1
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 September 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-27150
PATHOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Elliott Avenue West
Seattle, Washington 98119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (206) 467-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)
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 [ ]
At November 11, 1996, the number of shares outstanding of the registrant's
Common Stock, par value $.001 per share, was 13,897,057 shares.
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PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
September 30, December 31,
1996 1995
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 23,142,320 $ 575,297
Investment securities 43,136,632 36,871,537
Interest receivable 336,100 765,216
Grants and royalties receivable 142,683 0
Prepaid expenses 298,016 671,711
------------- -------------
Total current assets 67,055,751 38,883,761
------------- -------------
Property and equipment, at cost:
Leasehold improvements 6,567,451 6,435,336
Furniture and equipment 5,718,984 5,338,435
------------- -------------
12,286,435 11,773,771
Less accumulated depreciation and amortization 4,903,684 3,702,152
------------- -------------
Net property and equipment 7,382,751 8,071,619
------------- -------------
Other assets, net 4,145 7,758
------------- -------------
Total assets $ 74,442,647 $ 46,963,138
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 616,081 $ 1,635,711
Compensation and benefits 443,129 859,462
Clinical development costs 984,157 876,132
Other accrued expenses 152,791 81,473
------------- -------------
Total current liabilities 2,196,158 3,452,778
------------- -------------
Long-term liability 171,978 461,986
Stockholders' equity:
Preferred stock $.01 par value. Authorized 1,000,000 shares;
issued and outstanding none -- --
Common stock $.001 par value. Authorized 20,000,000 shares;
issued and outstanding 13,770,182 shares 13,770 10,898
Additional paid-in capital 133,442,030 89,520,221
Unrealized gain (loss) on investment securities (94,502) 38,458
Deficit accumulated during the development stage (61,286,787) (46,521,203)
------------- -------------
Total stockholders' equity 72,074,511 43,048,374
------------- -------------
Total liabilities and stockholders' equity $ 74,442,647 $ 46,963,138
============= =============
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PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
December 10,
1991
(Incorporation)
Three Months Ended Nine Months Ended Through
September 30, September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
Revenue:
Grants and Royalties $ 160,539 $ -- $ 282,843 $ -- $ 282,843
Operating expenses:
Research and development 4,940,519 3,557,859 14,437,674 11,266,394 51,866,163
General and administrative 995,666 896,795 2,919,173 2,804,169 16,055,359
------------ ------------ ------------ ------------ ------------
Total operating expenses 5,936,185 4,454,654 17,356,847 14,070,563 67,921,522
------------ ------------ ------------ ------------ ------------
Operating Loss (5,775,646) (4,454,654) (17,074,004) (14,070,563) (67,638,679)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Investment income, net 1,012,981 321,199 2,360,209 955,349 6,541,474
Other income (expense) (24,547) (11,018) (51,789) (31,056) (189,582)
------------ ------------ ------------ ------------ ------------
Net other income 988,434 310,181 2,308,420 924,293 6,351,892
------------ ------------ ------------ ------------ ------------
Net loss $ (4,787,212) $ (4,144,473) $(14,765,584) $(13,146,270) $(61,286,787)
============ ============ ============ ============ ============
Net loss per common share $ (0.35) $ (0.52) $ (1.18) $ (1.67)
============ ============ ============ ============
Weighted average common shares outstanding 13,759,209 7,897,706 12,468,547 7,886,191
============ ============ ============ ============
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PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF
COMMON PRICE ADDITIONAL
SHARES PER COMMON PAID -IN
DATE DESCRIPTION OUTSTANDING SHARE STOCK CAPITAL
---- ----------- ------------- ------- -------- --------
Feb to Mar 1992 Shares issued for cash 1,870,000 $0.08 1,870 147,730
June to Dec 1992 Shares issued for cash net of issue costs of
$744,966 4,308,500 10.00 4,309 42,335,725
November 1992 Repurchase of common stock through forgiveness
of note receivable (25,000) 10.00 (25) (249,975)
Repurchase of common stock for cash (46,875) 0.08 (47) (3,703)
Net loss for the period ended December 31, 1992
----------------------------------------------------
Balances at Decenber 31, 1992 6,106,625 6,107 42,229,776
October 1993 Shares issued in payment of license fees 50,000 10.00 50 499,950
Net loss for the year ended December 31, 1993
----------------------------------------------------
Balances at Decenber 31, 1993 6,156,625 6,157 42,729,726
March 1994 Shares issued for cash net of issue costs of
$1,251,739 1,690,677 12.00 1,690 19,093,694
Unrealized loss on investment securities
Net loss for the year ended December 31, 1994
----------------------------------------------------
Balances at Decenber 31, 1994 7,847,302 7,847 61,823,421
March 1995 Shares issued in payment of license fees 50,000 12.00 50 599,950
April to Aug 1995 Exercise of stock options for cash 413 10.00 1 4,124
November 1995 Shares issued for cash net of issue costs of
$2,904,274 3,000,000 10.00 3,000 27,092,726
Unrealized loss on investment securities
Net loss for the year ended December 31, 1995
----------------------------------------------------
Balances at Decenber 31, 1995 10,897,715 10,898 89,520,221
Jan to June 1996 Exercise of stock options 4,974 16.94 5 29,667
Jan to June 1996 Redemption of fractional shares (45) 12.00 (0) (540)
February 1996 Shares issued in payment of license fees 6,250 10.00 6 62,494
February 1996 Repurchase of common stock for cash (45,000) 0.08 (45) (3,555)
May 1996 Shares issued for cash net of issue costs of
$3,214,628 2,875,000 16.25 2,875 43,501,247
July to Sept 1996 Adjustment to issue costs 1,218
July to Sept 1996 Exercise of stock options 31,291 10.59 31 331,314
July to Sept 1996 Redemption of fractional shares (3) 12.00 (0) (36)
Unrealized loss on investment securities
Net loss for the period ended September 30, 1996
----------------------------------------------------
Balances at September 30, 1996 13,770,182 13,770 133,442,030
====================================================
DEFICIT
ACCUMULATED
UNREALIZED DURING THE TOTAL
LOSS ON DEVELOPMENT STOCKHOLDERS'
DATE DESCRIPTION INVESTMENTS STAGE EQUITY
---- ----------- ------------- ------------ -------------
Feb to Mar 1992 Shares issued for cash 149,600
June to Dec 1992 Shares issued for cash net of issue costs of
$744,966 42,340,034
November 1992 Repurchase of common stock through forgiveness
of note receivable (250,000)
Repurchase of common stock for cash (3,750)
Net loss for the period ended December 31, 1992 (2,930,285) (2,930,285)
---------------------------------------------
Balances at Decenber 31, 1992 (2,930,285) 39,305,599
October 1993 Shares issued in payment of license fees 500,000
Net loss for the year ended December 31, 1993 (10,804,878) (10,804,878)
---------------------------------------------
Balances at Decenber 31, 1993 (13,735,163) 29,000,721
March 1994 Shares issued for cash net of issue costs of
$1,251,739 19,095,384
Unrealized loss on investment securities (172,809) (172,809)
Net loss for the year ended December 31, 1994 (14,762,117) (14,762,117)
---------------------------------------------
Balances at Decenber 31, 1994 (172,809) (28,497,280) 33,161,179
March 1995 Shares issued in payment of license fees 600,000
April to Aug 1995 Exercise of stock options for cash 4,125
November 1995 Shares issued for cash net of issue costs of
$2,904,274 27,095,726
Unrealized loss on investment securities 211,267 211,267
Net loss for the year ended December 31, 1995 (18,023,923) (18,023,923)
---------------------------------------------
Balances at Decenber 31, 1995 38,458 (46,521,203) 43,048,374
Jan to June 1996 Exercise of stock options 29,672
Jan to June 1996 Redemption of fractional shares (540)
February 1996 Shares issued in payment of license fees 62,500
February 1996 Repurchase of common stock for cash (3,600)
May 1996 Shares issued for cash net of issue costs of
$3,214,628 43,504,122
July to Sept 1996 Adjustment to issue costs 1,218
July to Sept 1996 Exercise of stock options 331,345
July to Sept 1996 Redemption of fractional shares (36)
Unrealized loss on investment securities (132,960) (132,960)
Net loss for the period ended September 30, 1996 (14,765,584) (14,765,584)
---------------------------------------------
Balances at September 30, 1996 (94,502) (61,286,787) 72,074,511
=============================================
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PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
December 10,
1991
(Incorporation)
Nine Months Ended Through
September 30, September 30,
1996 1995 1996
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (14,765,584) $ (13,146,270) $ (61,286,787)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,202,884 1,170,273 5,019,465
Amortization of investment premiums (135,877) 110,856 236,473
Common stock issued in payment of license fees -- 600,000 1,159,000
Loss on sale of furniture and equipment 315 63,174
Change in certain assets and liabilities:
Interest receivable 429,116 (336,100)
Grants and royalties receivable (142,683) (142,683)
Prepaid expenses 373,695 (12,543) (298,016)
Other assets, net 3,613 (1,043) (4,145)
Accounts payable (1,019,630) (160,197) 616,081
Compensation and benefits (416,333) (136,205) 503,129
Clinical development costs 108,025 (172,368) 984,157
Other accrued expenses 71,318 (63,689) 152,791
Long-term liability (227,508) 507,086 234,478
------------- ------------- -------------
Net cash used in operating activities (14,518,649) (11,304,100) (53,098,983)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of investment securities (87,656,851) (13,007,643) (222,162,502)
Sales of investment securities 81,394,672 22,637,557 178,694,894
Purchases of furniture and equipment (514,430) (258,178) (12,565,489)
Proceeds from sale of furniture and equipment 100 -- 40,100
Issuance of note receivable -- -- (250,000)
------------- ------------- -------------
Net cash (used) provided in investing activities (6,776,509) 9,371,736 (56,242,997)
------------- ------------- -------------
Cash provided by financing activities
net proceeds from issuance of common stock 43,862,181 4,125 132,484,300
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 22,567,023 (1,928,239) 23,142,320
Cash and cash equivalents at beginning of period 575,297 2,873,792
------------- ------------- -------------
Cash and cash equivalents at end of period $ 23,142,320 $ 945,553 $ 23,142,320
============= ============= =============
Supplemental schedule of noncash investing and
financing activities:
Stock issued to extinguish long term-liability 62,500 62,500
Repurchase of common stock through forgiveness of
note receivable 250,000
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PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
(1) BASIS OF PRESENTATION
The accompanying financial statements and related notes have been
prepared pursuant to Securities and Exchange Commission rules and regulations
for interim financial statements. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The accompanying financial statements
and related notes should be read in conjunction with the audited financial
statements for the year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements in this Quarterly Report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All such forward-looking statements
involve risks and uncertainties, including, without limitation, relating to the
Company's limited operating history and anticipated future losses, uncertainties
relating to the Company's future profitability and ability to meet its capital
needs, product development, FDA approval, government regulation, competition,
market acceptance and other risks detailed in the Company's Prospectus dated
April 25, 1996 filed with the Securities and Exchange Commission pursuant to
Rule 424(b).
RESULTS OF OPERATIONS
Overview
The Company develops drugs for the treatment of serious human infectious
diseases where there is a significant need for improved therapy. Since its
incorporation in December 1991, the Company has been engaged in research and
development, clinical trials and administrative activities. The Company's most
advanced drug candidate, TOBI(TM) (tobramycin for inhalation), is a stable,
premixed, proprietary formulation of the antibiotic tobramycin for delivery by
inhalation. In October 1996, the Company completed Phase III clinical trials of
TOBI for the treatment of chronic pseudomonal lung infections in patients with
cystic fibrosis. The Company's second drug candidate, PA-1648, a novel
derivative of the antibiotic rifampin, is being developed for the treatment of
MAC, a tuberculosis-like disease, in AIDS patients, and tuberculosis.
PathoGenesis is currently in Phase I clinical trials for PA-1648. The Company
has also selected PA-824, a newly synthesized antibiotic, for further research
as a drug candidate for tuberculosis.
Financial results for the first nine months of 1996 reflect a planned
increase in operating expenses for activities related to advancing potential
products through the development process. Such activities include product
development and clinical trials. The Company expects to invest in additional
clinical, regulatory and product development efforts over the next few years.
The Company currently has limited sources of revenue, has incurred
losses since its inception and has an accumulated deficit through September 30,
1996 of $61,286,787. The Company expects that operating losses will continue
and increase for at least the next few years as total costs and expenses
continue to increase due principally to the advancement of the Company's
clinical development programs through various phases of clinical trials and, if
successful, the cost of commercializing its first products. The Company's
results of operations may vary significantly from period to period depending on
several factors, such as the timing of certain expenses and the progress of the
Company's research and development efforts.
In August 1996, the Company exercised its option for an additional 26,000
square feet of combined laboratory and office space contiguous to the Company's
principal facility in Seattle, Washington. Approximately one-half of the
additional space will be occupied by the Company and the remainder will be
subleased for approximately four years. The Company is currently negotiating a
lease agreement relating to an 18,000 square foot facility in Clinton, New
Jersey, in which it plans to establish an operations support center.
Revenue
In April 1996, the Company was awarded a competitive grant of $470,000 for
two years by the United States Food and Drug Adminstration Office of Orphan
Products Development to support the Company's recently completed Phase III
clinical trials of TOBI for the treatment of chronic pseudomonal lung infections
in cystic fibrosis patients. Revenue of $41,039 was earned from this grant in
the quarter ended September 30, 1996.
In May 1996, the Company entered into a distribution agreement with Bohdan
Automation, Inc. ("Bohdan") pursuant to which Bohdan has agreed to manufacture
and sell a proprietary combinatorial chemistry system invented by the Company.
Revenue of $118,000 was earned from this arrangement in the quarter ended
September 30, 1996.
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THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Total operating expenses for the quarter ended September 30, 1996
increased by $1,481,531 to $5,936,185 from $4,454,654 for the quarter ended
September 30, 1995. Research and development expense for the third quarter
increased by $1,382,660 to $4,940,519 in 1996 from $3,557,859 for the comparable
period in 1995. Such increase was due primarily to increases in clinical
development activity. General and administrative expense for the third quarter
increased by $98,871 to $995,666 in 1996 from $896,795 for the comparable period
in 1995. This increase was due to higher personnel and professional costs
relating to marketing, investor relations and higher premiums for directors' and
officers' liability insurance in the current quarter.
Other income primarily represents investment income from the Company's
investment securities. In the third quarter of 1996, investment income, net
increased by $678,253 to $988.434 from $310,181 for the comparable period in
1995. Such increase was due primarily to higher average invested cash balances.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Total operating expenses for the nine months ended September 30, 1996
increased by $3,286,284 to $17,356,847 from $14,070,563 for the nine months
ended September 30, 1995. Research and development expense for the nine months
ended September 30, 1996 increased by $3,171,280 to $14,437,674 from $11,266,394
for the comparable period in 1995. This increase resulted primarily from the
planned increase in product development and clinical trials. General and
administrative expense for the nine months ended September 30, 1996 increased by
$115,004 to $2,919,173 from $2,804,169 for the comparable period in 1995. This
increase was due to higher personnel and professional costs relating to
marketing and investor relations and higher premiums for directors' and
officers' liability insurance in the current period.
Other income primarily represents investment income from the Company's
investment securities. In the nine months ended September 30, 1996, investment
income, net increased by $1,384,127 to $2,308,420 from $924,293 for the
comparable period in 1995. This increase was due primarily to higher average
invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily by
the issuance of equity securities. Through September 30, 1996, the Company has
raised $61,331,268 from private sales of Common Stock and $70,599,848 from two
public offerings of Common Stock. Through September 30, 1996, the Company has
earned net interest and investment income of $6,351,892 from investments.
The Company's combined cash, cash equivalents and investment securities
totaled $66,278,952 at September 30, 1996, an increase of $28,832,118 from the
balance at December 31, 1995. This increase was due primarily to the net
proceeds from the public offering of 2,875,000 shares of Common Stock in May
1996. The primary uses of cash during the quarter ended September 30, 1996, were
to finance the Company's operations and working capital requirements. From the
Company's inception through September 30, 1996, the Company purchased
approximately $12.6 million of property and equipment.
The Company plans to continue its policy of investing excess funds in
government securities and investment grade, interest-bearing securities
primarily with a maturity of one and one half years or less.
The Company anticipates that its existing capital resources should be
sufficient to meet its capital requirements through the second quarter of 1998.
Until such time as the Company can generate sufficient levels of cash from
operations, the Company will have to continue to finance future cash needs
through some or all of the sources previously used or through other means. The
Company does not expect to generate a positive internal cash flow for at least a
few years due to the expected increase of spending for research and clinical
development programs and the expected cost of commercializing its first
products. The Company may need to arrange additional financing for the future
operation of the business, including the commercialization of its drug
candidates currently under development. There can be no assurances that such
additional financing can be obtained, and if obtained, at reasonable terms.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security-
Holders
On July 10, 1996 the Company held its Annual Meeting of
Stockholders. The holders of 13,735,927 shares of Common Stock
of the Company were entitled to vote at the meeting and the
holders of 9,989,225 shares of Common Stock, or 72.7% of
shares entitled to vote at the meeting, were represented by
proxy. No stockholders were present in person. The following
actions took place:
1. The holders of 9,956,300 shares of Common Stock voted for
the election of Alan R. Meyer to continue to serve as director
of the Company and the holders of 32,925 shares of Common
Stock abstained from voting. The holders of 9,954,217 shares
of Common Stock voted for the election of Michael J.
Montgomery to continue to serve as director of the Company and
the holders of 35,008 shares of Common Stock abstained from
voting. No stockholders voted against either of the nominees.
2. The stockholders approved a proposal to adopt the Company's
1996 Stock Option Plan for Non-Employee Directors. The holders
of 9,677,788 shares of Common Stock voted for the proposal,
the holders of 180,752 shares of Common Stock voted against
the proposal and the holders of 130,685 shares of Common Stock
abstained from voting.
3. Finally, the stockholders ratified the appointment of KPMG
Peat Marwick LLP, as independent accountants of the Company
for the fiscal year ending December 31, 1997. The holders of
9,965,897 shares of Common Stock voted for the ratification,
the holders of 15,818 shares of Common Stock voted against the
ratification and the holders of 7,510 shares of Common Stock
abstained from voting.
Item 5. Other Information
On November 7, 1996, the Board of Directors of the
Company voted to expand the numbers of members of the Board of
Directors of the Company to nine members and elected Elizabeth
M. Greetham as a Director of the Company. Ms. Greetham is a
portfolio manager with Weiss Peck & Greer, LLC, a New
York-based money management firm, having responsibilities for
healthcare investments. Ms. Greetham currently serves as a
director with several bio-pharmaceutical firms.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K None.
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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.
PATHOGENESIS CORPORATION
Date: November 13, 1996 By: WILBUR H. GANTZ
------------------------------------------
Wilbur H. Gantz
President and Chief Executive Officer
Date: November 13, 1996 By: ALAN R. MEYER
------------------------------------------
Alan R. Meyer
Senior Vice President and Chief
Financial Officer
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