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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 0-19125
ISIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0336973
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2292 Faraday Avenue, Carlsbad, CA 92008
(Address of principal executive offices, including zip code)
(760) 931-9200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
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.
(1) Yes X No __ (2) 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 $.001 par value 26,487,113 shares
(Class) (Outstanding at July 30, 1997)
EXHIBIT INDEX: Located at page number 12.
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ISIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996 3
Condensed Statements of Operations for the three months
and six months ended June 30, 1997 and 1996 4
Condensed Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations 7
Liquidity and Capital Resources 8
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 9
ITEM 2: Changes in Securities 9
ITEM 3: Default upon Senior Securities 9
ITEM 4: Submission of Matters to a Vote of Security Holders 9
ITEM 5: Other Information 9
ITEM 6: Exhibits and Reports on Form 8-K 9-10
SIGNATURES 11
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ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
ASSETS
June 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 35,851 $ 37,082
Short-term investments 34,745 40,542
Prepaid expenses and other current assets 1,975 1,732
------------ ------------
Total current assets 72,571 79,356
Property, plant and equipment, net 18,485 15,334
Patent costs, net 6,974 6,157
Deposits and other assets 1,027 458
------------ ------------
$ 99,057 $ 101,305
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,381 $ 2,362
Accrued payroll and related expenses 1,251 1,489
Accrued liabilities 3,588 2,763
Deferred contract revenues 15,658 10,204
Current portion of long term debt and capital lease obligations 1,605 6,238
------------ ------------
Total current liabilities 23,483 23,056
Long-term debt and capital lease obligations, less current portion 33,526 19,864
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized, 26,446,000
shares and 26,201,000 shares issued and outstanding at June 30, 1997
and December 31, 1996,
respectively 26 26
Additional paid-in capital 182,907 181,248
Unrealized gain on investments 162 178
Accumulated deficit (141,047) (123,067)
------------ ------------
Total stockholders' equity 42,048 58,385
------------ ------------
$ 99,057 $ 101,305
============ ============
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes.
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Research and development
revenue under collaborative
agreements $ 5,793 $ 4,719 $ 10,419 $ 10,078
Interest income 766 1,011 1,713 2,061
-------- -------- -------- --------
6,559 5,730 12,132 12,139
Expenses:
Research and development 13,374 11,212 25,160 21,028
General and administrative 2,054 1,601 3,761 2,999
Interest expense 557 238 1,191 486
-------- -------- -------- --------
15,985 13,051 30,112 24,513
-------- -------- -------- --------
Net loss $ (9,426) $ (7,321) $(17,980) $(12,374)
======== ======== ======== ========
Net loss per share $ (.36) $ (.29) $ (.68) $ (.49)
======== ======== ======== ========
Weighted average common shares 26,381 25,459 26,330 25,404
======== ======== ======== ========
See accompanying notes.
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Six months ended
June 30,
----------------------
1997 1996
-------- --------
Cash used in operations: $(11,698) $ (9,172)
Investing activities:
Short-term investments 5,797 (12,107)
Property and equipment (3,856) (802)
Other assets (1,492) (18)
-------- --------
Net cash provided from (used in) investing activities 449 (12,927)
-------- --------
Financing activities:
Net proceeds from issuance of common stock 1,659 2,316
Proceeds from long-term borrowings 11,378 --
Principal payments on debt and capital lease obligations (3,019) (1,160)
-------- --------
Net cash provided from financing activities 10,018 1,156
-------- --------
Net decrease in cash and cash equivalents (1,231) (20,943)
Cash and cash equivalents at beginning of period 37,082 46,463
-------- --------
Cash and cash equivalents at end of period $ 35,851 $ 25,520
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,080 $ 486
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Additions to capital lease obligations for acquisitions of property,
plant and equipment $ 670 $ 1,294
See accompanying notes.
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ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim financial statements for the three and six month
periods ended June 30, 1997 and 1996 have been prepared on the same basis as the
Company's audited financial statements for the year ended December 31, 1996. The
financial statements include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the operating results
and cash flows for those periods. Results for the interim periods are not
necessarily indicative of the results for the entire year. For more complete
financial information, these financial statements, and notes thereto, should be
read in conjunction with the audited financial statements for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
2. ACCOUNTING STANDARD ON EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of earnings per share is not expected to be material.
3. SUBSEQUENT EVENT
In July 1997, the Company entered into an agreement with CIBA Vision
Corporation (a Novartis company) granting CIBA Vision exclusive worldwide
distribution rights for fomivirsen (ISIS 2922). Under the terms of the
agreement, the Company will receive $20 million in a pre-commercial fee and
milestones through the time of regulatory approval in the U.S. and Europe. In
the third quarter of 1997, $5 million of the pre-commercial fees and milestones
will be received and recognized as revenue under collaborative agreements. The
Company will manufacture and sell fomivirsen to CIBA Vision at a price that will
allow the Company and CIBA Vision to share the commercial value of the product.
CIBA Vision will market and sell fomivirsen worldwide and will be responsible
for regulatory approvals outside of the U.S. and Europe. Once regulatory
approvals are obtained, CIBA Vision will hold the registrations. Additionally,
CIBA Vision receives the option to acquire the exclusive license to market and
distribute a second generation antisense compound to treat CMV retinitis (ISIS
13312) which is currently in preclinical development by the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information contained in this Report, this
Report contains forward-looking statements regarding the Company's business and
products and their projected prospects and qualities, and the Company's
relationships with its corporate partners. Such statements are subject to
certain risks and uncertainties, particularly those inherent in both the process
of discovering, developing and commercializing safe and effective drugs, and the
endeavor of building a business around such potential products. Actual results
could differ materially from those projected in this Form 10-Q. As a result, the
reader is cautioned not to place undue reliance on these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in Isis' Annual Report on Form 10-K for
the year ended December 31, 1996 which is on file with the U.S. Securities and
Exchange Commission, a copy of which is available from the Company.
Since its inception in January 1989, the Company has devoted
substantially all of its resources to its research, drug discovery and drug
development programs. The Company has been unprofitable since its inception and
expects to incur additional operating losses for the next several years. The
Company has entered into collaborative research and development agreements with
pharmaceutical companies that generate revenue to augment the level of research
and development activity and to offset portions of its research and development
costs. To date, the Company has not received any significant revenue from the
sale of products.
RESULTS OF OPERATIONS
The Company had contract revenue of $5.8 million for the second quarter
and $10.4 million for the six month period ended June 30, 1997, compared with
$4.7 million and $10.1 million, respectively, for the same periods in 1996. The
revenue increase was primarily due to the growing scope of activities related to
collaborative agreements with Novartis Pharma AG (formally Ciba-Geigy Limited)
and Boehringer Ingelheim International GmbH. The Company also had interest
income totaling $0.8 million for the quarter and $1.7 million for the six month
period compared with $1.0 million and $2.1 million for the same periods in 1996.
This decrease in interest income was primarily due to lower investment balances
in the quarter ended June 30, 1997.
Research and development expenses increased to $13.4 million for the
three months and $25.2 million for the six months ended June 30, 1997 from $11.2
million and $21.0 million for the same periods in 1996. This increase was
attributable to an increase in preclinical and clinical development activities
including compounds advancing into more expensive stages of clinical
development. The Company expects that its development expenses will continue to
increase as its current preclinical and clinical compounds advance and
preclinical and clinical studies on additional compounds are undertaken.
General and administrative expenses increased to $2.1 million for the
quarter and $3.8 million for the six months ended June 30, 1997, from $1.6
million and $3.0 million for the same periods in 1996. The Company expects that
its general and administrative expenses will increase in the future in support
of its expanding operations.
During the quarter ended June 30, 1997, the Company recorded a net loss
of $9.4 million, or $0.36 per share, compared with $7.3 million, or $0.29 per
share, for the same period in 1996. During the six-month period ended June 30,
1997, the Company's net loss amounted to $18.0 million, or $0.68 per share,
compared to $12.4 million, or $0.49 per share for the same period in 1996. The
Company expects that its operating losses will increase for the remainder of the
fiscal year and beyond as its activities grow, and may fluctuate from quarter to
quarter as a result of differences in the timing and composition of revenue
earned and expenses incurred.
The Company believes that inflation and changing prices have not had a
material effect on its ongoing operations to date.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of equity securities, raising net proceeds aggregating
approximately $180 million, as of June 30, 1997, from the private and public
sale of such securities. The Company has also financed a portion of its
operations through contract research and development revenue, portions of which
were paid in advance of work being performed, offsetting the Company's cash
usage for operations.
As of June 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $70.6 million and working capital of $49.1
million. In comparison, the Company had cash, cash equivalents and short-term
investments of $77.6 million and working capital of $56.3 million as of December
31, 1996. The decreases in cash and working capital resulted from the funding of
operating losses, investments in capital equipment and principal payments on
debt and capital lease obligations, offset in part, by an additional $6.4
million advance under a line of credit made available to the Company by
Boehringer Ingelheim.
The Company had long-term debt and capital lease obligations at June 30,
1997 totaling $35.1 million, versus $26.1 million at December 31, 1996. This
increase, which was partially offset by principal repayments on existing
obligations, was due to additional capital lease financing and a $6.4 million
borrowing under a line of credit with Boehringer Ingelheim. In addition, two new
term loans totaling $9.7 million were obtained from a bank to refinance $6.5
million in existing notes secured by real property, and to fund facilities
expansion. The Company expects that its capital lease obligations will increase
over time to fund capital equipment acquisitions required for its expanding
business. Lease lines will continue to be used by the Company to the extent that
terms thereof remain commercially attractive.
The Company expects to incur substantial additional research and
development costs, including costs related to clinical trials, manufacturing,
marketing and distribution and other capital expansion, and expects losses to
continue to increase as the Company's preclinical testing and clinical trial
efforts expand. It is the Company's intention to seek additional collaborative
research and development relationships with suitable potential corporate
partners. There can be no assurance that any agreements resulting from these
discussions will successfully reduce the Company's funding requirements, and
arrangements with collaborative partners or others may require the Company to
relinquish rights to certain of its technologies, product candidates or
products. Additional equity or debt financings will be required, and there can
be no assurance that these funds will be available on favorable terms, if at
all. If additional funds are raised by issuing equity securities, further
dilution to then existing stockholders may result.
The Company anticipates that its existing available cash, cash
equivalents and short-term investments, combined with anticipated interest
income and contract revenues, will be adequate to satisfy its anticipated
capital requirements for approximately two years. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research, drug discovery and development programs; the magnitude
of these programs and progress with preclinical and clinical trials; the time
and costs involved in obtaining regulatory approvals; the costs involved in
filing, prosecuting and enforcing patent claims; competing technological and
market developments; changes in the existing collaborative research and
development relationships and the ability of the Company to establish additional
research and development arrangements; and the cost of manufacturing scale-up
and effective commercialization activities and arrangements. If adequate funds
are not available, the Company may be required to significantly curtail one or
more of its research, drug discovery or development programs.
Uncertainties associated with the length and expense of preclinical and
clinical testing of any of the Company's products could greatly increase the
cost of development of such product and affect the timing of anticipated revenue
from product sales, and failure by the Company to obtain regulatory approval for
any product will preclude its commercialization. In addition, the failure by the
Company to obtain patent protection for its products may make certain of its
products commercially unattractive.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any 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
(a) The Company held its Annual Meeting of Stockholders on June 6,
1997.
(b) Christopher F. O. Gabrieli, Alan C. Mendelson, J.D. and
William R. Miller were elected to serve as directors for a three-
year term and until their successors are duly elected and
qualified.
Votes in Favor Votes Withheld
-------------- --------------
Christopher F.O. Gabrieli 24,625,756 71,699
Alan C. Mendelson 24,624,244 73,211
William R. Miller 24,627,598 69,857
Other directors whose terms of office continued after the Annual
Meeting were as follows: Stanley T. Crooke, M.D., Ph.D., Daniel L.
Kisner, M.D., Mark B. Skaletsky, Larry Soll, Ph.D., Joseph H. Wender
and Burkhard Blank, M.D.
(c) The following item was approved at the Annual Meeting:
The selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1997.
Votes in favor: 24,632,561
Votes withheld: 37,868
Abstentions: 27,026
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following documents are exhibits to this 10-Q:
10.1 Revised form of Supplemental Stock Option Agreement
under Registrant's 1992 Non-Employee Directors' Stock
Option Plan.
10.2 Agreement between the Registrant and CIBA Vision
Corporation dated July 10, 1997 (with certain
confidential information deleted).
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10.3 Imperial Bank Note Secured by Deed of Trust dated March
24, 1997 in the amount of $6,000,000; together with the
related Deed of Trust and Assignment of Rents dated
March 24, 1997.
10.4 Imperial Bank Note Secured by Deed of Trust dated March
24, 1997 in the amount of $3,706,620; together with the
related Deed of Trust and Assignment of Rents dated
March 24, 1997.
b. Reports on Form 8-K
The Company filed no reports on Form 8-K the quarter ended June 30,
1997.
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ISIS PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISIS PHARMACEUTICALS, INC.
(Registrant)
Date: August 12, 1997 By: /S/ STANLEY T. CROOKE
------------------------ ---------------------------
Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: August 12, 1997 By: /S/ B. LYNNE PARSHALL
------------------------ ---------------------------
B. Lynne Parshall
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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ISIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
10.1 Revised form of Supplemental Stock Option Agreement under 13
Registrant's 1992 Non-Employee Directors' Stock Option Plan.
10.2 Agreement between Registrant and CIBA Vision Corporation dated 18
July 10, 1997 (with certain confidential information deleted)
10.3 Imperial Bank Note Secured by Deed of Trust dated March 24, 75
1997 in the amount of $6,000,000; together with the related
Deed of Trust and Assignment of Rents dated March 24, 1997.
10.4 Imperial Bank Note Secured by Deed of Trust dated March 24, 90
1997 in the amount of $3,706,620; together with the related
Deed of Trust and Assignment of Rents dated March 24, 1997.
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