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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 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 0-19117
IMMULOGIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3397957
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
610 Lincoln Street, Waltham, MA 02451
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 466-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
requirement for the past 90 days. Yes X No
--- ---
Number of shares of $.01 par value common stock outstanding as of November 4,
1998: 20,367,672
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IMMULOGIC PHARMACEUTICAL CORPORATION
INDEX TO FORM 10-Q
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements and
Notes
Unaudited Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits 13
Reports on Form 8-K 13
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IMMULOGIC PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,898 $ 8,437
Investments 14,498 19,068
Prepaid expenses and other current assets 474 561
-------- --------
Total current assets 26,870 28,066
Property and equipment, net 4,435 6,685
Investments 22,422 24,788
Other assets 49 49
-------- --------
Total assets $ 53,776 $ 59,588
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 466 $ 539
Deferred rent 700 1,016
Accrued payroll and payroll taxes 206 1,796
Security deposit on sublease 500 --
Accrued expenses and other current liabilities 532 1,893
-------- --------
Total current liabilities 2,404 5,244
Other long-term liabilities 275 325
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Total liabilities 2,679 5,569
Stockholders' equity:
Preferred stock - $.01 par value;
1,000,000 shares authorized; no shares issued
or outstanding -- --
Common stock - $.01 par value; 40,000,000 shares
authorized; 20,367,672 and 20,340,727 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively 204 203
Additional paid-in capital 185,297 185,250
Accumulated deficit (134,404) (131,434)
-------- --------
Total stockholders' equity 51,097 54,019
-------- --------
Total liabilities and stockholders' equity $ 53,776 $ 59,588
======== =========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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IMMULOGIC PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Sponsored research revenues $ 219 $ 462 $ 1,181 $ 1,382
Operating expenses:
Research and development 1,434 3,113 4,242 13,117
General and administrative 556 965 1,936 5,249
-------- -------- -------- --------
Total operating expenses 1,990 4,078 6,178 18,366
-------- -------- -------- --------
Operating loss (1,771) (3,616) (4,997) (16,984)
Interest income 694 834 2,027 2,576
-------- -------- -------- --------
Net loss $ (1,077) $ (2,782) $ (2,970) $(14,408)
======== ======== ======== ========
Basic and diluted net loss per
common share $ (0.05) $ (0.14) $ (0.15) $ (0.71)
======== ======== ======== ========
Weighted average number of
common shares outstanding 20,366 20,270 20,360 20,251
======== ======== ======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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IMMULOGIC PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
---------- ---------
Cash flows for operating activities:
Net loss $(2,970) $(14,408)
Adjustments used to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 644 1,768
Write-down of leasehold improvements 200 --
Rent received for leasehold improvements 249 --
Gain on sale of equipment (19) --
Employer 401K stock match 48 135
Change in assets and liabilities:
Prepaid and other current assets 87 2
Accounts payable (73) (412)
Sublease deposit 500 --
Other current and long-term liabilities (3,317) (2,279)
------- --------
Total adjustments (1,681) (786)
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Net cash used in operating activities (4,651) (15,194)
Cash flows from investing activities:
Purchase of equipment and improvements -- (609)
Proceeds from sale of equipment 1,176 --
Purchase of short term investments (24,068) (30,222)
Maturities of short term investments 28,638 32,016
Purchase of long term investments -- (14,042)
Maturities of long term investments 2,366 11,460
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Net cash provided by (used in) investing activities 8,112 (1,397)
Cash flows from financing activities:
Proceeds from exercise of stock options -- 70
------- --------
Net cash provided by financing activities -- 70
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Net increase (decrease) in cash and cash equivalents 3,461 (16,521)
Cash and cash equivalents, beginning of period 8,437 23,742
------- --------
Cash and cash equivalents, end of period $11,898 $ 7,221
======= ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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IMMULOGIC PHARMACEUTICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting of only normally recurring adjustments) which are
necessary, in the opinion of management, for a fair presentation of results of
the interim periods presented. The statements do not include all information and
footnote disclosures required by generally accepted accounting principles and
therefore should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. The results of operations and cash flows
for the interim periods presented are not necessarily indicative of the results
of operations and cash flows for the full fiscal year.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP
98-5), "Accounting for the cost of start-up activities". SOP 98-5 requires all
costs of start-up activities (as defined by the SOP) to be expensed as incurred.
The Company has determined that adoption of SOP 98-5 will have no impact on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has determined that adoption of SFAS 133, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, will have no impact on
its consolidated financial statements.
NOTE C - NET LOSS PER SHARE
Basic net loss per share is the same as diluted net loss per common share for
the three and nine months ended September 30, 1998 and 1997, respectively.
Certain securities were not included in the computation of the Company's diluted
earnings per share for the three and nine months ended September 30, 1998 and
1997, respectively because they would have an anti-dilutive effect due to the
Company's net loss for each period. As of September 30, 1998 and 1997, these
securities included 1,561,627 stock options and 2,263,904 stock options
respectively.
NOTE D - SUBLEASE SECURITY DEPOSIT
During the first quarter of 1998, the Company received a security deposit in the
amount of $500,000 in accordance with the sublease agreement for its Waltham, MA
facility.
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NOTE E - LICENSE AGREEMENTS
During the second quarter of 1998, the Company signed an exclusive license
agreement, except in Japan, with Heska Corporation. The Company licensed the
worldwide exclusive rights, except in Japan, to develop and commercialize its
recombinant allergen technology for diagnosis, immunotherapy, and gene therapy
for both companion animals and humans. The Company may receive license fees,
milestone payments, and royalties for both veterinary and human applications.
The license is non-exclusive in Japan, where ImmuLogic licensed its recombinant
allergen technology for Japanese cedar on a non-exclusive basis to Sankyo Co.,
Ltd in May 1998. Total revenues recorded under these two agreements totaled
$200,000 for the period ending September 30, 1998.
NOTE F - MANUFACTURING AGREEMENT
In July 1998, the Company entered into an agreement with Chesapeake Biological
Laboratories Inc. for the latter to provide development and manufacturing
services for the Company's cocaine and nicotine vaccine products.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Revenues for the third quarter of 1998 were $219,000 compared to $462,000 for
the third quarter of 1997. For the first nine months of 1998, revenues were
$1,181,000 consisting primarily of sponsored research revenues from the National
Institute of Health (NIH) for a grant related to the research and development of
a cocaine vaccine, license revenues related to the company's recombinant
allergen technology, and research funding from Schering AG, Germany (Schering)
related to a joint development and collaboration agreement in the Company's
multiple sclerosis program which ended as of March 31, 1998. For the first nine
months of 1997, revenues were $1,382,000, consisting primarily of research
funding from Schering related to the aforementioned joint development and
collaboration agreement in the Company's multiple sclerosis program and research
revenues from the NIH.
OPERATING EXPENSES
Total operating expenses for the third quarter of 1998 decreased $2,088,000 or
51.2% to $1,990,000 as compared to the third quarter of 1997. For the first nine
months of 1998, total expenses decreased by $12,188,000 or 66.4% to $6,178,000
as compared to the first nine months of 1997. The decrease in operating expenses
in both the three and nine-month periods was primarily due to the Company's
restructuring, which occurred during 1997 (the "Restructuring'). Specifically,
on a year-to-date basis, reduced compensation and related expenses as a result
of lower headcount ($9,140,000), the sublease of a portion of the Company's
facility and related savings ($1,067,000) and reduced expenditures for the
Company's discontinued ALLERVAX(R) CAT and RAGWEED programs ($1,801,000)
contributed to the savings.
INTEREST INCOME
Interest income for the third quarter of 1998 was $694,000 compared to $834,000
for the third quarter of 1997, a decrease of $140,000 or 16.8%. For the first
nine months of 1998, interest income was $2,027,000 compared to $2,576,000 for
the first nine months of 1997, a decrease of $549,000 or 21.3%. The decrease in
interest income for both the quarter and year-to-date periods resulted from a
lower available cash and investment balance as compared to the same periods in
the prior year.
NET LOSS
The Company reported a net loss of $1,077,000 ($(0.05) per share) for the third
quarter of 1998 compared to a net loss of $2,782,000 ($(0.14) per share) for the
third quarter of 1997, a decrease of $1,705,000 or 61.3%. For the first nine
months of 1998, the Company reported a net loss of $2,970,000 ($(0.15) per
share) compared to a net loss of $14,408,000 ($0.71) per share) for the
comparable 1997 period. The decrease in net loss in both the three and
nine-month periods was primarily due to the Restructuring, offset in part by
lower interest income as compared to the same periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investments were $48,818,000 at September 30, 1998
compared to $52,293,000 at December 31, 1997. Net cash used in operations for
the nine months ended September 30, 1998 was $4,651,000 as compared to
$15,194,000 in the comparable 1997 period. The decrease of $10,543,000 was due
primarily to the Restructuring. In addition, the Company received a security
deposit in the amount of $500,000 in accordance with the sublease agreement for
its Waltham, MA
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facility. Offsetting these savings was a decrease in accounts payable and
accrued expenses of $3,340,000 due to the payment of expenses accrued as of
December 31, 1997 and reduced interest income for the first nine months of 1998
as compared to the same period of the prior year.
The Company has funded its operations to date primarily through the sale of
equity securities, sponsored research revenues, license payments, and earnings
on invested capital. The Company has expended substantial funds for the research
and development of its product candidates, and may in the future expend
substantial funds for further research and development of its product
candidates. The Company may seek to obtain additional funds for these purposes
through equity or debt financings, collaborative arrangements with corporate
partners, or from other sources. No assurance can be given that such additional
funds will be available to the Company for such purposes on acceptable terms, if
at all. Insufficient funds could require the Company to delay, scale back, or
eliminate certain of its research and development programs or to license third
parties to develop products or technologies that the Company would otherwise
develop itself. The Company anticipates that its existing capital resources will
enable it to maintain its current and planned operations through at least
December 31, 2000.
YEAR 2000
The Company is conducting a review of software and computer hardware products
used both within the Company and by third parties which assist the Company in
managing and operating its business to ensure that such products and systems
will be "Year 2000" compliant. The Year 2000 problem is the result of computer
programs being written to recognize two digits rather than four to define the
applicable year causing computer programs to interpret a date using "00" as the
year 1900 rather than the year 2000, which could result in product failures or
miscalculations. The Company is undertaking actions to ensure that such products
and systems will continue to function properly in the year 2000. The Company
expects that all products and systems used by the Company to manage and operate
its business will be Year 2000 compliant by mid 1999, to the extent that they
are not already compliant. The Company intends to achieve such compliance
primarily through regular updates and upgrades of such products and systems and
does not expect the cost of achieving such compliance to be material. While the
Company believes that software used to manage its business operations will be
Year 2000 compliant, the Company may experience disruptions in its business
operations as a result of use by customers and suppliers of the products and
systems that is not Year 2000 compliant.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP
98-5), "Accounting for the cost of start-up activities". SOP 98-5 requires all
costs of start-up activities (as defined by the SOP) to be expensed as incurred.
The Company has determined that adoption of SOP 98-5 will have no impact on it's
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has determined that adoption of SFAS 133, which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, will have no impact on
its consolidated financial statements.
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FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," expects," intends" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could affect the future operating results
of the Company, including, without limitation, the factors set forth with
respect to availability of funds and those set forth in this section and under
the heading "Factors Which May Affect Future Operating Results" and elsewhere in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
as filed with the Securities and Exchange Commission, and the information
contained in this Quarterly Report on Form 10-Q should be read in light of such
factors.
RESTRUCTURING OF OPERATIONS. In 1997, in connection with the reorganization of
the Company's development plans, the Company suspended its ALLERVAX(R) CAT,
ALLERVAX(R) RAGWEED and its injectable multiple sclerosis program. The Company
announced that it would continue its technical efforts in two programs: vaccines
for drugs of abuse and recombinant proteins directed to the diagnosis and
treatment of allergic diseases. In addition, the Company continued research on a
nonparental product for the treatment of multiple sclerosis in collaboration
with Schering which collaboration and research ended on March 31, 1998. The
Company is considering various strategic alternatives with respect to its
business, including further restructuring of operations, acquisition of
additional technology, strategic alliances, merger or sale or dissolution of the
Company. There can be no assurance that the Company will successfully complete
any further restructuring of operations, acquisition of additional technology,
strategic alliance, merger or sale in a timely manner or at all, or that any
such action would enhance the competitive position or future success of the
Company. The Company would be required to resolve any claims of creditors before
a dissolution of the Company and a distribution of all of the assets of the
Company to stockholders.
DEVELOPMENT STAGE OF THE COMPANY'S PRODUCTS. None of the Company's product
candidates have completed human clinical testing. All of the Company's product
candidates will require significant additional research, development,
preclinical and/or clinical testing, regulatory approval and an additional
commitment of resources prior to their successful development and
commercialization. In addition, given the Company's limited personnel and other
resources, the Company may be required to identify an appropriate strategic
partner to assist it in undertaking any or all of the foregoing activities.
There can be no assurance that the Company will be able to identify such a
strategic partner or that the Company will not have to relinquish significant
rights to its product candidates or technology in order to obtain such a
partner.
GOVERNMENT REGULATION. The production and marketing of the Company's products
and its ongoing research and development activities are subject to regulation by
numerous governmental authorities in the United States and other countries. The
rigorous preclinical and clinical testing requirements and regulatory approval
process can take a number of years and require the expenditure of substantial
resources. Delays in obtaining regulatory approvals would adversely affect the
marketing of products developed by the Company and the Company's ability to
receive product revenues or royalties. In addition, the Company cannot predict
the extent to which government regulations might have an adverse effect on the
production and marketing of the Company's products.
COMPETITION. The biotechnology and pharmaceutical industries are subject to
rapid and significant technological change. Competitors of the Company in the
United States and abroad are numerous and include, among others, major
pharmaceutical and chemical companies, specialized biotechnology firms,
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universities and other research institutions. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any which are being developed by the Company or
which would render the Company's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials or pharmaceutical products and obtaining the United States Food and Drug
Administration (FDA) and other regulatory approvals of products for use in
health care. Accordingly, the Company's competitors may succeed in obtaining FDA
approval for products more rapidly than the Company. If the Company commences
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it has limited or no experience.
PATENTS AND PROPRIETARY RIGHTS. The patent position of biotechnology and
pharmaceutical firms is highly uncertain and involves complex legal and factual
questions. There is no consistent policy regarding the breadth of claims allowed
in biotechnology patents. Accordingly, there can be no assurance that patent
applications relating to the Company's products or technology will result in
patents being issued or that, if issued, the patents will afford protection
against competitors with similar technology. In addition, companies that obtain
patents claiming products or processes that are necessary for or useful to the
development of the Company's products can bring legal actions against the
Company claiming infringement. The Company may be required to obtain licenses
from others to develop, manufacture or market its products. There can be no
assurance that the Company will be able to obtain such licenses on commercially
reasonable terms, if at all, or that the patents underlying the licenses will be
valid and enforceable.
In addition, the Company is aware of one issued European patent and one pending
European patent application belonging to third parties which may adversely
affect the Company's ability to commercialize, license, or sell its multiple
sclerosis therapeutic candidate. There may be additional domestic and foreign
patent applications pending, of which the Company is unaware, and which may
affect its ability to commercialize any of its products.
Some of the Company's know-how and technology is not patentable. To protect its
rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Further, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology.
PRODUCT LIABILITY. The testing, marketing and sale of human health care products
entail an inherent risk of allegations of product defects, and there can be no
assurance that substantial product liability claims will not be asserted against
the Company. To manage its potential liability, the Company maintains clinical
trial liability insurance coverage and seeks to include indemnity provisions in
its contracts with clinical investigators. These indemnities generally do not
protect the Company against certain of its own actions such as those involving
its negligence or misconduct. In some cases, the Company is required to
indemnify its investigators and others against its own actions. All such
indemnities are subject to negotiation and their terms and scope may vary.
The Company bears the risk that an indemnifying party may not have the financial
resources to fulfill its obligations. In addition, the Company could be
materially and adversely affected if it were required
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to pay damages or incur defense expenses in connection with an indemnity claim
or beyond the level of its insurance coverage. There is also no assurance that
adequate product liability insurance will be available at acceptable cost, if at
all, if and when the Company's products are commercialized.
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS. As the Company
continues its research, development and clinical testing and expands into areas
and activities requiring additional expertise such as production and marketing,
recruiting and retaining qualified scientific and other personnel will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such personnel on acceptable terms. The
failure to attract and retain management personnel or to develop additional
expertise could adversely affect the Company's business.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
Exhibit
Number Exhibit
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27 Financial Data Schedule
(b) Reports on Form 8-K: No Current Reports on Form 8-K were
filed during the quarter ended
September 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.
IMMULOGIC PHARMACEUTICAL CORPORATION
-------------------------------------
(Registrant)
Date: 11/4/98 /s/ J. Joseph Marr
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J. Joseph Marr, M.D.
President and Chief Executive Officer
Date: 11/4/98 /s/ J. Richard Crowley
- ------------------------------- -----------------------
J. Richard Crowley
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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