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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 September 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 0-19125
ISIS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0336973
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2292 Faraday Avenue, Carlsbad, CA 92008
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(Address of principal executive offices, including zip code)
(760) 931-9200
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(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 27,001,969 shares
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(Class) (Outstanding at October 30, 1998)
EXHIBIT INDEX: Located at page number 10.
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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 September 30, 1998 and
December 31, 1997 3
Condensed Statements of Operations for the three months
and nine months ended September 30, 1998 and 1997 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 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
Year 2000 Computer Issues 9
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 10
ITEM 2: Changes in Securities 10
ITEM 3: Default upon Senior Securities 10
ITEM 4: Submission of Matters to a Vote of Security Holders 10
ITEM 5: Other Information 10
ITEM 6: Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
ASSETS
September 30, December 31,
1998 1997
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(Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 38,002 $ 38,102
Short-term investments 35,046 48,684
Prepaid expenses and other current assets 2,527 2,364
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Total current assets 75,575 89,150
Property, plant and equipment, net 20,347 18,785
Patent costs, net 8,579 7,485
Deposits and other assets 2,261 2,461
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$ 106,762 $ 117,881
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,787 $ 2,843
Accrued payroll and related expenses 1,751 2,242
Accrued liabilities 3,946 4,347
Deferred contract revenues 10,269 14,893
Current portion of long term debt and capital lease obligations 2,234 2,252
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Total current liabilities 20,987 26,577
Long-term debt and capital lease obligations, less current portion 73,923 56,452
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized, 26,879,000 shares and 26,655,000 shares issued
and outstanding at September 30, 1998 and December 31, 1997,
respectively 27 27
Additional paid-in capital 191,976 188,793
Unrealized gain on investments 312 165
Accumulated deficit (180,463) (154,133)
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Total stockholders' equity 11,852 34,852
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$ 106,762 $ 117,881
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Note: The balance sheet at December 31, 1997 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Research and development revenue
under collaborative agreements $ 19,279 $ 12,641 $ 30,951 $ 23,060
Product revenue 560 -- 560 --
Interest income 1,038 1,133 3,309 2,846
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20,877 13,774 34,820 25,906
Expenses:
Research and development 16,540 13,368 47,931 38,528
General and administrative 2,310 1,805 6,430 5,566
Interest expense 2,983 791 6,789 1,982
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21,833 15,964 61,150 46,076
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Net loss $ (956) $ (2,190) $(26,330) $(20,170)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.04) $ (0.08) $ (0.98) $ (0.76)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 26,868 26,519 26,815 26,393
======== ======== ======== ========
See accompanying notes.
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Nine months ended
September 30,
1998 1997
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Cash used in operations: $(24,649) $(14,366)
Investing activities:
Short-term investments 13,638
885
Property and equipment (2,827) (3,713)
Other assets (1,095) (2,088)
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Net cash provided from (used in) investing activities 9,716 (4,916)
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Financing activities:
Net proceeds from issuance of common stock 3,183 3,153
Proceeds from long-term borrowings 13,354 11,386
Principal payments on debt and capital lease obligations (1,704) (3,479)
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Net cash provided from financing activities 14,833 11,060
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Net decrease in cash and cash equivalents (100) (8,222)
Cash and cash equivalents at beginning of period 38,102 37,082
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Cash and cash equivalents at end of period $ 38,002 $ 28,860
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,940 $ 1,480
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Additions to long-term debt obligations for acquisitions of property,
plant and equipment, and accrued interest $ 1,472 $ 1,585
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 nine month
periods ended September 30, 1998 and 1997 have been prepared on the same basis
as the Company's audited financial statements for the year ended December 31,
1997. 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, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
2. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). This
statement requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency translation adjustments and unrealized gains and losses on its
available-for-sale securities. SFAS 130 also requires the Company to reclassify
financial statements for earlier periods provided for comparative purposes. For
the three and nine month periods ended September 30, 1998 and 1997 comprehensive
income was not materially different than net income.
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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, the Company's
relationships with its corporate partners, and the impact of the Year 2000
Problem on the Company's operations. 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, 1997 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, almost all of the Company's
resources have been devoted to its research, drug discovery and drug development
programs. The Company is not yet profitable and expects to continue to have
operating losses for the next several years. Isis' revenue comes from
collaborative research and development agreements with pharmaceutical companies,
research grants and interest income. The revenue from the collaboration
increases the amount of research and development activity that the Company is
able to fund and offsets a portion of its research and development costs. During
the quarter ended September 30, 1998, Isis received approval from the U.S. Food
and Drug Administration ("FDA") to begin marketing its first product,
Vitravene(TM), a drug used to treat CMV retinitis.
RESULTS OF OPERATIONS
The Company's revenue from collaborative research and development
agreements was $19.3 million for the third quarter and $31.0 million for the
nine month period ended September 30, 1998, compared with $12.6 million and
$23.1 million, respectively, for the same periods in 1997. The revenue increase
was primarily due to $7.5 million in milestone payments earned during the
quarter when the FDA approved Vitravene(TM). Isis delivered its first commercial
shipment of Vitravene(TM) to CIBA Vision Corporation ("CIBA") during the quarter
ended September 30, 1998, realizing product revenues of $0.6 million. An
additional $4.0 million of revenue was recognized when the Company agreed to
exclusively license its issued patents covering immune stimulation by
phosporothioate oligonucleotides to CpG ImmunoPharmaceuticals, Inc. The Company
also had interest income totaling $1.0 million for the quarter and $3.3 million
for the nine month period compared with $1.1 million and $2.8 million for the
same periods in 1997.
Research and development expenses increased to $16.5 million for the
three months and $47.9 million for the nine months ended September 30, 1998 from
$13.4 million and $38.5 million for the same periods in 1997. This increase was
attributable to an increase in preclinical and clinical development activities
including compounds advancing into more expensive stages of clinical
development. We expect that research and development expenses will continue to
increase as compounds continue to advance in clinical development.
General and administrative expenses increased to $2.3 million for the
quarter and $6.4 million for the nine months ended September 30, 1998, from $1.8
million and $5.6 million for the same periods in 1997. This increase in general
and administrative expense is related to additional staffing in general and
administrative functions required to support the growth in research and
development. We expect that general and administrative expenses will continue to
increase in the future to support our growing research and development efforts.
Interest expense increased to $3.0 million for the third quarter and
$6.8 million for the nine month period ended September 30, 1998, compared with
$0.8 million and $2.0 million for the same periods in 1997. This increase in
interest expense is due to borrowing $25 million in a private debt financing
completed in the fourth quarter of 1997 with an additional $15 million follow-on
private debt financing in the second quarter of 1998. Under the terms of these
financing arrangements payment of both principal and interest is deferred for
the first five years. Therefore, of the $3.0 million of interest expense
recognized in the third quarter, $2.1 million was
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accrued under the long-term debt agreements and will not require current cash
payment. Similarly, of the $6.8 million interest expense for the nine month
period ended September 30, 1998, $4.3 million was accrued under the long-term
debt agreements and will not require current cash payment.
During the quarter ended September 30, 1998, the Company recorded a net
loss of $1.0 million, or $0.04 per share, compared with $2.2 million, or $0.08
per share, for the same period in 1997. During the nine month period ended
September 30, 1998, the Company's net loss amounted to $26.3 million, or $0.98
per share, compared to $20.2 million, or $0.76 per share for the same period in
1997. We expect that operating losses will continue for several more years as
the Company supports the discovery and development of potentially
commercializable drugs. Operating losses may fluctuate from quarter to quarter
because of differences in the timing of revenue and expense recognition.
The Company believes that inflation and changing prices have not had a
material effect on its ongoing operations to date.
LIQUIDITY AND CAPITAL RESOURCES
Isis has financed its operations with revenue from contract research
and development through the sale of equity securities and the issuance of
long-term debt. From its inception through September 30, 1998, Isis has earned
approximately $136 million in revenue from contract research and development.
The Company has also raised net proceeds of approximately $190 million from the
sale of equity securities since it was founded. Since 1996, Isis has borrowed
approximately $67 million under long-term debt arrangements to finance a portion
of its operations.
As of September 30, 1998, the Company had cash, cash equivalents and
short-term investments totaling $73.0 million and working capital of $54.6
million. In comparison, the Company had cash, cash equivalents and short-term
investments of $86.8 million and working capital of $62.6 million as of December
31, 1997. 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 $15 million
private debt financing.
The Company's collaborative agreement with Boehringer Ingelheim
provides Isis with a $40 million line of credit. This line of credit is
available under certain circumstances and is to be used to support the
collaboration cell adhesion programs. As of September 30, 1998, the outstanding
balance under this line of credit was $22.6 million.
In October 1997, Isis borrowed $25 million in a private transaction.
The loan bears interest at 14% per annum and must be repaid on November 1, 2007.
No payments of either principal or interest are required during the first five
years of the loan. After the first five years, interest must be paid quarterly.
No principal payments are required until November 1, 2007. In conjunction with
this transaction, Isis issued warrants to purchase 500,000 shares of common
stock at a price of $25 per share. On May 1, 1998, the Company completed a
follow-on $15 million private debt financing. This financing was a follow-on to
the Company's October 1997 $25 million private debt financing and bears the same
terms and conditions. Because interest is deferred during the first five years,
the combined principal balance of both borrowings will accrue to a total of $78
million on November 1, 2002. In conjunction with this follow-on transaction,
Isis issued warrants to purchase 300,000 shares of common stock at a price of
$25 per share. The warrants issued in connection with both of these financings
expire on November 1, 2004. The debt under these arrangements is carried on the
balance sheet net of the amortized amount allocated to the warrants and
including accrued interest. The combined carrying amount of these notes at
September 30, 1998 was $39.6 million.
The Company had long-term debt and capital lease obligations at
September 30, 1998 totaling $73.9 million, versus $56.5 million at December 31,
1997. This increase was due to the additional follow-on debt financing and the
accrual of interest on the ten-year notes described above, partially offset by
principal repayments on existing obligations. We expect that capital lease
obligations will increase over time to fund capital equipment acquisitions
required for the Company's growing business. We will continue to use lease
financing as long as the terms remain commercially attractive. We believe that
the Company's existing cash, cash equivalents
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and short-term investments, combined with interest income and contract revenue
will be sufficient to meet its anticipated requirements for approximately two
years.
YEAR 2000 COMPUTER ISSUES
Until recently many computer programs were written to store only 2
digits of date-related information. Thus, the programs were unable to
distinguish between the year 1900 and the year 2000. As a result, many computer
experts have significant concerns regarding how those programs will function
after December 31, 1999. This is frequently referred to as the "Year 2000
Problem." The Company is in the process of reviewing its computer systems and
other equipment that utilize embedded microprocessors to assess the potential
exposure to this problem. Because Isis was founded in 1989 and all of its
computer systems and equipment have been purchased or upgraded since that time,
we believe the risk of material disruption to the Company's operations as a
result of the presence of this defect in its own computer systems and equipment
is minimal.
The Company has also initiated discussions with its significant
suppliers, corporate partners and financial institutions to ensure that those
parties have appropriate plans to address Year 2000 issues where their systems
could impact Isis' operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to properly modify
their computer systems.
A team of Isis employees is conducting the Company's Year 2000
evaluation and preparation. The team's activities are designed to ensure that
there is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers, corporate partners and financial
institutions are fully supported. We estimate that the evaluation of these risks
will be completed by the end of 1998, and that any required remediation and
validation will be completed by mid-1999. While the Company believes its
planning and preparations will be adequate to address its Year 2000 concerns,
the Company cannot guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company. The Company does not yet have a
formal contingency plan. A contingency plan will be finalized as the risk
assessment is completed. Based on the information obtained to date, the cost of
identifying and remediating exposures to the Year 2000 Problem is not expected
to be material to the Company's results of operations or financial position.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a 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
Pursuant to the Company's bylaws, stockholders who wish to bring
matters or propose nominees for director at the Company's 1999
annual meeting of stockholders must provide specified information to
the Company by December 14, 1998 (unless such matters are included
in the Company's proxy statement pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934, as amended). .
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following documents are exhibits to this Form 10-Q:
10.1 Amendment No. 2 to the Agreement between the Company and
CIBA Vision Corporation, dated September 14, 1998 (with
certain confidential information deleted).
27.1 Financial Data Schedule
b. Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1998.
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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: November 16, 1998 By: /S/ STANLEY T. CROOKE
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Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 By: /S/ B. LYNNE PARSHALL
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B. Lynne Parshall
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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