paul W. Hawran
Paul W. Hawran
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 13
EXHIBIT INDEX
4 Amended and Restated Rights Agreement by and between the Company and
American Stock Transfer & Trust Company, as Rights Agent, dated as of
July 19, 1999.
10 Amended 1992 Incentive Stock Plan, as amended May 27, 1997, May 27,
1998 and May 21, 1999.
27 Financial Data Schedule.
Page 14