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EXHIBIT 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This exhibit contains forward-looking statements within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results
could differ materially from those in the forward-looking statements as a result
of a number of factors including the ability to attract additional collaborative
partners, development or availability of competing systems, and the ability to
meet existing collaborative commitments. You are encouraged to review the risk
factors discussed in "Business - Risk Factors" and elsewhere in Aurora's Form
10-K for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission for a more complete discussion of those risks and
uncertainties.
OVERVIEW
Aurora Biosciences Corporation designs, develops and commercializes advanced
drug discovery technologies, services and systems to accelerate the discovery of
new medicines. Our core technologies include a broad portfolio of proprietary
fluorescent assay technologies, including our GeneBLAzer(TM) and VIPR(TM)
technologies; our functional genomics GenomeScreen(TM) program; our automated
master compound store, the AMCS; our ultra-high throughput screening system, the
UHTSS(TM) Platform; and subsystems to miniaturize and automate drug screening
and profiling assays derived from those technologies.
In October 2000, we merged with Quorum Sciences, Inc. in a combination accounted
for as a pooling-of-interests. Accordingly, Management's Discussion and Analysis
of Financial Condition and Results of Operations reflects the financial
condition and results of operations for the merged entity for the periods
presented.
In November 2000, we announced that we have entered into a definitive merger
agreement under which we will acquire PanVera Corporation, a biotechnology
company engaged in manufacturing and marketing protein drug targets and drug
screening assays for high-throughput screening. The transaction, expected to
close in the first quarter of 2001 pending regulatory approvals and customary
closing conditions, will be accounted for using the pooling-of-interests method.
We had an accumulated deficit of $16.7 million as of September 30, 2000. We may
encounter significant fluctuations in our quarterly financial performance
depending on factors such as revenue from existing and future contracts and
collaborations, timing of the delivery of technologies and systems, completion
of contracted service commitments to our customers and integration of acquired
businesses. We may also continue to enter into strategic transactions and
programs which could include acquisitions of other companies, joint ventures,
collaborations, divestitures, reorganizations and research and development
undertakings. Accordingly, our results of operations for any period may not be
comparable to, or predictive of, the results of operations for any other period.
Revenue is predominately derived from sales of services, technology and
instruments and intellectual property licenses. Revenue to date has been
generated from a limited number of customers in the life sciences industry in
the United States and Europe. Many of our agreements provide for future
milestone payments from drug development achievements and royalties from the
sale of products derived from certain of our technologies. However, customers
may not ever generate products from technology provided by us and thus we may
not ever receive milestone payments or royalties. We believe our ability to
maintain profitability is not dependent on receipt of milestone payments or
royalties.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenue
Revenue increased 90% to $50.5 million in 1999 from $26.6 million in 1998, which
was an increase of 78% from $14.9 million in 1997. The increase in 1999 resulted
primarily from new agreements executed during the year, including a five-year
services, systems and technology access collaborative agreement with Pfizer,
Inc., drug discovery services agreements with Pharmacia & Upjohn, Inc. and
F.Hoffman-LaRoche, and licensing agreements with Clontech Laboratories, Inc. and
ZymoGenetics, Inc. Increased revenue under a collaborative agreement with
Bristol-Myers Squibb Pharmaceutical Research Institute executed in 1996 also
contributed to the overall increase in
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revenue in 1999. The increase in 1998 resulted primarily from our collaborative
agreements with Warner-Lambert Company and Merck & Co., Inc. executed in 1997,
and an agreement with Warner-Lambert executed in 1998 to develop an automated
master compound storage, or AMCS(TM) system.
Expenses
Total operating expenses increased 9% to $51.5 million in 1999 from $47.1
million in 1998, which was an increase of 193% from $16.1 million in 1997. The
increases in operating expenses resulted primarily from our growth, our product
development efforts, drug discovery services offerings and research and
development programs. This growth was reflected by the increase to 190 employees
at December 31, 1999 from 152 at December 31, 1998 and 88 at December 31, 1997,
and by the expansion of facilities in October 1997 to 81,000 square feet from
22,000 square feet.
Cost of revenue increased 17% to $27.9 million in 1999 from $23.8 million in
1998, which was an increase of 241% from $7.0 million in 1997. In addition to
the growth of operations as noted above, the increases in cost of revenue was
primarily a result of increased purchases of materials and increased technology
development expenses related to the development of the UHTSS Platform, the AMCS
and screening subsystems for our collaborators. Also contributing to the
increase in 1999 were costs related to the completion of contracted service
commitments under new drug discovery services agreements.
Research and development decreased 32% to $11.6 million in 1999 from $17.1
million in 1998, which was a 217% increase from $5.4 million in 1997. The
decrease in 1999 reflects a shift in drug discovery services resources from
internal research and development to external customer-funded activities to
support new as well as ongoing drug discovery services agreements in 1999. In
addition, non-recurring items in 1998 such as licensing of technology from OSI
Pharmaceuticals, Inc. and Xenometrix, Inc. and the costs of initiating a
collaboration with SIDDCO, Inc. to produce a large library of compounds for our
UHTSS Platform contributed to the decrease in 1999 and the increase in 1998. The
increase in 1998 was also attributable to ongoing development of a UHTSS
Platform and an AMCS for us, and the expansion of our human cell functional
genomics GenomeScreen(TM) program.
Selling, general and administrative expenses increased 96% to $11.9 million in
1999 from $6.1 million in 1998, which was a 66% increase from $3.7 million in
1997. The increases were primarily attributable to the growth of operations as
noted above, including increases in staffing of the executive, legal and
commercial development functions.
Interest and Other Income
Net interest income decreased 53% to $0.9 million in 1999 from $1.8 million in
1998, which was a 24% increase from $1.4 million in 1997. The decrease in 1999
primarily reflected interest income from lower average cash and investment
balances during the year. The increase in 1998 resulted from interest income
from higher average cash and investment balances due to receipts under
collaborative agreements and proceeds from our initial public offering in June
1997. Interest income was partially offset by interest expense incurred on
capital lease and loan obligations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue
Total revenue increased 54% from the nine months ended September 30, 1999 to the
nine months ended September 30, 2000 (the "nine-month period"). The increase in
revenue resulted from our existing collaborations with Pfizer (including our
original collaboration with Warner-Lambert, acquired by Pfizer in June 2000),
acceptance of Module Two of the UHTSS Platform by Merck, and new agreements
entered into since September 30, 1999, including a therapeutic drug discovery
agreement with the Cystic Fibrosis Foundation, as well as ion channel technology
agreements with Glaxo Wellcome, American Home Products, R.W. Johnson
Pharmaceutical Research Institute and Organon.
Expenses
Total operating expenses increased 25% for the nine-month period. The increases
in operating expenses resulted primarily from our growth, reflected by the
increase to 235 full-time employees at September 30, 2000 from 182 full-time
employees at September 30, 1999. Cost of revenue increased 31% for the
nine-month period, related to the continuing development of the UHTSS Platform,
the AMCS system and screening subsystems for our customers, as well as
instrument sales and drug discovery services performed under the new agreements.
For the nine-month period, research and development expenses increased only 12%,
despite our overall growth, with the assignment of scientific resources to
support revenue-generating programs. Selling, general and administrative
expenses increased
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26% for the nine-month period, primarily attributable to the growth of the
sales, marketing and legal functions in addition to increased professional
services expenses.
Interest and Other Income
Net interest and other income increased 887% for the nine-month period, due to
the increased cash and investment balances resulting from a $71 million private
placement of 1.8 million shares of common stock in February 2000 and a $1.7
million gain from the sale of shares of Cytovia, Inc. upon its acquisition by
Maxim Pharmaceuticals, Inc. in June 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we held cash, cash equivalents and investment securities
available-for-sale of $107 million and working capital of $105 million. We have
funded our operations since inception primarily through the issuance of equity
securities with aggregate net proceeds of $135 million, receipts from corporate
collaborations and strategic technology alliances of $133 million, capital
equipment lease and loan financing of $13 million and interest income of $11
million.
We have entered into certain contractual commitments, subject to satisfactory
performance by third parties, which obligate expenditures totaling approximately
$5.5 million over the next four years.
Our strategy for the UHTSS Platform includes the establishment of a syndicate of
collaborators to provide us with funding for development, technology and
personnel resources and payments for system validation. The UHTSS Platform
co-development syndicate currently includes Bristol-Myers Squib, Warner-Lambert
(acquired by Pfizer in June 2000), Merck and Pfizer. We have also entered into
agreements with Warner-Lambert and Pfizer to develop AMCS systems. In addition,
we have entered into collaborations with the Cystic Fibrosis Foundation,
Families of Spinal Muscular Atrophy and the Hereditary Disease Foundation to
provide screen development and/or screening services, and with Warner-Lambert,
Merck, Becton Dickinson, the National Cancer Institute and Pfizer for functional
genomics programs. We have entered into ion channel technology agreements with
Bristol-Myers Squib, Eli Lilly and Company, Glaxo Wellcome, American Home
Products, Merck, N.V. Organon and R.W. Johnson Pharmaceutical Research
Institute. Other collaborations include a combinatorial chemistry agreement with
SIDDCO to synthesize large libraries of chemical compounds for us.
Our ability to achieve sustained profitability will be dependent upon our
ability to deliver and obtain acceptance of equipment by collaborators, perform
contracted screening services, sell or license new products and services, and
increase market share of existing discovery services and technologies by
agreements with new collaborators and expansion of agreements with existing
collaborators. We may not be able to meet our revenue goals or sustain
profitability on a quarterly or annual basis. Although we are actively seeking
to enter into additional collaborations, we may not be able to negotiate
additional collaborative agreements on acceptable terms, if at all. Some of our
current collaborative agreements may be terminated by the collaborator without
cause upon short notice, which would result in loss of anticipated revenue.
Although certain of our collaborators would be required to pay some penalties in
the event they terminate their agreements without cause, any of our
collaborators may elect to terminate their agreements with us. In addition,
collaborators may terminate their agreements for cause if we cannot deliver the
technology in accordance with the agreements. Our collaborators may not perform
their obligations as expected and we may not derive any additional revenue from
the agreements. Current or future collaborative agreements may not be successful
and provide us with expected benefits. Termination of our existing or future
collaborative agreements, or the failure to enter into a sufficient number of
additional collaborative agreements on favorable terms or generate sufficient
revenues from our services and technologies could have a material adverse effect
on our business, financial condition or results of operations.
An important element of our strategy includes entering into strategic
transactions and evaluating strategic programs in order to maximize our business
opportunities and enhance stockholder value. These transactions and programs
could include acquisitions of other companies, joint ventures, collaborations,
divestitures, reorganizations and research and development undertakings. We
cannot assure you, however, that such transactions or programs will ultimately
take place on terms favorable to us or at all, or will ultimately maximize the
company's business opportunities or enhance stockholder value. Such transactions
and programs could have a number of adverse effects on us, including significant
diversions of management resources, substantial write-offs or other accounting
charges, requiring us to raise substantial additional capital, dilution to
stockholders from the issuance of additional shares, significant variances
between analysts projections and actual financial results, and volatility in our
stock price.
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The complexity of both the UHTSS and the AMCS has led to delays in developing
these platforms that may lead to contractual disputes regarding the delivery and
acceptance of these platforms by our customers. Because we are also dependent in
part on the performance of our customers and suppliers in order to deliver these
platforms, our ability to timely deliver these platforms may be outside of our
control. Our agreement with Warner-Lambert provides for a penalty payment up to
a maximum of $888,300 if we fail to deliver the completed AMCS according to a
specified development schedule. Failing to meet the development schedules under
any of our UHTSS and AMCS agreements could have a material adverse effect on our
business, financial condition or results of operations.
We may be required to raise additional capital over the next several years in
order to expand our operations or acquire new technology. This capital may be
raised through additional public or private equity financings, borrowings and
other available sources. Our business or operations may change in a manner that
would consume available resources more rapidly than anticipated and substantial
additional funding may be required before we can sustain profitable operations.
We may not continue to generate sales from and receive payments under existing
collaborative agreements and existing or potential revenue may not be adequate
to fund our operations. If additional funding becomes necessary, it may not be
available on favorable terms, if at all. If adequate funds are not available, we
may be required to curtail operations significantly or to obtain funds by
entering into arrangements with others that may have a material adverse effect
on our business, financial condition or results of operations.
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