SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19171
ICOS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 91-1463450
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22021 - 20th Avenue S.E., Bothell, WA 98021
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(Address of principal executive offices) (Zip code)
(425) 485-1900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
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Common Stock, $0.01 par value 42,981,823
ICOS CORPORATION
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TABLE OF CONTENTS
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PAGE NO.
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PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 1
Consolidated Statements of Comprehensive Operations for the three months
ended March 31, 1999 and 1998 2
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk 14
PART II. Other Information
ITEM 1: Legal Proceedings *
ITEM 2: Changes in Securities *
ITEM 3: Defaults Upon Senior Securities *
ITEM 4: Submission of Matters to a Vote of Security Holders *
ITEM 5: Other Information *
ITEM 6: Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBITS 17
* No information provided due to inapplicability of item.
(This page left blank intentionally.)
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
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1999 1998
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Revenues:
Collaborative research and development from related parties $15,645 $ 6,084
Other 500 500
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Total revenues 16,145 6,584
Operating expenses:
Research and development 22,263 14,449
General and administrative 801 791
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Total operating expenses 23,064 15,240
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Operating loss (6,919) (8,656)
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Other income (expense)
Equity in losses of affiliates (1,501) (37)
Investment income 1,141 511
Other, net 94 -
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(266) 474
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Net loss $(7,185) $(8,182)
===================== ====================
Net loss per common share - basic and diluted $(0.17) $(0.21)
===================== ====================
Weighted average common shares outstanding - basic and diluted 42,138 39,898
See accompanying notes to consolidated financial statements. Page 1
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
(unaudited)
Three months ended
March 31,
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1999 1998
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Net loss $(7,185) $(8,182)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period (4) 21
Less reclassification adjustments for gains
included in net loss - (20)
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Total other comprehensive income (loss) (4) 1
----------------------- ----------------------
Comprehensive loss $(7,189) $(8,181)
======================= ======================
See accompanying notes to consolidated financial statements. Page 2
ICOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
ASSETS
March 31, December 31,
1999 1998
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(unaudited)
Current assets:
Cash and cash equivalents $ 57,708 $ 69,584
Investment securities available for sale, at market value 7,895 8,090
Interest receivable 680 391
Receivables from related parties under collaborative arrangements 9,305 7,524
Other receivables 557 267
Prepaid expenses 720 501
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Total current assets 76,865 86,357
Property and equipment, at cost:
Land 2,310 2,310
Buildings and improvements 9,461 9,461
Leasehold improvements 9,742 9,805
Furniture and equipment 20,381 18,865
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41,894 40,441
Less accumulated depreciation and amortization 22,107 21,135
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19,787 19,306
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Construction in progress 314 270
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Net property and equipment 20,101 19,576
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Loan receivable from related party 7,341 7,341
Investment in affiliates 8,564 -
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Other assets 108 73
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$112,979 $113,347
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,086 $ 6,080
Accrued payroll and benefits 1,246 1,005
Federal income taxes payable - 648
Other accrued expenses 5,204 6,881
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Total current liabilities 9,536 14,614
Stockholders' equity:
Preferred stock, $.01 par value. 2,000,000 shares authorized; none issued - -
Common stock, $.01 par value. 100,000,000 shares authorized; 42,687,565
issued and outstanding at March 31, 1999 and 41,482,043 issued and
outstanding at December 31, 1998 427 415
Additional paid-in capital 201,323 189,436
Accumulated other comprehensive loss (7) (3)
Accumulated deficit (98,300) (91,115)
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Total stockholders' equity 103,443 98,733
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$112,979 $113,347
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See accompanying notes to consolidated financial statements. Page 3
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31,
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1999 1998
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Cash flows from operating activities:
Net loss $ (7,185) $ (8,182)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 972 869
Amortization of investment premiums/discounts 5 132
Gain on sale of investment securities - (20)
Equity in losses of affiliates 1,501 37
Change in operating assets and liabilities:
Interest receivable (289) (55)
Receivables under collaborative arrangements from related parties (1,781) (323)
Other receivables (290) (64)
Prepaid expenses (219) (132)
Accounts payable (2,994) 739
Accrued payroll, benefits and other expenses (2,084) 299
Deferred research and development revenue - 500
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Net cash used in operating activities (12,364) (6,200)
Cash flows from investing activities:
Purchases of investment securities (7,422) (11,118)
Maturities of investment securities 7,608 -
Sales of investment securities - 19,021
Acquisitions of property and equipment (1,497) (1,398)
Equity investment in affiliate (10,000) -
Decrease (increase) in other assets (100) -
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Net cash provided by (used in) investing activities (11,411) 6,505
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Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 10,744 159
Proceeds from issuance of warrants 1,155 822
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Net cash provided by financing activities 11,899 981
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Net increase (decrease) in cash and cash equivalents (11,876) 1,286
Cash and cash equivalents at beginning of period 69,584 1,404
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Cash and cash equivalents at end of period $ 57,708 $ 2,690
==================== ====================
Supplemental disclosure of noncash financing and investing activities:
Acquisition of property and equipment financed through
accounts payable - 171
Receivable for issuance of warrants - 181
Supplemental disclosure of cash paid for income taxes 648 -
==================== ====================
See accompanying notes to consolidated financial statements. Page 4
ICOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (unaudited) and December 31, 1998
1. Summary of Significant Accounting Policies
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Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. In the opinion of management of ICOS Corporation
("ICOS" or the "Company"), the information reflects all adjustments necessary to
make the results of operations for the interim period a fair statement of such
operations. All such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year. For a
presentation including all disclosures required by generally accepted accounting
principles, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998, included in the Company's Annual Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, ICOS Development Corporation. All significant
intercompany transactions and balances have been eliminated.
2. Research and Development Arrangements
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Suncos
The Company owns a 50% interest in Suncos Corporation ("Suncos"), a
corporation formed for the development and commercialization of Pafase (TM).
Pursuant to the terms of agreements entered into with Suncos, the Company
conducts certain research and development activities on behalf of Suncos and is
paid for such services based upon costs incurred. For the three months ended
March 31, 1999 and 1998, the Company recognized cost reimbursement revenue under
this arrangement of $4.7 million and $2.4 million, respectively.
In March 1999, the Company and Suntory Limited of Japan ("Suntory") each
made an equity investment in Suncos of $10 million. Accordingly, the Company
recognized $1.4 million of expense, equal to its 50% share of Suncos' 1999 first
quarter net loss incurred subsequent to Suncos' expenditure of its initial
capital of $30 million.
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ICOS Clinical Partners, L.P.
In 1997, ICOS Clinical Partners, L.P. (the "Partnership"), an affiliate of
the Company, completed the sale to private investors of interests in the
Partnership. Proceeds from the offering are being used by the Partnership to
fund continued development of product candidates by the Company pursuant to the
terms of a Product Development Agreement based on three compounds: LeukArrest
(TM), Pafase(TM) and ICM3. For the three months ended March 31, 1999 and 1998,
the Company recognized cost reimbursement revenue from the Partnership of $5.2
million and $3.7, respectively.
Lilly ICOS, LLC
In October 1998, the Company and Eli Lilly and Company ("Lilly") formed
Lilly ICOS LLC ("Lilly ICOS"), a 50/50 owned limited liability company, to
jointly develop and globally commercialize phosphodiesterase type 5 inhibitors
(PDE 5) as oral therapeutic agents for the treatment of both male and female
sexual dysfunction. For the three months ended March 31, 1999, the Company
recognized cost reimbursement revenue under this arrangement of $5.7 million.
The joint venture is being capitalized by Lilly through cash infusions and
the contribution by the Company of intellectual property associated with IC351
and its research platform. The technology contributed to Lilly ICOS by the
Company had a zero basis for financial reporting purposes and accordingly, the
Company has recorded its investment in Lilly ICOS as zero. The Company will not
report its proportionate share of Lilly ICOS' results of operations until such
time that the Company makes capital contributions to Lilly ICOS, if ever.
3. Net Loss Per Common Share
-------------------------
Basic earnings per share ("EPS") is based on the weighted average number of
common shares outstanding during the period. Diluted EPS is based on the
potential dilution that would occur on exercise or conversion of securities into
common stock using the treasury stock method. Securities included in the
Company's calculation of diluted EPS include all dilutive stock options,
dilutive stock warrants and dilutive contingently issuable stock warrants.
For the quarter ended March 31, 1999, options to acquire 7.1 million shares
of common stock with a weighted average exercise price of $11.40 per share,
warrants to acquire 5.2 million shares of common stock with a weighted average
exercise price of $9.45 per share and contingently issuable stock warrants to
acquire 7.6 million shares of common stock have been excluded from the
computation of diluted net loss per common share because they are antidilutive.
For the quarter ended March 31, 1998, options to acquire 6.3 million shares of
common stock with a weighted average exercise price of $8.58 per share, warrants
to acquire 7.6 million shares of common stock with a
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weighted average exercise price of $9.45 per share and contingently issuable
stock warrants to acquire 7.6 million shares of common stock have been excluded
from the computation of diluted net loss per common share because they are
antidilutive.
4. Business Segments
-----------------
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information
based on how management internally evaluates the operating performance of its
business units (segments). The Company's operations are confined to one
business segment, the discovery and development of proprietary pharmaceuticals
for the treatment of inflammatory diseases and other serious medical conditions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Risks and Uncertainties
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The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes included elsewhere in
this report. This discussion contains forward-looking statements that are
subject to certain risks and uncertainties including, without limitation,
statements of the Company's plans, objectives, expectations and intentions. The
Company's actual results could differ materially from those anticipated or
implied by the forward-looking statements discussed here. Factors that could
cause or contribute to such differences include those discussed under "Important
Factors Regarding Forward-Looking Statements" in the Company's annual report on
Form 10K for the year ended December 31, 1998. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
Overview
The Company is discovering and developing proprietary pharmaceuticals for
the treatment of inflammatory diseases and other serious medical conditions.
The Company's fundamental strategy is to identify and develop a significant
number of potential product candidates into breakthrough products with high
commercial potential. By understanding the underlying biochemical and
physiological mechanisms and identifying the cellular and molecular entities
involved in the disease process, the Company is developing product candidates
that address important opportunities in the treatment of acute and chronic
diseases that have inflammatory components as well as certain cardiovascular
diseases and cancer. Through this strategy, the Company believes it will be
able to develop novel therapeutics that are more selective than those presently
available.
Financial results for the first quarter of 1999 reflect planned increases
in operating expenses necessary for advancing multiple therapeutic product
candidates through the development process. Development activities include
product development, process development and the establishment and management of
clinical trials. The
Page 8
Company expects increased clinical, regulatory, process development and product
development activities over the remainder of the year and in future periods.
The Company has an accumulated deficit at March 31, 1999 of $98.3 million.
The Company's results of operations may vary significantly from quarter to
quarter and will depend on, among other factors, the timing of certain expenses
and payments received from certain collaborations, joint ventures, partnerships
and other business relationships, as well as the progress of the Company's own
research and development efforts, timing of clinical trials and the regulatory
process. The Company expects increased expenditures over the next several
quarters as it continues to expand the size and number of clinical trials of its
product candidates, continues to expand preclinical research and development
activities in support of additional potential product candidates, and initiates
clinical trials of those product candidates deemed most promising.
Revenues
Revenues for the quarter ended March 31, 1999 totaled $16.1 million and
consisted of (i) $5.2 million in cost reimbursement from ICOS Clinical Partners
LLP ("the Partnership"), (ii) $4.7 million in cost reimbursement from Suncos
Corporation ("Suncos"), (iii) $5.7 million in cost reimbursement from Lilly ICOS
LLC ("Lilly ICOS"), and (iv) $0.5 million received under the Company's research
and development agreement with Abbott Laboratories ("Abbott"). Revenues for the
first quarter of 1998 totaled $6.6 million, and consisted of (i) $3.7 million in
cost reimbursement from the Partnership, (ii) $2.4 million in cost reimbursement
from Suncos, and (iii) $0.5 million received under the Company's research and
development agreement with Abbott.
Operating Expenses
Total operating expenses for the quarter ended March 31, 1999 increased to
$23.1 million from $15.2 million for the quarter ended March 31, 1998.
Research and development expenses for the first quarter of 1999 increased
to $22.3 million from $14.4 million for the first quarter of 1998. The increase
in research and development expenses was due primarily to costs associated with
the progression of clinical trials for LeukArrest(TM), Pafase(TM), IC351 and
ICM3, and the expansion of other product development efforts.
General and administrative expenses for both the first quarter of 1999 and
1998 totaled $0.8 million.
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Other Income and Expense
Other income primarily represents investment income earned on the Company's
investment securities and interest accrued on the Company's loan to the
Partnership. Investment income for the first quarter of 1999 totaled $1.1
million compared to $0.5 million for the first quarter of 1998. This increase
was due primarily to higher average cash and investment balances during the
first quarter of 1999 compared to the first quarter of 1998. Total interest
accrued on the loan to the Partnership was $0.2 million for both the first
quarter of 1999 and the first quarter of 1998.
In March 1999, the Company and Suntory Limited of Japan ("Suntory") each
made an equity investment in Suncos of $10 million. Accordingly, the Company
recognized $1.4 million of expense, equal to its 50% share of Suncos' 1999 first
quarter net loss incurred subsequent to Suncos' expenditure of its initial
capital of $30 million.
Net Loss
For the quarter ended March 31, 1999, the Company's net loss decreased to
$7.2 million or $0.17 per share from $8.2 million or $0.21 per share for the
first quarter of 1998. The decrease in net loss was due primarily to increased
cost reimbursement revenues, partially offset by increased research and
development expenses.
Liquidity & Capital Resources
The Company's future cash requirements and expense levels will depend on
many factors, including continued scientific progress in its research and
development programs, the results of research and development, preclinical
studies and clinical trials, acquisitions of products or technology, if any,
relationships with corporate collaborators, competing technological and market
developments, the time and costs involved in filing and prosecuting patents and
enforcing patent claims, the regulatory process, the time and costs of
manufacturing scale-up and commercialization activities, and other factors. The
Company has financed its operations since inception primarily through private
and public sales of the Company's common stock, investment income, and revenue
from research and development collaborations, corporate joint ventures, limited
partnerships and license payments.
At March 31, 1999, the Company had $66.3 million in cash and cash
equivalents, investment securities, and interest receivable, a decrease of $11.8
million from December 31, 1998. This decrease is primarily attributable to
continuing costs associated with clinical trials for LeukArrest(TM), Pafase(TM),
IC351 and ICM3 and the Company's $10 million equity investment in Suncos,
partially offset by increased cost reimbursement revenues and $11.9 million of
proceeds from the exercise of stock options and warrants.
Page 10
For the three months ended March 31, 1999, the Company spent $1.5 million
for the purchase of capital equipment and leasehold improvements to support
research and development activities. To support its ongoing and future research
and product development efforts over the next several years, the Company will
need to purchase additional capital equipment and lease or purchase additional
laboratory and administrative facilities.
The Company anticipates that its operating expenses will continue to
increase during 1999 and in subsequent quarters as it adds the personnel and
facilities associated with advancing potential product candidates through
development and clinical trials. Foreseeable incremental costs may include, but
are not limited to, those associated with the Company's own product development,
preclinical studies and clinical trials, patent filings and administrative
activities. The Company may also incur costs and make capital contributions
under its joint venture agreement with Suntory and Lilly related to the
development of Pafase(TM) and IC351, respectively. Under provisions of the
development agreements with Suncos and Lilly ICOS, the Company is to be
reimbursed for certain of these costs. There can be no assurance that all such
costs will be reimbursed.
The Company anticipates that its existing cash, including interest income
from investments and anticipated payments from Suncos, Lilly ICOS and the
Partnership, will be adequate to satisfy its cash requirements until mid 2000.
However, the amounts and timing of expenditures will depend on the progress of
ongoing research and development, the rate at which operating losses are
incurred, the execution of development and licensing agreements with potential
corporate partners, the Company's development of products, the Food and Drug
Administration ("FDA") regulatory process, and other factors, many of which are
beyond the Company's control.
The Company has been successful in negotiating collaborations and joint
development agreements with other parties where the work and strategies of the
other parties complement those of the Company. In some instances, these
relationships may involve commitments by the Company to fund some or all of
certain development programs. Although corporate collaborations, partnerships
and joint ventures have provided cost reimbursement revenue to the Company in
the past, there can be no assurance that such funds will be available to the
Company in the future. The Company intends to expand its operations and hire
the additional personnel deemed necessary to continue development of its current
portfolio of product candidates in clinical trials, as well as continuing
discovery and preclinical research to identify additional potential drug
candidates. The Company anticipates that expansion of these activities will
increase operating expenses in future quarters. Further, incremental
expenditures will be required for additional laboratory, production and office
facilities to accommodate activities and the personnel associated with this
increased development activity. As such, the Company will need to raise
substantial additional funds to conduct its research and development activities,
preclinical studies, clinical trials and pre-marketing activities necessary to
bring its product candidates to market and to establish marketing capabilities
if and when product candidates are ready for commercialization. There can be no
assurance that additional funds will be available as needed or on terms that are
acceptable to the Company. Insufficient funding will require the
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Company to delay, scale-back or eliminate some or all of its research and
development activities, planned clinical trials and administrative programs.
Year 2000
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Overview
The Year 2000 problem is the result of computer programs being written
using two, rather than four, digits to define the applicable year. Unless
corrected, those systems with time-sensitive software may recognize a date
ending in "00" as the year 1900 rather than the year 2000, potentially resulting
in system failures or miscalculations.
Readiness
Based on an initial review of its computer systems and a survey of its key
outside vendors, the Company presently believes that Year 2000 issues will not
pose significant operational problems. The Company believes that it can correct
the majority of its internal Year 2000 issues with certain modifications to
existing software and selective conversion to new software and hardware. In
addition, most of the Company's software and computer equipment have been
purchased within the last five years and as such, have been manufactured with
Year 2000 considerations in mind. Finally, all of the Company's critical
software applications have been purchased from third-party vendors, the majority
of which have already provided upgrades to bring their products into Year 2000
compliance. The Company estimates that it has already addressed the majority of
expected internal Year 2000 issues through normal upgrades and new purchases of
software and computer equipment. While the Company does not believe its Year
2000 issues will be significant to its operations, it has established a plan to
proactively identify and address remaining Year 2000 issues. Currently, the
Company is in the process of analyzing its software and computer systems and the
Year 2000 status of its key outside vendors. The Company is contacting software
and hardware vendors and its key outside vendors to confirm Year 2000 compliance
for each item or vendor identified in the analysis. Based on the information
gathered from each vendor, the Company will implement a Year 2000 solution if
warranted. Finally, the Company will perform tests of relevant systems and
correct any Year 2000 issues that are identified.
Costs
An initial review of the Company's computer systems showed that a majority
of the Company's software, hardware, and embedded controllers have been
manufactured with Year 2000 issues in mind. As such, the Company believes that
the cost of identifying and correcting any internal Year 2000 issues will be
minimal.
Risks
It is possible that after analyzing its systems for Year 2000 issues,
making necessary upgrades and replacements to its systems and testing its
systems, the Company may still encounter Year 2000 problems.
Page 12
Furthermore, it is possible that some of the Company's key outside vendors will
experience Year 2000 problems. Year 2000 problems with the Company's computer
systems or its key outside vendors, might cause delays in development activities
or in clinical trials and ultimately delay the launch of products or have other
effects on the Company's operations. The Company anticipates that its highest
Year 2000 risks are in the Clinical and Manufacturing areas, as failures in
these areas may delay development or increase the time to bring a product to
market.
Contingency Plans
The Company is in the process of establishing contingency plans to address
any Year 2000 issues.
Page 13
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts payable and a note receivable from a related
party. The Company does not use derivative financial instruments in its
investment portfolio. The Company's exposure to market risk for changes in
interest rates relates primarily to its short-term investments, thus,
fluctuations in interest rates would not have a material impact on the fair
value of these securities.
Page 14
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The company did not file any reports on Form 8-K during the
Quarter Ended March 31, 1999.
Page 15
SIGNATURE
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.
ICOS CORPORATION
Date: May 14, 1999 By: /S/ GEORGE B. RATHMANN
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George B. Rathmann
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: May 14, 1999 By: /S/ HOWARD S. MENDELSOHN
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Howard S. Mendelsohn
Chief Accounting Officer
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Index to Exhibits
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Page
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27.1 Financial Data Schedule #
___________________________________
# Filed with this document
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