UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-28006
MICROCIDE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3186021
(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification Number)
850 Maude Avenue, Mountain View, California 94043
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-428-1550
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
--
Number of shares of Common Stock, no par value, outstanding as of July 31, 2001:
11,519,313
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
JUNE 30, 2001
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements and Notes (unaudited)
Condensed Balance Sheets as of June 30, 2001 3
and December 31, 2000
Condensed Statements of Operations for the three and six months
ended June 30, 2001 and June 30, 2000 4
Condensed Statements of Cash Flows for the six months
ended June 30, 2001 and June 30, 2000 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
---------------- -----------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 8,342 $ 3,744
Short-term investments 2,984 8,845
Receivables, prepaid expenses and other current
assets 848 7,896
---------------- -----------------
Total current assets 12,174 20,485
Property and equipment, net 4,755 5,856
Other assets 867 857
---------------- -----------------
Total assets $ 17,796 $ 27,198
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 512 $ 566
Accrued compensation 1,038 879
Current portion of notes payable 1,025 1,597
Deferred revenue 4,038 7,323
Other accrued liabilities 1,236 906
---------------- -----------------
Total current liabilities 7,849 11,271
Long-term portion of notes payable 103 309
Accrued rent 353 294
Stockholders' equity:
Common stock 68,897 68,483
Deferred compensation (130) ---
Accumulated deficit (59,276) (53,188)
Accumulated other comprehensive income --- 29
---------------- -----------------
Total stockholders' equity 9,491 15,324
---------------- -----------------
Total liabilities and stockholders' equity $ 17,796 $ 27,198
================ =================
NOTE: The balance sheet at December 31, 2000 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 Notes to Condensed Financial Statements.
3
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -------------------------------------
2001 2000 2001 2000
----------------- -------------- --------------- -----------------
Revenues:
Research revenues $ 961 $ 1,521 $ 2,731 $ 2,654
License fees and other revenues 892 50 1,784 100
----------------- -------------- --------------- -----------------
Total revenues 1,853 1,571 4,515 2,754
Operating expenses:
Research and development 4,406 4,112 8,477 8,169
General and administrative 1,340 1,083 2,463 1,925
----------------- -------------- --------------- -----------------
Total operating expenses 5,746 5,195 10,940 10,094
----------------- -------------- --------------- -----------------
Loss from operations (3,893) (3,624) (6,425) (7,340)
Interest and other income, net 166 223 337 469
----------------- -------------- --------------- -----------------
Loss before cumulative effect of change
in accounting principle (3,727) (3,401) (6,088) (6,871)
Cumulative effect of change in
accounting principle --- --- --- (233)
----------------- -------------- --------------- -----------------
Net loss $ (3,727) $ (3,401) $ (6,088) $ (7,104)
================= ============== =============== =================
Basic and diluted net loss per share:
Loss before cumulative effect of change
in accounting principle $ (0.32) $ (0.30) $ (0.53) $ (0.61)
Cumulative effect of change in
accounting principle --- --- --- (0.02)
----------------- -------------- --------------- -----------------
Net loss per share $ (0.32) $ (0.30) $ (0.53) $ (0.63)
================= ============== =============== =================
Weighted-average shares used in computing
basic and diluted net loss per share 11,509 11,309 11,486 11,261
See Notes to Condensed Financial Statements.
4
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Increase (decrease) in cash and cash equivalents
Six Months Ended
June 30,
--------------------------------------
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (6,088) $ (7,104)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,118 1,260
Cumulative effect of change in accounting principle --- 233
Amortization of deferred compensation 15 ---
Loss on disposal of fixed assets 44 ---
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets 7,038 (621)
Accounts payable (54) 120
Accrued compensation and other accrued liabilities 489 15
Accrued rent 59 (31)
Deferred revenue (3,285) 556
--------------- ---------------
Net cash used in operating activities (664) (5,572)
--------------- ---------------
Cash flows from investing activities:
Purchase of short-term investments (3,918) (6,700)
Maturities of short-term investments 9,750 11,000
Capital expenditures (61) (379)
--------------- ---------------
Net cash provided by investing activities 5,771 3,921
--------------- ---------------
Cash flows from financing activities:
Principal payments on notes payable (778) (698)
Net proceeds from issuance of common stock 269 898
--------------- ---------------
Net cash provided by (used in) financing activities (509) 200
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 4,598 (1,451)
Cash and cash equivalents, beginning of period 3,744 5,660
--------------- ---------------
Cash and cash equivalents, end of period $ 8,342 $ 4,209
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 72 $ 143
=============== ===============
.
See Notes to Condensed Financial Statements.
5
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Microcide Pharmaceuticals, Inc. (the Company) is a biopharmaceutical
company committed to the discovery, development and commercialization of novel
antimicrobials for the improved treatment of serious bacterial, fungal and viral
infections. The Company's three discovery research platforms address the growing
problems of antibiotic resistance and the need for improved antifungal and
antiviral therapeutics. The Company's Cephalosporin Antibiotics and Efflux Pump
Inhibition platforms focus on developing novel antibiotics and antibiotic
potentiators (efflux inhibitors) to directly address existing bacterial and
fungal resistance problems. Microcide's Microbial Genomics platform utilizes
proprietary bacterial, fungal and viral genetics and genomics tools to discover
entirely new classes of antimicrobial agents.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire year.
The Company previously recognized nonrefundable upfront license fees as
revenue when received and when all contractual obligations of the Company
relating to the fees had been fulfilled. Effective January 1, 2000, the Company
changed its method of accounting for nonrefundable license fees to recognize
such fees over the term of the related research collaboration agreement. The
Company believes the change in accounting principle is preferable based on
guidance provided in SEC Staff Accounting Bulletin No. 101 -- Revenue
Recognition in Financial Statements.
This unaudited financial data should be read in conjunction with the
financial statements and footnotes contained in the Company's annual report on
Form 10-K/A for the year ended December 31, 2000.
2. Net Loss per Share
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding. Because the Company is in a net loss
position, diluted earnings per share is calculated using the weighted average
number of common shares outstanding and excludes the effects of options which
are antidilutive.
3. Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net loss. Specifically, unrealized
holding gains and losses on our available-for-sale securities, which were
reported separately in stockholders' equity, are included in accumulated other
comprehensive income (loss).
6
4. Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
133). The Company was required to adopt SFAS 133 effective January 1, 2001. SFAS
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments. Microcide does not currently
engage in hedging activities and the adoption of SFAS 133 had no material impact
on Microcide's financial condition and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain areas of the staff's views in applying
generally accepted accounting principles to revenue recognition. The Company
adopted SAB 101 in the fourth quarter of 2000, effective January 1, 2000, and
recorded a cumulative effect of a change in accounting principle related to
recognition of upfront nonrefundable license payments received under
collaborative agreements. As a result of this change in accounting for
nonrefundable upfront license fees, the first quarter of 2000 reflects a charge
for the $233,000 cumulative effect of the change in accounting principle,
calculated as of January 1, 2000, and an adjustment was made to previously
reported research revenues to reflect revenue recognition of $50,000 in each of
the first and second quarters. The cumulative effect was initially recorded as
deferred revenue and was recognized as revenue over the remaining contractual
term of the collaborative research and development agreement.
In July 2001, the FASB issued FAS 141 "Business Combinations" and FAS 142
"Goodwill and Other Intangible Assets". FAS 141 eliminates the pooling-of-
interests method of accounting for business combinations except for qualifying
business combinations that were initiated prior to July 1, 2001. Statement 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of FAS 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001
(i.e., the acquisition date is July 1, 2001 or after). Under FAS 142, goodwill
and indefinite lived intangible assets, are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company will adopt FAS 141
and FAS 142 on July 1, 2001. The adoption is not expected to have any material
impact on the Company's financial position or results of its operations.
5. Subsequent Events
In July 2001, the Company announced that it had signed a definitive
agreement with The Althexis Company, Inc. (Althexis) pursuant to which a wholly-
owned subsidiary of Microcide will merge with and into Althexis in a stock-for-
stock exchange. Concurrent with the merger, the Company will receive up to $60
million in private equity funding. Under the terms of the merger agreement, the
Company will issue approximately 5.2 million shares of common stock for all
outstanding shares of Althexis, and will assume the outstanding options and
warrants of Althexis. All but approximately 400,000 of the newly issued shares
will be subject to certain restrictions on resale for one year from closing.
Based on the fair value of the Company's common stock on the date the
transaction was announced, the purchase price will be approximately $21 million,
including estimated acquisition costs. The Company anticipates that a
significant portion of the purchase price will be charged to acquired in-process
research and development upon the close of the merger.
The new financing of up to $60 million is being provided in a private
placement of the Company's convertible redeemable preferred stock. The preferred
stock is convertible into shares of Microcide common stock at a fixed exchange
ratio of $3.00 per share, which represents a 24% discount from the 20-day
average closing price of Microcide's common stock as of July 19, 2001, the date
on which the Company's Board of Directors authorized the offering. Preferred
shares converted into common stock will be registered by a Form S-3 filing, and
will be subject to certain lockup provisions for up to 9 months after closing.
To the extent the conversion price of the preferred stock is less than the fair
value of the Company's common stock on the date of issuance, the Company will
record a deemed dividend to the preferred stockholders which will have the
effect of increasing loss per share attributable to common stockholders.
The transaction will be structured as a tax-free share exchange and is
intended to be accounted for under the purchase method of accounting. The merger
and the financing are contingent upon each other and anticipated to close
concurrently. Completion of the transactions is subject to approval of Microcide
and Althexis stockholders, regulatory approvals and customary closing
conditions. Stockholders of Althexis holding approximately 93% of Althexis'
outstanding common stock have executed stockholder support agreements in favor
of the merger. The merger is expected to close in the third quarter of 2001. The
companies also announced that they intend to choose a new name for the combined
company.
In connection with the merger, the Company formed a wholly-owned
subsidiary, California MP Acquisition, Inc., which will merge with and into
Althexis, with Althexis surviving the merger and continuing as a wholly-owned
subsidiary of Microcide.
Also in July 2001, the Company announced that it had entered into a
collaborative research and license agreement with NAEJA Pharmaceutical Inc. to
discover, develop and commercialize drugs based upon NAEJA's proprietary azole
antifungals and Microcide's proprietary fungal efflux pump inhibitor leads. The
collaboration gives the Company exclusive worldwide rights to develop and
commercialize azole antifungal compounds alone or in combination with a
Microcide fungal efflux pump inhibitor.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
As part of the Company's strategy to enhance its research and development
capabilities and to fund, in part, its capital requirements, Microcide has
entered into collaborative agreements with several major pharmaceutical
companies. Pursuant to the Company's collaborative agreements with the R.W.
Johnson Pharmaceutical Research Institute, a subsidiary of Johnson & Johnson
(RWJPRI), Daiichi Pharmaceutical Co., Ltd. (Daiichi), Pfizer Inc. (Pfizer) and
Schering-Plough Animal Health Corporation (SPAH) (the Collaborative Agreements),
the Company has received license fees, milestone payments and research support
payments, and can potentially receive additional research support payments,
milestone payments and royalty payments. License payments are typically
nonrefundable upfront payments for licenses to develop, manufacture and market
products, if any, that are developed as a result of the collaboration. Research
support payments are typically contractually obligated payments to fund research
and development over the term of the collaboration. Milestone payments are
payments contingent upon the achievement of specified milestones, such as
selection of candidates for drug development, the commencement of clinical
trials or receipt of regulatory approvals. If drugs are successfully developed
and commercialized as a result of the Collaborative Agreements, the Company will
receive royalty payments based upon the net sales of such drugs. In addition,
the Company has derived other revenues principally through the sale of molecular
diversity to other pharmaceutical and biotechnology companies for use in their
research programs, and through short-term contract research. Through June 30,
2001, the Company had received in the aggregate $62.8 million in license fees,
milestone payments and research support payments under the Collaborative
Agreements.
The initial funded research portion of the 1995 collaborative agreement
with RWJPRI concluded in late 1999. In November 1999, RWJPRI commenced Phase I
clinical trials of the Company's cephalosporin compound RWJ-54428 (MC-02,479)
developed during the Microcide-RWJPRI Gram-positive research collaboration.
Based upon the observation of irritation at the injection site in some subjects
in these trials, the Company announced in May 2001 that RWJPRI had decided to
focus current efforts on the advancement of RWJ-442831, a Microcide-developed
prodrug form of the cephalosporin compound RWJ-54428, into pre-clinical
toxicology studies which, if successful, would allow the compound to advance
into Phase I clinical trials. A prodrug is a modified form of a drug which is
readily converted to the active drug in the body. Preliminary studies of RWJ-
442831 in animals, conducted by Microcide, demonstrated reduced venous
irritation at the injection site compared to RWJ-54428. There is no assurance
that any compounds developed to address the incidence of irritation at the
injection site will successfully proceed through pre-clinical development and
clinical trials. In addition, work continues on a second parenteral Microcide
cephalosporin compound, RWJ-333441 (MC-04,546), in pre-clinical development with
RWJPRI.
In December 2000, the Company and RWJPRI extended their collaboration to
develop a new class of cephalosporins, having similar spectrum and potency to
the collaboration's parenteral compounds, but which would be bioavailable
following oral administration. Also in December 2000, a new and unrelated
collaboration with RWJPRI was established, to focus on the discovery of products
from the Company's Natural Product extracts. The agreement covers collaborative
research to discover novel drugs from natural products. Microcide will provide
RWJPRI with access to its Natural Products Library for the purpose of screening
for activity in various biological and therapeutic applications. RWJPRI will
undertake a program for the development, manufacture and sale of products
developed from the collaborative research.
The initial funded research portion of the 1995 collaborative agreement
with Daiichi concluded in 1999. In May 2000, the Company and Daiichi signed a
subsequent one-year funded research agreement to discover and develop inhibitors
to overcome the effect of efflux pumps in Pseudomonas aeruginosa. In May 2001,
the Company announced the successful completion of this funded pre-clinical
research phase. Daiichi will continue pre-clinical and clinical work on
8
candidates resulting from the collaboration. Microcide will receive milestone
payments and royalties on worldwide sales of any marketed products resulting
from the research.
The five-year funded research portion of the 1996 collaborative agreement
with Pfizer concluded at the end of February 2001. Each of Microcide and Pfizer
now has the right without further obligation to the other to independently use
the technology developed during the collaboration. Consequently, the Company
began using the validated essential gene targets from this collaboration in its
Microcide-owned Microbial Genomics program beginning in March 2001. In October
2000, Pfizer Animal Health notified the Company of its decision to extend the
Collaborative Research Agreement initiated in January 1999 for an additional
year, beginning January 2001.
In October 2000, the Company entered into a research collaboration and
license agreement with SPAH to discover and develop compounds to be used in the
treatment of veterinary bacterial infections, based upon application of the
Company's efflux pump technology to existing SPAH antibacterials. In July 2001,
the Company announced an amendment to this agreement that increases the level of
research at Microcide funded by SPAH.
The Company continues to enhance its discovery and development programs by
entering into research and/or license agreements. In May 2001, the Company
announced that it had entered into a collaborative research and development
agreement with NeoGenesis, Inc. to discover and develop new classes of
antibiotics. The collaboration will identify and optimize chemical compounds
with antibacterial activity, utilizing a specific number of Microcide's
proprietary essential gene targets from the Company's VALID (Validated
Antimicrobial Lead Identification and Development) System and from NeoGenesis'
ALIS (Automated Ligand Identification System) screening system and its small
molecule libraries. Microcide will have worldwide product development and
commercialization rights. In June 2001, the Company announced that it had
entered into a collaborative research and development agreement with Cetek
Corporation to discover and develop new classes of anti-infective agents. The
collaboration will utilize a specified number of Microcide's proprietary
bacterial, fungal and viral targets from its Microbial Genomics program,
together with Cetek's proprietary capillary electrophoresis technology, to
identify novel compounds and natural products with antimicrobial activity.
Microcide will have worldwide development and commercialization rights on
products that result from the collaboration. In July 2001, the Company entered
into a collaborative research and license agreement with NAEJA Pharmaceutical
Inc. to discover, develop and commercialize drugs based upon NAEJA's proprietary
azole antifungals and Microcide's proprietary fungal efflux pump inhibitor
leads. Microcide will have worldwide development and commercialization rights on
azole antifungals, fungal efflux pump inhibitors and combinations thereof that
result from the collaboration. Other companies with which Microcide is currently
collaborating are Coelacanth Corporation and Discovery Partners International,
Inc. Certain of these collaborative agreements provide for potential milestone
payments and/or royalties to be paid by the Company to its collaborators. The
milestone payments, of up to approximately $6 million, are contingent upon
achieving specified research and product development milestones through product
approval.
In the event that the Company and its collaborators achieve the specified
research and product development milestones, the Company will be entitled to
receive milestone payments as follows: up to $16.5 million for the first
parenteral (administered by injection) product, up to $15.5 million for each
additional parenteral product and up to $18.5 million for an orally-absorbed
product developed pursuant to the RWJPRI agreements, and up to $6.5 million for
each product developed pursuant to the Daiichi agreements. The Pfizer Animal
Health and SPAH collaborations provide for a lower level of milestone payments
than those applicable to human health applications. Receipt of the above
milestone payments is contingent upon achieving specified research and product
development milestones, a number of which may not be achieved for several years,
if ever. While the Collaborative Agreements provide for royalty payments on
future products that may result, the Company does not expect to receive
royalties based upon net sales of drugs for a significant number of years, if at
all.
The Company has incurred substantial losses in the past and expects to
continue to incur operating losses over the next several years. Quarterly
results of operations are subject to significant fluctuations based on the
timing and amount of certain revenues earned under the Collaborative Agreements.
Fluctuations in the Company's operating results and market conditions for
biotechnology stocks in general could have a significant impact on the
volatility of the market price for the common stock and on the future price of
the common stock. The stock market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. The market price of the common stock, like that of the securities of
many other biopharmaceutical companies, has been and is likely to continue to be
highly volatile.
The biotechnology industry is highly competitive, and new developments are
occurring at an increasing pace. Competition from biotechnology and
pharmaceutical companies, joint ventures, academic and other research
institutions and others is intense and is expected to increase. Many competitors
have substantially
9
greater financial, technical and personnel resources than the Company. Although
the Company believes that it has identified new and distinct approaches to drug
discovery, there are other companies with drug discovery programs, at least some
of the objectives of which are the same as or similar to the Company's.
Competing technologies may be developed which would render the Company's
technologies obsolete or non-competitive.
In July 2001, the Company announced that it had signed a definitive
agreement with The Althexis Company, Inc. pursuant to which a wholly-owned
subsidiary of Microcide will merge with and into Althexis in a stock-for-stock
exchange. Concurrent with the merger, the Company will receive up to $60 million
in private equity funding. Please see Note 5 to the Condensed Financial
Statements included elsewhere in this report. There is no assurance that the two
companies will complete the merger or the financing or, if such transactions are
completed, that the combined company will realize any of the anticipated
benefits therefrom.
This Form 10-Q contains forward-looking statements based upon current
expectations and such forward-looking statements involve risks and
uncertainties, including, without limitation, those set forth in the section
entitled "Risk Factors" below.
Results of Operations
Three Months Ended June 30, 2001 and June 30, 2000
Revenues. Total revenues for the second quarter of 2001 were $1.9 million, as
compared to $1.6 million in the second quarter of 2000, derived from the major
collaborative agreements. The increase in comparative revenues during the period
was due primarily to research revenues and license fees recognized under both
the amended agreement and the Natural Product agreement signed with RWJPRI in
December 2000, as well as research support revenues from the joint research
agreement signed in October 2000 with SPAH. The increase in comparative revenues
was partially offset by the conclusion of funded research with Pfizer and
Daiichi at the end of the first quarter of 2001.
Research and Development Expenses. Research and development expenses for the
second quarter increased from $4.1 million in 2000 to $4.4 million in 2001. The
increase was due primarily to higher expenses for planned contract research
services to accelerate the Company's lead optimization programs related to
Microcide-owned antifungal compounds and personnel-related costs.
General and Administrative Expenses. General and administrative expenses for the
second quarter increased from $1.1 million in 2000 to $1.3 million in 2001,
primarily due to higher expenses for outside services.
Interest Income, net. Interest income for the second quarter decreased from
$288,000 in 2000 to $196,000 in 2001, primarily due to a decrease in average
cash balances. Interest expense for the second quarter decreased from $66,000 in
2000 to $31,000 in 2001, primarily due to the declining balance on an equipment
financing loan.
Six Months Ended June 30, 2001 and June 30, 2000
Revenues. Total revenues for the first half of 2001 were $4.5 million, an
increase from $2.8 million in revenues recognized in the first half of 2000.
Increased revenues were derived from the RWJPRI and SPAH research and license
agreements, and were partially offset by lower revenues resulting from the
conclusion of funded research with Pfizer and Daiichi at the end of the first
quarter of 2001.
Research and Development Expenses. Research and development expenses for the
first half of 2001 increased from $8.2 million in 2000 to $8.5 million in 2001,
primarily a result of higher expenses for planned contract research services to
accelerate the Company's lead optimization programs related to Microcide-owned
antifungal compounds and personnel-related costs.
General and Administrative Expenses. General and administrative expenses for the
first half of 2001 increased from $1.9 million in 2000 to $2.5 million in 2001.
The increase was due primarily to higher expenses for outside services and
personnel-related costs.
Interest Income, net. Interest income for the first half of 2001 decreased from
$610,000 in 2000 to $451,000 in 2001, primarily due to a decrease in average
cash balances. Interest expense for the first half of 2001 decreased from
$143,000 in 2000 to $72,000 in 2001, primarily due to the declining balance on
an equipment financing loan.
10
Liquidity and Capital Resources
The Company has financed its operations since inception primarily through
the sale of equity securities, through funds provided under the Collaborative
Agreements, through other revenues principally consisting of sales of molecular
diversity and contract research and through equipment financing. As of June 30,
2001, the Company had received $66.4 million from the sale of equity and $62.8
million in cash from license and milestone fees and research support payments
under the Collaborative Agreements.
Cash, cash equivalents and short-term investments at June 30, 2001 were
$11.3 million compared to $12.6 million at December 31, 2000. The decrease
during the first six months of 2001 was due to cash used by operations of
$664,000, $778,000 utilized in making principal payments on the Company's
equipment financing arrangement and $61,000 in capital expenditures. This
decrease was partially offset by $269,000 in net proceeds from the issuance of
common stock from the exercise of employee stock options.
The Company expects that its existing capital resources, interest income
and future payments due under the Collaborative Agreements will enable the
Company to maintain current and planned operations at least through 2001. The
Company expects that it will need to seek additional funds to continue its
business activities and will seek to raise such additional funding from other
collaborative arrangements, or public or private financings, including sales of
equity or debt securities. Any such collaborative or licensing arrangements
could result in limitations on the Company's ability to control the
commercialization of resulting drugs, if any, and could limit profits, if any,
therefrom. Any such equity financing could result in dilution to the Company's
then-existing stockholders.
The Company filed a Form S-3 shelf registration statement on February 9,
2001, as amended March 21, 2001, pursuant to which it may offer up to $35
million of newly issued common stock. The registration statement became
effective in March 2001. There can be no assurance that additional funds will be
available on favorable terms or at all, or that such funds, if raised, would be
sufficient to permit the Company to continue to conduct its operations. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research programs.
In July 2001, the Company announced that it had signed a definitive
agreement with The Althexis Company, Inc. pursuant to which a wholly-owned
subsidiary of Microcide will merge with and into Althexis in a stock-for-stock
exchange. Concurrent with the merger, the Company will receive up to $60 million
in private equity funding. Please see Note 5 to the Condensed Financial
Statements included elsewhere in this report. There is no assurance that the two
companies will complete the merger or the financing or, if such transactions are
completed, that the combined company will realize any of the anticipated
benefits therefrom.
Risk Factors
IF OUR RESEARCH AND DEVELOPMENT EFFORTS DO NOT RESULT IN POTENTIAL DRUG
CANDIDATES AND/OR WE CANNOT ADVANCE POTENTIAL PRODUCTS THROUGH CLINICAL TRIALS,
WE MAY FAIL TO DEVELOP PHARMACEUTICAL PRODUCTS.
Our first potential pharmaceutical product, a compound in the cephalosporin
class of antibacterials, commenced Phase I Clinical Trials under the direction
of our partner, The R.W. Johnson Pharmaceutical Research Institute (RWJPRI), an
affiliate of Johnson & Johnson, in November 1999. The cephalosporin class of
antibacterial drugs is the largest class of antibiotics in terms of global
sales. The purpose of these Phase I studies is to assess the compound's safety,
tolerability and pharmacokinetics. Safety and tolerability are measures of the
body's ability to assimilate the compound at various dose levels without adverse
reactions or side effects. Pharmacokinetics includes measures of absorption,
distribution, metabolism and excretion of the compound in the body. Based upon
the observation of irritation at the injection site in some subjects in these
trials, the Company announced in May 2001 that RWJPRI had decided to focus
current efforts on the advancement of RWJ-442831, a Microcide-developed prodrug
form of the collaboration's lead parenteral cephalosporin product (RWJ-54428),
into pre-clinical toxicology studies which, if successful, would allow the
compound to advance into Phase I clinical trials. A prodrug is a modified form
of a drug which is readily converted to the active drug in the body. Preliminary
studies of RWJ-442831 in animals, conducted by Microcide, demonstrated reduced
venous irritation at the injection site compared to RWJ-54428. The Phase I
clinical trials for such cephalosporin compound may not be completed. There are
11
two other Microcide cephalosporin compounds in the Johnson & Johnson
collaboration: another parenteral compound which is in pre-clinical development
and a cephalosporin intended for oral administration, in the research stage. Our
other potential products are in the pre-clinical or research stage. Our
potential products will require significant additional research and development
efforts before we can sell them. These efforts include extensive pre-clinical
and clinical testing prior to submission to the Food and Drug Administration
(FDA) or other regulatory authority. Pre-clinical and clinical testing will
likely take several years. After submission, such potential products will be
subject to lengthy regulatory review. We cannot predict with accuracy the time
required to commercialize new pharmaceutical products.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. We do not expect any of our potential
products to be commercially available for a number of years, if at all.
Pharmaceuticals that appear to be promising at early stages of development may
not reach the market for a number of reasons including the following:
. we or our collaborators may not successfully complete our research and
development efforts;
. any pharmaceuticals we or our collaborators develop may be found to be
ineffective or to cause harmful side effects during pre-clinical testing or
clinical trials;
. we may fail to obtain required regulatory approvals for any products we
develop;
. we may be unable to manufacture enough of any potential products at an
acceptable cost and with appropriate quality;
. our products may not be competitive with other existing or future products;
and
. proprietary rights of third parties may prevent us from commercializing our
products.
IF WE ARE UNABLE TO MAINTAIN OUR CURRENT CORPORATE COLLABORATIONS OR ENTER INTO
NEW COLLABORATIONS, DEVELOPMENT OF OUR POTENTIAL PRODUCTS COULD BE DELAYED.
Our strategy for enhancing our research and development capability and
funding, in part, our capital requirements involves entering into collaboration
agreements with major pharmaceutical companies. We have entered into such
collaboration agreements with Johnson & Johnson, Daiichi Pharmaceutical Co.,
Ltd., Pfizer Inc.'s animal health group and Schering-Plough Animal Health
Corporation. Under such agreements, our collaborative partners are responsible
for:
. selecting which compounds discovered in the collaboration will proceed into
subsequent development, if any;
. conducting pre-clinical testing, clinical trials and obtaining required
approvals for such potential products; and
. manufacturing and commercializing any such approved products.
We cannot control the timing of such actions or the amount of resources
devoted to such activities by our partners. In addition, these agreements are
subject to cancellation or the election not to extend by our partners. As a
result, our receipt of revenue (whether in the form of continued research
funding, product development milestones, or royalties on sales) depends upon the
decisions made and the actions taken by our partners. Our collaborative
partners may view compounds that we may discover as competitive with such
partner's products or potential products, and therefore such partner may elect
not to proceed with the development of our potential product. Our partners are
free to pursue their own existing or alternative technologies to develop
products in preference to our potential products. We cannot be certain that our
interests will continue to coincide with those
12
of our partners, or that disagreements concerning our rights, technology, or
other proprietary interests will not arise with our partners.
Substantially all of our revenues to date have resulted from our
collaborations. We intend to continue to rely on our collaborations to fund a
substantial portion of our research and development activities over the next
several years. If our existing partners do not extend our collaborations or if
we are unable to enter into new collaborations, the development and
commercialization of our potential products may be delayed. In addition, we may
be forced to seek alternative sources of financing for such product development
and commercialization activities.
IF WE CANNOT OBTAIN SUBSTANTIAL ADDITIONAL FUNDING, WE MAY NOT BE ABLE TO
PROCEED WITH OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS.
The development of our potential pharmaceutical products will require
substantially more money than we currently have. We intend to seek to raise
such additional funding from sources including other collaborative partners and
through public or private financings involving the sale of equity or debt
securities. We cannot be certain that any financings will be available when
needed, or if available will be on acceptable terms. Funding from collaborative
partners could limit our ability to control the research, development and
commercialization of potential products, and could limit our revenues and
profits from such products, if any. Such collaborative agreements may also
require us to give up rights to products or technologies that we would otherwise
seek to develop or commercialize ourselves. Any additional equity financing will
result in dilution to our current stockholders. If we fail to secure sufficient
additional funding we will have to delay or terminate some or all of our drug
discovery and development programs.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST, EXPECT TO CONTINUE TO INCUR
LOSSES FOR THE NEXT SEVERAL YEARS AND MAY NEVER ACHIEVE PROFITABILITY.
We have incurred substantial net losses in every year since our inception
in December 1992. We had net losses of $4.6 million in 1997, $9.8 million in
1998, $10.7 million in 1999, and $13.9 million in 2000. We had an accumulated
deficit of $59.3 million through June 30, 2001. We expect to continue to incur
operating losses over the next several years.
Substantially all of our revenues to date have resulted from license fees,
research support and milestone payments under our collaborative agreements. We
will not receive revenues or royalties from drug sales until we or our
collaborative partners successfully complete clinical trials with regard to a
drug candidate, obtain regulatory approval for such drug candidate, and
successfully commercialize the drug. We do not expect to receive revenues or
royalties from sales of drugs for a number of years, if at all. If we fail to
achieve sufficient revenues to become profitable or sustain profitability, we
may be unable to continue operations.
OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN AND WE MAY NOT SUCCEED IN IDENTIFYING
ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.
We are developing a gene function based technology platform and other
proprietary technology to attempt to identify and commercialize novel
antibiotics, antifungals and antiviral agents. To date these technologies have
identified a small number of compounds that have demonstrated potential clinical
benefits. We cannot be certain that these or any other technology we may
develop will allow us to identify drug candidates that may have clinical
benefits. The failure to identify and develop new drug candidates will have a
material adverse effect on our business.
13
IF WE FAIL TO SATISFY SAFETY AND EFFICACY REQUIREMENTS OR MEET REGULATORY
REQUIREMENTS IN OUR CLINICAL TRIALS, WE WILL NOT BE ABLE TO COMMERCIALIZE OUR
DRUG CANDIDATES.
Either we or our collaborators must show through pre-clinical studies and
clinical trials that each of our pharmaceutical products is safe and effective
in humans for each indication before obtaining regulatory clearance from the FDA
for the commercial sale of that pharmaceutical. If we fail to adequately show
the safety and effectiveness of a pharmaceutical, regulatory approval could be
delayed or denied. The results from pre-clinical studies and early clinical
trials are often different than the results that are obtained in large-scale
testing. We cannot be certain that we will show sufficient safety and
effectiveness in our clinical trials that would allow us to obtain the needed
regulatory approval. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. We have observed
local irritation at the injection site in some subjects receiving RWJ-54428, one
of our potential cephalosporin products, in Phase I clinical trials conducted by
our collaborator, RWJPRI. In addressing this problem, the Company announced in
May 2001 that RWJPRI had decided to focus current efforts on the advancement of
RWJ-442831, a Microcide-developed prodrug form of the cephalosporin compound
RWJ-54428, into pre-clinical toxicology studies which, if successful, would
allow the compound to advance into Phase I clinical trials. A prodrug is a
modified form of a drug which is readily converted to the active drug in the
body. Preliminary studies of RWJ-442831 in animals, conducted by Microcide,
demonstrated reduced venous irritation at the injection site compared to RWJ-
54428. If we observe further unacceptable toxicities or other side effects, we,
our collaborators or regulatory authorities may interrupt, limit, delay or halt
the development of the drug. In addition, such unacceptable toxicities or side
effects could prevent approval by the FDA or foreign regulatory authorities for
any or all indications.
We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and
other required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
None of our drug candidates have received regulatory approval. If we fail
to obtain this approval, we will be unable to manufacture and sell our drug
products commercially. Even if we obtain regulatory approval, we may be required
to continue clinical studies even after we have started selling a
pharmaceutical. In addition, identification of certain side effects after a drug
is on the market or the occurrence of manufacturing problems could cause
subsequent withdrawal of approval, reformulation of the drug, additional pre-
clinical testing or clinical trials and changes in labeling of the product. This
could delay or prevent us from generating revenues from the sale of that drug or
cause our revenues to decline.
If we obtain regulatory approval, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we, our collaborators, or any third party that we use to
manufacture the drug will be required to adhere to regulations setting forth
current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we, our collaborators, or our third-party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA before obtaining marketing
approval.
Failure to comply with the FDA or other relevant regulatory requirements
may subject us to administrative or legally imposed restrictions. These
include: warning letters, civil penalties, injunctions, product
14
seizure or detention, product recalls, total or partial suspension of production
and FDA refusal to approve pending New Drug Applications, or NDAs, or
supplements to approved NDAs.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE THE
COMPETITIVE ADVANTAGE INHERENT IN OUR PROPRIETARY TECHNOLOGIES.
Our success depends in part on our ability to establish, protect and
enforce our proprietary rights relating to our lead compounds, gene discoveries,
screening technology and certain other proprietary technology. We have filed
approximately 80 patent applications in the United States, in addition to
applications filed in other countries, in order to protect lead compounds, gene
discoveries and screening technology, and 24 United States patents have been
issued to date on such applications. We cannot be certain that patents will be
granted with respect to any of our patent applications currently pending in the
United States or in other countries, or with respect to applications filed in
the future. For example, although in 2000 a patent was granted in the U.S.
covering our cephalosporin compounds now in development, prosecution has not yet
begun on more recently filed patent applications related to prodrugs of our
earlier inventions, as well as on our new compounds having potential for oral
administration. A prodrug is a modified form of a drug, typically having
additional beneficial properties such as improved solubility or absorption
characteristics, which is readily converted to the active drug in the body. In
our Bacterial Essential Genes Program, while three U.S. patents have been
granted covering 35 bacterial essential genes, 70 targets are still in various
stages of prosecution. Our failure to obtain patents pursuant to our current or
future applications could have a material adverse effect on our business.
Furthermore, we cannot be certain that any patents issued to us will not be
infringed, challenged, invalidated or circumvented by others, or that the rights
granted thereunder will provide competitive advantages to us. In particular, it
is difficult to enforce patents covering methods of use of screening and other
similar technologies. Litigation to establish the validity of patents, to defend
against copatent infringement claims and to assert infringement claims against
others can be expensive and time-consuming, even if the outcome is favorable to
us. If the outcome of patent prosecution or litigation is not favorable to us,
our business could be materially adversely affected.
Our commercial success also depends on our ability to operate without
infringing patents and proprietary rights of third parties. There can be no
assurance that our products will not infringe on the patents or proprietary
rights of others. For example, many companies are active in the field of
genomics, and some have filed patents on essential genes in bacteria. While we
are not currently aware of any patents encumbering our ability to practice the
technologies we have discovered, it is possible that such a patent may issue in
the future. We may be required to obtain licenses to patents or other
proprietary rights of others. Such licenses may not be available on terms
acceptable to us, if at all. The failure to obtain such licenses could delay or
prevent our collaborative partners' activities, including the development,
manufacture or sale of drugs requiring such licenses.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and technological advances which we seek to protect, in part, by
confidentiality agreements with our collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach, or that our
trade secrets, proprietary know-how and technological advances will not
otherwise become known or be independently discovered by others.
IF OTHER COMPANIES DEVELOP BETTER PRODUCTS THAN OURS OR MARKET SIMILAR PRODUCTS
SOONER, OUR PRODUCTS MAY BE RENDERED OBSOLETE OR NONCOMPETITIVE.
We operate in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase. Many of our competitors have substantially greater
financial, technical and personnel resources than we have. Although we believe
that we have identified new and distinct approaches to drug discovery, there are
other companies with drug discovery programs, at least some of the objectives of
which are the same as or similar to ours. For example, there are other companies
that have recently described cephalosporins in early stages of development which
are designed for treatment of resistant gram-positive
15
infections in hospitals, the same objective as our lead cephalosporin compound.
Similarly, several other companies are seeking to capitalize on the expanding
body of knowledge of efflux pumps in microorganisms.
Competing technologies may be developed which would render our technologies
obsolete or non-competitive. We are aware of many pharmaceutical and
biotechnology companies that are engaged in efforts to treat each of the
infectious diseases for which we are seeking to develop therapeutic products.
There can be no assurance that our competitors will not develop competing drugs
that are more effective than those developed by us and our collaborative
partners or obtain regulatory approvals of their drugs more rapidly than we and
our collaborative partners, thereby rendering our and our collaborative
partners' drugs obsolete or noncompetitive. Moreover, there can be no assurance
that our competitors will not obtain patent protection or other intellectual
property rights that would limit our and our collaborative partners' ability to
use our technology or commercialize our or their drugs.
OUR POTENTIAL PRODUCTS MAY NOT BE ACCEPTABLE IN THE MARKET OR ELIGIBLE FOR THIRD
PARTY REIMBURSEMENT, RESULTING IN A NEGATIVE IMPACT ON OUR FUTURE FINANCIAL
RESULTS.
Any products successfully developed by us or our collaborative partners may
not achieve market acceptance. The antibiotic products which we are attempting
to develop will compete with a number of well-established traditional antibiotic
drugs manufactured and marketed by major pharmaceutical companies. The degree
of market acceptance of any of our products will depend on a number of factors,
including:
. the establishment and demonstration in the medical community of the clinical
efficacy and safety of such products;
. the potential advantage of such products over existing treatment methods;
and
. reimbursement policies of government and third-party payors.
Physicians, patients or the medical community in general may not accept or
utilize any products that may be developed by us or our collaborative partners.
Our ability to receive revenues and income with respect to drugs, if any,
developed through the use of our technology will depend, in part, upon the
extent to which reimbursement for the cost of such drugs will be available from
third-party payors, such as government health administration authorities,
private health care insurers, health maintenance organizations, pharmacy
benefits management companies and other organizations. Third-party payors are
increasingly challenging the prices charged for pharmaceutical products. If
third-party reimbursement was not available or sufficient to allow profitable
price levels to be maintained for drugs developed by us or our collaborative
partners, it could adversely affect our business.
WE HAVE NO MANUFACTURING, MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO
ENTER INTO MANUFACTURING AGREEMENTS OR MAINTAIN COLLABORATIONS WITH MARKETING
PARTNERS OR IF WE ARE UNABLE TO DEVELOP OUR OWN MANUFACTURING, SALES AND
MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING OUR PRODUCTS.
We do not have any experience in the manufacture of commercial quantities
of drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our collaborative
partners for the manufacturing, marketing and sales of any products which result
from such collaborations. The current third-party manufacturer of our potential
cephalosporin product has in the past encountered difficulties with the
manufacture of related compounds in sufficient quantities for clinical trial
purposes. Manufacturers often encounter difficulties in scaling up to
manufacture commercial quantities of pharmaceutical products. We cannot be
certain that our current or any other manufacturer will not encounter similar
delays in the scale-up to manufacture this or any other compound in commercial
quantities in the future.
16
We will be required to contract with third parties for the manufacture of
our products or to acquire or build production facilities before we can
manufacture any such products. There can be no assurance that we will be able to
enter into such contractual manufacturing arrangements with third parties on
acceptable terms, if at all, or acquire or build such production facilities
ourselves.
To date we have no experience with sales, marketing or distribution. In
order to market any of our products, we will be required to develop marketing
and sales capabilities, either on our own or in conjunction with others. We
cannot be certain that we will be able to develop any of these capabilities.
HEALTH CARE REFORM MEASURES OR COST CONTROL INITIATIVES MAY NEGATIVELY IMPACT
PHARMACEUTICAL PRICING.
The levels of revenue and profitability of pharmaceutical companies may be
affected by continuing governmental efforts to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is already subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Cost control initiatives could decrease the price
that we or our collaborative partners receive for any products which we or they
may develop in the future which would adversely affect our business. Further,
to the extent that such proposals or initiatives have a material adverse effect
on our collaborative partners or potential collaborative partners, our ability
to commercialize our potential products may be materially adversely affected.
IF OUR PRODUCTS HARM PEOPLE, WE MAY EXPERIENCE PRODUCT LIABILITY CLAIMS THAT MAY
NOT BE COVERED BY INSURANCE.
We face an inherent business risk of exposure to potential product
liability claims in the event that drugs, if any, developed through the use of
our technology are alleged to have caused adverse effects on patients. Such risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. We will, if appropriate,
seek to obtain product liability insurance with respect to drugs developed by us
and our collaborative partners. However, we may not be able to obtain such
insurance. Even if such insurance is obtainable, it may not be available at a
reasonable cost or in a sufficient amount to protect us against liability.
IF WE CANNOT ATTRACT AND RETAIN MANAGEMENT AND SCIENTIFIC STAFF, WE MAY NOT BE
ABLE TO PROCEED WITH OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS.
We are highly dependent on management and scientific staff, including James
E. Rurka, our President and Chief Executive Officer, George H. Miller, Ph.D.,
our Senior Vice President - Research and Development, Donald D. Huffman, our
Vice President - Finance and Corporate Development and Chief Financial Officer
and on our other officers. Considering the time necessary to recruit
replacements, if we lose the services of any of the named individuals or other
senior management and key scientific staff, we may incur delays in our product
development and commercialization efforts or experience difficulties in raising
additional funds. We may also lose a significant amount of revenues without the
senior staff necessary to adequately maintain existing corporate collaborations
or to enter into new collaborations. We do not carry key-man life insurance on
any of our executives. We believe that our future success will depend, in part,
on our ability to attract and retain highly talented managerial and scientific
personnel and consultants. We face intense competition for such personnel from,
among others, biotechnology and pharmaceutical companies, as well as academic
and other research institutions. We cannot be certain that we will be able to
attract and retain the personnel we require on acceptable terms.
17
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS, WHICH COULD SUBJECT US TO
SIGNIFICANT LIABILITY.
As with many biotechnology and pharmaceutical companies, our activities
involve the use of radioactive compounds and hazardous materials. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. Any violation of, and the cost of compliance with, these
regulations could materially adversely affect our operations. We are subject to
periodic inspections for possible violations of any environmental or safety law
or regulation.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS AND DELAWARE LAW, TOGETHER
WITH OUR STOCKHOLDER RIGHTS PLAN, COULD MAKE THE ACQUISITION OF OUR COMPANY BY
ANOTHER COMPANY MORE DIFFICULT.
Certain provisions of our Restated Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of our company.
Such provisions could limit the price that investors might be willing to
pay in the future for shares of our common stock. These provisions
allow us to issue preferred stock without a vote or further action by our
stockholders, provide for staggered elections of our Board of Directors and
specify procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. None of these
provisions provide for cumulative voting in the election of directors. Certain
provisions of Delaware law applicable to us could also delay or make more
difficult a merger, tender offer or proxy contest involving us, including
Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits a
Delaware corporation from engaging in any business combination with any
stockholder owning fifteen percent or more of our outstanding voting stock for a
period of three years from the date such person became a 15% stockholder unless
certain conditions are met.
We adopted a stockholder rights plan, dated as of February 2, 1999,
pursuant to which our Board of Directors declared a dividend of one right for
each share of the common stock outstanding, which right entitles the holder to
purchase for $30.00 a fraction of a share of our Series A preferred stock with
economic terms similar to that of one share of the common stock. In the event
that an acquiror obtains 20% or more of our outstanding common stock, each
right, other than rights owned by the acquiror or its affiliates, will
thereafter entitle the holder thereof to purchase, for the exercise price, a
number of shares of the common stock having a then current market value equal to
twice the exercise price. If, after an acquiring person obtains 20% or more of
our outstanding common stock, we merge into another entity, an acquiring entity
merges into our company, or we sell more than 50% of our assets or earning
power, then each right, other than rights owned by the acquiring person or its
affiliates, will entitle the holder thereof to purchase for the exercise price,
a number of shares of common stock of the person engaging in the transaction
having a then current market value equal to twice the exercise price.
The possible issuance of preferred stock, the procedures required for
director nominations and stockholder proposals and Delaware law could have the
effect of delaying, deferring or preventing a change in control of Microcide,
including without limitation, discouraging a proxy contest or making more
difficult the acquisition of a substantial block of our common stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock.
MARKET CONDITIONS AND CHANGES IN OPERATING RESULTS MAY CONTINUE TO CAUSE
VOLATILITY IN THE MARKET PRICE OF OUR STOCK, MAKING FUTURE EQUITY FINANCINGS
MORE DIFFICULT.
The market price of the common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. The stock market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of particular
companies. Factors contributing to such volatility include:
. results of pre-clinical studies and clinical trials by us or our
competitors;
. announcements of new collaborations;
. announcements of our technological innovations or new therapeutic products
or that of our competitors;
. developments in our patent or other proprietary rights or that of our
competitors, including litigation;
. governmental regulation; and
. healthcare legislation.
18
Fluctuations in our operating results and market conditions for
biotechnology stocks in general could have a significant impact on the
volatility of the market price for the common stock and on the future price of
the common stock.
WE EXPECT TO RETAIN ALL FUTURE EARNINGS AND HAVE NO INTENTION TO PAY DIVIDENDS.
We have never paid any cash dividends on Microcide common stock. We
currently intend to retain all future earnings, if any, for use in our business
and do not expect to pay any dividends in the foreseeable future.
THERE IS NO ASSURANCE THAT THE COMPANY AND ALTHEXIS WILL COMPLETE THE MERGER OR
THE FINANCING OR, IF SUCH TRANSACTIONS ARE COMPLETED, THAT THE COMBINED COMPANY
WILL REALIZE ANY OF THE ANTICIPATED BENEFITS THEREFROM.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company and Althexis, including any
forecasts, projections and descriptions of anticipated synergies related to the
merger. Many factors could affect the actual financial results of the Company
and Althexis, and could cause actual results to differ materially from those in
the forward-looking statements. These factors include the following:
. the merger and the financing not being completed;
. costs or difficulties related to the integration of the businesses of the
companies being greater than expected;
. demands placed on management by the increase in the combined company's
size;
. unanticipated increases occurring in financing and other costs;
. general economic or business conditions being less favorable than
expected;
. legislative or regulatory changes adversely affecting the businesses in
which the companies are engaged; and
. other opportunities being presented to and pursued by the companies.
THERE IS NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO EFFECTIVELY AND
EFFICIENTLY INTEGRATE ITS OPERATIONS WITH THE OPERATIONS OF ALTHEXIS.
Integrating the operations and management of the Company and Althexis will
be a complex process, and there is no assurance that this integration will be
completed rapidly or will achieve all of the anticipated synergies and other
benefits expected from the merger. Moreover, the integration of the two
companies will require significant management attention, which may temporarily
distract management from its usual focus on the daily operations of the combined
company. Management's inability to integrate successfully the operations of
Microcide and Althexis, or any significant delay in achieving this integration,
could cause our business to suffer after the merger.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In some cases, these statements can be identified by the
use of forward-looking terminology such as "may," "will," "could," "should,"
"would," "expect," "anticipate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state trends and known uncertainties or
other forward-looking information. Such statements are based on current
expectations that involve a number of uncertainties including those set forth in
the risk factors above. When considering forward-looking statements, you should
keep in mind that the risk factors noted above and other factors noted
throughout this document or incorporated by reference could cause our actual
results to differ significantly from those contained in any forward-looking
statement.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosure
involves forward-looking statements. The Company is exposed to market risk
related mainly to changes in interest rates. The Company does not invest in
derivative financial instruments.
Interest Rate Sensitivity
The fair value of the Company's investments in marketable securities at
June 30, 2001 was $3.0 million with a weighted-average days to maturity at June
30, 2001 of 40 days and a weighted average interest rate of 5.16%. The Company's
investment policy is to manage its marketable securities portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio.
The Company's marketable securities portfolio is primarily invested in corporate
debt securities with an average maturity of under one year and a minimum
investment grade rating of A or A-1 or better to minimize credit risk. Although
changes in interest rates may affect the fair value of the marketable securities
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments are sold prior to maturity.
Foreign Currency Exchange Risk
At this time, the Company does not participate in any foreign currency
exchange activities, and therefore is not subject to risk of gains or losses for
changes in foreign exchange rates.
20
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Microcide Pharmaceuticals,
Inc. was held on June 21, 2001.
(b) The following Class II Directors were elected to serve for a term of
three years to expire at the Company's 2004 Annual Meeting of
Stockholders:
Name Position Term Expires
--------------------------- --------------------------- ------------
Hugh Y. Rienhoff, Jr., M.D. Class II Director 2004
John P. Walker Chairman, Class II Director 2004
The following Class I and III Directors continue to serve their
respective terms, which expire at the Company's Annual Meeting of
Stockholders in the year as noted:
Name Position Term Expires
-------------------------- ---------------------------- ------------
Keith A. Bostian, Ph.D. Class III Director 2002
Daniel L. Kisner, M.D. Class I Director 2003
James E. Rurka Class III Director 2002
David Schnell, M.D.(1) Class I Director 2003
(1) David Schnell, M.D., resigned as a Director on June 5, 2001.
(c) The matters voted upon at the meeting and the voting results were as
follows:
(i) The election of two Class II Directors for a term of three
years:
Name For Against Abstain Not Voted
---------------------------- --------- --------- ------- ---------
Hugh Y. Rienhoff, Jr., M.D. 9,191,688 20,286 -- 2,275,264
John P. Walker 9,185,747 26,227 -- 2,275,264
(ii) Approval of the Company's 2001 Incentive Stock Plan, which
initially includes up to 550,000 shares of Common Stock
reserved for issuance thereunder:
For Against Abstain Not Voted
------------ ------------- ------------- ---------
5,152,269 477,144 39,271 5,818,554
(iii) Approval to increase the number of shares of Common Stock
reserved for issuance under the Company's 1996 Amended
Employee Stock Purchase Plan from 220,000 shares to 470,000
shares:
For Against Abstain Not Voted
------------- ------------- ------------- ---------
5,449,100 204,343 15,241 5,818,554
(iv) Ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31,
2001:
For Against Abstain Not Voted
------------ ------------- ------------- ---------
9,186,734 19,040 6,200 2,275,264
21
Item 5. Other Information
Events Subsequent to June 30, 2001:
On August 6, 2001, the Company filed a current report on Form 8-K with
the Securities Exchange Commission. The purpose of the filing was to
disclose the proposed merger between the Company and The Althexis
Company, Inc. and the related financing.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits have been filed with this report:
10.34 Form of Amended and Restated Severance Agreement executed in
May 2001 by the Company and each of Donald D. Huffman,
George H. Miller, Ph.D., Robert D. Testorff and Robert B.
Kammer, M.D.
10.35* Collaborative Research and License Agreement between the
Company and NAEJA Pharmaceutical Inc. effective January 15,
2001.
* Confidential treatment requested.
(b) Reports on Form 8-K.
None.
22
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.
Dated: August 14, 2001
MICROCIDE PHARMACEUTICALS, INC.
------------------------------
(Registrant)
/s/ James E. Rurka
---------------------------------
James E. Rurka
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Donald D. Huffman
---------------------------------
Donald D. Huffman
Vice President - Finance and Corporate Development
and Chief Financial Officer
(principal financial officer)
23
Index to Exhibits
10.34 Form of Amended and Restated Severance Agreement executed in
May 2001 by the Company and each of Donald D. Huffman,
George H. Miller, Ph.D., Robert D. Testorff and Robert B.
Kammer, M.D.
10.35* Collaborative Research and License Agreement between the
Company and NAEJA Pharmaceutical Inc. effective January 15,
2001.
* Confidential treatment requested.