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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________.
Commission File Number: 0-22788
ARRIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2969941
- -------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices)
(650) 829-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[x] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 15,164,260 as of October 31, 1997.
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ARRIS PHARMACEUTICAL CORPORATION
INDEX
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) *
Consolidated Balance Sheets - September 30, 1997 and December 31,1996........ 3
Consolidated Statements of Operations - Three and nine months
ended September 30, 1997 and 1996.................................. 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996........................................ 5
Notes to Consolidated Financial Statements - September 30, 1997.............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9
PART II: OTHER INFORMATION .................................................15
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
SIGNATURES...................................................................16
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Report on Form 10-K for the year ended December 31, 1996, filed on
March 31, 1997.
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ARRIS PHARMACEUTICAL CORPORATION
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (1)
------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 31,638 $ 10,822
Short-term marketable investments 23,681 37,021
Prepaid expenses and other current assets 2,064 2,217
---------- ----------
Total current assets 57,383 50,060
Long-term marketable investments 995 11,627
Restricted investments - 7,250
Property and equipment, net 12,759 10,446
Other assets 1,715 1,449
---------- ----------
TOTAL ASSETS $ 72,852 $ 80,832
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,201 $ 1,439
Accrued compensation 1,570 1,480
Other accrued liabilities 1,686 1,570
Current portion of deferred revenue 6,886 10,783
Current portion of capital lease and debt obligations 1,519 1,984
---------- ----------
Total current liabilities 12,862 17,256
Deferred revenue, noncurrent 83 1,973
Capital lease and debt obligations, net of current portion 13,255 8,703
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
shares authorized, none issued or outstanding - -
Common stock, $.001 par value; 30,000,000 shares
authorized, 15,164,260 shares and 14,831,975 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 117,410 115,904
Note receivable from officer (200) (200)
Accumulated deficit (70,558) (62,804)
---------- ----------
Total stockholders' equity 46,652 52,900
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,852 $ 80,832
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
(1) The balance sheet at December 31, 1996 has been derived from the audited
financial statement at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $ 5,548 $ 5,161 $ 18,413 $ 16,195
Operating expenses:
Research and development 7,527 5,615 22,841 18,126
General and administrative 1,930 1,289 5,132 3,879
Acquired in-process
research and development - 230 - 230
---------- ---------- ----------- -----------
Total operating expenses 9,457 7,134 27,973 22,235
---------- ---------- ----------- -----------
Operating loss (3,909) (1,973) (9,560) ( 6,040)
Interest income 745 879 2,513 2,198
Interest expense (325) (208) (707) (486)
---------- ---------- ----------- -----------
Net loss $ (3,489) $ (1,302) $ (7,754) $ (4,328)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net loss per share $ (0.23) $ (0.09) $ (0.52) $ (0.34)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Shares used in computing net loss per share 15,070 14,136 14,978 12,803
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
-------------------------
1997 1996
----------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,754) $ (4,328)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Depreciation and amortization 3,212 2,981
Stock grants issuable to employees - 21
Loss on disposal of fixed assets - 184
Acquired in-process research and development - 230
Changes in assets and liabilities:
Prepaid expenses and other current assets 602 (1,665)
Other assets (398) (15)
Accounts payable, accrued liabilities and
deferred revenue (6,269) (2,821)
----------- ----------
Net cash and cash equivalents used in operating activities (10,607) (5,413)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases (4,999) (10,915)
Maturities 749 -
Purchase of held-to-maturity securities:
Purchases (9,683) (59,323)
Maturities 37,906 17,653
Purchase of restricted cash (4,000) -
Release of restrictions on cash 11,250 -
Note receivable from officer - (750)
Purchase of property and equipment (5,394) (3,765)
----------- ----------
Net cash and cash equivalents provided by (used in)
investing activities 25,829 (57,100)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,506 43,043
Proceeds from notes payable and lease financing 16,150 6,164
Principal payments on notes payable and capital leases (12,062) (3,993)
----------- ----------
Net cash and cash equivalents provided by financing
activities 5,594 45,214
----------- ----------
Net increase (decrease) in cash and cash equivalents 20,816 (17,299)
Cash and cash equivalents, beginning of period 10,822 21,706
----------- ----------
Cash and cash equivalents, end of period $ 31,638 $ 4,407
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Arris Pharmaceutical Corporation, a Delaware corporation ("Arris" or the
"Company"), uses an integrated drug discovery approach combining
structure-based drug design, combinatorial chemistry and its proprietary
Delta Technology to discover and develop a number of diverse synthetic small
molecule therapeutics for commercially important disease categories where
existing therapies have significant limitations. Arris' product development
programs include protease discovery programs targeting the inhibition of
enzymes implicated in asthma, inflammatory disease, osteoporosis, cancer and
autoimmune disease. The Company's technology platform also includes
receptor-based discovery programs designed to discover small molecule drugs
that mimic important therapeutic proteins that are already successful
products.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Arris Protease, Inc., and Arris
Pharmaceuticals Canada, Inc. ("Arris Canada"). All significant intercompany
accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company according to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to state fairly the financial
position and results of operations as of and for the periods indicated. The
results of operations for the three- and nine-month periods ended September
30, 1997 are not necessarily indicative of the results to be expected for
subsequent quarters or the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1996
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTE PAYABLE
On September 29, 1997, the Company replaced its Bank of America line of
credit with a new credit agreement with Sumitomo Bank, Limited and Silicon
Valley Bank jointly to provide up to $20 million dollars in debt financing.
Interest only payments are due quarterly until September 30, 1998, at which
time principal and interest is payable in 48 monthly installments. Interest
is computed on a Eurodollar rate, which was approximately 7.7% on September
30, 1997. The loan is subject to certain financial covenants over the course
of the agreement. The Company was in compliance with all covenants at
September 30, 1997. The balance outstanding on this loan at September 30, 1997
was $11.8 million.
3. STOCK OPTION PLANS
On May 21, 1997, stockholders approved the Company's 1989 stock option plan,
as amended to increase the aggregate number of shares of common stock
authorized for issuance under such plan by 750,000 shares, to 3,417,500
shares.
On August 31, 1997, the Company adopted the 1997 Non-Officer Equity Incentive
Stock Option Plan, whereby non-officer employees and consultants may be
issued nonqualified stock options to purchase the Company's common stock at
the discretion of the board of directors. All options granted under this
plan become exercisable pursuant to the applicable terms of the grant.
Generally the exercise price of the options are granted at fair market value,
vest ratably over four years and expire ten years from the date of grant.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The
requirement is expected to have no effect on earnings per share for the nine
months ended September 30, 1997 and 1996. The impact of Statement 128 on the
calculation of diluted earnings per share for these periods is also expected
to have no effect.
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ARRIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER RECENT PRONOUNCEMENTS
In 1997, Statement of Financial Accounting Standard No. 130 (SFAS 130)
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standard No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information" were issued and are effective for fiscal years
commencing after December 15, 1997. The Company will comply with the
requirements of SFAS 130 and SFAS 131 in fiscal year 1998.
6. SUBSEQUENT EVENT
On November 2, 1997, the Company signed a definitive agreement with Sequana
Therapeutics, Inc. ("Sequana"), pursuant to which the Company will acquire
all of the outstanding Common Stock of Sequana based on an exchange ratio of
1.35 shares of the Company's Common Stock for each share of Sequana. The
acquisition will be accounted for as a "purchase" and is valued at
approximately $166 million.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER "CERTAIN BUSINESS RISKS" BELOW AS WELL AS ELSEWHERE HEREIN,
TOGETHER WITH THOSE DISCUSSED IN "ITEM 1. BUSINESS" AND "BUSINESS RISKS" IN
THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, FILED
MARCH 31, 1997.
OVERVIEW
Since its inception in April 1989, the Company has devoted substantially all
of its resources to its research and development programs. To date, the
Company's only source of revenue has been its corporate collaborations with
Pharmacia & Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"),
Bayer AG ("Bayer"), SmithKline Beecham Corporation ("SB"), Merck & Co.
("Merck") and Abbott Laboratories ("Abbott"). Its collaborations have taken
a variety of forms including, in each case, certain of the following
elements: payments to the Company of an up-front commitment fee, purchase of
the Company's common stock (PNU human growth hormone collaboration only),
research funding payments, purchase of compounds produced, milestone payments
when milestones are achieved, and royalties upon the sale of any resulting
products. Where appropriate, the up-front commitment fees have been recorded
as deferred revenue until earned.
In September 1997, the Company announced the results of the third in a series
of Phase IIa studies of APC-366, a tryptase inhibitor for the treatment of
asthma. The results of this crossover study of bronchial hyperresponsiveness
showed improvement over the placebo control in two-thirds of the trial's
asthmatic patients, however, did not reach statistical significance as
measured by the amount of histamine (PD-20) required to produce a drop of 20
percent or more in FEV-1, a measure of lung function.
The Company has not been profitable since inception and expects to incur
substantial losses for at least the next several years, primarily due to the
cost of its research and development programs, including preclinical studies
and human clinical trials. The Company expects that losses will fluctuate
from quarter to quarter, that such fluctuations may be substantial, and that
results from prior quarters may not be indicative of future operating
results. As of September 30, 1997, the Company's accumulated deficit was
approximately $70.6 million.
RESULTS OF OPERATIONS
Revenue
The Company's revenues increased to $5.5 million and $18.4 million for the
three- and nine-month periods ended September 30, 1997, respectively,
compared to $5.2 million and $16.2 million, respectively, for the comparable
periods in 1996. All of the Company's revenues presently are attributable to
collaborations with PNU, Amgen, Bayer, SB, Merck and Abbott. The increases in
1997 were primarily due to: (i) the full effects of the research funding for
the
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
collaboration with SB to develop inhibitors using Arris' Delta technology
targeting intracellular viral proteases, which commenced in June 1996 and
expanded in July 1997; (ii) the research funding for the collaboration
with Merck to develop small molecule inhibitors of proteases involved in
osteoporosis, which commenced in November 1996; (iii) the shipment of small
molecule synthetic organic compounds under the combinatorial chemistry
collaboration with PNU (250,000 total compounds are due under the three-year
agreement), which commenced in March 1996; and (iv) the recognition of a
portion of a license fee from Abbott for the transfer of technology, which
commenced in June 1997. These increases were partially offset by lower
revenues recognized under the erythropoeitin collaboration with Amgen, in
which the research funded portion ended during the first quarter of 1997 and
the human growth hormone collaboration with PNU, in which the research funded
portion will end in 1997.
Research and development
Research and development expenses increased to $7.5 million and $22.8 million
for the three- and nine-month periods ended September 30, 1997, respectively,
from $5.6 and $18.1 million in the comparable periods in 1996. This increase
was primarily due to the higher expenditures associated with the clinical
trials of APC-366 and investments in proprietary research programs. Research
and development expenses as a percentage of total expenses has remained
relatively constant at approximately 80% and 82% of total expenses for the
three- and nine-months ended September 30, 1997 and approximately 79% and 82%
for the comparable periods in 1996. The Company expects its research and
development costs will increase for the remainder of 1997 in absolute dollars
when compared to 1996 as a result of further expansion of its proprietary
research programs, conduct of preclinical studies, and clinical trials.
General and administrative
The Company's general and administrative expenses increased to $1.9 million
and $5.1 million for the three- and nine-month periods ended September 30,
1997, from $1.3 and $3.9 million in the comparable periods in 1996. The
increase in expenses for the three- and nine-month periods was primarily due
to additional headcount in Business Development and Finance, as well as costs
associated with additional facility space. In spite of the overall increase,
general and administrative expenses as a percentage of total expenses
remained relatively constant at approximately 20% and 18% for the three- and
nine-month periods ended September 30, 1997 and approximately 18% and 17% for
the comparable periods in 1996. The Company expects its general and
administrative costs will increase for the remainder of 1997 in absolute
dollars when compared to 1996 in order to provide corporate support for
expanding research and development efforts.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest income and expense
Interest income decreased to $745,000 for the three-months ended September
30, 1997, from $879,000 for the same period in 1996 and increased to $2.5
million for the nine-months ended September 30, 1997 from $2.2 million for
the same period in 1996. The decrease for the three-months ended September
30, 1997 compared to the same period in 1996 was primarily due to the
decrease in average cash balances between the periods. The increase for the
nine-months ended September 30, 1997 compared to the same period in 1996 was
primarily due to the increase in average cash balances between the periods,
resulting from receipt of net proceeds of approximately $36 million from the
public offering of 3,000,000 shares of the Company's Common Stock which
closed on March 27, 1996, and approximately $5.5 million from the exercise on
April 24, 1996 by the underwriters of the over allotment option of 450,000
shares in the public offering. The receipt of up-front fees collected under
new collaborations, proceeds from research funding and collection of revenues
from the shipment of compounds under the collaboration with PNU have helped
to sustain the cash levels. Interest expense increased to $325,000 for the
three-month period ended September 30, 1997, from $208,000 for the same
period in 1996, and increased to $707,000 for the nine-months ended September
30, 1997, from $486,000 for the same period in 1996. The increase for the
three- and nine-month periods ended September 30, 1997 was the result of
higher debt balances primarily from the previous line of credit with Bank of
America. The Company has only used draw downs from that line for capital
acquisitions during the nine-months ended September 30, 1997. The Company
expects interest expense to fluctuate as financing needs change for further
expansion of the Company's facilities and acquisition of lab equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of its Capital Stock and through corporate
collaborations. As of September 30, 1997, the Company had realized
approximately $92.5 million in net proceeds from offerings of its Capital
Stock. In addition, the Company has realized $75 million from its corporate
collaborations (excluding the $5.4 million equity investment in the Company
made by PNU).
The Company's principal sources of liquidity are its cash and investments,
which totaled $56.3 million as of September 30, 1997. In September 1997, the
Company entered into a new credit agreement with Sumitomo Bank, Limited and
Silicon Valley Bank jointly, for borrowings up to $20 million. As of
September 30, 1997 the Company had borrowed $11.8 million and had $8.2
million remaining available under this agreement.
Net cash used in operating activities during the nine-month period ended
September 30, 1997 was $10.6 million compared to $6.2 million in the same
period in 1996. The increase was primarily due to the increase in net loss
for the nine months ended September 30, 1997 and the timing of cash received
under the Company's collaboration agreements. Cash used in operating
activities is expected to fluctuate from quarter to quarter depending, in
part, upon the
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
timing and amounts, if any, of cash received from existing and any new
collaboration agreements.
The Company also spent approximately $5.4 million for the purchase of
property, plant and equipment during the nine months ended September 30,
1997. Additional equipment will be needed as the Company increases its
research and development activities. The Company received net financing of
$4.1 million, which was comprised of borrowings under existing credit
instruments and payments under lease agreements, during the nine-months ended
September 30, 1997.
The Company's revenues presently are attributable to collaborations with PNU,
Amgen, Bayer SB, Merck and Abbott. The research phase of the Amgen
erythropoeitin collaboration ended in February 1997. The proof of concept
phase of the SB collaboration has been extended through the end of 1997 and
can be extended by SB for an additional six month period, at which time it
may enter into a research phase. The human growth hormone collaboration with
PNU and research support of the Bayer collaboration for an oral tryptase
inhibitor extends through the fourth quarter of 1997. The research support
for the Factor Xa program with PNU and the osteoporosis program with Merck
extends through third and fourth quarters of 1998, respectively. The
Combinatorial Chemistry collaboration with PNU extends beyond the next 12
months. If the Company is unable to renew or replace any of these
collaborations or extend the SB collaboration into the research phase, such
events may have a material adverse effect on the Company's business and
financial condition.
The Company expects that its existing capital resources, including research
and development revenues from existing collaborations, will enable the
Company to maintain current and planned operations through at least the next
42 months. The Company may need to raise substantial additional capital to
fund its operations beyond the end of such period. The Company expects that
it will seek such additional funding through new collaborations, through the
extension of existing collaborations or through public or private equity or
debt financing.
There can be no assurance that additional financing will be available on
acceptable terms or at all. Any additional funds raised by issuing equity
securities, may result in further dilution to stockholders. If adequate
funds are not available, the Company may be required to delay, to reduce the
scope of or to eliminate one or more of its research or development programs
or to obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies or products that the Company would otherwise seek to develop or
commercialize itself.
RECENT EVENTS
On November 3, 1997 the Company announced that it had signed a definitive
agreement with Sequana Therapeutics, Inc. ("Sequana"), pursuant to which the
Company will acquire all
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of the outstanding stock of Sequana based on an exchange ratio of 1.35 shares
of the Company's common stock for each share of Sequana. The combined
Company is proposed to be renamed AxyS Pharmaceuticals, Inc. and will trade
on the Nasdaq National Market System. The acquisition is valued at
approximately $166 million, will be accounted for as a "purchase" and is
expected to result in a substantial charge related to "in-process" technology
when the transaction is completed, which is currently expected to take place
in early 1998. The transaction is expected to qualify as a tax-free
reorganization and has been approved by the Boards of Directors of both
corporations. The transaction must be approved by the stockholders of each
company. Certain stockholders owning approximately 19% of the outstanding
Common Stock of Sequana have agreed to vote their shares in favor of the
transaction. The completion of the transaction is subject to certain risks,
including, but not limited to, the potential inability to complete the merger
as scheduled, or at all, potential problems associated with integrating the
two companies, including the risk that key employees will choose to leave,
acceptance of the combined companies by corporate partners of each company,
some of whom will have the right to terminate their collaborations as the
result of the merger, acceptance of the merger by the stockholders of each
company and by the market, as well as those associated with the ongoing
businesses of each company as discussed in their respective SEC filings.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development. The Company's technologies
are, in many cases, new and all are still under development. All of the
Company's proposed products are in research or development and will require
significant additional research and development efforts prior to any
commercial use, including extensive preclinical and clinical testing as well
as lengthy regulatory approval. There can be no assurance that the Company's
research and development efforts will be successful, that any of its proposed
products will prove to be safe and efficacious in the clinical trials or that
any commercially successful products will ultimately be developed by the
Company. In addition, many of the Company's currently proposed products are
subject to development and licensing arrangements with the Company's
collaborators. Therefore, the Company is dependent on the research and
development efforts of these collaborators. Moreover, the Company is
entitled only to a portion of the revenues, if any, realized from the
commercial sale of any of the proposed products covered by the
collaborations. The Company has experienced significant operating losses
since its inception and expects to incur significant operating losses over at
least the next several years. The development of the Company's technology
and proposed products will require a commitment of substantial funds to
conduct these costly and time consuming activities. All of the Company's
revenues to date have been received pursuant to the Company's collaborations.
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ARRIS PHARMACEUTICAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Should the Company or its collaborators fail to perform in accordance with
the terms of their agreements, any consequent loss of revenue under the
agreements could have a material adverse effect on the Company's results of
operations. The proposed products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that
such products can be manufactured at a cost or in quantities necessary to
make them commercially viable. The Company has no sales, marketing or
distribution capability. If any of its products subject to collaborative
agreements are successfully developed, the Company must rely on its
collaborators to market such products.
If the Company develops any products which are not subject to collaborative
agreements, it must either rely on other pharmaceutical companies to market
such products or must develop a marketing and sales force with technical
expertise and supporting distribution capability in order to market such
products directly.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and products. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding protection of patents and proprietary
rights, government regulation and uncertainties regarding health care reform.
These risks and uncertainties are discussed further in "Item 1. - Business -
Business Risks" on Form 10-K for the year ended December 31, 1996, filed by
the Company March 31, 1997.
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ARRIS PHARMACEUTICAL CORPORATION
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.47 Loan agreement among the registrant and Sumitomo
Bank, Limited and Silicon Valley Bank, dated September 29, 1997.
27 Financial Data Schedule.
b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter
ended September 30, 1997.
15
ARRIS PHARMACEUTICAL CORPORATION
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.
ARRIS PHARMACEUTICAL CORPORATION
Date: November 14, 1997 By: /S/ JOHN P. WALKER
-------------------------------------------
John P. Walker
President, Chief Executive Officer and
Director
Date: November 14, 1997 By: /S/ FREDERICK J. RUEGSEGGER
-------------------------------------------
Frederick J. Ruegsegger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16