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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
Amendment No. 1
For the Quarterly Ended March 31, 1998 Commission File Number 0-27150
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PathoGenesis Corporation
(Exact name of Registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
201 Elliott Avenue West, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 467-8100
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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
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On May 8, 1998, the registrant had an aggregate of 16,249,935 shares of
Common Stock issued and outstanding.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements in this quarterly report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding future
revenues, expenses and profits. These forward-looking statements are subject to
known and unknown risks, uncertainties or other factors which may cause the
actual results of the Company to be materially different from historical results
or any results expressed or implied by the forward-looking statements. Factors
that could cause actual results to differ materially include, but are not
limited to, uncertainties related to the fact that PathoGenesis began commercial
operations only recently, its dependence on TOBI, third party reimbursement and
product pricing, government regulation, drug development and clinical trials,
competition and alternative therapies. Further information regarding these and
other factors is discussed in PathoGenesis' 1997 annual report on Form 10-K,
which was filed with the Securities and Exchange Commission.
Overview
The Company was organized in December 1991 to develop novel drugs to treat
serious, chronic human infectious diseases where there is a significant need for
improved therapy. From its incorporation through the end of 1997, the Company
engaged primarily in research, development, clinical trials and administrative
activities.
In December 1997, the United States Food and Drug Administration (FDA)
approved the Company's first drug, TOBI/TM/ (tobramycin solution for
inhalation). TOBI is a stable, premixed, proprietary formulation of the
antibiotic tobramycin for delivery by inhalation using a nebulizer. The drug is
indicated for the management of cystic fibrosis patients with Pseudomonas
aeruginosa (P. aeruginosa). The Company began marketing TOBI in the U.S. in
January 1998. In March 1998, the Company filed for approval to market TOBI to
cystic fibrosis patients in Canada. It expects to apply for regulatory approval
in the United Kingdom in the fourth quarter of 1998.
Currently, the Company is investigating TOBI in patients with
bronchiectasis (a form of severe chronic bronchitis) and tuberculosis and is
developing a second drug candidate, PA-1648, an oral drug candidate that may be
a potential replacement for the antibiotic rifampin in tuberculosis treatment.
The Company hopes to report the results of all three trials by year-end. In
addition, the Company is developing other inhaled and oral drug candidates for
lung infections.
Results of Operations
The first quarter of 1998 was a period of transition for the Company. For
the first time since incorporation, the Company had revenue from sales of a drug
product. It also achieved overall profitability for the first time.
Nevertheless, the Company reported an operating loss of $113,553. This result
reflects a planned increase in operating expenses and costs incurred in
manufacturing and launching TOBI, including expenses associated with
establishing a sales force. In addition, the Company continued to engage in
research and development to develop potential products. However, when net other
income was included, the Company earned a modest profit. Based on the current
TOBI sales trend, the Company anticipates that it will be profitable for 1998,
although there can be no assurance that the Company will achieve a profit.
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Revenues. Revenues in the first quarter of 1998 totaled $14,664,897,
including $14,527,031 from TOBI sales. The balance of $137,866 was generated by
research grants and royalties. Revenues for the corresponding period in 1997
were $86,238, which were entirely generated by research grants and royalties.
The Company plans to add three salespersons to its current sales force of 21 to
accelerate TOBI's market penetration. The Company expects TOBI sales in the
second and third quarters to be in roughly the same range as the first quarter.
Third quarter sales may not exceed second quarter sales. This is because cystic
fibrosis patients are less likely to visit their doctors in the summer, as a
result of which the Company expects fewer new patients to begin taking TOBI in
mid-year. That fact also means it is likely that more new patients will start
treatment with TOBI in the fall and winter, which may strengthen fourth quarter
sales. However, there can be no assurance that actual sales of TOBI will meet
the Company's expectations.
Operating Expenses. The Company incurred total operating expenses of
$14,778,450 in the first quarter of 1998, more than double the amount
($7,163,358) for the corresponding period in 1997. The cost of manufacturing and
marketing TOBI accounted for the major part of the increase. In addition,
research and development expenses increased as the Company continued to develop
new drug candidates. Because total selling, general and administrative expenses
in the first quarter of 1998 included one-time TOBI launch costs, selling,
general and administrative expenses should moderate in the remainder of 1998.
However, there can be no assurance that future developments will not result in
cost increases.
The cost of goods sold was $2,669,816 in the first quarter of 1998. The
Company did not have any such cost in the corresponding period in 1997. Selling,
general and administrative expenses increased to $5,533,230 in the first quarter
of 1998 from $1,340,646 for the corresponding period in 1997. The increase in
those expenses reflects the costs associated with establishing and supporting a
sales force and launching of TOBI. The Company expects selling, general and
administrative expenses to moderate in the remainder of the year.
Research and development expense for the first quarter increased by
$752,692 to $6,575,404 in 1998 from $5,822,712 for the corresponding period in
1997. Such increase was primarily due to ongoing Phase II clinical trials of
TOBI for bronchiectasis and tuberculosis, as well as a Phase II clinical trial
of PA-1648.
Net Income (Loss). Operating loss decreased significantly in the first
quarter of 1998, to $113,553 from $7,077,120 for the corresponding period in
1997, due to revenues generated from TOBI sales. Including net other income, the
Company had net income of $984,590, compared to a net loss of $6,225,888 for the
first quarter of 1997. Other income primarily represents income from the
Company's investment securities. In the first quarter of 1998, net investment
income increased by $249,590 to $1,131,643 from $882,053 for the corresponding
period in 1997. Such increase was due primarily to higher average invested cash
balances.
Liquidity and Capital Resources
The Company has financed its operations since incorporation primarily by
the issuance of equity securities.
The Company's combined cash, cash equivalents and investment securities
totaled $67,780,536 at March 31, 1998, a decrease of $11,260,596 from the
balance at December 31, 1997. The primary uses of cash and investments during
the quarter ended March 31, 1998, were to finance the Company's
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operations and working capital requirements. Net cash used in operating
activities totaled $10,071,003 for the three months ended March 31, 1998, as
compared to $5,131,468 in the three months ended March 31, 1997. The increase
principally resulted from the launch of TOBI at the beginning of 1998. In the
first quarter of 1998, accounts receivable and inventories increased by
$10,001,529 and $1,134,938, respectively. Total current liabilities decreased by
$1,423,107 in the three months ended March 31, 1998, as compared to an increase
of $612,176 in the first quarter of 1997. At March 31, 1998, the Company had
working capital of $79,607,575 and a current ratio of 12.91 to 1.
The Company plans to continue its policy of investing excess funds in
government securities and investment grade, interest-bearing securities
primarily with an expected maturity of one-and-one-half years or less.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 26, 1998.
PathoGenesis Corporation
By: /s/ Wilbur H. Gantz
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Wilbur H. Gantz
Chairman and Chief Executive Officer
By: /s/ Alan R. Meyer
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Alan R. Meyer
Executive Vice President and
Chief Financial Officer
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