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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 MARCH 31, 1999
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 March 31, 1999 was 20,110,403.
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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 (Unaudited)
Balance Sheets as of March 31, 1999 and December 31, 1998............................3
Statements of Operations for the three months ended March 31, 1999 and 1998..........4
Statements of Cash Flows for the three months ended March 31, 1999 and 1998..........5
Notes to 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..................*
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.........................*
ITEM 5. Other information...........................................................*
ITEM 6. Exhibits and Reports on Form 8-K...........................................11
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)
March 31, December 31,
1999 1998
----------- -----------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 8,565 $ 11,176
Short-term investments 12,468 12,174
Other current assets 442 517
-------- --------
Total current assets 21,475 23,867
Property and equipment, net 895 659
Patent costs and other assets, net 1,434 1,289
-------- --------
Total Assets $ 23,804 $ 25,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 334 $ 1,254
Accrued expenses 707 575
Accrued payroll and related expenses 474 355
Deferred revenue - related party 2,320 1,769
Current portion of obligations under capital leases 103 3
-------- --------
Total current liabilities 3,938 3,956
Noncurrent portion of obligations under capital leases 91 --
Commitments
Stockholders' equity:
Common stock 201 201
Additional paid-in capital 84,287 84,276
Accumulated deficit (64,713) (62,618)
-------- --------
Total stockholders' equity 19,775 21,859
-------- --------
Total Liabilities and Stockholders' Equity $ 23,804 $ 25,815
======== ========
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
balance sheets.
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
Revenue from collaborative agreement - related party $ 1,659 $ 1,903
Expenses:
Research and development 3,175 3,525
General and administrative 822 718
-------- --------
Total expenses 3,997 4,243
-------- --------
Loss from operations (2,338) (2,340)
Interest expense (9) (4)
Interest income 252 353
-------- --------
Net loss and comprehensive net loss $ (2,095) $ (1,991)
======== ========
Basic and diluted net loss per share $ (.10) $ (.11)
======== ========
Shares used in computing basic and diluted net
loss per share 20,109 18,161
======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net loss $ (2,095) $ (1,991)
Adjustments to reconcile net loss to net cash (used
for) provided by operating activities:
Depreciation and amortization 99 106
Deferred compensation amortization -- 12
Change in operating assets and liabilities:
Other current assets 75 218
Accounts payable and accrued expenses (788) (1,079)
Accrued payroll and related expenses 119 14
Deferred revenue - related party 551 827
-------- --------
Net cash used for operating activities (2,039) (1,893)
INVESTING ACTIVITIES
(Decrease) increase in short-term investments (294) 6,382
Additions to property and equipment (95) (347)
Increase in patent costs and other assets (157) (96)
-------- --------
Net cash (used for) provided by investing activities (546) 5,939
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 11 11
Payments on obligations under capital leases (37) (72)
-------- --------
Net cash used for financing activities (26) (61)
Net (decrease) increase in cash and cash equivalents (2,611) 3,985
Cash and cash equivalents at beginning of period 11,176 11,999
-------- --------
Cash and cash equivalents at end of period $ 8,565 $ 15,984
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 9 $ 4
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Adjustment to deferred compensation for terminations $ -- $ 1
======== ========
Capital lease obligations incurred for property and
equipment $ 228 $ --
======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 1999
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 months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for other quarters or the year ended December 31, 1999. 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, 1998 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.
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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
RECENT DEVELOPMENTS
As announced on May 12, 1999, in a planned interim analysis of the Phase
II/III clinical trial of LJP 394 in lupus patients being conducted by Abbott
Laboratories ("Abbott") and the Company, the independent Data Monitoring
Committee reported efficacy as defined by the primary chosen endpoint, time to
renal flare, was less than expected. No major safety concerns were observed,
and patients receiving the experimental drug seemed to have a reduction in
circulating antibodies to double-stranded DNA that are associated with the lupus
nephritis.
Following discussion with the Food and Drug Administration, the two
companies have elected to stop enrollment and to stop treatment of the more than
200 enrolled patients until the data can be validated and analyzed. This
analysis is expected to take several months to complete. An ongoing Phase II
dose-ranging study of LJP 394 involving 75 lupus patients is expected to be
completed in the coming months.
Abbott and the Company are committed to understanding the effects of LJP
394 on endpoints from this study before deciding on how to proceed with any
further development.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including without
limitation, those dealing with the Company's relationship with Abbott, Abbott's
financing of development expenses, the analysis of results from the ongoing
trials, as well as the Company's drug candidates and drug development plans 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
materially from those anticipated. Abbott's continuing support obligations are
subject to certain conditions. The Company's relationship with Abbott could be
terminated by either party for various reasons. If clinical trials of LJP 394
continue, they may continue to have negative or inconclusive results. Further,
delays in continued testing of LJP 394, the Company's lead product candidate,
and/or termination of development would result in delays or an inability to
market the compound. Tolerance, or the specific inactivation of pathogenic B
cells, is a new technology that has not been proven, and the development of LJP
394 involves many risks and uncertainties, including, without limitation,
whether LJP 394 can provide a meaningful clinical benefit. Any positive results
observed to date may not be indicative of future results. The Company's other
potential drug candidates are at earlier stages of development and involve
comparable risks.
Additional risk factors include the uncertainty of obtaining required
regulatory approvals, successfully marketing products, receiving future revenue
from product sales or other sources such as collaborative relationships, future
profitability, the need for additional financing, 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 Securities and Exchange Commission 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,
revenue 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
expenses and operating losses for at least the next several years as it
increases its research and development expenditures on additional drug
candidates, possibly increases its manufacturing scale-up activities including
the possible production of LJP 394 for any clinical trials after its review of
the analysis of the Phase II/III clinical trial data, and increases general and
administrative expenditures to support increased research and development and
possible manufacturing scale-up 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.
As of March 31, 1999, the Company's accumulated deficit was approximately $64.7
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
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LA JOLLA PHARMACEUTICAL COMPANY
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, a related party (as a 16.8%
stockholder of the Company). 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 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 further development of LJP 394 will
occur or that LJP 394 will prove to be safe or effective. Furthermore, the
clinical trials of LJP 394 may be viewed as a test of the Company's entire
Tolerance Technology approach. If these clinical trials are determined to have
been unsuccessful, depending on the reason for the lack of success, the
applicability of the Company's Tolerance Technology to other antibody-mediated
diseases will be highly uncertain.
RESULTS OF OPERATIONS
The Company earned $1.7 million in revenue from its collaborative agreement
with Abbott in the first quarter of 1999 compared to $1.9 million for the same
period in 1998. The decrease in revenue is due to the timing of expenditures for
manufacturing scale-up have been funded by Abbott. Payments received in advance
under the collaborative agreement with Abbott are recorded as deferred revenue
until earned. Total payments of approximately $2.1 million were received under
the collaborative agreement with Abbott in the first three months of 1999. As of
March 31, 1999, deferred revenue was approximately $2.3 million. The receipt of
payments and the recognition of revenue from the collaborative agreement with
Abbott have historically varied significantly from quarter to quarter and from
year to year depending on the level of research effort expended. There can be no
assurance that the Company will realize any further revenue from the Abbott
arrangement or any other collaborative arrangement.
For the three months ended March 31, 1999, research and development
expenses decreased to $3.2 million from $3.5 million for the same period in
1998. The decrease was primarily due to the timing of manufacturing scale-up
activities. The Company's research and development expenses are expected to
increase significantly in the future as efforts to develop additional drug
candidates are intensified, products potentially progress into and through
clinical trials, and manufacturing scale-up activities are possibly increased.
General and administrative expenses increased to $822,000 for the three
months ended March 31, 1999, from $718,000 for the same period in 1998. The
increase was due to expanded business development activities. The Company
expects general and administrative expenses to increase in the future in order
to support increased research and development and, possibly, manufacturing
scale-up activities.
Interest income of $252,000 for the three months ended March 31, 1999
decreased from interest income of $353,000 for the same period in 1998. The
decrease in interest income was due to lower investment balances. For the three
months ended March 31, 1999, interest expense increased to $9,000 from $1,000
for the same period in 1998. The increase in interest expense was the result of
increases in the Company's capital lease obligations.
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LA JOLLA PHARMACEUTICAL COMPANY
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had incurred a cumulative net loss since
inception of approximately $64.7 million, and had financed its operations
through private and public offerings of its securities, payments from
collaborative agreements, capital and operating lease transactions, and interest
income on its invested cash balances. As of March 31, 1999, the Company had
raised $83.7 million in net proceeds since inception from sales of equity
securities.
At March 31, 1999, the Company had $21.0 million in cash, cash equivalents
and short-term investments, as compared to $23.4 million at December 31, 1998.
The Company's working capital at March 31, 1999 was $17.5 million, as compared
to $19.9 million at December 31, 1998. The decrease in cash, cash equivalents
and short-term investments resulted from the continued use of the Company's cash
towards operating activities, patent expenditures and the purchase of property
and equipment. The decrease in working capital is primarily due to the use of
cash for net operating expenses and the addition of property and equipment under
capital leases in the first quarter of 1999. The Company invests its cash in
corporate and United States Government-backed debt instruments.
As of March 31, 1999, the Company had acquired an aggregate of $4.4 million
in property and equipment, of which approximately $228,000 of total property and
equipment costs are 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. However, the Company anticipates
increasing its investment in property and equipment in connection with the
enhancement of its research and development and, possibly, its manufacturing
facilities and capabilities.
The Company intends to use its financial resources to fund its research and
development efforts, to fund its possible manufacturing scale-up activities 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 analysis of the Phase
II/III clinical trial data, the timing of regulatory applications and approvals,
and technological developments. Expenditures will also depend upon the
establishment and progression of collaborative arrangements and contract
research as well as the availability of other financings. 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 will be sufficient to fund the Company's operations as currently planned
into 2000. 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 analysis of data from the Phase II/III clinical trial, the
time and costs involved in applying for any 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 possible
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.
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LA JOLLA PHARMACEUTICAL COMPANY
The Company has no current means of generating cash flow from operations.
Unless the Company's lead drug candidate, LJP 394, is proven safe and effective,
receives regulatory approval and is successfully commercialized, it will not
generate revenues, if at all. This process, if completed, could likely take
several years. The Company's other drug candidates are much less developed than
LJP 394. There can be no assurance that the Company's product development
efforts with respect to any 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.
There can be no assurance that the Company will receive any further funding
from Abbott. 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. Payments under the Company's collaborative agreement with
Abbott are uncertain 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 using 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.
Based on recent assessments, the Company believes that it has an effective
program in place to resolve the Year 2000 Issue in a timely manner, that its
total internal Year 2000 Issue costs for information technology and
non-information technology systems will be less than $85,000 and will primarily
be incurred in 1999. The Company's year 2000 conversion requirements are
expected to be achieved through routine upgrades to its hardware and software
programs and these upgrades are expected to be completed by the second quarter
of 1999. These costs and the expected completion date are based on management's
best estimates; therefore, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
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 the assessment phase for almost 100% of the systems that
could be significantly affected by the Year 2000 Issue and has determined that
the majority of the systems assessed do not require remediation to be year 2000
compliant. Approximately 50% of the systems requiring remediation are now year
2000 compliant. In addition, the Company has initiated communications with most
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
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LA JOLLA PHARMACEUTICAL COMPANY
on which the Company's systems rely will be timely converted and will not have
an adverse effect on the Company's systems.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the year 2000 program. The Company plans to
evaluate the status of completion in the second quarter of 1999 and determine
whether such a plan is necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in interest-bearing investment-grade
securities that it holds for the duration of the term of the respective
instrument. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market-risk-sensitive instruments,
positions or transactions in any material fashion. Accordingly, the Company
believes that, while the investment-grade securities it holds are subject to
changes in the financial standing of the issuer of such securities, the Company
is not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices or other market changes that
affect market-risk-sensitive instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Intentionally omitted
3.2 Amended and Restated Bylaws of the Company(1)
3.3 Restated Certificate of Incorporation of the Company(2)
4.0 Rights Agreement dated as of December 3, 1998 between the Company and
American Stock Transfer & Trust Company(3)
27 Financial Data Schedule(4)
- ----------
(1) Previously filed with the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated by reference
herein.
(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) Previously filed with the Company's Registration Statement on Form 8-A
(No. 000-24274) as filed with the Securities and Exchange Commission on
December 4, 1998.
(4) Filed herein.
(b) REPORTS ON FORM 8-K
None
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LA JOLLA PHARMACEUTICAL COMPANY
SIGNATURE
MARCH 31, 1999
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: May 14, 1999 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
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- -----------
27 Financial Data Schedule 14
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