1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 31, 2000
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: 0-22788
AXYS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2969941
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 829-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required 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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001
par value, was 35,252,547 as of April 30, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
AXYS PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)*
Consolidated Balance Sheets -- March 31, 2000 and December 3
31, 1999....................................................
Consolidated Statements of Operations -- Three months ended 4
March 31, 2000 and 1999.....................................
Consolidated Statements of Cash Flows -- Three months ended 5
March 31, 2000 and 1999.....................................
Notes to Consolidated Financial Statements -- March 31, 6
2000........................................................
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults Upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures........................................................... 16
- ---------------
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
filed with the Securities and Exchange Commission on March 8, 2000.
2
3
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2000 1999(1)
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 48,484 $ 23,577
Marketable investments.................................... -- 3,080
Accounts receivable, trade................................ 4,861 4,786
Inventory................................................. 2,072 2,258
Prepaid expenses and other current assets................. 2,239 1,524
--------- ---------
Total current assets.............................. 57,656 35,225
Property and equipment, net................................. 18,254 18,873
Other long-term investment.................................. 1,500 --
Note receivable from officer................................ 480 671
Other assets................................................ 949 965
--------- ---------
Total Assets...................................... $ 78,839 $ 55,734
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,337 $ 4,563
Accrued compensation...................................... 2,657 2,980
Other accrued liabilities................................. 3,592 5,284
Deferred revenue.......................................... 1,327 2,083
Current portion of capital lease and debt obligations..... 26,392 23,646
--------- ---------
Total current liabilities......................... 36,305 38,556
Capital lease and debt obligations, net of current
portion................................................... 42 57
Minority interest in joint venture.......................... 2,665 3,074
Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 325,601 291,328
Accumulated other comprehensive loss...................... (71) (70)
Accumulated deficit....................................... (285,703) (277,211)
--------- ---------
Total stockholders' equity........................ 39,827 14,047
--------- ---------
Total Liabilities and Stockholders' Equity........ $ 78,839 $ 55,734
========= =========
- ---------------
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statement at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
3
4
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues
Collaboration and license revenue......................... $ 1,931 $ 8,662
Product and service revenue............................... 5,060 3,142
------- -------
Total revenue..................................... 6,991 11,804
Operating expenses
Cost of goods sold........................................ 1,124 548
Research and development.................................. 11,301 15,925
General and administrative................................ 3,888 3,201
Restructuring charge...................................... (545) --
------- -------
Total operating expenses.......................... 15,768 19,674
------- -------
Operating loss.............................................. (8,777) (7,870)
Interest income............................................. 161 907
Interest expense............................................ (284) (507)
Equity interest in loss of joint venture.................... -- (563)
Minority interest........................................... 408 285
------- -------
Net loss.................................................... $(8,492) $(7,748)
======= =======
Basic and diluted net loss per share........................ $ (.26) $ (.26)
======= =======
Shares used in computing basic and diluted net loss per
share..................................................... 32,067 30,321
======= =======
See accompanying notes.
4
5
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (8,492) $ (7,748)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Non-cash restructuring charge.......................... (545) --
Depreciation and amortization.......................... 1,953 2,743
Gain on sale of fixed asset............................ (1) (22)
Equity interest in loss of joint venture............... -- 538
Forgiveness of note receivable from officer............ 191 175
Changes in assets and liabilities:
Accounts receivable.................................. (75) (2,389)
Inventory............................................ 186 (331)
Prepaid expenses and other current assets............ (715) 1,155
Other assets......................................... 16 (1,542)
Accounts payable..................................... (2,226) (370)
Accrued compensation................................. (323) (1,538)
Other accrued liabilities............................ (1,147) (66)
Deferred revenue..................................... (756) (3,891)
-------- --------
Net cash and cash equivalents used in operating
activities................................................ (11,934) (13,286)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases................................................. -- (8,235)
Maturities................................................ 3,080 9,259
Minority interest........................................... (409) 8,510
Proceeds from sale of fixed asset........................... 5 22
Other long-term investment.................................. (1,500) --
Purchase of property and equipment.......................... (1,338) (2,477)
-------- --------
Net cash and cash equivalents (used in) provided by
investing activities...................................... (162) 7,079
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............. 34,273 651
Proceeds from notes payable and lease financing........ 20,000 --
Principal payments on notes payable and capital
leases................................................ (17,269) (1,945)
-------- --------
Net cash and cash equivalents provided by (used in)
financing activities.................................. 37,004 (1,294)
-------- --------
Effect of exchange rate change.............................. (1) --
-------- --------
Net increase/(decrease) in cash and cash equivalents........ 24,907 (7,501)
Cash and cash equivalents, beginning of period.............. 23,577 36,261
-------- --------
Cash and cash equivalents, end of period.................... $ 48,484 $ 28,760
======== ========
See accompanying notes.
5
6
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by the Company according to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to state fairly the financial position and results of operations as of
and for the periods indicated. The results of operations for the three-month
period ended March 31, 2000 are not necessarily indicative of the results to be
expected for subsequent quarters or the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
Reclassifications
Certain 1999 amounts have been reclassified to conform to the March 31,
2000 presentations.
2. EQUITY FINANCING
In February 2000, the Company completed a private placement in which it
sold an aggregate 3.5 million newly issued shares of its common stock to
selected institutional and other accredited investors for $31.5 million.
3. OTHER LONG-TERM INVESTMENT
In March 2000, the Company entered into a collaboration agreement with a
privately held biotechnology company located in San Diego, CA, to discover and
develop anti-cancer compounds that induce apoptosis (programmed cell death).
Under the terms of the collaboration agreement, each company will fund its
own research as part of the collaboration. Axys will provide the privately held
company with up to approximately 700,000 compounds for screening over an
estimated 18-month period and Axys will provide preclinical and clinical
development for any leads. The Company also made a $1.5 million equity
investment in the privately held company for a minority ownership interest. The
investment is carried at cost.
4. RESTRUCTURING CHARGE
In December 1999, the Company completed the closing of its San Diego, CA
operations and relocated its oncology genomics activities to its South San
Francisco headquarters. As a result of this action, a one-time charge of $7.0
million was taken during the third quarter of 1999, of which $2.2 million
related to severance and other employee-related costs, $1.7 million related to
facilities costs, $1.8 million related to the disposal of assets, and $1.3
million in other costs associated with the restructuring. During the first
quarter of 2000, the restructuring reserve was reduced by actual cash payments
and additional subleases of the San Diego facility.
6
7
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
The following table summarizes the Company's 2000 restructuring charge
activity for the three months ended March 31, 2000 (in thousands):
RESERVE RESERVE
BALANCE BALANCE
DESCRIPTION AT 12/31/99 OTHER PAYMENTS AT 3/31/00
----------- ----------- ----- -------- ----------
Severance and benefits............................. $(1,095) $ -- $674 $(421)
Facilities......................................... (748) 545 88 (115)
Contractual research commitments................... (81) -- 81 --
------- ---- ---- -----
Total.................................... $(1,924) $545 $843 $(536)
======= ==== ==== =====
The Company anticipates that the remaining accruals will be utilized by
December 31, 2000.
5. INVENTORY
Inventories associated with the Company's Axys Advanced Technologies, Inc.
("AAT") subsidiary are stated at the lower of cost (first-in, first-out) or
market. At March 31, 2000, inventories consisted of the following (in
thousands):
Raw materials....................... $ 181
Finished goods...................... 1,891
------
$2,072
======
6. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following:
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
Machinery and equipment.............................. $ 30,140 $ 29,119
Purchased software................................... 1,981 1,946
Furniture and office equipment....................... 2,728 2,702
Leasehold improvements............................... 14,620 14,614
Construction in progress............................. 466 227
-------- --------
$ 49,935 $ 48,608
Less accumulated depreciation and amortization....... (31,681) (29,735)
-------- --------
$ 18,254 $ 18,873
======== ========
7. COMPREHENSIVE LOSS
Total comprehensive loss was ($8,493,000) and ($7,718,000) for the three
months ended March 31, 2000 and 1999, respectively.
7
8
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
8. SEGMENT INFORMATION
Segment information consists of the following:
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
------- --------
(IN THOUSANDS)
Revenues:
Drug discovery........................................ $ 1,415 $ 8,509
AAT................................................... 5,340 3,114
Other affiliated businesses........................... 236 181
------- --------
Total consolidated............................ $ 6,991 $ 11,804
======= ========
Net income (loss):
Drug discovery........................................ $(8,405) $ (7,821)
AAT................................................... 2,184 1,315
Other affiliated businesses........................... (2,271) (1,242)
------- --------
Total consolidated............................ $(8,492) $ (7,748)
======= ========
Assets:
Drug discovery........................................ $65,432 $ 85,534
AAT................................................... 9,877 6,392
Other affiliated businesses........................... 3,530 8,851
------- --------
Total consolidated............................ $78,839 $100,777
======= ========
Other affiliated businesses represent the results of Akkadix's and PPGx's
principal activities, which commenced in 1998 and 1999, respectively. The
Company's ownership of Akkadix was reduced from 52% to 38% in August 1999.
Therefore, Akkadix's activities are excluded above for the three months ended
March 31, 2000. Both Akkadix and PPGx are funded by third parties.
9. REVOLVING LINE OF CREDIT
The Company has a $30.0 million revolving line of credit with Foothill
Capital Corporation. The balance outstanding at March 31, 2000 was $20.0
million. The line is subject to the terms of a security agreement, and is fully
secured by the Company's cash and cash equivalents, and marketable investments,
if any. Interest is due on the line monthly and is computed at the reference
rate for Wells Fargo Bank, which approximated 9.0% at March 31, 2000. The line
is available through July 2002.
10. SUBSEQUENT EVENTS
Sale of AAT
In April 2000, the Company closed a definitive merger agreement to combine
AAT with Discovery Partners International, Inc. ("DPI"), a privately held
company. Under the terms of the agreement, AAT was merged with a subsidiary of
DPI and the Company primarily received as consideration 7,425,000 shares of
common stock in DPI (which represents an approximately 43% minority ownership
position), $50,000 in cash, $550,000 in a form of note receivable and a warrant
to purchase 200,000 additional shares of DPI at $8 per share. The Company will
account for its investment in DPI under the equity method of accounting.
8
9
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
Following is the March 31, 2000 Pro Forma Condensed Consolidated Balance
Sheet of Axys giving effect to the sale of AAT as if the sale had occurred on
March 31, 2000:
(IN THOUSANDS)
Cash and cash equivalents................................... $ 48,534
Other current assets........................................ 2,396
--------
Total current assets.............................. 50,930
Property and equipment, net................................. 15,229
Equity investment in affiliate.............................. 41,008
Other assets................................................ 3,403
--------
Total assets...................................... $110,570
========
Total liabilities................................. $ 39,924
Total stockholders' equity........................ 70,646
--------
Total liabilities and stockholders' equity........ $110,570
========
Following is certain information, which is presented as Pro Forma Condensed
Consolidated Statements of Operations giving effect to the sale of AAT as if the
sale had occurred on January 1, 1999:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2000 1999
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................... $ 1,651 $ 24,971
Operating loss......................... $(10,894) $(53,219)
Net loss............................... $(10,795) $(54,191)
Basic and diluted net loss per share... $ (.34) $ (1.78)
Buy Back of Certain Technology Rights from Akkadix
In April 2000, the Company exchanged 2,000,000 shares of Akkadix's
preferred stock for the return of certain license technology rights.
Subsequently, some of these rights were effectively transferred to AAT in
exchange for a warrant to purchase 200,000 shares of DPI. The Company's
ownership of Akkadix reduced from 38% at March 31, 2000 to approximately 27%
after this exchange.
9
10
AXYS PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains both historical information and
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include projections and other statements about events that may occur
at some point in the future. The Company's actual results could differ
significantly from those described in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in this section as well as under "Item 1. Business,"
including, "What Factors Could Cause Our Results to Differ Significantly from
Those You Might Expect" and "What Matters Should Stockholders Consider with
Respect to the Company?", in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 filed with the Securities and Exchange Commission.
OVERVIEW
The Company is an early-stage biopharmaceutical company focused on the
discovery, development and commercialization of small molecules. The Company
invests its own resources in discovering and developing therapeutics for the
treatment of various types of cancer and collaborates with large pharmaceutical
companies in discovering therapeutics for chronic diseases for which there are
large markets.
The Company previously formed three affiliated companies to provide capital
to Axys for its drug discovery operations:
- Axys Advanced Technologies, Inc. ("AAT"), which began operations in 1996
and was set up as a wholly owned subsidiary in 1999, markets
combinatorial chemistry compounds, enabling technology and services.
Financial results of AAT were consolidated into Axys' financial results
through April 2000 when a merger involving AAT was consummated and AAT
became a subsidiary of Discovery Partners International, Inc. ("DPI"). In
conjunction with the merger, Axys received as consideration 7,425,000
shares of common stock in DPI (which represents a minority ownership
position), $50,000 in cash, $550,000 note receivable and a warrant to
purchase 200,000 additional shares of DPI at $8 per share.
- Akkadix Corporation ("Akkadix"), an agricultural biotechnology company
founded in 1998, is 38% owned by Axys at March 31, 2000. In April 2000,
Axys exchanged shares of Akkadix's preferred stock for certain license
technology rights in connection with the DPI/AAT transaction described
above. The Company's ownership percentage following this exchange is
approximately 27%. Akkadix has incurred losses since inception. Akkadix
is separately managed and is funded by third parties. Akkadix financial
results were consolidated into Axys financial results though August 1999.
In September 1999, Axys' ownership in Akkadix fell below 50%. As a
result, Akkadix is now accounted for under the equity method.
- PPGx, Inc. ("PPGx"), a pharmacogenomics subsidiary founded in 1999, is
82% owned by Axys and 18% owned by PPD, Inc. ("PPD"). Financial results
of PPGx are consolidated into Axys' financial results. It has incurred
losses since inception, is separately managed and has been funded by
third parties.
To date, the Company has not generated any product revenue in its drug
discovery programs and does not expect to generate such revenues for at least
several years. The Company expects its sources of revenue, if any, for the next
several years to consist of payments under corporate partnerships and interest
income. The process of developing the Company's products will require
significant additional research and development, preclinical testing and
clinical trials, as well as regulatory approval. These activities, together with
general and administrative expenses, are expected to result in significant
operating losses for the foreseeable future. The Company expects that losses
will fluctuate from quarter to quarter, that such fluctuations may be
substantial, and that results from prior quarters may not be indicative of
future operating results. Axys will not receive product revenue or royalties in
its drug discovery programs unless the Company or its collaborative partners
complete clinical trials and successfully commercialize one or more of the
Company's products. In addition,
10
11
there can be no assurance that DPI, Akkadix or PPGx will ever generate funding
for the Company's drug discovery operations. As of March 31, 2000, the Company
had an accumulated deficit of $286 million. Included in the Company's
accumulated deficit at March 31, 2000 was approximately $147 million of acquired
in-process research and development from the acquisition of Khepri
Pharmaceuticals, Inc. in 1995 and the acquisition of Sequana Therapeutics, Inc.
in January 1998.
The Company is subject to risks common to early-stage drug discovery and
development companies, including risks inherent in its research and development
efforts and clinical trials, reliance on collaborative partners, the need for
future capital, enforcement of patent and proprietary rights, potential
competition and uncertainty of regulatory approval. In order for a product to be
commercialized, it will be necessary for the Company, and in some programs, its
collaborators, to conduct preclinical tests and clinical trials to demonstrate
efficacy and safety of product candidates, obtain regulatory clearances and
enter into manufacturing, distribution and marketing arrangements, as well as
obtain market acceptance. There can be no assurance that the Company will
generate revenues or achieve and sustain profitability in the future.
RESULTS OF OPERATIONS
REVENUES
Total revenue was $7.0 million for the three months ended March 31, 2000,
compared to $11.8 million for the same period in 1999. Revenue is made up of two
components, which are discussed below.
Collaboration and Licensing Revenues
The Company's collaboration and licensing revenues were $1.9 million for
the three months ended March 31, 2000, compared to $8.7 million for the same
period in 1999. The decrease was primarily due to wind-up of several
collaborations in 1999. The collaboration and licensing revenues for the three
months ended March 31, 2000 consisted of research support and license fees from
four collaborative partners, compared to the research support and license fees
from eight collaborative partners for the same period in 1999.
Product and Service Revenues
The Company's product and service revenues were $5.1 million for the three
months ended March 31, 2000, compared to $3.1 million for the same period in
1999. The increase was primarily due to the increase in compound libraries
shipped in the first quarter of 2000 under five AAT agreements, as well as the
addition of PPGx's service revenue, compared to the compounds shipped in the
first quarter of 1999 under three AAT agreements and the absence of PPGx service
revenue.
Cost of Goods Sold
The Company's cost of goods sold was $1.1 million for the three months
ended March 31, 2000, compared to $548,000 for the same period in 1999. The
increase was primarily due to the greater number of compound libraries sold in
the first quarter of 2000 than in the first quarter of 1999 under the AAT
combinatorial chemistry agreements.
Research and Development
The Company's research and development expenses were $11.3 million for the
three months ended March 31, 2000, compared to $15.9 million for the same period
in 1999. The overall decrease for the first three months of 2000 was primarily
due to the shutdown of the San Diego operations and the conclusion of several
collaborations in gene identification in 1999. In addition, the Company's
results for the first quarter of 2000 do not include operations of Akkadix,
which is accounted for under the equity method, since the Company's ownership of
Akkadix was reduced from 52% to 38% in August 1999. Research and development
expenses for Akkadix for the three months ended March 31, 1999 were $209,000 and
were included in the Company's research and development expenses for the first
quarter of 1999. However, the decrease in research and
11
12
development expenses for the first quarter of 2000 was partially offset by the
increased research and development expenses of PPGx.
General and Administrative
The Company's general and administrative expenses were $3.9 million for the
three months ended March 31, 2000, compared to $3.2 million for the same period
in 1999. The increase was primarily due to the expanded activities of PPGx and
the additions to AAT's general and administrative department, including sales
and marketing staff, in 2000. This increase was partially offset by the
reduction of general and administrative expenses due to the shutdown of the
Company's San Diego operations in 1999. In addition, the amount of increase in
these expenses was further lessened by the exclusion of Akkadix's results in
2000 because the Company's ownership of Akkadix had fallen from 52% to 38% in
August 1999. General and administrative expenses for Akkadix for the three
months ended March 31, 1999 were $174,000.
Interest Income and Interest Expense
Interest income was $161,000 for the three months ended March 31, 2000,
compared to $907,000 for the same period in 1999. The decrease was primarily due
to the decrease in average cash and investment balances during the first quarter
of 2000, compared to the first quarter of 1999. Interest expense was $284,000
for the three months ended March 31, 2000, compared to $507,000 for the same
period in 1999. The decrease was primarily due to the lower debt balances on the
Company's revolving line of credit and capital lease arrangements during the
first quarter of 2000, compared to the first quarter of 1999.
Equity Interest in Loss of Joint Venture
There was no equity interest in loss of joint venture for the three months
ended March 31, 2000, compared to $563,000 for the same period in 1999. This
account represents the Company's 38% ownership of Akkadix starting with the
period that the Company's ownership fell to 38%, and a 50% ownership of a
subsidiary that was written off in June 1999. The change was primarily
attributed to the write-off of the 50% owned subsidiary and the discontinuance
of recording the Company's pro rata share of the net losses of Akkadix as the
book value of Akkadix has been reduced to zero.
Minority Interest
Minority interest represents a third party's share of a subsidiary's
operating income (loss), where the Company owns 51% to 99% of that subsidiary.
Minority interest was $408,000 for the three months ended March 31, 2000,
compared to $285,000 for the same period in 1999. This amount is the result of
the formation of the Company's majority owned subsidiaries, PPGx in 1999 and
Akkadix in 1998. Since the Company reports all of PPGx's expenses as its
expenses (see "General and Administrative" above), this one line allocates a
portion of PPGx's loss to the minority shareholders, reducing the Company's
operating loss. As a result of the reduction in the Company's ownership level in
Akkadix to less than 50% in August 1999, Akkadix's results of operations are
included in Equity Interest in Loss of Joint Venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of capital stock, corporate collaborative research
agreements, and sales of combinatorial chemistry compounds. From inception
through March 31, 2000, the Company realized approximately $217 million in net
proceeds from offerings of its capital stock. In addition, over the same period,
the Company realized approximately $206 million from its collaborative research
agreements and the sale of compound libraries.
The Company's principal sources of liquidity are its cash and cash
equivalents, which totaled $48.5 million as of March 31, 2000. The Company has a
$30.0 million line of credit under which $20.0 million was outstanding as of
March 31, 2000. The line is available through July 2002. PPGx has an $8.0
million line of credit that is guaranteed by PPD, Inc., its minority
shareholder, under which $6.0 million was outstanding as of March 31, 2000. This
line is available through June 2000. The Company's cash and cash equivalents at
12
13
March 31, 2000 include the cash and cash equivalents from its wholly owned and
majority owned subsidiaries, some of which is subject to certain restrictions on
use. The Company's cash and cash equivalents, and marketable investments, if
any, serve as security for its borrowings under its line of credit.
Net cash used in operating activities during the three-month period ended
March 31, 2000 was $11.9 million, compared to $13.3 million for the same period
in 1999. The change was primarily attributable to lower operating expenses in
2000 due to the shutdown of the San Diego operations in 1999. Cash used in
operating activities is expected to fluctuate from quarter to quarter depending
in part upon the timing and amounts, if any, of cash received from existing and
any new collaboration agreements.
The Company also spent approximately $1.3 million for the purchase of
property, plant and equipment during the three-month period ended March 31,
2000. The Company expects to acquire or lease additional equipment in connection
with future research and development activities. There were no material
commitments for capital expenditures outstanding at March 31, 2000. However, the
Company expects to enter into agreements pertaining to the construction of a
43,000 square foot medicinal chemistry building on leased property adjacent to
its corporate headquarters commencing the second quarter of 2000.
The Company's AAT subsidiary had approximately $22.3 million of backlog
from committed contracts for the sale of combinatorial chemistry libraries as of
March 31, 2000. The Company's consolidated financial statements will no longer
include any backlog after the sale of AAT in April 2000.
The Company's material commitments at March 31, 2000 included its
obligations to perform research under its collaboration agreements with Merck
and Aventis (for which the company is fully funded from its partners), its
obligations to develop, produce and deliver combinatorial compounds and transfer
related technology under AAT's combinatorial chemistry agreements with
Parke-Davis, Daiichi, Bristol-Myers Squibb, Aventis, and Allergan (for which the
Company receives payments in excess of its costs), and its obligations under its
line of credit. The Company believes that its existing cash and cash equivalents
(including the proceeds of the $31.5 million stock issuance described below) are
sufficient for the Company to fulfill its commitments to the lender under its
line of credit, which had a $20 million balance outstanding at March 31, 2000.
In February 2000, the Company completed a private placement of equity
financing agreements for the sale of an aggregate 3.5 million newly issued
shares of Axys Pharmaceuticals, Inc. common stock to selected institutional and
other accredited investors for $31.5 million in gross proceeds. The Company
intends to use net proceeds from this private placement for working capital and
other general corporate purposes.
The Company expects that existing cash and investments, revenues from
existing collaborations, and the net proceeds from its recently completed
private placement, together with debt financing which the Company believes is
available to it, will enable the Company to maintain current and planned
operations for a period of 15 to 21 months. The Company continues to actively
pursue a variety of financing alternatives.
In April 2000, the Company closed a definitive merger agreement to combine
AAT with Discovery Partners International, Inc. ("DPI"), a privately held
company. Under the terms of the agreement, AAT was merged with a subsidiary of
DPI and the Company primarily received as consideration 7,425,000 shares of
common stock in DPI (which represents an approximately 43% minority ownership),
$50,000 in cash, $550,000 note receivable and a warrant to purchase 200,000
additional shares of DPI at $8 per share. In May 2000, DPI filed a registration
statement with the Securities and Exchange Commission for a proposed public
offering of its common stock. As previously announced, it is the Company's
intention to monetize over time its ownership interest in DPI. However, the
monetization of the Company's investment in DPI is still uncertain.
The drug development process is expensive and the Company is at an early
stage of development. Therefore, the Company expects that it will continue to
need to raise money in the future until the Company achieves substantial product
or royalty revenues, if ever. The Company expects that it will continue to seek
additional funding from time to time through one or more of the following: new
collaborations, the extension of existing collaborations, the sale of its
interests in its affiliated businesses, or through public or private equity or
debt financings. Furthermore, the Company may obtain funds through arrangements
with collaborative partners or others that require the Company to give up rights
to technologies or products that it would
13
14
otherwise seek to develop or commercialize itself. The Company cannot be certain
that additional funding will be available or that, if available, the terms will
be acceptable. Existing stockholders will experience dilution of their
investment if additional funds are raised through private or public stock sales.
If adequate funds are not available, the Company may delay, reduce or eliminate
any of its research or development programs.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development and will need a substantial
amount of additional funding to continue to prosecute its research and
development programs. The Company's technologies are, in many cases, new and all
are still under development. All of its proposed products are in research or
development and will require significant additional research and development
efforts prior to any commercial use, including extensive and costly pre-clinical
and clinical testing, as well as lengthy regulatory approval involving many
complexities. The Company's research and development efforts may not be
successful, its proposed products may not prove to be safe and efficacious in
clinical trials, and no commercially successful products may ultimately be
developed by the Company. In addition, many of the Company's currently proposed
products are subject to development and licensing arrangements with its
collaborators. Therefore, the Company is dependent in many cases on the research
and development efforts of these collaborators. Moreover, the Company is
entitled only to a portion of the revenues, if any, realized from the commercial
sale of any of the proposed products covered by the collaborations. The Company
has experienced significant operating losses since inception and expects to
incur significant operating losses over at least the next several years. The
development of the Company's technology and proposed products will require a
commitment of substantial funds to conduct these costly and time-consuming
activities, which funds may not be available.
Should the Company or its collaborators fail to perform in accordance with
the terms of the applicable agreements, any consequent loss of revenue under the
collaboration agreements could have a material adverse effect on the Company's
business, financial condition and results of operations. The proposed products
under development by the Company have never been manufactured on a commercial
scale and it is possible that proposed products may not be able to be
manufactured at a cost or in quantities necessary to make them commercially
viable. The Company has no sales, marketing or distribution capability for its
proposed products. If any of the products subject to the Company's collaborative
agreements are successfully developed, the Company must rely on its
collaborators to market the products. The Company cannot ensure that any
collaborator's marketing efforts would be successful.
If the Company develops any products which are not subject to its
collaborative agreements, we must either rely on other pharmaceutical companies
to market the products or the Company must develop a marketing and sales force
with technical expertise and supporting distribution capability in order to
market the products directly. The Company cannot guarantee that these marketing
efforts would be successful.
The foregoing risks reflect the Company's early stage of development and
the nature of its industry and products. Also inherent in the Company's stage of
development are a number of additional risks, including competition, the
substantially greater financial resources of a number of its competitors, the
manufacturing challenges presented by the production of increasing numbers of
combinatorial chemistry compounds, uncertainties regarding protection of patents
and proprietary rights, government regulation, uncertainties related to clinical
trials and health care reform and the potential volatility of its stock price.
These risks and uncertainties are discussed further in "Items 1.
Business -- What Factors Could Cause Our Results to Differ Significantly from
Those You Might Expect?" and "-- What Other Matters Should Stockholders Consider
with Respect to the Company?" in the Company's Report on Form 10-K for the year
ended December 31, 1999, filed by the Company with the Securities and Exchange
Commission on March 8, 2000.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold derivative financial investments, derivative
commodity investments or other financial investments or engage in foreign
currency hedging or other transactions that exposes it to market risk. In
addition, due to the short-term nature of the Company's financial instruments,
market risk is not material.
14
15
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, the Company issued and sold 3,497,778 shares of common
stock at $9.00 per share in a private placement, receiving net proceeds of
approximately $29.5 million, after deducting estimated offering expenses. The
Company intends to use net proceeds from this transaction for working capital
and other general corporate purposes. The shares were purchased by institutional
and other accredited investors. In March 2000, the Company filed a registration
statement on Form S-3 with the Securities and Exchange Commission to register
for resale of all of the shares issued in the private placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
10.123* Collaborative Research and License Agreement between Axys
Pharmaceuticals, Inc. and Cytovia, Inc., dated March 15,
2000.
10.124* Fourth Amendment to the Research Collaboration and License
Agreement between Arris Pharmaceuticals Corporation and
Merck and Co., Inc., dated March 3, 2000.
10.125 Form of Stock Purchase Agreement between Axys
Pharmaceuticals, Inc. and various Investors, dated February
15, 2000.(1)
27 Financial Data Schedule.
- ---------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated herein by reference to the Registrant's statement on Form S-3
filed with the Securities and Exchange Commission on March 10, 2000 as
Exhibit 10.1.
B) REPORTS ON FORM 8-K
On February 21, 2000, the Company filed with the Commission a Current
Report on Form 8-K relating to the supplemental disclosure of financial
statements for Sequana Therapeutics, Inc. for the year ended December
31, 1997.
15
16
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.
AXYS PHARMACEUTICALS, INC.
Date: May 12, 2000 By: /s/ JOHN P. WALKER
------------------------------------
John P. Walker
Chief Executive Officer,
Chairman of the Board,
Director (Principal Executive
Officer and
Principal Financial Officer)
Date: May 12, 2000 By: /s/ MARK B. LUCKY
------------------------------------
Mark B. Lucky
Controller,
Director of Financial Planning &
Analysis
(Chief Accounting Officer)
16
17
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.123* Collaborative Research and License Agreement between Axys
Pharmaceuticals, Inc. and Cytovia, Inc., dated March 15,
2000.
10.124* Fourth Amendment to the Research Collaboration and License
Agreement between Arris Pharmaceuticals Corporation and
Merck and Co., Inc., dated March 3, 2000.
10.125 Form of Stock Purchase Agreement between Axys
Pharmaceuticals, Inc. and various Investors, dated February
15, 2000.(1)
27 Financial Data Schedule.
- ---------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated herein by reference to the Registrant's statement on Form S-3
filed with the Securities and Exchange Commission on March 10, 2000 as
Exhibit 10.1.
17