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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
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _______
Commission File Number: 0-24274
LA JOLLA PHARMACEUTICAL COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0361285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6455 NANCY RIDGE DRIVE 92121
SAN DIEGO, CA (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (619) 452-6600
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 shares of the Registrant's common stock, $.01 par value,
outstanding at June 30, 1998 was 18,188,948.
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LA JOLLA PHARMACEUTICAL COMPANY
FORM 10-Q
QUARTERLY REPORT
INDEX
COVER PAGE....................................................................................... 1
INDEX ........................................................................................... 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997 ...................... 3
Statements of Operations (Unaudited) for the three months and six months ended
June 30, 1998 and 1997 .................................................................. 4
Statements of Cash Flows (Unaudited) for the six months ended June 30, 1998 and 1997...... 5
Notes to Financial Statements (Unaudited) ................................................. 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 ....................... *
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................................ *
ITEM 2. Changes in Securities ............................................................ *
ITEM 3. Defaults upon Senior Securities .................................................. *
ITEM 4. Submission of Matters to a Vote of Security Holders .............................. 10
ITEM 5. Other information ................................................................ *
ITEM 6. Exhibits and Reports on Form 8-K ................................................. 10
SIGNATURE ....................................................................................... 12
* No information provided due to inapplicability of item.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA JOLLA PHARMACEUTICAL COMPANY
BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 15,708 $ 11,999
Short-term investments .......................................... 6,902 14,979
Other current assets............................................. 507 658
-------- --------
Total current assets ....................................... 23,117 27,636
Property and equipment, net ........................................... 665 946
Patent costs and other assets, net .................................... 1,219 1,064
-------- --------
Total assets ............................................... $ 25,001 $ 29,646
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 385 $ 1,256
Accrued expenses ................................................ 513 880
Accrued payroll and related expenses ............................ 440 377
Deferred revenue - related party ................................ 1,907 1,277
Current portion of obligations under capital leases ............. 37 133
-------- --------
Total current liabilities .................................. 3,282 3,923
Noncurrent portion of obligations under capital leases ................ -- 8
Commitments
Stockholders' equity:
Common stock .................................................... 182 182
Additional paid-in capital ...................................... 80,368 80,304
Deferred compensation ........................................... (5) (30)
Accumulated deficit ............................................. (58,826) (54,741)
-------- --------
Total stockholders' equity ................................. 21,719 25,715
-------- --------
Total liabilities and stockholders' equity ................. $ 25,001 $ 29,646
======== ========
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue from collaborative agreement -
related party ............................................... $ 2,263 $ 2,130 $ 4,166 $ 4,494
Expenses:
Research and development .................................... 3,721 3,337 7,245 6,474
General and administrative .................................. 933 766 1,651 1,546
-------- -------- -------- --------
Total expenses .......................................... 4,654 4,103 8,896 8,020
-------- -------- -------- --------
Loss from operations .......................................... (2,391) (1,973) (4,730) (3,526)
Interest expense .............................................. (2) (16) (5) (40)
Interest income ............................................... 299 355 650 710
-------- -------- -------- --------
Net loss and comprehensive net loss ........................... $ (2,094) $ (1,634) $ (4,085) $ (2,856)
======== ======== ======== ========
Basic and diluted net loss per share .......................... $ (.12) $ (.09) $ (.22) $ (.17)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share .................................... 18,169 17,284 18,165 17,284
======== ======== ======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net loss .................................................................... $ (4,085) $ (2,856)
Adjustments to reconcile net loss to net cash (used
for) provided by operating activities:
Depreciation and amortization ........................................... 202 321
Deferred compensation amortization ...................................... 17 65
Change in operating assets and liabilities:
Receivable - related party .......................................... -- 4,000
Other current assets ................................................ 151 352
Accounts payable and accrued expenses ............................... (1,238) (1,886)
Accrued payroll and related expenses ................................ 63 119
Deferred revenue - related party .................................... 630 2,547
-------- --------
Net cash (used for) provided by operating activities ........................ (4,260) 2,662
INVESTING ACTIVITIES
Decrease (increase) in short-term investments ............................... 8,077 (32)
Deletions (additions) to property and equipment ............................. 96 (38)
Increase in patent costs and other assets.................................... (172) (152)
-------- --------
Net cash provided by (used for) investing activities ........................ 8,001 (222)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock .................................. 72 58
Payments on obligations under capital leases................................. (104) (478)
-------- --------
Net cash used for financing activities ...................................... (32) (420)
Net increase in cash and cash equivalents ................................... 3,709 2,020
Cash and cash equivalents at beginning of period ............................ 11,999 6,613
-------- --------
Cash and cash equivalents at end of period .................................. $ 15,708 $ 8,633
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................................... $ 5 $ 40
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Adjustment to deferred compensation for terminations ........................ $ 8 $ 16
======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of La Jolla Pharmaceutical
Company (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 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, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for other quarters or the year ended December 31,
1998. For more complete financial information, these financial statements, and
the notes thereto, should be read in conjunction with the audited financial
statements for the year ended December 31, 1997 included in the Company's Form
10-K filed with the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during the period from
transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company's comprehensive net loss and net loss are the
same and therefore the adoption of SFAS 130 did not have an impact on the
financial statements.
SEGMENT INFORMATION
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, "Segment Information" ("SFAS 131"). SFAS 131 redefines
segments and requires companies to report financial and descriptive information
about their operating segments. The Company has determined that it operates in
one business segment and therefore the adoption of SFAS 131 did not affect the
Company's financial statements.
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LA JOLLA PHARMACEUTICAL COMPANY
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below includes forward-looking statements, including
without limitation those dealing with the Company's drug development plans and
clinical trials, its relationship with Abbott Laboratories ("Abbott"), and other
matters described in terms of the Company's plans and expectations. The
forward-looking statements involve risks and uncertainties and a number of
factors, both foreseen and unforeseen, could cause actual results to differ from
the Company's current expectations. The Company's ongoing Phase II/III clinical
trial of LJP 394, the Company's drug candidate for the treatment of lupus, could
result in a finding that LJP 394 is not effective in producing a sustained
reduction of dsDNA antibodies in large patient populations or does not provide a
meaningful clinical benefit. The Company's other potential drug candidates are
at earlier stages of development and involve comparable risks. Payments by
Abbott to the Company are contingent upon progress of clinical trials and the
Company's achievement of certain other milestones that might not be met. The
relationship with Abbott could be terminated by either party for various
reasons. Clinical trials could be delayed and could have negative or
inconclusive results. Additional risk factors include the uncertainty of future
revenue from product sales or other sources such as collaborative relationships,
the uncertainty of future profitability, the Company's dependence on patents and
other proprietary rights, the Company's limited manufacturing capabilities and
the Company's lack of marketing experience. Readers are cautioned not to place
undue reliance upon forward-looking statements, which speak only as of the date
hereof, and the Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date hereof.
Interested parties are urged to review the risks described below and in other
reports and registration statements of the Company filed with the SEC from time
to time.
OVERVIEW
Since its inception in May 1989, the Company has devoted substantially
all of its resources to the research and development of technology and potential
drugs to treat antibody-mediated diseases. The Company has never generated any
revenue from product sales and has relied upon private and public investors,
revenues from collaborative agreements, equipment lease financings and interest
income on invested cash balances for its working capital. The Company has been
unprofitable since inception and expects to incur substantial additional
operating losses for at least the next several years as it increases
expenditures on research and development and allocates significant and
increasing resources to its manufacturing, clinical trials, and marketing
activities. The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future, and the Company's historical
operations and the financial information reported below are not indicative of
its future operating results or financial condition.
The Company expects that losses will fluctuate from quarter to quarter
as a result of differences in the timing of expenses incurred and potential
revenues from collaborative arrangements. Some of these fluctuations may be
significant. The Company's research and development expenses are expected to
increase significantly in the future as the Company increases its development
efforts. As of June 30, 1998, the Company's accumulated deficit was
approximately $58.8 million.
The Company's business is subject to significant risks including, but
not limited to, the risks inherent in its research and development efforts,
including clinical trials, uncertainties associated with both obtaining and
enforcing its patents and with the patent rights of others, the lengthy,
expensive and uncertain process of seeking regulatory approvals, uncertainties
regarding government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties and dependence
on its collaborative relationship with Abbott. Even if the Company's product
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LA JOLLA PHARMACEUTICAL COMPANY
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
products 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. All of the Company's
product development efforts are based upon technologies and therapeutic
approaches that are unproven. There can be no assurance that LJP 394 will
reliably induce or sustain suppression of disease-causing antibodies, or that
LJP 394 will prove to be safe or effective. Furthermore, clinical trials of LJP
394 may be viewed as a test of the Company's entire Tolerance Technology
approach. If these clinical trials are unsuccessful, the applicability of the
Company's Tolerance Technology to other antibody-mediated diseases will be
highly uncertain.
RESULTS OF OPERATIONS
The Company earned $2.3 million and $4.2 million in revenue from its
collaborative agreement with Abbott in the three and six months ended June 30,
1998, respectively, and earned $2.1 million and $4.5 million in revenue for the
same periods in 1997. Payments received in advance under the collaborative
agreement with Abbott are recorded as deferred revenue until earned. Total
revenue payments of approximately $4.8 million were received in advance under
the collaborative agreement with Abbott during the first six months of 1998, of
which approximately $2.1 million was received in the three months ended June 30,
1998. As of June 30, 1998, deferred revenue was approximately $1.9 million. The
receipt of payments and the recognition of revenue from the collaborative
agreement with Abbott may vary significantly from quarter to quarter and from
year to year depending on the level of research effort expended and the timing
of milestone payments. There can be no assurance that the Company will realize
any further revenue from the Abbott arrangement or any other collaborative
arrangement.
Research and development expenses increased to $3.7 million for the
second quarter of 1998 from $3.3 million for the same period in 1997. For the
six months ended June 30, 1998, research and development expense increased to
$7.2 million from $6.5 million for the same period in 1997. The increase was due
primarily to the expansion of the Company's research and development programs,
an increase in manufacturing scale-up activities and increased facilities
expenditures. The Company's research and development expenses are expected to
increase significantly in the future as the organization grows, efforts to
develop additional drug candidates are intensified and potential products
progress into and through clinical trials.
General and administrative expenses increased to $933,000 for the second
quarter of 1998 from $766,000 for the same period in 1997. For the six months
ended June 30, 1998, general and administrative expense increased to $1.7
million from $1.5 million for the same period in 1997. Several factors
contributed to this increase, including expanded business development and
investor relations activities. The Company expects general and administrative
expenses to increase in the future in order to support increased research and
development and manufacturing scale-up activities.
Interest income decreased to $299,000 for the second quarter of 1998
from $355,000 for the same period in 1997. For the six months ended June 30,
1998, interest income decreased to $650,000 from $710,000 for the same period in
1997. The decrease was due to lower investment balances. Interest expense
decreased to $2,000 for the second quarter of 1998 from $16,000 for the same
period in 1997. For the six months ended June 30, 1998, interest expense
decreased to $5,000 from $40,000 for the same period in 1997. The decrease was
the result of decreases in the Company's capital lease obligations as compared
to the same period in 1997.
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LA JOLLA PHARMACEUTICAL COMPANY
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had incurred a cumulative net loss
since inception OF approximately $58.8 million, and had financed its operations
through private and public offerings of its securities, payments under
collaborative agreements, capital and operating lease transactions, and interest
income on its invested cash balances. As of June 30, 1998, the Company had
raised $79.5 million in net proceeds since inception from sales of equity
securities.
At June 30, 1998, the Company had $22.6 million in cash, cash
equivalents and short-term investments, as compared to $27.0 million at December
31, 1997. The Company's working capital at June 30, 1998 was $19.8 million, as
compared to $23.7 million at December 31, 1997. The decrease in cash, cash
equivalents and short-term investments resulted from the continued use of the
Company's cash toward expenses of ongoing clinical and research and development
programs and related general and administrative expenses. The decrease in
working capital is primarily due to the use of cash for net operating expenses
in the first two quarters of 1998. The Company invests its cash in corporate and
United States government-backed debt instruments.
As of June 30, 1998, the Company had acquired an aggregate of $4.0
million in property and equipment, of which approximately $196,000 of total
fixed assets costs remains financed under capital lease obligations. In
addition, the Company leases its office and laboratory facilities and certain
property and equipment under operating leases. The Company has no material
commitments for the acquisition of property and equipment but anticipates
increasing investment in property and equipment in connection with the
enhancement of its research and development and manufacturing facilities and
capabilities.
The Company intends to use its financial resources to fund manufacturing
scale-up activities including the production of LJP 394 for clinical trials,
research and development efforts, and for working capital and other general
corporate purposes. The amounts actually expended for each purpose may vary
significantly depending upon numerous factors, including the results of clinical
trials, the timing of regulatory applications and approvals, and technological
developments. Expenditures will also depend upon the establishment and progress
of collaborative arrangements, contract research and the availability of other
financing. There can be no assurance that these funds will be available on
acceptable terms, if at all.
The Company anticipates that its existing capital and interest earned
thereon and anticipated funding from the Abbott collaboration will be sufficient
to fund the Company's operations as currently planned through 1999. The
Company's future capital requirements will depend on many factors including
continued scientific progress in its research and development programs, the size
and complexity of these programs, the scope and results of clinical trials, the
time and costs involved in applying for regulatory approvals, the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims,
competing technological and market developments, the ability of the Company to
maintain its collaborative arrangement with Abbott and to establish and maintain
additional collaborative relationships and the cost of manufacturing scale-up
and effective commercialization activities and arrangements. The Company expects
to incur significant net operating losses each year for at least the next
several years as it expands its current research and development programs and
increases its general and administrative expenses to support a larger, more
complex organization. It is possible that the Company's cash requirements will
exceed current projections and that the Company will therefore need additional
financing sooner than currently expected.
The Company has no current means of generating cash flow from
operations, and its lead drug candidate, LJP 394, will not generate revenues, if
at all, until it has been proven safe and effective, has received regulatory
approval, and has been successfully commercialized, a process that is expected
to take at least the next several years. The Company's other drug candidates are
much less developed than
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LA JOLLA PHARMACEUTICAL COMPANY
LJP 394. There can be no assurance that the Company's product development
efforts with respect to LJP 394 or any other drug candidate will be successfully
completed, that required regulatory approvals will be obtained, or that any
product, if introduced, will be successfully marketed or achieve commercial
acceptance. Accordingly, the Company must continue to rely upon outside sources
of financing to meet its capital needs for the foreseeable future.
Abbott's funding of the development costs for LJP 394 and milestone
payments are expected to continue to enhance the Company's short-term liquidity
by minimizing the expenditure of the Company's own funds on further development
of LJP 394. However, the Company anticipates increasing expenditures on the
development of other drug candidates, and over time, the Company's consumption
of cash will necessitate additional sources of financing. Furthermore, the
Company has no internal sources of liquidity, and termination of the Abbott
arrangement would have a serious adverse effect on the Company's ability to
generate sufficient cash to meet its needs.
The Company will continue to seek capital through any appropriate
means, including issuance of its securities and establishment of additional
collaborative arrangements. However, there can be no assurance that additional
financing will be available on acceptable terms, and the Company's negotiating
position in its capital-raising efforts may worsen as it continues to use its
existing resources. Financing through collaborative arrangements is uncertain
because payments under the Company's collaborative agreement with Abbott are
subject to certain termination rights, including those related to progress in
clinical trials for LJP 394, and there is no assurance that the Company will be
able to enter into further collaborative relationships.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs written in the
past that used two digits rather than four to define the applicable year. As a
result, these computer programs may not properly recognize calendar dates
beginning in the year 2000. This problem may cause systems to fail or
miscalculate causing disruptions of operations, including a temporary inability
to process transactions or engage in similar normal business activities.
The Company believes that its total internal Year 2000 Issue costs will
be minimal and that its Year 2000 conversion requirements will be achieved
through routine upgrades to its software programs. The Company expects these
upgrades to be completed by the end of 1998. These costs and the expected
completion date are based on management's best estimates; there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated. The Company has also initiated communications
with all of its significant suppliers to determine the extent to which the
Company's systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. There can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted and will
not have an adverse effect on the Company's systems.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 13, 1998. All of the
Company's directors were re-elected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
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- ------- ----------------------------------------------------------------
Exhibit
Number Description
- ------- ----------------------------------------------------------------
3.1 Intentionally omitted
3.2 Bylaws of the Company (1)
3.3 Restated Certificate of Incorporation of the Company (2)
10.38 Master Lease Agreement No. 2 dated June 23, 1998 by and between
the Company and Transamerica Business Credit Corporation (3)
27 Financial Data Schedule (3)
- ----------------
(1) Previously filed with the Company's Registration Statement on Form S-1 (No.
33-76480) as declared effective by the Securities and Exchange Commission
on June 3, 1994.
(2) Previously filed with the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated by reference herein
(3) Filed herein.
(B) REPORTS ON FORM 8-K
None
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LA JOLLA PHARMACEUTICAL COMPANY
SIGNATURE
JUNE 30, 1998
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.
La Jolla Pharmaceutical Company
Date: August 12, 1998 By: /s/ Wood C. Erwin
-------------------------------------
Wood C. Erwin
Vice President Finance
Chief Financial Officer
Signed both on behalf of the
Registrant and as Principal
Accounting Officer.
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LA JOLLA PHARMACEUTICAL COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
10.38 Master Lease Agreement No. 2 dated June 23, 1998 by and between the
Company and Transamerica Business Credit Corporation
27 Financial Data Schedule
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