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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-22788
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AXYS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2969941
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 829-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 30,358,514 at April 30, 1999.
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AXYS PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) *
Consolidated Balance Sheets -- March 31, 1999 and December
31, 1998.................................................... 3
Consolidated Statements of Operations -- Three months ended
March 31, 1999 and 1998..................................... 4
Consolidated Statements of Cash Flows -- Three months ended
March 31, 1999 and 1998..................................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures 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
Signature............................................................ 17
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* 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, 1998,
filed with the Securities and Exchange Commission on March 31, 1999.
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AXYS PHARMACEUTICALS, INC.
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998(1)
----------- ------------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 28,760 $ 36,261
Marketable investments.................................... 35,277 36,456
Accounts receivable, trade................................ 4,529 2,140
Inventory................................................. 766 435
Prepaid expenses and other current assets................. 3,096 4,513
-------- --------
Total current assets.............................. 72,428 79,805
Property and equipment, net................................. 21,630 21,510
Investment in joint venture................................. 1,370 1,908
Note receivable from officer................................ 646 821
Intangible assets........................................... 3,814 2,200
Other assets................................................ 889 1,018
-------- --------
TOTAL ASSETS...................................... $100,777 $107,262
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,418 $ 3,788
Accrued compensation...................................... 2,694 4,232
Other accrued liabilities................................. 2,334 2,956
Deferred revenue.......................................... 4,807 8,698
Current portion of capital lease and debt obligations..... 9,227 9,872
-------- --------
Total current liabilities......................... 22,480 29,546
Capital lease and debt obligations, net of current
portion................................................... 16,070 16,816
Minority Interest........................................... 8,898 388
Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 290,942 290,291
Accumulated other comprehensive income.................... 30 116
Accumulated deficit....................................... (237,643) (229,895)
-------- --------
Total stockholders' equity........................ 53,329 60,512
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $100,777 $107,262
======== ========
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(1) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues
Collaboration and license revenue......................... $ 8,662 $ 8,351
Product and service revenue............................... 3,142 83
------- ---------
Total revenues.................................... 11,804 8,434
Operating expenses:
Cost of goods sold........................................ 548 446
Research and development.................................. 15,925 15,041
General and administrative................................ 3,201 3,432
Acquired in-process research and development.............. -- 124,888
------- ---------
Total operating expenses.......................... 19,674 143,807
------- ---------
Operating loss.............................................. (7,870) (135,373)
Interest income............................................. 907 1,381
Interest expense............................................ (507) (568)
Equity interest in loss of joint venture.................... (563) (457)
Minority interest........................................... 285 --
------- ---------
Net loss.................................................... $(7,748) $(135,017)
======= =========
Basic and diluted net loss per share........................ $ (.26) $ (4.69)
======= =========
Shares used in computing basic and diluted net loss per
share..................................................... 30,321 28,782
======= =========
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(7,748) $(135,017)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Depreciation and amortization............................. 2,743 2,072
Gain on sale of fixed asset............................... (22) --
Equity interest in loss on joint venture.................. 538 457
Forgiveness of note receivable from officer............... 175 125
Acquired in-process research and development.............. -- 124,888
Changes in assets and liabilities:
Accounts receivable.................................... (2,389) --
Inventory.............................................. (331) --
Prepaid expenses and other current assets.............. 1,155 1,305
Other assets........................................... (1,542) (2,791)
Accounts payable and accrued liabilities............... (1,974) (2,994)
Deferred revenue....................................... (3,891) (3,653)
------- ---------
Net cash and cash equivalents used in operating
activities................................................ (13,286) (15,608)
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases................................................. (8,235) (8,206)
Maturities................................................ 9,259 23,805
Minority interest........................................... 8,510 --
Acquisition, net of cash balances........................... -- 13,270
Proceeds from sale of fixed assets.......................... 22 --
Purchase of property and equipment.......................... (2,477) (830)
------- ---------
Net cash and cash equivalents provided by investing
activities................................................ 7,079 28,039
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 651 1,535
Proceeds from note receivable............................... -- 593
Principal payments on notes payable and capital leases...... (1,945) (1,630)
------- ---------
Net cash and cash equivalents (used in) provided by
financing activities...................................... (1,294) 498
------- ---------
Net increase (decrease) in cash and cash equivalents........ (7,501) 12,929
Cash and cash equivalents, beginning of period.............. 36,261 22,938
------- ---------
Cash and cash equivalents, end of period.................... $28,760 $ 35,867
======= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock and value of options and warrants
issued in acquisition..................................... $ -- $ 169,730
======= =========
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the
"Company"), focuses on transforming gene discoveries into drugs. Axys' business
is focused in three primary areas: (i) drug discovery and development programs
in collaboration with pharmaceutical and biotechnology companies, (ii) drug
discovery and development programs which are not partnered in the area of
oncology, and (iii) the spin out of affiliated businesses in combinatorial
chemistry, pharmacogenomics, and agricultural biotechnology.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Arris Pharmaceuticals Canada, Inc., and
Sequana Therapeutics, Inc. ("Sequana") and includes the accounts of Xyris
Corporation and PPGx, Inc. the Company's majority owned subsidiaries (See
"Formation of PPGx, Inc.", Note 3). All significant intercompany accounts and
transactions have been eliminated.
Sequana owns 50% of Genos, a joint venture with Memorial Sloan-Kettering
Cancer Center ("MSKCC"). This investment is accounted for under the equity
method.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the March 31,
1999 presentations.
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, 1999 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 1998 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
2. SECOND ROUND OF FINANCING FOR XYRIS CORPORATION
In February 1999, Xyris concluded the negotiation of an exclusive license
to all Axys technology in the field of agriculture (the "Technology License").
This resulted in the Company receiving additional shares of Xyris in exchange
for the Technology License.
Also in February 1999, Xyris completed a financing in which it raised
$4,500,000 from a third party. After this financing, the third party's
investment in Xyris totaled $5,000,000. Under the terms of the financing, the
Company granted the third party the right (the "Put Option") to require the
Company to purchase all of the third party's interest in Xyris in exchange for
that number of shares of the Company whose market value equals $5,000,000 at the
date of the exercise of the Put Option. The Put Option may be exercised at any
time between August 5, 1999 and February 5, 2001.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
The net effect of issuance of shares in connection with the Technology
License and in connection with the financing reduced the Company's ownership in
Xyris from 82% to 70%.
3. FORMATION OF PPGX, INC.
In February 1999, the Company announced the formation of a majority-owned
subsidiary, PPGx, Inc. ("PPGx") which is engaged in the business of providing
pharmacogenomic (the science of how genetic variations among individuals affects
drug safety and efficacy) products and services to the pharmaceutical industry.
In connection with the formation of PPGx, Axys contributed certain assets and
technology in exchange for an 82% ownership interest in PPGx. PPD, Inc. ("PPD"),
Axys' partner in PPGx, contributed certain assets, technology, cash and loan
guarantees in exchange for an 18% ownership interest in PPGx and the exclusive,
worldwide right to market the pharmacogenomic products and services of PPGx.
Under the terms of a shareholder agreement between the Company and PPD, PPD
has the option (the "PPD Option") to purchase 32% of PPGx from the Company at
various escalating prices until February 1, 2002. Under certain circumstances,
the Company has the option to put (the "Axys Put") 32% of PPGx to PPD at various
escalating prices until August 1, 2002. At such time as either the PPD Option or
the Axys Put are exercised, the Company would also become a co-guarantor of a
certain PPGx line of credit to the extent any borrowings are outstanding at that
time. Additionally, at any time after the fifth anniversary of the formation of
PPGx, the Company and, provided either the PPD Option or the Axys Put have been
exercised, PPD have the right to buy all of the outstanding equity interests in
PPGx at fair market value in accordance with the terms of buy-sell provisions of
the shareholder agreement.
4. INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or
market. At March 31, 1999, inventories consisted of the following (in
thousands):
Raw materials................................. $171
Finished goods................................ 595
----
$766
====
5. COMPREHENSIVE INCOME
Total comprehensive loss was ($7,718) and ($135,017) for the three months
ended March 31, 1999 and 1998, respectively.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
6. SEGMENT INFORMATION
Segment information consists of the following:
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
------- ---------
(IN THOUSANDS)
Revenues:
Drug discovery............................. $ 8,509 $ 7,851
ATD........................................ 3,114 583
Other...................................... 181 --
------- ---------
Total consolidated................. $11,804 $ 8,434
======= =========
Operating income (loss):
Drug discovery(1).......................... $(7,821) $(133,808)
ATD........................................ 1,315 (1,209)
Other...................................... (1,242) --
------- ---------
Total consolidated................. $(7,748) $(135,017)
======= =========
Other represents the results of PPGx's and Xyris' principal activities
which commenced in 1999.
- ---------------
(1) Includes $125 million in acquired in-process research and development
recorded in 1998 relating to the acquisition of Sequana Therapeutics, Inc.
in January 1998.
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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 the sections entitled "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 Annual
Report on Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
OVERVIEW
Since the company's founding in 1989, Axys has devoted most of its
resources to research and development programs. To date, the company's revenues
have resulted from its collaborative research programs with pharmaceutical
companies as part of its drug discovery business and more recently from sales of
chemical compound libraries as part of its Advanced Technologies Division
("ATD") combinatorial chemistry business.
The company's collaborative research programs generally contain one or more
of the following sources of revenue to the company:
- Research Support: Payments which are generally based on the number of
researchers Axys is committing to a particular program. These revenues
are recorded when earned by the company.
- License Fees: Payments generally made when a collaboration agreement is
signed. These revenues are recorded when the agreement is signed.
- Commitment Fees: Payments made in conjunction with the company's
commitment to perform certain funded research. These revenues are
recorded in equal periodic amounts over the course of the research
efforts.
- Milestone Payments: Payments which are based on the company or its
partner achieving certain technical or regulatory milestones in the
collaboration. These revenues are recorded upon the achievement of
mutually agreed upon milestones.
- Royalties: Upon commercialization of products resulting from a
collaboration, the company may earn royalties based on a percentage of
the revenue earned by the collaboration partner. These revenues would be
recorded when product sales result from the company's collaborations.
The company's sales of chemical compound libraries contain one or more of
the following sources of revenue to the company:
- Product Sales: As chemical compound libraries are shipped to customers of
the ATD, the company records revenue based on the contracted price per
compound.
- License Fees: Payments made when compound supply or technology license
agreements are signed. These revenues are recorded when the agreement is
signed.
- Commitment Fees: Payments made in conjunction with the ATD's commitment
to perform certain obligations under compound supply or technology
license agreements. These revenues are recorded in equal periodic amounts
over the course of the relevant agreement.
Although the sale of stock by the company to one of its partners is not a
source of revenue, unless sold at a premium to market, the company's
collaborative research programs occasionally include the sale of stock by the
company to the pharmaceutical company sponsoring the research.
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The company has not been profitable since inception and expects to incur
substantial losses for at least the next several years, primarily due to the
cost of its research and development programs, including preclinical studies and
human clinical trials. 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. As of
March 31, 1999, the company's accumulated deficit was approximately $238
million. Included in the company's accumulated deficit at March 31, 1999 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 in January 1998.
RESULTS OF OPERATIONS
REVENUES
Collaboration and licensing revenues
The company's collaboration and licensing revenues increased to $8.6
million for the three months ended March 31, 1999, compared to $8.4 million for
the same period in 1998. The change was primarily due to: (i) the increase in
technology licensing fees of $2,000,000; (ii) the commencement in December 1998
of research support payments in connection with an agreement with Rhone-Polenc
Rorer for the development of small molecule therapeutics that inhibit cathepsin
S, which may be associated with certain inflammatory diseases; and (iii) the
termination fee paid by Corange International, Ltd. in connection with the
termination of their collaboration in February 1999. These increases were offset
by lower revenues compared to the prior year due to the following: (i) the end
of the research funding in mid-1998 under the Pharmacia & Upjohn agreement for
the development of inhibitors of Factor Xa; (ii) the reduction in research
support in the Boehringer Ingelheim International GmbH agreement for the gene
identification program in asthma; and (iii) the conclusion of the Glaxo-Wellcome
Inc. agreement for the genomics work in the area of type II diabetes and related
conditions.
Product and service revenues
The company's product and service revenues increased to $3.1 million for
the three months ended March 31, 1999 compared to $83,000 for the same period in
1998. The increase was primarily due to an increase in the number of
combinatorial chemistry compounds shipped in 1999 under three ATD agreements, as
well as the inclusion of the service revenue recognized by PPGx, Inc., the
company's majority owned subsidiary formed in February 1999, compared to the
number of combinatorial chemistry compounds shipped in 1998 under one ATD
agreement.
Cost of Goods Sold
The company's cost of goods sold increased to $548,000 for the three months
ended March 31, 1999 compared to $446,000 for the same period in 1998. The costs
in 1999 are directly related to the costs of producing combinatorial chemistry
compounds. The costs in 1998 primarily reflect start up costs for the production
of combinatorial chemistry compounds.
Research and Development
The company's research and development expenses increased to $15.9 million
for the three months ended March 31, 1999, compared to $15.0 million for the
same period in 1998. In both periods research and development expenses included
the clinical costs associated with pursuing the company's own clinical programs.
In 1999 those costs related to the clinical trials of both ulcerative colitis
and psoriasis. In 1998 those costs related to the clinical trials of developing
an inhaled therapeutic for asthma. Other factors contributing to the increase
are primarily due to severance costs associated with the reduction in headcount
and include the research and development expenses of the company's newly formed
subsidiaries, PPGx, Inc. and Xyris Corporation.
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General and Administrative
The company's general and administrative expenses were $3.2 million for the
three months ended March 31, 1999 compared to $3.4 million for the same period
in 1998. The difference between periods was due to efficiencies applied in
combining general and administrative functions among the consolidating entities.
Interest Income and Interest Expense
Interest income decreased to $907,000 for the three months ended March 31,
1999, compared to $1.4 million for the same period in 1998. The decrease was
primarily due to the decrease in average cash and investment balances between
the periods. Interest expense decreased to $507,000 for the three months ended
March 31, 1999, compared to $568,000 for the same period in 1998. The decrease
was primarily due to the lower debt balances from the company's two lines of
credit and capital lease arrangements.
Equity Interest in Loss of Joint Venture
Equity interest in loss of joint venture increased to $563,000 for the
three months ended March 31, 1999, compared to $457,000 for the same period in
1998. This account represents the company's 50% portion of Genos' loss for the
period based on the company's 50% ownership of Genos.
Minority interest
Minority interest represents another investor's share of a subsidiary's
operating income (loss), where the company owns 51% to 99% of that subsidiary.
Income reported by the company, which is attributable to a minority owner was
$285,000 at March 31, 1999, compared to zero for the same period in 1998. This
amount is the result of the formation of the company's majority owned
subsidiaries, PPGx, Inc. and Xyris Corporation. Since the company records all of
the PPGx and Xyris operating expenses as our expenses, a portion of the losses
from these entities is allocated to the minority shareholders in these entities,
offsetting the company's operating loss.
IMPACT OF THE YEAR 2000
The Year 2000 problem or the "Y2K problem" is a problem that may arise at
the turn of the century in computers or other equipment utilizing microprocessor
technology. Some computer software programs and computer equipment, as well as
other equipment using embedded microprocessors, use two digit date fields rather
than four date digit fields (that is, "98" in the computer code refers to the
year "1998"). As a result, time-related functions in such software and equipment
may misinterpret dates after January 1, 2000 to refer to the twentieth century
rather than the twenty-first century (that is, "02" could be interpreted as
"1902" rather than "2002"). This could potentially cause system or equipment
shutdowns, failures or miscalculations, resulting in inaccuracies in computer
output. The Y2K problem is a global problem and has the potential to impact
virtually every company to one degree or another, including Axys.
The company has been addressing the Y2K problem by reviewing its core
information technology systems, including its servers, databases, desktop
computers, significant applications (whether licensed from third parties or
developed internally) and significant microprocessor-controlled equipment for
Y2K readiness. Because the Y2K problem potentially affects many other companies,
the company is also in the process of reviewing the Y2K readiness of its
vendors, service providers and other companies (including its collaboration
partners and customers) with whom the company has significant business
relationships ("Important Third Parties").
As the company completes these internal and external reviews, the company
has been prioritizing the responses it needs to take to address the Y2K problem,
to address the highest priorities first and to develop by the end of the second
quarter of 1999 such contingency plans as management believes to be prudent. The
company expects to update and revise this contingency plan throughout the
remainder of 1999 as additional information becomes known. With respect to the
company's core information technology systems, the review is complete and
modifications have been substantially completed. The review and modification
process of the
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desktop computers is substantially complete. The company expects to have
completed its review and to have made any necessary modifications or
replacements by the end of the second quarter of 1999. With respect to third
party software applications, the company expects to complete its review and to
replace or upgrade such applications by the end of the third quarter of 1999. In
this regard, the company has completed the replacement of its enterprise
management information system with a new system that is Y2K ready. With respect
to the few software applications the company has developed and licensed to third
parties, the company has completed its review of some of these applications and
believes them to be Y2K ready. The remaining applications are undergoing testing
and if determined not to be Y2K ready, the company expects to provide upgrades
to such applications, making them Y2K ready by the third quarter of 1999. With
respect to other internally-developed software applications, the company has
compiled a list of such applications and has completed the design of appropriate
tests. The company is in the process of running these tests and expects to
complete its review by the end of the second quarter. The company expects to
complete the replacement or upgrade of these applications during the second and
third quarters of 1999. Finally, with respect to other significant
microprocessor-controlled equipment, the company has identified and completed
its review of such equipment. The company expects to complete its test of such
equipment and to have made any necessary upgrades or replacements by the end of
the second quarter of 1999.
The review of the Y2K readiness of Important Third Parties is in-progress
and is expected to be substantially completed by the end of the second quarter
of 1999. Following completion, the company expects to assess the nature and
extent of the risk from non-readiness by such third parties and to either cease
doing business with such third parties, locate back-up businesses who are Y2K
ready, obtain reasonable assurances of Y2K readiness, or to implement other
appropriate contingency plans, by the end of 1999.
The total costs associated with the company's Y2K readiness efforts is
currently projected to be in the range of $250,000. Out-of-pocket expenditures
to date with respect to the Y2K problem have not been material and the time of
company personnel to address Y2K readiness has also not been material. Until the
reviews described above are completed, the company's estimates of the extent of
the expenditures that will be necessary to address the Y2K problem are subject
to change.
The company believes that its Y2K readiness review and the actions it
intends to take prior to the end of 1999 should result in the absence of
significant Y2K-related problems for the company's computer systems,
applications and microprocessor-controlled equipment. However, there can be no
assurances that the company will be able to complete its review of various
systems within the time frames indicated, that the company, will be completely
Y2K ready by the end of 1999 or that the company will not encounter Y2K-related
problems that could have a material adverse affect on the company's results of
operations and financial condition. In addition, the company cannot guarantee
the Y2K readiness of Important Third Parties and certain business disruptions
could occur, such as a financial institution's inability to process checks drawn
on bank accounts, to accept deposits or process wire transfers, an Important
Third Party's business failure, interruption in deliveries of equipment,
supplies and services from Important Third Parties, loss of voice and/or data
connections, loss of power to electrical facilities, and other business
interruptions which cannot be predicted. Accordingly, there can be no assurance
that Y2K-related problems of Important Third Parties will not have a material
adverse affect on the company's results of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The company has financed its operations since inception primarily through
private and public offerings of its capital stock and through corporate
collaborations. As of March 31, 1999, the company had realized approximately
$183 million in net proceeds from offerings of its capital stock. In addition,
the company had realized approximately $174 million since inception from its
corporate collaborations.
The company's principal sources of liquidity are its cash and investments,
which totaled $64 million as of March 31, 1999. The company has two lines of
credit under which it had borrowed $25.9 million under the agreements as of
March 31, 1999. The company has no additional borrowing capacity under these
agreements. The company is in discussions to refinance these borrowings.
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Net cash used in operating activities during the three-month period ended
March 31, 1999 was $13.3 million compared to $15.6 million in the same period in
1998. The change relates to the costs incurred in 1998 in relation to the
acquisition of Sequana Therapeutics, Inc., as well as the timing of cash
received under the company's collaboration or combinatorial chemistry compound
sales agreements. 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 or the sale
of combinatorial chemistry compound libraries.
The company also spent approximately $2.5 million for the purchase of
property, plant and equipment during the three months ended March 31, 1999.
Additional equipment is expected to be acquired or leased in connection with the
company's continuing research and development activities.
We expect that our existing money resources, including research and
development revenues from existing collaborations, will enable us to maintain
current and planned operations for at least the next two years. However, we
expect to raise substantial additional money to fund operations before the end
of this period. In addition, we will need to continue to raise money until we
achieve substantial product or royalty revenues.
We expect that we will seek additional funding through one or more of the
following: new collaborations, the extension of existing collaborations, through
sale of our interests in our affiliated businesses, or through public or private
equity or debt financings. Furthermore, we may obtain funds through arrangements
with collaborative partners or others that require us to give up rights to
technologies or products that we would otherwise seek to develop or
commercialize ourselves. We cannot be certain that additional funding will be
available or that the terms will be acceptable. Existing stockholders will
experience dilution of their investment if additional funds are raised by a
follow-on stock offering. If adequate funds are not available, we may delay,
reduce or eliminate any of our research or development programs.
CERTAIN BUSINESS RISKS
We are at an early stage of development. Our technologies are, in many
cases, new and all are still under development. All of our proposed products are
in research or development and will require significant additional research and
development efforts prior to any commercial use, including extensive preclinical
and clinical testing, as well as lengthy regulatory approval involving many
complexities. Our research and development efforts may not be successful, our
proposed products may not prove to be safe and efficacious in clinical trials
and no commercially successful products may ultimately be developed by us. In
addition, many of our currently proposed products are subject to development and
licensing arrangements with our collaborators. Therefore, we are dependent on
the research and development efforts of these collaborators. Moreover, we are
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. We have
experienced significant operating losses since our inception and expect to incur
significant operating losses over at least the next several years. The
development of our technology and proposed products will require a commitment of
substantial funds to conduct these costly and time consuming activities.
Should we or our 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 our business,
financial condition and results of operations. The proposed products under
development by us 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. We have no sales,
marketing or distribution capability for our proposed products. If any of the
products subject to our collaborative agreements are successfully developed, we
must rely on our collaborators to market the products. We cannot ensure that any
collaborator's marketing efforts would be successful.
If we develop any products which are not subject to our collaborative
agreements, we must either rely on other pharmaceutical companies to market our
products or we must develop a marketing and sales force with technical expertise
and supporting distribution capability in order to market our products directly.
We cannot guarantee that these marketing efforts would be successful.
13
14
The foregoing risks reflect our early stage of development and the nature
of our 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 our 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 our stock price.
These risks and uncertainties are discussed further in "Item 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, 1998, filed by the Company with the Securities and Exchange Commission on
March 31, 1999.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
14
15
AXYS PHARMACEUTICALS, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In February 1999, the company issued an option (the "Put Option") to The
Bay City Capital Fund I, L.P. ("BCC"), granting BCC the right to require the
company to purchase from BCC all of the 1,501,501 shares of Series A Preferred
Stock of Xyris Corporation (the "Xyris Stock") held by BCC. If the Put Option is
exercised, the company would purchase the Xyris Stock with shares of the
Company's Common Stock, at its then market price, with an aggregate market value
on the date the Put Option is exercised equal to $5,000,000, rounded down to the
nearest whole number of shares. The Put Option was granted in connection with
Series A Preferred Stock Purchase Agreement between BCC, Xyris Corporation and
the Company, whereby BCC purchased Series A Preferred Stock of Xyris Corporation
in connection with the additional financing of Xyris Corporation, a majority
owned agricultural biotechnology subsidiary of the company. The Put Option may
be exercised at any time between August 2, 1999 and February 2, 2001.
The issuance of the above securities were intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof, due
to, among other things, (i) the limited number of persons to whom the securities
were issued, (ii) the distribution of disclosure documents to the investor,
(iii) the fact that such investors represented and warranted to the company,
among other things, that such investors were acquiring the securities for
investment only and not with a view to the resale or distribution thereof, and
(iv) the fact that such investors were knowledgeable, sophisticated and
experienced in making investment decisions of this kind.
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
10.97 Employment Agreement, dated February 26, 1999, between the
John Walker and the Registrant.
10.98 Series A Preferred Stock Purchase Agreement, dated February
2, 1999 by and among Xyris Corporation, Bay City Capital
Fund I and the Registrant.
10.99 Third Amendment to Expansion Lease, dated August 24, 1998
between the Registrant and ARE-11099 North Torrey Pines,
LLC.
10.100 Fourth Amendment to Expansion Lease, dated March 31, 1999
between the Registrant and ARE-11099 North Torrey Pines,
LLC.
10.101 First Amendment to the Research Agreement, dated February
28, 1999 between the Registrant and Pharmacia & Upjohn, Inc.
15
16
10.102 Seventh Amendment to Standard Industrial Lease Multi-tenant,
dated February 13, 1998, between Shelton Corporation and the
Registrant.
10.103 Eighth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.
10.104 Ninth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.
10.105* Termination of Collaborative Research Agreement, dated
February 13, 1999 between Corange International, Ltd. and
the Registrant.
10.106* Termination Agreement, dated February 5, 1999 between
Pharmacia and Upjohn AB and the Registrant.
27 Financial Data Schedule
- ---------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit.
b) REPORTS ON FORM 8-K
None
16
17
AXYS PHARMACEUTICALS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AXYS PHARMACEUTICALS, INC.
Date: May 17, 1999
By: /s/ FREDERICK J. RUEGSEGGER
------------------------------------
Frederick J. Ruegsegger
Senior Vice President Finance and
Corporate
Development and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
17
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.97 Employment Agreement, dated February 26, 1999, between the
John Walker and the Registrant.
10.98 Series A Preferred Stock Purchase Agreement, dated February
2, 1999 by and among Xyris Corporation, Bay City Capital
Fund I and the Registrant.
10.99 Third Amendment to Expansion Lease, dated August 24, 1998
between the Registrant and ARE-11099 North Torrey Pines,
LLC.
10.100 Fourth Amendment to Expansion Lease, dated March 31, 1999
between the Registrant and ARE-11099 North Torrey Pines,
LLC.
10.101 First Amendment to the Research Agreement, dated February
28, 1999 between the Registrant and Pharmacia & Upjohn, Inc.
10.102 Seventh Amendment to Standard Industrial Lease Multi-tenant,
dated February 13, 1998 between Shelton Corporation and the
Registrant.
10.103 Eighth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.
10.104 Ninth Amendment to Standard Industrial Lease Multi-tenant,
dated November 18, 1998 between Shelton International
Holdings, Inc. and the Registrant.
10.105* Termination of Collaborative Research Agreement, dated
February 13, 1999 between Corange International, Ltd. and
the Registrant.
10.106* Termination Agreement, dated February 5, 1999 between
Pharmacia and Upjohn AB and the Registrant.
27 Financial Data Schedule
- ---------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit.