UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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
Commission file number: 0-28006
MICROCIDE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3186021
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
850 Maude Avenue, Mountain View, California 94043
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-428-1550
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
--- ---
Number of shares of Common Stock, no par value, outstanding as of July 31, 1998:
10,971,930.
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
JUNE 30, 1998
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of June 30, 1998
and December 31, 1997 3
Condensed Statements of Operations for the three
and six months ended June 30, 1998 and June 30, 1997 4
Condensed Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 11
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in 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
SIGNATURES 13
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MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
June 30, December 31,
1998 1997
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,890 $ 11,763
Short-term investments 31,024 28,624
Prepaid expenses and other current assets 1,925 1,284
-------- --------
Total current assets 35,839 41,671
-------- --------
Property and equipment, net 9,780 9,540
Other assets 885 571
-------- --------
Total assets $ 46,504 $ 51,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 990 $ 1,313
Construction payable 344 347
Accrued compensation 779 746
Current portion of capital lease obligations 377 612
Deferred revenue 875 786
Other accrued liabilities 675 632
-------- --------
Total current liabilities 4,040 4,436
-------- --------
Long-term portion of capital lease obligations 82 224
Accrued rent 164 226
Stockholders' equity:
Common stock 66,792 66,930
Deferred compensation (725) (1,251)
Net unrealized loss on marketable securities (58) (44)
Accumulated deficit (23,791) (18,739)
-------- --------
Total stockholders' equity 42,218 46,896
-------- --------
Total liabilities & stockholders' equity $ 46,504 $ 51,782
======== ========
NOTE: The balance sheet at December 31, 1997 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
financial statements.
See Notes to Condensed Financial Statements.
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Microcide Pharmaceuticals, Inc.
Condensed Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues
License and milestone fees $ -- $ -- $ -- $ 1,000
Research revenue 2,800 2,994 5,835 6,101
-------- -------- -------- --------
Total revenues 2,800 2,994 5,835 7,101
Operating expenses
Research and development 4,815 4,336 9,876 8,437
General and administrative 953 1,099 2,011 2,121
-------- -------- -------- --------
Total operating expenses 5,768 5,435 11,887 10,558
-------- -------- -------- --------
Loss from operations (2,968) (2,441) (6,052) (3,457)
Interest income 504 650 1,030 1,338
Interest expense (12) (40) (30) (93)
-------- -------- -------- --------
Net loss $ (2,476) $ (1,831) $ (5,052) $ (2,212)
======== ======== ======== ========
Net loss per share $ (0.23) $ (0.17) $ (0.46) $ (0.21)
======== ======== ======== ========
Shares used in calculation of net loss per share 10,957 10,778 10,941 10,797
<FN>
See Notes to Condensed Financial Statements.
</FN>
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Microcide Pharmaceuticals, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Six Months Ended
June 30
-----------------------------
1998 1997
-------- --------
Cash flows used in operating activities:
Net loss $ (5,052) $ (2,212)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,466 1,258
Amortization of deferred compensation 264 295
Accrued rent (62) 32
Net unrealized gain (loss) on securities (14) 25
Changes in assets and liabilities:
Prepaid expenses and other current assets (641) (235)
Other assets (314) 6
Accounts payable (326) (1,355)
Accrued compensation and other accrued liabilities 76 389
Deferred revenue 89 125
-------- --------
Net cash used in operating activities (4,514) (1,672)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments (26,410) (62,015)
Maturities of short-term investments 24,010 61,290
Capital expenditures (1,708) (1,308)
-------- --------
Net cash provided by (used in) investing activities (4,108) (2,033)
-------- --------
Cash flows financing activities:
Principal payments on capital lease obligations (377) (582)
Repayment of shareholder note 0 35
Net proceeds from issuance of common stock 126 126
-------- --------
Net cash used in financing activities (251) (421)
-------- --------
Net decrease in cash and cash equivalents (8,873) (4,126)
Cash and cash equivalents at beginning of period 11,763 8,317
-------- --------
Cash and cash equivalents at end of period $ 2,890 $ 4,191
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2 $ 21
======== ========
Interest paid $ 30 $ 81
======== ========
<FN>
See Notes to Condensed Financial Statements.
</FN>
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MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Microcide Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical
company whose mission is to discover, develop and commercialize novel
antimicrobials for the improved treatment of serious bacterial, fungal and viral
infections. The Company's discovery and development programs address the growing
problem of bacterial drug resistance and the need for improved antifungal and
antiviral agents through two principal themes: (i) Targeted Antibiotics, which
focuses on developing novel antibiotics and antibiotic potentiators to directly
address existing bacterial resistance problems, and (ii) Targeted Genomics,
which utilizes bacterial, fungal and viral genetics to discover new classes of
antimicrobials and other novel treatments for infectious diseases.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire year.
This unaudited financial data should be read in conjunction with the
financial statements and footnotes contained in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
2. Investments
Investment securities are classified as available-for-sale (estimated
fair value) and consist of the following investments (in thousands):
June 30, December 31,
1998 1997
------- -------
Cash equivalents and short-term investments:
Money market funds $ 4,588 $ 2,133
Corporate debt securities 26,436 37,417
------- -------
$31,024 $39,550
======= =======
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3. Per Share Information
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted-average number of shares of Common Stock outstanding during the period.
Diluted net loss per share has not been presented; given the Company's net loss
position, the result would be anti-dilutive.
4. Changes in Accounting Standards
As of January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement has no impact on the
Company's net loss or stockholders' equity. SFAS 130 requires, among other
things, unrealized gains or losses on the Company's securities to be included in
comprehensive income or loss. During the six months ended June 30, 1998 and
1997, the Company's comprehensive loss amounted to $5,066,000 and $2,187,000,
respectively.
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MICROCIDE PHARMACEUTICALS, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
As part of the Company's strategy to enhance its research and
development capabilities and to fund, in part, its capital requirements,
Microcide has entered into collaborative agreements with three major
pharmaceutical companies. The Company has received license fees, research
support payments and milestone payments pursuant to these agreements and can
potentially receive additional research support payments, additional milestone
payments and royalty payments. License payments are typically nonrefundable
up-front payments for licenses to develop, manufacture and market products, if
any, that are developed as a result of the collaboration. Research support
payments are typically contractually obligated payments to fund research and
development over the term of the collaboration. Milestone payments are payments
contingent upon the achievement of specified milestones, such as selection of
candidates for drug development, the commencement of clinical trials or receipt
of regulatory approvals. If drugs are successfully developed and commercialized
as a result of the collaborative agreements, the Company will receive royalty
payments based upon the net sales of such drugs.
Through June 30, 1998, the Company had received in the aggregate $35.0
million in license fees, milestone payments and research support payments under
the collaborative agreements. Assuming none of the existing collaborative
agreements is terminated prior to its scheduled expiration, the Company will be
entitled to receive up to an additional $16.0 million of research support
payments. In addition, in the event that any of the collaborative agreements are
extended beyond their current terms, the Company will be entitled to receive
additional research support payments.
In the event that the Company achieves the specified research and
product development milestones, the Company will be entitled to receive
milestone payments under its collaborative agreements with the three major
pharmaceutical companies ranging from $13.0 million to $32.5 million per
product. No royalty payments have yet been received and the Company does not
expect to receive royalties based upon the net sales of drugs for a significant
number of years, if ever.
In May 1998, the Company signed an agreement to extend various
facilities leases for a 60-month term after their scheduled expiration. The
lease combines other previous agreements signed in relation to its facilities
comprising 71,210 square feet. The agreement calls for total minimum monthly
rental payments ranging from $132,000 to $152,000 beginning on October 1, 2000.
Quarterly results of operations are subject to significant fluctuations
based on the timing and amount of certain revenues earned under the
collaborative agreements. The Company expects to incur operating losses in the
future.
This Form 10-Q contains forward-looking statements based upon current
expectations, including statements with regard to the potential receipt of
additional research support payments, milestone payments and royalties from the
Company's collaborative partners, and the period of time the Company's existing
capital resources and future payments under collaborative agreements will be
sufficient to satisfy the Company's funding requirements, expectations
concerning the Company's
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future research and development and general and administrative expenses and
future facility needs. Such forward-looking statements involve risk and
uncertainties, including without limitation, the risk that the Company's
collaborations will be terminated, development candidates will not be
identified, development candidates which are selected will not proceed through
pre-clinical trials or will not prove safe and effective for treatment of humans
in clinical trials, or that the identification, selection, pre-clinical, and
clinical testing of development candidates will take substantially longer or be
substantially more expensive than contemplated by the Company, or that the
Company will not be able to obtain on a timely basis government regulatory
clearance required for clinical testing, manufacturing, and marketing of its
products, and the other risks and uncertainties set forth in the Company's
annual report on Form 10-K for the year ended December 31, 1997. Actual results
and timing of certain events could differ materially from those indicated in the
forward-looking statements as a result of these or other factors.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Revenues. Total revenues for the second quarter of 1998 were $2.8 million, a
decrease of 6% from the $3.0 million in revenues recognized in the second
quarter of 1997, due to a decrease in research support revenues. Research
support revenue decreased in the second quarter of 1998 due primarily to lower
revenues earned from the Daiichi collaborative agreement resulting from a
decrease in reimbursable costs associated with the program. There were no
license and milestone fees earned for either period.
Research and Development Expenses. Research and development expenses for the
second quarter increased approximately 11% from $4.3 million in 1997 to $4.8
million in 1998. The increases are due primarily to higher compensation and
other employee-related expenses associated with an increase in headcount to
support the Company's corporate collaborations and its internal programs, higher
spending for research supplies and materials, higher costs relating to expanded
research and development facilities, and costs associated with providing
research support to Iconix Pharmaceuticals related to the viral research
program, partially offset by lower expenses related to assembling the Company's
molecular diversity collection. Research and development expenses are expected
to further increase in the third quarter.
General and Administrative Expenses. General and administrative expenses for the
second quarter decreased 13% from $1.1 million in 1997 to $1.0 million in 1998.
Decreased expenses primarily consisted of lower operational costs, travel and
entertainment costs, and facilities costs. General and administrative expenses
may increase in dollar amounts in the third quarter, but are expected to be at a
lower percentage of total operating expenses.
Interest Income and Expense. Interest income for the second quarter decreased
from $650,000 in 1997 to $504,000 in 1998, primarily due to a decrease in
average cash balances. Interest expense for the second quarter decreased from
$40,000 in 1997 to $12,000 in 1998 due to a decrease in capital lease balances
outstanding.
Six Months Ended June 30, 1998 and 1997
Revenues. Total revenues for the first half of 1998 were $5.8 million, a
decrease of 18% from the $7.1 million in revenues for the first half of 1997
primarily due to a decrease in license and
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milestone fees. In addition, research support revenue decreased from $6.1
million in the first half of 1997 to $5.8 million in the first half of 1998
primarily as a result of lower revenues earned from the Daiichi collaborative
agreement resulting from a decrease in reimbursable costs associated with the
program.
Research and Development Expenses. Research and development expenses for the
first half of 1998 were $9.9 million, an increase of approximately 17% from $8.4
million in the first half of 1997, primarily due to increased compensation and
other employee-related expenses associated with an increase in headcount to
support the Company's corporate collaborations and its internal programs, higher
spending for research supplies and materials, higher costs relating to expanded
research and development facilities, and costs associated with providing
research support to Iconix Pharmaceuticals related to the viral research
program, partially offset by lower expenses related to assembling the Company's
molecular diversity collection. Research and development expenses are expected
to further increase in the second half of 1998.
General and Administrative Expenses. General and administrative expenses for the
first half of 1998 decreased approximately 5% from $2.1 million in 1997 to $2.0
million in 1998. Decreased expenses primarily consisted of lower payroll and
related expenses, lower operational costs, and lower travel and entertainment
costs, partially offset by an increase in outside service expenses associated
with recruiting, legal and insurance activities. General and administrative
expenses may increase in dollar amounts in the second half of 1998 as compared
to the first half of 1998, but are expected to be at a lower percentage of total
operating expenses.
Interest Income and Expense. Interest income for the first half of 1998
decreased from $1.3 million in 1997 to $1.0 million in 1998, primarily due to a
decrease in average cash balances. Interest expense decreased from $93,000 in
the first half of 1997 to $30,000 in the first half of 1998 due to a decrease in
capital lease balances outstanding.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily
through the sale of equity, through funds provided under collaborative
agreements, through other revenues principally consisting of sales of molecular
diversity samples and through equipment financing. As of June 30, 1998 the
Company had received approximately $64.5 million in net proceeds from the sale
of equity and approximately $36.7 million from license and milestone fees,
research support payments under collaborative agreements and sales of molecular
diversity samples.
Cash, cash equivalents and short-term investments at June 30, 1998 were
$33.9 million compared to $40.4 million at December 31, 1997. The decrease
during the first half of 1998 was due primarily to cash used by operations of
$4.5 million, $1.7 million in capital expenditures and $251,000 utilized in
financing activities which predominantly consisted of principal payments on
capital lease obligations.
The Company believes that its existing capital resources, interest
income and future payments due under collaborative agreements will enable the
Company to maintain current and planned operations at least through 1999.
-10-
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Microcide Pharmaceuticals,
Inc. was held on June 18, 1998.
(b) The following Class II Directors were elected to serve for a term
of three years to expire at the Company's 2001 Annual Meeting of
Stockholders:
Name Position Term Expires
---------------------------------- --------------------------------- ------------
Hugh Y. Rienhoff, Jr., M.D. Class II Director 2001
John P. Walker Class II Director 2001
The following Class I and III Directors continue to serve their
respective terms which expire at the Company's Annual Meeting of
Stockholders in the year as noted:
Name Position Term Expires
---------------------------------- --------------------------------- ------------
Daniel L. Kisner, M.D. Class I Director 2000
David Schnell, M.D. Class I Director 2000
Mark B. Skaletsky Class I Director 2000
Keith A. Bostian, Ph.D. Class III Director 1999
James E. Rurka Class III Director 1999
(c) The matters voted upon at the meeting and the voting results were
as follows:
(i) The election of two Class II Directors for a term of three
years:
Name For Against Abstain Not Voted
--------------------------- --------- ------- ------- ---------
Hugh Y. Rienhoff, Jr., M.D. 8,582,585 128,973 - 2,226,934
John P. Walker 8,592,285 119,273 - 2,226,934
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(ii) Approval of amendment to the Company's 1993 Amended Incentive
Stock Plan, increasing the number of shares of Common Stock
reserved for issuance from 1,880,000 to 2,280,000:
For Against Abstain Not Voted
--------- ------- ------ ---------
8,141,242 547,396 22,920 2,226,934
(iii) Ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31,
1998:
For Against Abstain Not Voted
--------- ------- ------ ---------
8,686,515 13,284 11,759 2,226,934
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits have been filed with this report:
10.22 Lease agreement between the Registrant and Portola Land Co.
dated May 1998
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
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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.
Dated: August 14, 1998
MICROCIDE PHARMACEUTICALS, INC.
------------------------------------------------
(Registrant)
/s/ James E. Rurka
------------------------------------------------
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Matthew J. Hogan
------------------------------------------------
Chief Financial Officer
(principal financial and accounting officer)
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