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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 ending September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 00-23473
COMBICHEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0617379
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9050 Camino Santa Fe, San Diego, CA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 530-0484
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.
(1) [X] Yes [ ] No; (2) [X] Yes [ ] No
As of November 11, 1998 there were 13,423,838 shares of $.001 par value common
stock outstanding.
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COMBICHEM, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets At September 30, 1998 (unaudited) and December 31, 1997........ 1
Condensed Statements of Operations (unaudited) for the Three and Nine months ended
September 30, 1998 and 1997.................................................... 2
Condensed Statements of Cash Flows (unaudited) for the Nine months ended
September 30, 1998 and 1997.................................................... 3
Notes To Condensed Financial Statements.................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 14
PART II - OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
</TABLE>
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COMBICHEM, INC.
CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 21,617 $ 5,867
Short-term investments 10,046 11,055
Accounts receivable 874 528
Prepaid expenses and other current assets 968 767
-------- --------
Total current assets 33,505 18,217
Property and equipment, net 7,587 5,961
Other assets 704 1,348
-------- --------
Total assets $ 41,796 $ 25,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 893 $ 881
Accrued liabilities 1,180 1,394
Deferred revenue 2,712 1,476
Current portion of obligations under capital leases 2,552 1,569
-------- --------
Total current liabilities 7,337 5,320
Deferred rent 129 91
Obligations under capital leases, less current portion 3,250 3,284
Redeemable convertible preferred stock, $.001 par value: -- 23,130
Authorized shares - 63,196,296 shares and no shares on
December 31, 1997 and September 30, 1998, respectively;
Issued and outstanding shares - 31,019,635 shares and no shares
on December 31, 1997 and September 30, 1998, respectively
Stockholders' equity (deficit):
Preferred stock, $.001 par value
Authorized shares - no shares and 5,000,000 shares on December 31,
1997 and September 30, 1998, respectively; Issued and outstanding
shares - no shares issued or outstanding on December 31, 1997 or
September 30, 1998 -- --
Common stock, $.001 par value:
Authorized shares - 80,000,000 shares and 40,000,000 shares on
December 31, 1997 and September 30, 1998, respectively; Issued and
outstanding shares - 3,227,005 shares and 13,406,338 shares on
December 31, 1997 and September 30, 1998, respectively 13 3
Additional paid-in capital 51,859 12,520
Notes receivable from employees (346) (419)
Deferred compensation (1,251) (1,582)
Accumulated deficit (19,195) (16,821)
-------- --------
Total stockholders' equity (deficit) 31,080 (6,299)
-------- --------
Total liabilities and stockholders' equity $ 41,796 $ 25,526
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 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 accompanying notes
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COMBICHEM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Project initiation fees and
milestone payments $ 1,850 $ 2,000 $ 4,900 $ 2,000
Research and development
funding 2,042 1,278 5,996 2,599
-------- -------- -------- --------
Total revenue 3,892 3,278 10,896 4,599
Expenses:
Research and development
Collaborative 2,424 1,392 6,674 2,631
Proprietary 1,449 1,052 4,164 3,354
-------- -------- -------- --------
3,873 2,444 10,838 5,985
General and administrative 1,011 1,071 3,020 2,356
-------- -------- -------- --------
Total operating expenses 4,884 3,515 13,858 8,341
-------- -------- -------- --------
Loss from operations (992) (237) (2,962) (3,742)
Interest income 479 128 1,004 438
Interest expense (130) (28) (387) (165)
Foreign tax expense -- (200) (30) (200)
-------- -------- -------- --------
Net loss $ (643) $ (337) $ (2,375) $ (3,669)
======== ======== ======== ========
Net loss per share $ (0.05) $ (0.37) $ (0.30) $ (12.55)
======== ======== ======== ========
Shares used in calculating
net loss per share 12,758 909 7,870 292
======== ======== ======== ========
</TABLE>
See accompanying notes
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COMBICHEM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,374) $ (3,669)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,317 560
Deferred rent 38 46
Deferred revenue 1,237 (942)
Amortization of deferred compensation 331 75
Change in operating assets and liabilities:
Accounts receivable (346) 148
Prepaid expenses and other current assets (58) (123)
Accounts payable and accrued liabilities (203) 179
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (58) (3,726)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (11,762) (6,646)
Maturities of short-term investments 12,500 14,697
Purchases of property and equipment (2,815) (1,741)
Other assets (91) (5)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,168) 6,305
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on capital lease obligations 2,251 1,506
Principal repayments on capital lease obligations (1,302) (617)
Receipt of payment on note from stockholder 73 0
Deferred public offering costs (587) 0
Issuance of common stock, net of repurchased shares 17,558 127
Restricted cash given as collateral for letter of credit (17) 325
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 17,976 1,341
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,750 3,920
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,867 367
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,617 $ 4,287
======== ========
</TABLE>
See accompanying notes
3
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COMBICHEM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information. 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. Interim results
are not necessarily indicative of the results that may be expected for
the year. For further information refer to the financial statements and
footnotes thereto for the year then ended December 31, 1997 included in
the Company's prospectus (dated May 8, 1998) for its initial public
offering.
2. Computation of Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS 128), which requires the presentation of
basic and diluted earnings per share. Basic earnings per share reflects
the historical weighted average shares of common stock and excludes any
dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share includes the dilutive effect of such
securities. All earnings per share amounts for all periods conform to
SFAS 128 and the requirements of Staff Accounting Bulletin No. 98.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in
computing certain loss per share data. The Company previously considered
redeemable convertible preferred stock, which converted in conjunction
with the Company's initial public offering (IPO) , as outstanding in
pre-IPO periods from the date of original issuance ("as if converted
method"). To conform with the recent interpretations, the Company has
revised its calculation of loss per share for all pre-IPO periods to
exclude the impact of redeemable convertible preferred shares. For
comparison purposes, if redeemable convertible preferred stock were
included as outstanding during the three and nine months ended September
30, 1997, using the as if converted method, basic loss per share would
have been ($.04) and ($.46), respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including the Company's dependence on the execution of new collaborative
agreements and other factors relating to the Company's growth as well as those
discussed below at "Risks and Uncertainties." While this outlook represents
management's current judgment on the future direction of the business, such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. The Company undertakes no obligation to
release publicly the results of any revisions to these forward-looking
statements to reflect events or circumstances arising after the date hereof.
OVERVIEW
CombiChem, Inc. is a computational drug discovery company that is
applying its proprietary design technology and rapid synthesis capabilities to
accelerate the discovery process for new drugs. The Company believes its
approach offers pharmaceutical, biotechnology and agrochemical companies the
opportunity to conduct their drug discovery efforts in a more productive and
cost-effective manner. Using its proprietary Discovery Engine(TM) process, the
Company focuses on the generation, evolution and optimization of potential new
lead candidates for its collaborative partners, who will then develop,
manufacture, market and sell any resulting projects. CombiChem believes that its
process is widely applicable to a variety of disease targets and therapeutic
indications. To date, the Company has established collaborative agreements with
Teijin Limited ("Teijin"), Roche Bioscience, a division of Syntex (U.S.A.) Inc.
("Roche Bioscience"), Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone
Systems Incorporated ("ImClone"), Athena Neurosciences, Inc., a wholly owned
subsidiary of Elan Corporation, plc ("Elan/Athena"), ICOS Corporation ("ICOS")
and Novartis Crop Protection AG ("Novartis"). In addition, the Company intends
to use its approach on internal programs to discover new lead candidates and
then to outlicense them to third parties, while retaining a larger economic
interest.
The Company's revenue to date is primarily attributable to the receipt
of project initiation fees, milestone payments and research funding. Project
initiation fees are received from the Company's collaborators upon, or shortly
following, execution of the collaborative agreement. Milestone payments are
received from collaborators upon achievement of certain pre-determined
objectives. Research funding is received by the Company in connection with the
performance of research services under the collaborative agreement. Research
funding typically is received only during the life of the research program under
the particular collaboration. In addition, the Company may receive advance
payments from its collaborators or potential collaborators, which require the
Company to complete certain performance obligations. Such payments are recorded
as deferred revenue when received and are recognized as revenue when the
Company's performance obligations have been met, as evidenced by the
collaborator's written approval and acceptance. The collaborative activities for
which the Company receives revenue typically occur over a one- to three-year
period if multiple projects are anticipated, or one to two years for single
project collaborations, although the agreements provide for earlier termination
in certain circumstances. The Company expects that a significant portion of its
revenue for the foreseeable future will be comprised of such payments, although
the receipt of project initiation fees will be dependent on the Company's
ability to enter into additional collaborative agreements which provide for such
fees and the timing of such payments will be difficult to predict. In addition,
the timing of certain revenue in the future will depend upon the completion of
certain milestones as provided for in the Company's collaborative agreements,
which are contingent and uncertain. Milestone fees may be earned for different
events or achievements in different agreements and for certain collaborations,
such fees may not be earned until the collaborator has advanced products into
clinical testing. In any one fiscal quarter the Company may earn multiple or no
payments from its collaborators. Operating results may therefore vary
substantially from period to period and will not necessarily be indicative of
results in subsequent periods. Completion of the research phase of a single
project collaboration or a single project within a broad multiple project
collaboration is not expected to have a material adverse effect on the Company's
business. However, the termination or conclusion of any collaborative agreement
could have a material adverse effect on the Company's business, and the failure
of the Company to enter into additional collaborative agreements on favorable
terms would have a material adverse effect on the Company's business.
The Company has not been profitable since inception and has incurred a
cumulative net loss of $19.2 million through September 30, 1998. Losses have
resulted principally from costs incurred in research and development activities
related to the Company's efforts to develop its technologies and from the
associated administrative costs required to support these efforts. The Company's
ability to achieve profitability is dependent on its ability to market its
technology and capabilities to pharmaceutical, biotechnology and agrochemical
companies.
5
<PAGE> 8
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 and 1997
Revenue
The Company's revenue for the three months ended September 30, 1998 was
$3.9 million, up from $3.3 million for the same period in 1997. Revenue was
$10.9 million for the nine months ended September 30, 1998 compared to $4.6
million for the same period ended 1997. The increase in revenue reflects the
increase in the number of projects in the active collaboration phase. Revenue
for the first nine months of 1998 includes $4.9 million for project initiation
fees and milestone achievements, and $6.0 million for research support. Project
initiation fees were paid under two new collaborative agreements with Novartis
and ICOS. Three milestone payments were received from Roche Bioscience and one
from Teijin.
Operating Expenses
Research and development expenses for the three months ended September
30, 1998 totaled $3.9 million compared to $2.4 million for the same period in
1997. Research and development expenses were $10.8 million and $6.0 million for
the nine months ended September 30, 1998 and 1997, respectively. Research and
development costs incurred on behalf of the Company's collaborators increased
$1.0 and $4.1 million for the three and nine month periods, respectively, due to
an increase in the number of projects in the active collaboration phase.
Research and development costs incurred to advance the Company's proprietary
technologies increased $.3 million and $.8 million for the three and nine month
periods, respectively. The Company expects research and development spending to
increase over the next several years due to increased activities related to
collaborations, internal programs and technology development.
The Company's general and administrative expenses for the three months
ended September 30, 1998 totaled $1.0 million compared to $1.1 million for the
same period in 1997. General and administrative expenses increased $0.6 million
to $3.0 million from $2.4 million for the nine months ended September 30, 1998
and 1997, respectively. This increase reflects increased business development
activities and administrative support for the Company's continued expansion.
These expenses will likely increase in future periods to support the projected
growth of the Company.
Net Loss
The Company's net loss for the three months ended September 30, 1998 was
$0.6 million compared to $0.3 million for the same period in 1997. The net loss
for the nine months ended September 30, 1998 decreased $1.3 million to $2.4
million from $3.7 million for the same period in 1997. The decreased loss for
both periods is primarily attributable to increased revenue from project
initiation fees and milestone achievements, as well as increased research
funding partially offset by increased collaborative research and development
expenses.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1998, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payments from corporate collaborators,
and the utilization of capital equipment lease financing. In May 1998, the
Company completed an initial public offering (IPO) of 2,359,500 shares of its
Common Stock (including partial exercise of the underwriters' over-allotment
option), generating net proceeds of approximately $16.2 million.
Net cash used in operating activities for the nine months ended
September 30, 1998 was $0.1 million compared to net cash used of $3.7 million
for the corresponding period in 1997. The decrease in net cash used in operating
activities was primarily attributable to the reduction of the Company's net loss
and the collection of pre-payments or advance payments from collaborators.
At September 30, 1998, the Company held cash and cash equivalents and
short-term investments with a value of $31.7 million. The Company's working
capital at September 30, 1998 was $26.2 million. The Company has maintained
capital lease arrangements since 1994. Under these arrangements, the Company has
funded certain capital expenditures with lease terms ranging from 36 to 48
months in duration. As of September 30, 1998, the Company had utilized $8.4
million of an available $11.4 million financing facility. The Company expects
the net proceeds from the IPO completed in May 1998 and the interest income
thereon, together with the existing cash and
6
<PAGE> 9
cash equivalents, short term investments, operating revenues, and lease
financing arrangements, will be sufficient to finance its working capital and
capital requirements for the foreseeable future. The Company's capital
requirements depend on numerous factors, including the ability of the Company to
enter into additional collaborative arrangements, competing technological and
market developments, changes in the Company's existing collaborative
relationships, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, the purchase of additional
capital equipment, the progress of the Company's drug discovery programs and the
progress of the commercialization of milestone- and royalty-bearing compounds by
the Company's collaborators. The Company may be required to raise additional
capital over a period of several years in order to continue to conduct its
operations. Such capital may be raised through additional public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. In addition, the Company may from time to time earn milestone
fees under its collaborations. Milestone fees may be earned for different events
or achievements in different agreements. Furthermore, for certain
collaborations, such fees may not be earned until the collaborator has advanced
products into clinical testing. Such milestones may not be earned for several
years, if at all. The Company's collaborative arrangements may not produce
revenue adequate to fund the Company's operating expenses. Additional funding,
if necessary, may not be available on favorable terms, if at all. If adequate
funds are not available, the Company may be required to curtail operations
significantly or obtain funds through arrangements with collaborative partners
or others that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets that the Company
would not otherwise relinquish. The failure to receive additional funding would
have a material adverse effect on the Company's business.
YEAR 2000 ISSUE
DESCRIPTION OF THE ISSUE. The Year 2000 ("Y2K") issue refers to the inability of
certain date-sensitive computer chips, software, and systems to recognize a
two-digit date field as belonging to the 21st century. Mistaking "00" for 1900
or any other incorrect year could result in a system failure or miscalculations
causing disruptions to operations, including manufacturing, a temporary
inability to process transactions, or send invoices, or engage in other normal
business activities. This is a significant issue for most, if not all companies,
with far reaching implications, some of which cannot be anticipated or predicted
with any degree of certainty. The Y2K issue may create unforeseen risks to the
Company from its internal computer systems as well as from computer systems of
third parties with which it deals. Failures of the Company's and/or third
parties' computer systems could have a material adverse impact on the Company's
ability to conduct its business.
YEAR 2000 READINESS. The Company has formed a committee, including the chief
financial officer and the information technology manager, to evaluate Year 2000
risks and readiness. Such Committee is nearing completion of its assessment of
Year 2000 readiness with respect to: (1) systems used to conduct its business
operations internally, (2) systems relied upon by the Company to conduct its
operations (i.e., payroll, accounting, cash management), and (3) systems of
vendors providing materials to the company. With respect to the Company's
internal hardware and software, the review has been completed and it has been
determined that Year 2000 issues do not affect the Company's proprietary drug
discovery software. Most of the hardware utilized by the Company is Year 2000
ready; with a few minor hardware replacements required. The cost of such
replacements has been determined to be immaterial. With respect to the Company's
reliance on systems of third parties, the Company has received written
assurances from third parties that they are or expect to be Year 2000 compliant
in time. While the company is not dependent on any sole-source suppliers to
conduct its laboratory operations, efforts are ongoing to monitor the progress
of the Year 2000 readiness of its current major suppliers of laboratory
materials.
YEAR 2000 COSTS. Based upon the information currently available, the Company
believes that costs it will incur associated with the Year 2000 issue, and the
consequences of incomplete or untimely resolution of the Year 2000 issue, will
not have a material adverse effect on its business, operating results or
financial condition.
RISKS AND CONTINGENCIES. In the event that third-party systems providers or
vendors of laboratory supplies fail to resolve Year 2000 issues that effect
services or product deliveries to the Company, the Company may have to change
providers or vendors. Such changes are not anticipated to have a material
adverse effect on the Company's business.
7
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RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. This Quarterly Report may contain predictions,
estimates and other forward-looking statements that involve risks and
uncertainties. Such risks and uncertainties could cause actual results to differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed elsewhere in this Quarterly Report. The
Company undertakes no obligation to release publicly revisions to the
forward-looking statements to reflect events or circumstances arising after the
date hereof.
NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS. The Company's Discovery Engine
process is novel and has not yet been shown to be successful in the discovery of
lead candidates that have been subsequently developed into commercialized drugs.
Furthermore, the Company's drug discovery efforts are focused on some targets,
the functions of which are not yet known. Development of new pharmaceutical
products is highly uncertain. The Company's drug discovery process may not
result in lead candidates that will be safe or efficacious or commercially
successful as products. Failure to validate the Company's technology through the
successful discovery of lead candidates would have a material adverse effect on
the Company's business.
The Company's strategy, which is unproven, is to use its proprietary
design technology for the purpose of rapidly identifying, optimizing and
obtaining proprietary rights to as many lead candidates and development
candidates as possible. The Company's ability to achieve profitability in the
near term depends entirely on its ability to enter into additional collaborative
agreements with third parties and to maintain the agreements it currently has in
place. The pricing and nature of the Company's collaborative relationships is
such that there may only be a limited number of pharmaceutical, biotechnology
and agrochemical companies that will be its potential customers. The Company's
ability to succeed is also dependent upon the acceptance by potential customers
of its Discovery Engine process as an effective tool in new drug discovery.
Historically, pharmaceutical, biotechnology and agrochemical companies have
conducted lead candidate identification and optimization within their own
research departments, due to the highly proprietary nature of the activities
being conducted, the central importance of these activities to their drug
discovery and development efforts and the desire to obtain maximum patent and
other proprietary protection on the results of their internal programs. In order
to achieve its business objectives, the Company must convince these companies
that its technology and capabilities justify the outsourcing of their programs
to the Company. There can be no assurance that the Company will be able to
attract any future customers on acceptable terms for its products and services
or develop a sustainable, profitable business. Failure to do so will have a
material adverse effect on the Company's business.
The Company's collaborative agreements are structured in a way that
provides the Company with payments for (i) initiating the collaboration, (ii)
providing research for a specified period, typically over a one- to two-year
period for each project undertaken under the collaboration, (iii) attaining
specifically negotiated milestones, and (iv) royalties from the sale of any drug
successfully developed under each collaborative agreement. Whereas a significant
portion of the Company's revenue to date has been related to the research phase
of each of its collaborative agreements which is for a specified period and is
generally offset by corresponding research costs, the Company expects profit, if
any, to result primarily from project initiation fees, milestone payments and
royalties. Following the completion of the research phase of each collaborative
agreement, the Company may receive additional revenue under each respective
collaborative agreement only from milestones and royalties. Failure to do so
could have a material adverse effect on the Company's business. See "Dependence
of Company's Strategy on Third Parties."
UNCERTAINTY OF FUTURE PROFITABILITY. The Company's ability to achieve
profitability in the near term depends entirely on its ability to enter into
additional collaborative agreements with third parties and to maintain the
agreements it currently has in place. The Company has not yet received any
revenue from royalties for the sale of a commercial drug by a customer, and the
Company may never receive such revenue. An element of the Company's
commercialization strategy is the potential development and licensing to others
of lead compounds or drug development candidates identified by the Company
through its internal programs, at its own expense, for potential pharmaceutical
development. To date, no such license has been entered into, and there can be no
assurance that any such license will be entered into on acceptable terms in the
future, if at all. The Company is unable to predict when, or if, it will become
profitable. See "Management's Discussion And Analysis Of Financial Condition And
Results of Operations."
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<PAGE> 11
DEPENDENCE OF COMPANY'S STRATEGY ON THIRD PARTIES. The Company's strategy
depends upon the formation of multiple collaborative arrangements with third
parties on a regular basis. To date, the Company has entered into seven such
arrangements, and substantially all of its revenue has been from its
collaborative arrangements. The Company may not be able to continue to establish
additional collaborative arrangements. If the Company is successful in
establishing additional arrangements, such arrangements may not be on terms
favorable to the Company. Current or any future collaborative arrangements may
not ultimately be successful. Failure to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's business. CombiChem's receipt of revenue from collaborative
arrangements is affected by the timing of efforts expended by the Company and
its collaborators and the timing of lead compound identification by the Company.
Milestone payments may be earned for different events or achievements in
different agreements and, for certain collaborations, such fees may not be
earned until the collaborator has advanced products into clinical testing, which
may be well into the future. The Company's products and services will only
result in commercialized pharmaceutical products generating milestone payments
and royalties upon the successful outcome of significant preclinical and
clinical development, the procurement of requisite regulatory approvals, the
establishment of manufacturing, sales and marketing capabilities and the
achievement of successful marketing. The Company does not currently intend to
perform any of these activities. Therefore, the Company will be dependent upon
the expertise and dedication of sufficient resources by third parties to develop
and commercialize products based on library compounds produced and lead
compounds discovered or optimized by the Company. In addition, there can be no
assurance that any such development or commercialization efforts by third
parties would be successful. Should a collaborative partner fail to develop or
commercialize a compound or product to which it has rights from the Company, the
Company may not receive any future milestone payments and will not receive any
royalties associated with such compound or product. In addition, the Company's
collaborative arrangements with its partners do not obligate the partners to
develop or commercialize lead compounds discovered or optimized by the Company.
Each collaborative partner may independently move forward with a competing lead
candidate developed either by such partner internally or in collaboration with
others, including the Company's competitors. The potential drugs developed by a
collaborative partner may be derivatives of the lead compounds provided to the
customer by the Company. While the Company's existing collaborative agreements
provide that the Company retain milestone and royalty payment rights with
respect to drugs developed from certain derivative compounds, disputes may arise
over the application of payment provisions to such drugs. Current or future
collaborative partners, if any, may pursue alternative technologies or develop
alternative products either on their own or in collaboration with others,
including the Company's competitors, as a means for developing treatments for
the diseases targeted by collaborative arrangements with the Company.
Furthermore, conflicts may arise between collaborative partners as to
proprietary rights to particular compounds. The amount and timing of resources
that current and future collaborators, if any, devote to collaborations with the
Company are not within the control of the Company. Collaborators may not perform
their obligations as expected. Further, the Company's collaborations generally
may be terminated by its collaborators upon short notice and following an
uncured material breach, which terminations would result in a loss of
anticipated revenue. Termination of the Company's existing or future
collaborative agreements, if any, could have a material adverse effect on the
Company's business.
The Company's strategy also involves conducting its own internally
funded discovery programs by choosing biological targets of current scientific
interest and working in collaboration with screening companies. Access to such
targets, novel or otherwise, on an ongoing basis may be difficult to achieve.
Furthermore, despite the Company's installation of independent teams to conduct
each collaborative project, conflicts may arise among collaborators as to the
rights to overlapping lead candidate compounds developed independently as a
result of being identified through the use of the Company's technologies.
Failure to manage multiple existing and future collaborator relationships
successfully, maintain confidentiality among such relationships or prevent the
occurrence of such conflicts could lead to disputes that result in, among other
things, a significant strain on management resources, legal claims involving
significant time and expense and loss of reputation, a loss of capital or a loss
of current or future collaborators, any of which could have a material adverse
effect on the Company's business.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. To date, substantially all
revenue received by the Company has been from the receipt of project initiation
fees, research funding and milestone fees paid pursuant to collaborative
agreements. The Company expects that a significant portion of its revenue for
the foreseeable future will be comprised of such payments. The timing of certain
revenue in the future will depend upon the completion of certain milestones as
provided for in the Company's collaborative agreements. In any one fiscal
quarter, the Company may receive multiple or no payments from its several
collaborators. Operating results may therefore vary substantially from quarter
to quarter and will not necessarily be indicative of results in subsequent
periods. Any such quarterly fluctuations in revenue or financial results may
have a material impact on the Company's stock price.
9
<PAGE> 12
COMPANY'S SUCCESS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS. The Company's
success will depend in large part on its own, its licensees' and its licensors'
ability to obtain and defend patents for each party's respective technologies
and the compounds and other products, if any, resulting from the application of
such technologies, maintain trade secrets and operate without infringing upon
the proprietary rights of others, both in the United States and in foreign
countries. The patent positions of pharmaceutical and biotechnology companies,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. The
Company has pending United States and foreign patent applications relating to
various aspects of its technology, certain systems, materials and methods used
in screening compounds and the libraries or compounds contained therein. These
patent applications are either owned or co-owned by the Company or rights under
them are licensed to the Company. To date, one foreign patent and one United
States patent owned by the Company have been issued and notices of allowance for
two United States patent applications owned by the Company have been received.
To the extent that any foreign patent application filed in the European Patent
Office or the Japanese Patent Office issues as a patent, a challenge to the
validity of such patent may be presented in an opposition proceeding. Patents
may not issue as a result of any such pending applications. If issued, such
patents may not be sufficiently broad to afford protection against competitors
with similar technologies. The Company is aware of five United States patents
issued to third parties that claim proprietary rights; two of these patents are
entitled "System and method for automatically generating chemical compounds with
desired properties", the third is entitled "System, method, and computer program
for at least partially automatically generating chemical compounds having
desired properties" and the fourth and fifth are entitled "Method of generating
a plurality of chemical companies in a spatially arranged array." Although the
Company believes that its current activities do not infringe these patents or
the patents of other third parties, the Company continually assesses its
position with respect to such patents and there can be no assurance that the
Company's belief would be affirmed in any litigation over patents or that the
Company's future technological developments would be outside the scope of these
patents or the patents of other third parties. Further, there can be no
assurance that any third party will not seek to assert such patent rights
against the Company, which would result in significant legal costs and require
substantial management resources, and there can be no assurance that the Company
would be able to obtain a license from any third party, if required, on
commercially reasonable terms, if at all. From time to time the Company receives
correspondence from third parties to license patents owned or controlled by
third parties and has recently received such correspondence. The Company's
inability to obtain or maintain patent protection or necessary licenses could
have a material adverse effect on the business, financial condition and results
of operations of the Company. The inability of the Company either to demonstrate
non-infringement of these and other current and future patents, whether issued
in the United States or overseas, or to obtain the appropriate licenses, would
have a material adverse effect on the Company's business, financial condition
and operations. Moreover, there can be no assurance that the Company or its
customers will be able to obtain patent protection for lead compounds or
pharmaceutical products based upon the Company's or such customers'
technologies. There can be no assurance that any patents issued to the Company
or its collaborative partners, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. To the extent
that the Company or its consultants or collaborators use intellectual property
owned by others in their work for the Company, disputes may also arise as to the
rights in related or resulting know-how and inventions. Litigation may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Any such litigation whether or
not the outcome thereof is favorable to the Company, could result in substantial
cost to and diversion of effort by the Company. Further, United States patents
do not provide any remedies for infringement that occurred before the patent is
issued. The commercial success of the Company will also depend upon successfully
avoiding the infringement of current and future patents issued to competitors
and upon maintaining the technology licenses upon which certain of the Company's
current products are, or any future products under development might be, based.
If competitors of the Company prepare and file patent applications in the United
States that claim inventions also claimed by the Company or its collaborators,
the Company or its collaborators may have to participate in interference
proceedings declared by the United States Patent and Trademark Office ("PTO") to
determine the priority of invention, which could result in substantial cost to
the Company, even if the outcome is favorable to the Company. An adverse outcome
could subject the Company to significant liabilities to third parties and
require the Company to license disputed rights from third parties or cease using
the technology.
A United States patent application is maintained under conditions of
confidentiality while the application is pending in the PTO, so that the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors in the PTO. A number of pharmaceutical and
biotechnology and agrochemical companies and research and academic institutions
have developed technologies, filed patent applications or received
10
<PAGE> 13
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain, or result
in the denial of the Company's patent applications. In addition, there can be no
assurance that the Company would be able to obtain licenses to patents held by
third parties that may cover the Company's activities at a reasonable cost, if
at all, or that the Company would be able to develop or obtain any alternative
technologies. The Company currently has certain licenses from third parties and
in the future may require additional licenses from other parties in order to
refine its Discovery Engine further and to allow its collaborators to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that (i) such licenses will be obtainable on commercially reasonable
terms, if at all, (ii) any patents underlying such licenses will be valid and
enforceable or (iii) the proprietary nature of any patented technology
underlying such licenses will remain proprietary. The Company relies
substantially on certain technologies that are not patentable or proprietary and
are therefore available to the Company's competitors. The Company also relies on
certain proprietary trade secrets and know-how that are not patentable. Although
the Company has taken steps to protect its unpatented trade secrets and
know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no assurance
that (i) these agreements will not be breached, (ii) the Company would have
adequate remedies for any breach or (iii) the Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors. Failure by the Company to protect all or part of its patents, trade
secrets and know-how could have a material adverse effect on the Company's
business.
COMPETITIVE NATURE OF COMPANY'S INDUSTRY AND RISKS OF OBSOLESCENCE OF
TECHNOLOGY. Many organizations are actively attempting to identify, optimize and
generate lead compounds for potential pharmaceutical development. The Company
competes with the research departments of pharmaceutical companies,
biotechnology companies, agrochemical companies, combinatorial chemistry
companies and research and academic institutions as well as other
computationally based drug discovery companies. Many of these competitors have
greater financial and human resources and more experience in research and
development than the Company. Historically, large pharmaceutical companies have
maintained close control over their research activities, including the
synthesis, screening and optimization of chemical compounds. Many of these
companies, which represent one of the largest potential markets for CombiChem's
products and services, are internally developing combinatorial and computational
approaches and other methodologies to improve productivity, including major
investments in robotics technology to permit the automated parallel synthesis of
compounds. In addition, these companies may already have large collections of
compounds previously synthesized or ordered from chemical supply catalogs or
other sources against which they may screen new targets. Other sources of
compounds include compounds extracted from natural products, such as plants and
microorganisms, and compounds created using rational drug design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company is working, either on their
own or through collaborative efforts. The Company anticipates that it will face
increased competition in the future as new companies enter the market and
advanced technologies become available. The Company's processes may be rendered
obsolete or uneconomical by technological advances or entirely different
approaches developed by one or more of the Company's competitors. The existing
approaches of the Company's competitors or new approaches or technology
developed by the Company's competitors may be more effective than those
developed by the Company.
SUCCESS OF COMPANY DEPENDENT ON SCALE-UP AND MANAGEMENT OF GROWTH. The Company's
success will depend on the expansion of its operations to service additional
collaborative arrangements and the management of these expanded operations. To
be cost-effective in its delivery of services and products, the Company must
enhance productivity through further automation of its processes and
improvements to its technology generally. In addition, the Company must
successfully structure and manage multiple additional collaborative
relationships, including maintaining the confidentiality of the research being
provided to multiple customers. The Company may not be successful in adding
technical personnel as needed to meet the staffing requirements of any
additional collaborative relationships. In addition, there can be no assurance
that the Company will be successful in its engineering efforts to automate its
processes further or in its initiatives to improve its technology. Failure to
achieve any of these goals could have a material adverse effect on the Company's
business.
DEPENDENCE OF COMPANY ON KEY EMPLOYEES. The Company is highly dependent on the
principal members of its scientific and management staff. The loss of one or
more key members of the Company's scientific or management staff could have a
material adverse effect on the Company's business. The Company's future success
will also depend in part on the continued service of its key design engineering,
scientific, software and management
11
<PAGE> 14
personnel and on its ability to identify, hire and retain any additional
personnel. There is intense competition for such qualified personnel in the
areas of the Company's activities. The Company may not be able to continue to
attract and retain the personnel necessary for the development of the Company's
business. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business.
UNCERTAINTY OF REGULATORY APPROVALS. Regulation by governmental entities in the
United States and other countries will be a significant factor in the production
and marketing of any pharmaceutical products that may be developed by a customer
or collaborator of the Company or, in the event the Company decides to develop a
drug beyond the preclinical phase, by the Company. The nature and the extent to
which such regulation may apply to the Company's customers will vary depending
on the nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by the Company's customers will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures established by the United States
Food and Drug Administration (the "FDA") and by similar foreign regulatory
authorities. Various federal and, in some cases, state statutes and regulations
also govern or influence, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of such products. Non-compliance with applicable requirements can result in
fines, warning letters, recall or seizure of products, clinical study holds or
delays, total or partial suspension of production, refusal of the government to
grant approvals, and civil and criminal penalties. The process of obtaining
these approvals and the subsequent compliance with appropriate federal and
foreign statutes and regulations are time-consuming and require the expenditure
of substantial resources. Generally, in order to gain FDA approval, a company
first must conduct preclinical studies in the laboratory and in animal models to
gain preliminary information on a compound's efficacy and to identify any safety
problems. Preclinical studies must be conducted by laboratories that comply with
FDA regulations regarding Good Laboratory Practices. The results of these
studies are submitted as a part of an Investigational New Drug application (an
"IND") that the FDA must review before human clinical trials of an
investigational drug can begin. In order to commercialize any products, the
Company or its customer will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA and foreign regulatory
authority approval of any such products. Clinical trials are normally done in
three phases and generally take two to five years but may take longer to
complete. After completion of clinical trials of a new product, FDA and foreign
regulatory authority marketing approval must be obtained. If the product is
classified as a new drug, the Company or its customer will be required to file a
New Drug Application (an "NDA") and receive approval before commercial marketing
of the drug. The testing and approval processes require substantial time and
effort, and there can be no assurance that any approval will be granted on a
timely basis, if at all. NDAs submitted to the FDA can take, on average, two to
five years to obtain approval. If questions arise during the FDA review process,
approval can take more than five years. Even if FDA regulatory clearances are
obtained, a marketed product is still subject to continual review, and later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions. Domestic manufacturing facilities of the Company or
its customers are subject to biannual inspections by the FDA and must comply
with the FDA's current Good Manufacturing Practices regulations. To comply with
such regulations, a manufacturer must spend funds, time and effort in the areas
of production and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. For marketing
outside the United States, the Company or its customer will also be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company expects the
net proceeds from the IPO completed in May 1998 and the interest income thereon,
together with the existing cash and cash equivalents, short term investments,
operating revenues, and lease financing arrangements, will be sufficient to
finance its working capital and capital requirements for the foreseeable future.
The Company's capital requirements depend on numerous factors, including the
ability of the Company to enter into additional collaborative arrangements,
competing technological and market developments, changes in the Company's
existing collaborative relationships, the cost of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights, the purchase
of additional capital equipment, the progress of the Company's drug discovery
programs and the progress of the commercialization of milestone- and
royalty-bearing compounds by the Company's collaborators. The Company may be
required to raise additional capital over a period of several years in order to
continue to conduct its operations. Such capital may be raised through
additional public or private financings, as well as collaborative
12
<PAGE> 15
arrangements, borrowings and other available sources. In addition, the Company
may from time to time earn milestone fees under its collaborations. Milestone
fees may be earned for different events or achievements in different agreements.
Furthermore, for certain collaborations, such fees may not be earned until the
collaborator has advanced products into clinical testing. Such milestones may
not be earned for several years, if at all. The Company's collaborative
arrangements may not produce revenue adequate to fund the Company's operating
expenses. Additional funding, if necessary, may not be available on favorable
terms, if at all. If adequate funds are not available, the Company may be
required to curtail operations significantly or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates,
products or potential markets that the Company would not otherwise relinquish.
The failure to receive additional funding would have a material adverse effect
on the Company's business.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM. The Company
expects that a substantial portion of its revenue in the foreseeable future will
be derived from products and services provided to the pharmaceutical,
biotechnology and agrochemical industries. Accordingly, the Company's success in
the foreseeable future is directly dependent upon the success of the companies
within those industries and their continued demand for the Company's products
and services. The level of revenue and profitability of pharmaceutical companies
may be affected by the continuing efforts of governmental and third-party payors
to contain or reduce the costs of health care through various means and the
initiatives of third-party payors with respect to the availability of
reimbursement. For example, in certain foreign markets, pricing or profitability
of prescription pharmaceuticals is subject to governmental control. In the
United States, there have been, and the Company expects that there will continue
to be, a number of federal and state proposals to implement similar governmental
control. It is uncertain what legislative proposals may be adopted or what
actions federal, state or private payors for health care goods and services may
take in response to any health care reform proposals or legislation. To the
extent that such proposals or reforms have a material adverse effect on the
business, financial condition and profitability of pharmaceutical and
biotechnology companies that are actual or prospective collaborators for certain
of the Company's products and services, the Company's business.
May be adversely affected.
COMPANY'S USE OF HAZARDOUS MATERIALS. The research and development processes of
the Company involve the controlled use of hazardous materials. The Company is
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its activities currently comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any such liability could exceed the resources
of the Company. In addition, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future. The occurrence of any such event could have a
material adverse effect on the Company's business.
CONTROL BY MANAGEMENT AND EXISTING SHAREHOLDERS. The Company's executive
officers, directors and affiliated entities together beneficially own
approximately 30.8% of the outstanding shares of Common Stock. As a result,
these stockholders may be able to exercise control over matters requiring
stockholder approval, including the election of directors and mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This may prevent or discourage tender offers for Common Stock unless
the terms are approved by such stockholders.
POSSIBLE VOLATILITY OF STOCK PRICE. The market prices for securities of life
sciences companies have been highly volatile, and the market has experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. Announcements of technological innovations
or new commercial products by the Company or its competitors, developments
concerning proprietary rights, including patents and litigation matters,
publicity regarding actual or potential results with respect to products or
compounds under development by the Company or its strategic partners, regulatory
developments in both the United States and foreign countries, public concern as
to the efficacy of new technologies, general market conditions, as well as
quarterly fluctuations in the Company's revenue and financial results among
other factors, may have a significant impact on the market price of the Common
Stock. In particular, the realization of any of the risks described in these
"Risk and Uncertainties" could have a dramatic and adverse impact on such market
price.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTS AND BYLAW PROVISIONS AND DELAWARE LAW.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
13
<PAGE> 16
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. Although the
Company has no current plans to issue any shares of Preferred Stock, the
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Company's Certificate of Incorporation
also provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors and certain provisions of the Company's by-laws and
of Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. Further, the
Company's stock option plans generally provide for the acceleration of vesting
of options granted under such plans in the event of certain transactions which
result in a change of control of the Company. In addition, the Company is
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder. These
provisions may have the effect of delaying or preventing a change of control of
the Company without action by the stockholders and, therefore, could adversely
affect the price of the Company's Common Stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
14
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. None
Item 2. Change in Securities
None
Use of Proceeds
A Registration Statement on Form S-1 (File No. 333-37981)
registering 2,587,500 shares of the Company's Common Stock filed in
connection with the Company's Initial Public Offering (the "IPO") for
an aggregate offering of $20.7 million was declared effective by the
Securities and Exchange Commission on May 7, 1998. The sale of
2,250,000 shares was closed on May 13, 1998. Exercise of a portion of
the over-allotment option was initiated on June 5, 1998 and was closed
on June 10, 1998. The amount of net offering proceeds from the IPO and
over-allotment option was approximately $16.2 million.
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders
On July 23, 1998 the Company's Annual Meeting of Stockholders was held
in San Diego, California for the following purposes:
(1) To elect the six (6) directors. The total number of votes cast
for, against and withheld for each nominee was as follows:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
<S> <C> <C> <C>
Nominees with Terms to Expire at 1999 Annual Meeting:
Pierre R. Lamond 7,391,836 700 0
Peter L. Myers 7,391,836 700 0
Nominees with Terms to Expire at 2000 Annual Meeting:
Philippe O. Chambon 7,391,836 700 0
William Scott 7,391,836 700 0
Nominees with Terms to Expire at 2001 Annual Meeting:
Vicente Anido, Jr. 7,391,836 700 0
Arthur Reidel 7,391,836 700 0
</TABLE>
(2) To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
1998. The total number of votes cast for, against and withheld
was 7,390,686; 1,450; and 400 respectively.
Item 5. None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
3.1 Amended and Restated Certificate of Incorporation
of the Company, previously filed as Exhibit 3.2 on
Form S-1, File No. 333-37981, and incorporated
herein by reference.
3.2 Restated Bylaws of the Company, previously filed as
Exhibit 3.4 on Form S-1, File No. 333-37981, and
incorporated herein by reference.
15
<PAGE> 18
10.1* Amendment to Collaborative Research and License
Agreement by and between the Company and Roche
Bioscience a division of Syntex (U.S.A.) Inc. dated
as of July 31, 1998
27.1 Financial Data Schedules
b. None.
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.
16
<PAGE> 19
COMBICHEM, INC.
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.
CombiChem, Inc.
Date: November 12 By: /S/ KARIN EASTHAM
Karin Eastham
Vice President, Finance and Administration and
Chief Financial Officer (Duly Authorized Officer
and Principal Financial and Accounting Officer)
17
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
THIS AMENDMENT TO THE COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the
"First Amendment") is entered into as of July 31, 1998 (the "Effective Date"),
by and between COMBICHEM, INC., a Delaware corporation, 9050 Camino Santa Fe,
San Diego, California 92121 ("CCI") and ROCHE BIOSCIENCE, a division of SYNTEX
(U.S.A.) INC., a Delaware corporation, 3401 Hillview Avenue, Palo Alto, CA
94304-1397 ("RBS").
WHEREAS, CCI and RBS have entered into a Collaborative Research and
License Agreement dated as of October 25, 1996 (the "Agreement");
WHEREAS, the parties wish to amend Program II of Appendix A of the
Agreement to *** from a Lead *** Program to a Lead *** Program; and
WHEREAS, as part of the *** , the parties wish to amend Milestone 2 of
Program II of Appendix A of the Agreement to have the milestone criteria more
accurately reflect the kinds of criteria that are actually used to make
decisions about compound selection and the successful completion of goals, but
which criteria allow for flexibility taking other properties of a molecule into
account.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties mutually agree as follows:
1. Defined terms not otherwise defined herein shall have the meanings
given them in the Agreement.
2. Program II of Appendix A of the Agreement is hereby deleted and
replaced in its entirety by the Program II of Appendix A attached to this First
Amendment.
3. Roche Bioscience paid *** for Milestone #1 (LE-1) under the Lead ***
Program schedule set forth in Appendix C. Should additional milestones and
royalties become due and owing in the future, such milestones and royalties
shall be payable in accordance with the Lead *** Program schedule set forth in
Appendix C *** .
4. All other others and conditions of the Agreement remain in full force
and effect and nothing contained herein shall be deemed to waive any rights of
either party under the Agreement.
IN WITNESS WHEREOF, the Parties have caused their duly authorized
officers to execute this Amendment to be effective as of the Effective Date.
COMBICHEM, INC. ROCHE BIOSCIENCE, A DIVISION OF SYNTEX
(U.S.A.) INC.
/s/ Vicente Anido, Ph.D. /s/ Robert F. Booth, Ph.D.
- -------------------------------------- --------------------------------------
Vicente Anido, Ph.D. Robert F. Booth, Ph.D.,
President and Chief Executive Officer Senior Vice President, Head of
Inflammatory Disease Unit
Date: 9-8-98 Date: 8/31/98
--------------------------------- ---------------------------------
***Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE> 2
***Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<PAGE> 3
***Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,663
<SECURITIES> 0
<RECEIVABLES> 874
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,505
<PP&E> 10,048
<DEPRECIATION> 2,461
<TOTAL-ASSETS> 41,796
<CURRENT-LIABILITIES> 7,337
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 31,067
<TOTAL-LIABILITY-AND-EQUITY> 41,796
<SALES> 0
<TOTAL-REVENUES> 10,896
<CGS> 0
<TOTAL-COSTS> 13,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (387)
<INCOME-PRETAX> (2,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,375)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
