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 March 31, 1997
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
incorporation or organization) Identification No.)
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 May 12, 1997, the number of shares outstanding of the registrant's Common
Stock, par value $.001 per share, was 16,140,354 shares.
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS
March 31, December 31,
1997 1996
------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 46,901,922 $ 14,785,818
Investment securities 61,031,402 45,901,978
Interest receivable 328,562 298,437
Other current assets 623,057 823,092
------------- --------------
Total current assets 108,884,943 61,809,325
------------- --------------
Restricted securities 675,000 675,000
------------- --------------
Property and equipment, at cost:
Leasehold improvements 6,920,331 6,766,935
Furniture and equipment 6,736,718 5,967,110
------------- --------------
13,657,049 12,734,045
Less accumulated depreciation and amortization 5,756,628 5,320,039
------------- --------------
Net property and equipment 7,900,421 7,414,006
------------- --------------
Other assets, net 134,733 100,370
------------- --------------
Total assets $117,595,097 $ 69,998,701
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,115,956 $ 812,259
Compensation and benefits 717,815 774,258
Clinical development costs 1,219,411 818,629
Other accrued expenses 533,208 569,068
------------- --------------
Total current liabilities 3,586,390 2,974,214
------------- --------------
Long-term liability $ 24,568 $ 98,273
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 16,049,260 shares and 13,930,760
shares at March 31, 1997 and December 31, 1996,
respectively 16,049 13,931
Additional paid-in capital 188,110,945 134,727,920
Unrealized loss on investment securities (131,534) (30,204)
Deficit accumulated during the development stage (74,011,321) (67,785,433)
------------- --------------
Total stockholders' equity 113,984,139 66,926,214
------------- --------------
Total liabilities and stockholders' equity $117,595,097 $69,998,701
============= ==============
Page 1
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
Number of
common Price
shares per Common
Date Description outstanding share Stock
---- ----------- ------------ ----- ------
Feb to Mar 1992 Shares issued for cash 1,870,000 $0.08 1,870
June to Dec 1992 Shares issued for cash net of issue costs of $744,966 4,308,500 10.00 4,309
November 1992 Repurchase of common stock through forgiveness
of note receivable (25,000) 10.00 (25)
Repurchase of common stock for cash (46,875) 0.08 (47)
Net loss for the period ended December 31, 1992
------------------------------------
Balances at December 31, 1992 6,106,625 6,107
October 1993 Shares issued in payment of license fees 50,000 10.00 50
Net loss for the year ended December 31, 1993
------------------------------------
Balances at December 31, 1993 6,156,625 6,157
March 1994 Shares issued for cash net of issue costs of $1,251,739 1,690,677 12.00 1,690
Unrealized loss on investment securities
Net loss for the year ended December 31, 1994
------------------------------------
Balances at December 31, 1994 7,847,302 7,847
March 1995 Shares issued in payment of license fees 50,000 12.00 50
April to Aug 1995 Exercise of stock options for cash 413 10.00 1
November 1995 Shares issued for cash net of issue costs of $2,904,274 3,000,000 10.00 3,000
Unrealized gain on investment securities
Net loss for the year ended December 31, 1995
------------------------------------
Balances at December 31, 1995 10,897,715 10,898
Redemption of fractional shares (48) 12.00 (0)
February 1996 Shares issued in payment of license fees 6,250 10.00 6
February 1996 Repurchase of common stock for cash (45,000) 0.08 (45)
May 1996 Shares issued for cash net of issue costs of $3,213,410 2,875,000 16.25 2,875
Shares issued from cash and cashless exercise of options & warrants 196,843 10.82 197
Unrealized loss on investment securities
Net loss for the year ended December 31, 1996
------------------------------------
Balances at December 31, 1996 13,930,760 13,931
Jan to Mar 1997 Exercise of stock options for cash 18,500 11.49 18
March 1997 Shares issued for cash net of issue costs of $3,527,419 2,100,000 27.00 2,100
Unrealized loss on investment securities
Net loss for the period ended March 31, 1997
------------------------------------
Balances at March 31, 1997 16,049,260 16,049
[RESTUBBED TABLE CONTINUED FROM ABOVE]
Deficit
accumulated
Additional Unrealized during the Total
paid-in loss on development Stockholders'
Date capital investments stage equity
---- -------------- ------------- -------------- -----------
Feb to Mar 1992 147,730 149,600
June to Dec 1992 42,335,725 42,340,034
November 1992
(249,975) (250,000)
(3,703) (3,750)
(2,930,285) (2,930,285)
-------------------------------------------------------------------------
42,229,776 (2,930,285) 39,305,599
October 1993 499,950 500,000
(10,804,878) (10,804,878)
-------------------------------------------------------------------------
42,729,726 (13,735,163) 29,000,721
March 1994 19,093,694 19,095,384
(172,809) (172,809)
(14,762,117) (14,762,117)
-------------------------------------------------------------------------
61,823,421 (172,809) (28,497,280) 33,161,179
March 1995 599,950 600,000
April to Aug 1995 4,124 4,125
November 1995 27,092,726 27,095,726
211,267 211,267
(18,023,923) (18,023,923)
-------------------------------------------------------------------------
89,520,221 38,458 (46,521,203) 43,048,374
(576) (576)
February 1996 62,494 62,500
February 1996 (3,555) (3,600)
May 1996 43,502,465 43,505,340
1,646,871 1,647,068
(68,662) (68,662)
(21,264,230) (21,264,230)
-------------------------------------------------------------------------
134,727,920 (30,204) (67,785,433) 66,926,214
Jan to Mar 1997 212,545 212,563
March 1997 53,170,480 53,172,580
(101,330) (101,330)
(6,225,888) (6,225,888)
-------------------------------------------------------------------------
188,110,945 (131,534) (74,011,321) 113,984,139
Page 1
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
December 10,
1991
Three Months Ended (Incorporation)
March 31, Through
----------------------------- March 31,
1997 1996 1997
------------- ----------- --------------
Revenue:
Grants & royalties $ 86,238 $ -- $ 526,118
Operating expenses:
Research and development 5,822,712 4,490,958 63,924,250
General and administrative 1,340,646 833,305 18,718,171
-------------- ----------- --------------
Total operating expenses 7,163,358 5,324,263 82,642,421
-------------- ----------- --------------
Operating Loss (7,077,120) (5,324,263) (82,116,303)
Other income (expense):
Investment income, net 882,053 546,288 8,357,100
Other expense (30,821) (12,442) (252,118)
-------------- ------------ -------------
Net other income 851,232 533,846 8,104,982
-------------- ------------ -------------
Net loss $ (6,225,888) $(4,790,417) $(74,011,321)
============== ============ =============
Net loss per common share $ (0.43) $ (0.44)
============== ============
Weighted average common shares outstanding 14,383,942 10,874,857
============== ============
Page 1
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
December 10,
1991
(Incorporation)
Three Months Ended Through
March 31, March 31,
1997 1996 1997
--------------------------- --------------
Cash flows from operating activities:
Net loss $(6,225,888) $(4,790,417) $(74,011,321)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 444,805 393,677 5,880,368
Amortization of investment premiums (discounts) (32,724) - 306,543
Common stock issued in payment of license fees - - 1,159,000
Loss on sale of property and equipment 8,321 - 71,495
Change in certain assets and liabilities: -
Interest receivable (30,125) 374,691 (328,562)
Prepaid expenses 200,035 262,193 (623,057)
Other assets, net (34,363) 1,289 (134,733)
Accounts payable 303,697 (1,205,906) 1,115,956
Compensation and benefits (56,443) (336,612) 777,815
Clinical development costs 400,782 613,515 1,219,411
Other accrued expenses (35,860) 11,698 533,208
Long-term liability (73,705) (80,099) 24,568
------------ ------------- --------------
Net cash used in operating activities (5,131,468) (4,755,971) (64,009,309)
------------ ------------- --------------
Cash flows from investing activities:
Purchases of investment securities (33,588,098) (2,969,377) (284,592,570)
Sales of investment securities 18,390,069 12,563,263 222,448,092
Purchases of property and equipment (941,541) (17,757) (13,954,384)
Proceeds from sale of property and equipment 2,000 - 42,100
Issuance of note receivable - - (250,000)
------------ ------------- --------------
Net cash (used) provided in investing activities (16,137,570) 9,576,129 (76,306,762)
------------ ------------- --------------
Cash provided by financing activities
net proceeds from issuance of common stock 53,385,142 12,148 187,217,993
------------ ------------- --------------
Net increase (decrease) in cash and cash
equivalents 32,116,104 4,832,306 46,901,922
Cash and cash equivalents at beginning of period 14,785,818 575,297 -
------------ ------------- --------------
Cash and cash equivalents at end of period $ 46,901,922 $ 5,407,603 $ 46,901,922
============ ============= ==============
Page 1
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 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, 1996.
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.
(2) Public Offering
In March 1997 the Company completed a public offering of 2,100,000
shares of Common Stock resulting in net proceeds to the Company of
approximately $53.2 million.
6
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.
Such forward-looking statements involve known and unknown risks,
uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, uncertainties
related to the Company's absence of products and dependence on TOBI,
government regulation, the development of drug candidates,
competition and pharmaceutical pricing. Further information regarding
such factors are discussed in PathoGenesis' 1996 Annual Report on
Form 10-K, which was filed with the Securities and Exchange
Commission.
Results of Operations
Overview
The Company develops novel drugs to treat 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 lead
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 its two pivotal Phase III
clinical trials of TOBI for the treatment of chronic Pseudomonas aeruginosa
lung infections in people with cystic fibrosis. The Company intends to file a
New Drug Application ("NDA") for TOBI in cystic fibrosis patients with the
United States Food and Drug Administration ("FDA") in the second quarter of
1997. The FDA has agreed to an expedited review of such NDA; however, there
can be no assurance as to the timing of such filing or the outcome or timing
of the FDA's review of such filing. The Company also intends to commence Phase
II clinical trials of TOBI in patients suffering from bronchiectasis (a form
of severe chronic bronchitis) and tuberculosis during 1997. The Company's
second drug candidate, PA-1648, a derivative of the antibiotic rifampin, is
being developed for the treatment of tuberculosis. The Company intends to
commence Phase II clinical trials of PA-1648 in tuberculosis patients during
1997. The Company is also developing PA-824, a proprietary antibiotic, to
treat tuberculosis.
Financial results for the first three months of 1997 reflect a
planned increase in operating expenses for activities related to advancing
potential products through the development process. Such activities include
product development, clinical trials and marketing activities. The Company
expects to invest in additional clinical, regulatory and product development
efforts over the next few years.
The Company currently has no sources of revenue from any of its drug
candidates, has incurred losses since its inception and had an accumulated
deficit through March 31, 1997 of $74,011,321. The Company expects that
operating losses will continue and increase for at least the next year as its
research and development, clinical testing and marketing activities expand.
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 March 1997 the Company completed a public offering of 2,100,000 shares
of Common Stock resulting in net proceeds to the Company of approximately
$53.2 million.
Three Months Ended March 31, 1997 and 1996
Revenue from grants and royalties was $86,238 in the first quarter of
1997. The Company did not have any revenue in the comparable period in 1996.
Revenues in the first quarter of 1997 represented income received from a two
year competitive grant from the FDA and royalties from sales of a proprietary
combinatorial chemistry system invented by the Company.
Research and development expense for the first quarter increased by
$1,331,754 to $5,822,712 in 1997 from $4,490,958 for the comparable period in
1996. Such increase was due primarily to increases in clinical development
activity. General and administrative expense for the first quarter increased
by $507,341 to $1,340,646 in 1997 from $833,305 for the comparable period in
1996. This increase was due to higher personnel and professional costs
relating to marketing, finance and investor relations. The Company expects
general and administrative expense to increase in
7
future periods as the Company begins to implement a selling and marketing
program and expands its staff and facilities.
Other income primarily represents investment income from the Company's
investment securities. In the first quarter of 1997, investment income, net
increased by $335,765 to $882,053 from $546,288 for the comparable period in
1996. Such 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 March 31, 1997, the Company has raised
$61,331,268 from private sales of Common Stock and $123,773,646 from public
offerings of Common Stock. Through March 31, 1997, the Company has earned net
interest and investment income of $8,357,100 from investments.
The Company's combined cash, cash equivalents and investment securities
totaled $107,933,324 at March 31, 1997, an increase of $47,245,528 from the
balance at December 31, 1996. This increase was due primarily to the net
proceeds to the Company from the public offering of 2,100,000 shares of Common
Stock in March 1997. The primary uses of cash and investments during the
quarter ended March 31, 1997, were to finance the Company's operations and
working capital requirements. From the Company's inception through March 31,
1997, the Company purchased approximately $14.0 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 an expected maturity of one and one half years or less.
The Company anticipates that its existing capital resources should be
sufficient to meet its operating expenses and capital requirements through at
least the next 24 months. 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 the next two 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 its 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.
8
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
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K None.
9
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: May 14, 1997 By: /s/ Wilbur H. Gantz
--------------------
Wilbur H. Gantz
President and Chief
Executive Officer
Date: May 14, 1997 By: /s/ Alan R. Meyer
---------------------
Alan R. Meyer
Senior Vice President
and Chief Financial
Officer
10