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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 SEPTEMBER 30, 1999
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 30,442,268 as of October 31, 1999.
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AXYS PHARMACEUTICALS, INC.
INDEX
PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)*
Consolidated Balance Sheets -- September 30, 1999 and
December 31, 1998......................................... 3
Consolidated Statements of Operations -- Three and nine
months ended September 30, 1999 and 1998.................. 4
Consolidated Statements of Cash Flows -- nine months ended
September 30, 1999 and 1998............................... 5
Notes to Consolidated Financial Statements -- September 30,
1999...................................................... 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures............................................................
18
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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
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (1)
------------- ------------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................... $ 4,099 $ 36,261
Marketable investments...................................... 39,118 36,456
Accounts receivable, trade.................................. 4,170 2,140
Inventory................................................... 793 435
Prepaid expenses and other current assets................... 3,004 4,513
--------- ---------
Total current assets........................................ 51,184 79,805
Property and equipment, net................................. 20,792 21,510
Investment in joint venture................................. -- 1,908
Note receivable from officer................................ 666 821
Intangible assets........................................... -- 2,200
Other assets................................................ 1,125 1,018
--------- ---------
Total Assets...................................... $ 73,767 $ 107,262
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,240 $ 3,788
Accrued compensation........................................ 2,971 4,232
Other accrued liabilities................................... 8,410 2,956
Deferred revenue............................................ 2,003 8,698
Current portion of capital lease and debt obligations....... 9,976 9,872
--------- ---------
Total current liabilities................................... 26,600 29,546
Capital lease and debt obligations, net of current
portion................................................... 23,355 16,816
Minority interest in joint venture.......................... 3,431 388
Stockholders' equity:
Preferred stock............................................. -- --
Common stock................................................ 291,229 290,291
Accumulated other comprehensive income...................... (51) 116
Accumulated deficit......................................... (270,797) (229,895)
--------- ---------
Total stockholders' equity........................ 20,381 60,512
--------- ---------
Total Liabilities and Stockholders' Equity........ $ 73,767 $ 107,262
========= =========
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(1) The balance sheet at December 31, 1998 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 to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
-------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues
Collaboration and license revenue............... $ 5,493 $ 9,761 $ 20,289 $ 26,411
Product and service revenue................... 3,487 4,513 8,822 5,394
-------- ------- -------- ---------
Total revenue......................... 8,980 14,274 29,111 31,805
Operating expenses
Cost of goods sold............................ 1,394 391 2,844 778
Research and development...................... 14,706 15,710 47,371 44,697
General and administrative.................... 5,076 4,480 12,829 11,602
Restructuring Charge.......................... 7,008 -- 7,008 --
Acquired in-process research and
development................................ -- -- -- 124,888
-------- ------- -------- ---------
Total operating expenses.............. 28,184 20,581 70,052 181,965
-------- ------- -------- ---------
Operating loss.................................. (19,204) (6,307) (40,941) (150,160)
Interest income (expense), net.................. (57) 410 606 1,972
Equity interest in loss of joint venture........ (6) (788) (836) (1,690)
Minority interest............................... 612 -- 1,522 --
Other income (expense), net..................... (1,285) -- (1,253) --
-------- ------- -------- ---------
Net loss........................................ $(19,940) $(6,685) $(40,902) $(149,878)
======== ======= ======== =========
Basic and diluted net loss per share............ $ (0.66) $ (0.22) $ (1.35) $ (5.06)
======== ======= ======== =========
Shares used in computing basic and diluted net
loss per share................................ 30,359 30,095 30,340 29,625
======== ======= ======== =========
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
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(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(40,902) $(149,878)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Non-cash restructuring charge............................... 2,920 --
Write off of investment in Genos............................ 1,072 --
Depreciation................................................ 7,591 6,385
Amortization................................................ 828 825
Gain (loss) on sale of fixed asset.......................... (178) 44
Equity interest in loss of joint venture.................... 836 1,690
Forgiveness of note receivable from officer................. 183 125
Acquired in-process research and development................ -- 124,888
Changes in assets and liabilities:
Accounts Receivable.................................... (2,030) (3,054)
Inventory.............................................. (358) (960)
Prepaid expenses and other current assets.............. 1,509 513
Other assets........................................... (135) (4,100)
Accounts payable and accrued liabilities............... 3,907 (1,728)
Deferred revenue....................................... (6,695) (4,611)
-------- ---------
Net cash and cash equivalents used in operating
activities................................................ (31,452) (29,861)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases................................................. (76,569) (33,969)
Maturities................................................ 73,846 66,247
Minority interest........................................... 3,043 500
Proceeds from sale of fixed asset........................... 255 119
Sequana acquisition, net of cash............................ -- 13,270
Investment in joint venture................................. -- (2,000)
Purchase of property and equipment.......................... (8,862) (5,925)
-------- ---------
Net cash and cash equivalents (used in) provided by
investing activities...................................... (8,287) 37,742
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 938 2,350
Proceeds from note receivable............................... -- 252
Proceeds from notes payable and lease financing............. 32,308 6,174
Principal payments on notes payable and capital leases...... (25,665) (4,649)
-------- ---------
Net cash and cash equivalents provided by financing
Activities................................................ 7,581 4,627
-------- ---------
Effect of exchange rate change.............................. (4) --
-------- ---------
Net (decrease)/increase in cash and cash equivalents........ (32,162) 12,508
Cash and cash equivalents, beginning of period.............. 36,261 22,938
-------- ---------
Cash and cash equivalents, end of period.................... $ 4,099 $ 35,446
======== =========
See accompanying notes to consolidated financial statements.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the
"Company"), is a drug discovery and development company with a proprietary focus
in oncology. 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 in the
area of oncology, which are not partnered, 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 Axys Advanced Technologies, Inc.
("AAT"), and includes the account of PPGx, Inc. the Company's majority-owned
subsidiary (See "Formation of PPGx, Inc.", Note 4). All significant intercompany
accounts and transactions have been eliminated.
The Company owns 41% of Akkadix Corporation ("Akkadix"), (formerly known as
Xyris Corporation) (See "Changes in Akkadix Corporation", Note 3). Sequana owns
50% of Genos, a joint venture with Memorial Sloan-Kettering Cancer Center
("MSKCC"). These investments are accounted for under the equity method.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the September 30,
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 nine-month
period ended September 30, 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. RESTRUCTURING CHARGE
In July 1999, the Company announced the closing of its San Diego operations
by the end of the calendar year. The Company is relocating its oncology genomics
operations from San Diego to its South San Francisco headquarters. The
restructuring activities resulted in a one-time charge of $7.0 million during
the third quarter 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 plan. The facilities costs included lease payments on facilities to be
vacated in San Diego net of proceeds from existing subleases. The company
anticipates that the accrual for facilities will be utilized over the period
through lease termination on December 31, 2001. As a result of closing the
facility, the Company eliminated 120 positions of
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
which 93 are included in the severance calculation. Sixty-two employees will be
terminated in October 1999. The Company anticipates that the remaining employees
will be terminated by December 31, 1999.
The following table summarizes the Company's 1999 restructuring charge
activity for the nine months ended September 30, 1999 (in thousands):
SEVERANCE CONTRACTUAL
& RESEARCH OTHER
BENEFITS FACILITIES EQUIPMENT COMMITMENTS ASSETS TOTAL
----------- ---------- --------- ----------- ------- -------
Q3 1999 Charges.......... $2,210 $1,664 $ 1,810 $214 $ 1,110 $ 7,008
Asset write-offs......... (1,810) (1,110) (2,920)
------ ------ ------- ---- ------- -------
Liability at September
30, 1999............... $2,210 $1,664 $ 0 $214 $ 0 $ 4,088
====== ====== ======= ==== ======= =======
3. CHANGES IN AKKADIX CORPORATION
ROUND OF FINANCING
In February 1999, Akkadix executed an exclusive license to the Company's
technology in the field of agriculture (the "Technology License"). The Company
received additional shares of Akkadix in exchange for the Technology License.
Also in February 1999, Akkadix completed a financing in which it raised
$4.5 million from a third party. During the second quarter of 1999 Akkadix
completed a round of financing in which it raised $5 million from other third
parties. Under the terms of this financing, the Company has granted the third
parties the right (the "Put Option") to require the Company to purchase all of
the their interests in Akkadix in exchange for that number of shares of the
Company whose market value equals $10 million at the date of the exercise of the
Put Option. The Put Option may be exercised at any time through February 2,
2001.
The net effect of issuance of shares in connection with the completion of
this round of financing in the second quarter of 1999 reduced the Company's
ownership in Akkadix from 82% at December 31, 1998, to 52% at June 30, 1999.
ACQUISITION OF GLOBAL AGRO CORPORATION BY AKKADIX
On September 9, 1999 Akkadix completed its acquisition of Global Agro, Inc.
("Global"), a privately held California corporation. Under the terms of the
merger, all outstanding shares of Global stock were converted into Series B
preferred stock of Akkadix. The merger was accounted for as a purchase.
As a result of the merger, the Company's ownership interest in Akkadix fell
below 50%. Therefore, Akkadix's balance sheet is no longer consolidated into the
Company's balance sheet. Akkadix's results of operations are included with the
Company's results of operations through the date of merger between Akkadix and
Global. Subsequent to the acquisition of Global, operating results of Akkadix
are included in the Company's results using the equity method of accounting.
4. 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 and
biotechnology industries. In connection with the formation of PPGx, Axys
contributed certain fixed assets, which were recorded at the Company's net book
value, and technology in exchange for a 82% ownership interest in PPGx. PPD,
Inc. ("PPD"), Axys' partner in PPGx, contributed certain assets, technology,
cash
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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. Upon
exercise of the PPD Option or the Axys Put, the Company and PPD would have equal
ownership positions in PPGx. 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.
5. INVENTORY
Inventories associated with the Company's Axys Advanced Technologies (AAT)
subsidiary are stated at the lower of cost (first-in, first-out) or market. At
September 30, 1999, inventories consisted of the following (in thousands):
Raw materials................................. $302
WIP........................................... 32
Finished goods................................ 459
----
$793
====
6. COMPREHENSIVE INCOME
Total comprehensive loss was ($19,882,000) and ($40,953,000) for the three-
and nine-months ended September 30, 1999, respectively, and ($6,540,000) and
($149,733,000) for the three- and nine-months ended September 30, 1998,
respectively.
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AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
7. SEGMENT INFORMATION
Segment information consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
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(IN THOUSANDS)
Revenues:
Drug discovery........................................ $ 17,556 $ 24,911
AAT................................................. 10,909 6,894
Other............................................... 646 --
-------- ---------
Total consolidated.......................... $ 29,111 $ 31,805
======== =========
Net income (loss):
Drug discovery (1).................................. $(39,866) $(151,922)
AAT................................................. 3,329 2,352
Other............................................... (4,365) (308)
-------- ---------
Total consolidated.......................... $(40,902) $(149,878)
======== =========
Assets:
Drug discovery...................................... $ 64,443 $ 103,128
AAT................................................. 5,556 3,807
Other............................................... 3,768 327\
-------- ---------
$ 73,767 $ 107,262
======== =========
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(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.
Other represents the results of Akkadix's and PPGx's principal activities
which commenced in 1998 and 1999, respectively.
Total assets for AAT were approximately $5,556,000 and $3,807,000 as of
September 30, 1999 and 1998, respectively.
8. REVOLVING LINE OF CREDIT
On July 26, 1999, the Company refinanced its two lines of credit, one with
Sumitomo Bank, Limited ("Sumitomo") and one with Sumitomo and Silicon Valley
Bank, jointly for a new $30 million revolving line of credit with Foothill
Capital Corporation. The Company has fully drawn down this new line of credit,
and repaid the previous notes with Sumitomo and Silicon Valley Bank. The new
line is subject to the terms of a security agreement, and is fully secured by
the Company's marketable investments. Interest is due on the line monthly and is
computed at the reference rate for Wells Fargo Bank. The balance of any unpaid
principal and interest is due July 2002.
9. IMPAIRMENT OF INVESTMENT IN GENOS
In May 1999 the Board of Directors of Genos decided to suspend it research
activities and wind up its affairs. The Company is receiving back rights to use
its technology in the identification of programs in oncology from Genos. As a
result of the winding up of Genos, the Company has taken a one-time charge of
$1.1 million in the third quarter of 1999, representing the total carrying value
of the Investment in Genos.
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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", 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 the
sales of chemical compound libraries by its new combinatorial chemistry business
subsidiary, Axys Advanced Technologies, Inc. ("AAT"), (formerly known as the
Company's Advanced Technologies Division).
In October 1999, the company announced its first in-licensing deal with
Signal Pharmaceuticals, Inc. ("Signal"). Signal has granted exclusive worldwide
development and marketing rights to the company for its selective estrogen
receptor-beta modulators (SERM-B) for the treatment of cancer. Under the terms
of the agreement, the company is obligated to provide payments to Signal in the
form of an up-front license fee, research funding, research milestones and
royalties.
In September 1999, Akkadix Corporation ("Akkadix"), (formerly known as
Xyris Corporation) completed its acquisition of Global Agro, Inc. ("Global"). As
a result of this acquisition, the company's interest in Akkadix fell below 50%
and will no longer be consolidated into the company's financial statements, and
will be accounted for under the equity method.
In July 1999, the company announced the closing of its San Diego operations
by the end of the calendar year. The company is in the process of relocating its
oncology genomics operations from San Diego to its South San Francisco
headquarters and winding down all other operations in San Diego, which are
expected to conclude by the end of this calendar year. As a result of this
action, a one-time charge of $7.0 million was taken in the third quarter and
operating expenses are projected to decrease by $17 million on an annual basis,
beginning with fiscal year 2000.
Since June 1995 Sequana Therapeutics, Inc. ("Sequana"), which was acquired
by the company in January 1998, has been involved in a collaboration with
Boehringer Ingelheim International GmbH ("Boehringer Ingelheim") to identify the
genetic causes of asthma. In June 1999 the Company agreed that Boehringer
Ingelheim's research funding obligations would end as of June 30, 1999, and that
certain royalty terms in the agreement would be revised.
The company and Memorial Sloan-Kettering Cancer Center ("MSKCC") formed and
funded a joint venture called Genos Biosciences, Inc. ("Genos") in January 1997
to identify genes and related genetic information pertaining to prostate, breast
and colon cancer. In May 1999 the Board of Directors of Genos decided to suspend
its research activities and wind up its affairs. The company is receiving back
rights to use its technology in the identification programs in oncology as a
result of this winding up of Genos. In the third quarter of 1999, the company
wrote off the balance of the investment in Genos.
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 through the performance of the required research
by the company.
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- License Fees: Payments generally made when a collaboration agreement is
signed. These revenues are recorded when the agreement is signed, as no
future performance obligations exist.
- Commitment Fees: Payments made in conjunction with the company's
commitment to perform certain funded research. These revenues are
recorded 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
AAT, 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, as no future performance obligation exists.
- Commitment Fees: Payments made in conjunction with AAT's commitment to
perform certain obligations under compound supply or technology license
agreements. These revenues are recorded over the course of the relevant
agreement, as performance obligations are completed.
- Protocol Fees: Payments made for granting access to technology know-how.
These revenues are recorded as protocols are delivered.
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
September 30, 1999, the Company's accumulated deficit was approximately $271
million. Included in the Company's accumulated deficit at September 30, 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
Total revenue was $9.0 million and $29.1 million for the three- and
nine-month periods ended September 30, 1999, respectively, compared to $14.3 and
$31.8 million for the comparable periods in 1998. Revenue is made up of two
components, which are discussed below.
Collaboration and licensing Revenues
The company's collaboration and licensing revenues were $5.5 million and
$20.3 million for the three-and nine-month periods ended September 30, 1999,
respectively, compared to $9.8 million and $26.4 million, respectively, for the
comparable periods in 1998. The revenue mix for the quarter ended September 30,
1999 was positively affected in comparison to the same quarter for the prior
year by: (i) an increase in technology licensing fees, arising out of the
combinatorial chemistry agreements between AAT and Daiichi Pharmaceutical Co.,
Ltd., signed in June 1999 and between AAT and Allergan, signed in September
1999; (ii) payments for research support in connection with an agreement with
Rhone-Polenc Rorer for the development of small molecule therapeutics that
inhibit cathepsin S, associated with certain inflammatory diseases; and (iii)
the termination fee associated with an agreement with Corange International,
Ltd., which ended in February 1999. These revenue increases were more than
offset by decreased revenues recognized compared to the prior
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year under the following agreements: (i) the end of the research funding in mid
1998 of the Pharmacia & Upjohn agreement for the development of inhibitors of
Factor Xa; (ii) the termination of research support in June 1999 under the
Boehringer Ingelheim International GmbH agreement for the gene identification
program in asthma; and (iii) the conclusion in May 1998 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 were $3.5 million and $8.8
million for the three- and nine-month periods ended September 30, 1999,
respectively, compared to $4.5 million and $5.4 million, respectively, for the
comparable periods in 1998. The lower third quarter revenue was primarily the
result of a reduction in the number and value of compounds shipped in 1999 under
the AAT agreements, which was offset by the inclusion of the service revenue
recognized by PPGx, Inc. since its formation in February 1999, compared to the
number of compounds shipped in 1998 under one AAT agreement. The nine month
revenue numbers were higher in 1999 than in 1998 because higher revenues were
recorded for the first six months of 1999 compared to the first six months of
1998.
Cost of Goods Sold
The company's cost of goods sold increased to $1.4 million and $2.8 million
for the three- and nine-month periods ended September 30, 1999, respectively,
compared to $391,000 and $778,000, respectively, for the comparable periods in
1998. The costs in 1999 are directly related to the costs of producing compounds
for sale. The costs in 1998 primarily reflect start up costs for the production
of compounds. The increases in cost of goods sold in 1999 over 1998 reflect
increases in the number of compounds sold in 1999 over 1998.
Research and Development
The company's research and development expenses were $14.7 million and
$47.4 million for the three-and nine-month periods ended September 30, 1999,
respectively, compared to $15.7 million and $44.7 million, respectively, for the
comparable periods in 1998. The decrease for the three months ended September
30, 1999 compared to the same period in 1998 is primarily due to the winding
down of activities in the company's San Diego operation. The increase in the
nine month period ended September 30, 1999 compared to the same period in 1998
was primarily due to the research and development expenses of the company's
newly formed subsidiaries PPGx and Akkadix. Akkadix's activities are reflected
in the consolidated results of the company through the date it merged with
Global Agro, which means through the first eight months of 1999. Other factors
contributing to the increase for the nine-month period relate to the clinical
costs associated with pursuing our own clinical programs in both ulcerative
colitis and psoriasis in 1999, versus lower clinical costs associated with an
inhaled therapeutic for asthma in 1998, as well as severance costs associated
with the reduction in headcount in the first quarter of 1999.
When the company acquired Sequana in January 1998, Sequana had the
following research programs in progress: Asthma, partnered with Boehringer
Ingelheim Int'l GmbH; Osteoporosis, partnered with Corange International Ltd.;
Non-Insulin Dependent Diabetes Mellitus (NIDDM), partnered with Glaxo Wellcome,
Inc.; Schizophrenia/Bipolar, partnered with Parke-Davis Pharmaceutical Research
division of Warner-Lambert Company; Obesity, Alzheimer's and Pharmacogenomics.
As of September 30, 1999 the following programs are still on-going: the
Schizophrenia/Bipolar program partnered with Parke-Davis and with respect to
which the company is currently in negotiations to transfer the program to
Parke-Davis; and the Pharmacogenomics program, which was spun off into the PPGx
subsidiary with PPD. All other programs have ended.
General and Administrative
The company's general and administrative expenses increased to $5.1 million
and $12.8 million for the three- and nine-month periods ended September 30,
1999, respectively, compared to $4.5 million and
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$11.6 million, respectively, for the comparable periods in 1998. The increases
were primarily due to the addition of the administrative expenses of the
company's newly formed subsidiaries, PPGx and Akkadix. Akkadix's activities are
reflected in the consolidated results of the company through the date it merged
with Global Agro, which means through the first eight months of 1999.
Interest Income and Interest Expense
Interest income decreased to $775,000 and $2.4 million for the three- and
nine-month periods ended September 30, 1999, respectively, compared to $990,000
and $3.7 million, respectively, for the same periods in 1998. The decrease was
primarily due to the decrease in average cash and investment balances during the
periods. Interest expense increased to $832,000 and $1.8 million for the three-
and nine-month periods ended September 30, 1999, respectively, compared to
$580,000 and $1.7 million, respectively, for the same periods in 1998. The
increase was primarily due to the higher debt balances from the company's
revolving line of credit and capital lease arrangements.
Equity Interest in Loss of Joint Venture
Equity interest in loss of joint venture decreased to $6,000 and $836,000
for the three- and nine-month periods ended September 30, 1999, respectively,
compared to $788,000 and $1.7 million respectively, 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. The decrease is primarily due to
the wind down of operations of Genos since May 1999. In the third quarter of
1999, the company's wrote off the balance of the investment in 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
$612,000 and $1.5 million for the three- and nine-month periods ended September
30, 1999, respectively, compared to none for the same periods in 1998. This
amount is the result of the recent formation of the Company's majority-owned
subsidiaries, PPGx and Akkadix. Since the company consolidates all of the PPGx
and Akkadix operating expenses, a portion of the losses from these entities is
allocated to the minority shareholders in these entities as minority interest,
offsetting the company's operating loss. As a result of the merger between
Akkadix and Global, discussed above, Akkadix' results of operations will all be
included in Equity Interest in Loss of Joint Venture in future periods.
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 addressed 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, we
have also been reviewing the Y2K readiness of our vendors, service providers and
other companies (including collaboration partners and customers) with whom we
have significant business relationships ("Important Third Parties").
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The company has completed all internal reviews and has prioritized the
responses needed to address the Y2K problem. All external reviews are expected
to be completed by the end of November 1999. Management is currently developing
such contingency plans as believed to be prudent.
With respect to the company's core information technology systems and
desktop computers, the company has completed its review and has substantially
completed all necessary modifications and replacements. The company expects to
complete its replacement or upgrade of all third party software applications by
the end of November 1999. The company previously replaced 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 these applications and believes
them to be Y2K ready. The company has compiled a list of all other internally
developed software applications and does not believe them to be date sensitive.
Finally, with respect to other significant microprocessor-controlled equipment,
the company has identified such equipment and has made any necessary upgrades or
replacements.
The review of the Y2K readiness of Important Third Parties is substantially
completed. 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
estimated to be $250,000. The company has spent approximately $67,000 through
September 30, 1999 on its Y2K activities, excluding the time of company
personnel, all of which has been expensed, and expects to spend approximately
$183,000 through December 31, 1999.
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 September 30, 1999, the company had realized approximately
$183 million in net proceeds from offerings of its capital stock. In addition,
the company had realized approximately $189 million since inception from its
corporate collaborations.
The company's principal sources of liquidity are its cash and investments,
which totaled $43.2 million as of September 30, 1999. The company's cash and
investments at September 30, 1999 include the cash and investments from its
wholly-owned and majority-owned subsidiaries. As a result of the merger between
Akkadix and Global, discussed above, Akkadix is no longer consolidated into the
company's balance sheet. Consequently, Akkadix's cash and investments of
approximately $8 million at June 30, 1999 is no longer included in the balance
of cash and investments at September 30, 1999. The company's investments also
serve as security for the company's borrowings under its line of credit.
Net cash used in operating activities during the nine-month period ended
September 30, 1999 was $31.5 million compared to $29.9 million in the same
period in 1998. Operating expenses between the two
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periods were largely unchanged. 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 $8.9 million for the purchase of
property, plant and equipment during the nine months ended September 30, 1999.
Additional equipment is expected to be acquired or leased in connection with the
company's future research and development activities, although the magnitude of
such purchases or leases is not presently known. There were no material
commitments for capital expenditures outstanding at September 30, 1999.
The company's AAT subsidiary currently has approximately $22.0 million of
backlog from committed contracts for the sale of combinatorial chemistry
libraries as of September 30, 1999 .
In January of 1999 and then again in September of 1999 the company reduced
its work force engaged in early stage genomics research activities in order to
reduce its future cash requirements. The company believes it has sufficient cash
resources, in light of the funding commitments of its research collaborators and
its combinatorial chemistry partners, to allow it to continue to meet its
committed research obligations and its committed combinatorial chemistry
delivery obligations for the foreseeable future. However, the company is also
pursuing its own internally-financed research programs. In order to continue
these research efforts and to fund future clinical development activities, the
company has been seeking and is continuing to seek additional funding through a
variety of means, including new collaborations, public or private equity or debt
financings and the sale of our interests in our affiliated businesses. We cannot
be certain that additional funding will be available or that, if available, the
terms will be acceptable. In the event the company is unsuccessful in the near
term in securing additional funding or in securing the desired amount of
funding, the company would have to reduce its future cash expenditures further
and could scale back its internally-financed research.
The drug development process is expensive and we are at an early stage of
development. Therefore, we expect we will continue to need to raise money in the
future until we achieve substantial product or royalty revenues, if ever. We
expect that we 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 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, 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, we may delay, reduce or eliminate any of our research or
development programs.
CERTAIN BUSINESS RISKS
We are at an early stage of development and we will need a substantial
amount of additional funding to continue to prosecute our research and
development programs. 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 and costly 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 in many cases
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, which
funds may not be available.
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
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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.
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 "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, 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.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
10.113* Combinatorial Chemistry Agreement between Axys Advanced
Technologies, Inc. and Allergan, Inc., dated September 27,
1999
10.114* Loan Agreement by and between Axys Pharmaceuticals, Inc. and
Foothill Capital Corporation, dated July 26, 1999
10.115 Warrant to Purchase Common Stock, issued to Reedland Capital
Partners, dated July 30, 1999.
10.116 Registration Rights Agreement by and among the Registrant
and Reedland Capital Partners, dated July 30, 1999.
10.117 Fifth Amendment to Expansion Lease by and between the
Registrant and Alexandria Real Estate Equities, dated
October 1999.
27 Financial Data Schedule
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* Confidential treatment has been requested with respect to certain portions of
this exhibit.
b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXYS PHARMACEUTICALS, INC.
Date: November 15, 1999 By: /s/ JOHN P. WALKER
------------------------------------
John P. Walker
Chairman and Chief Executive Officer
By: /s/ KATHLEEN STAFFORD
------------------------------------
Kathleen Stafford
Sr. VP and CFO (Chief Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.113* Combinatorial Chemistry Agreement between Axys Advanced
Technologies, Inc. and Allergan, Inc., dated September 27,
1999
10.114* Loan Agreement by and between Axys Pharmaceuticals, Inc. and
Foothill Capital Corporation, dated July 26, 1999
10.115 Warrant to Purchase Common Stock, issued to Reedland Capital
Partners, dated July 30, 1999.
10.116 Registration Rights Agreement by and among the Registrant
and Reedland Capital Partners, dated July 30, 1999.
10.117 Fifth Amendment to Expansion Lease by and between the
Registrant and Alexandria Real Estate Equities, dated
October 1999.
27 Financial Data Schedule
- ---------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit.