<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27118
PHARMACOPEIA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0557266
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CN 5350, Princeton, New Jersey 08543-5350
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(Address of principal executive offices) (Zip code)
(609) 452-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at November 3, 2000
------------------------------------ ---------------------------------
<S> <C>
Common Stock, $.0001 par value 23,364,115 shares
</TABLE>
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements:
Balance Sheets - September 30, 2000 and December 31, 1999 3
Statements of Operations - Three and Nine Months Ended September 30, 2000 and 1999 4
Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibits 18
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------- ----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54,520 $ 17,157
Marketable securities 111,951 51,875
Trade receivables, net of allowance for doubtful accounts
of $1,970 and $624, respectively 19,775 26,836
Prepaid expenses and other current assets 4,990 5,251
---------- -----------
Total current assets 191,236 101,119
Property and equipment - net 12,402 11,362
Capitalized software - net 17,388 3,353
Goodwill and other intangibles - net 43,370 9,071
Other assets 5,134 1,354
---------- ----------
Total assets $ 269,530 $ 126,259
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,616 $ 3,479
Accrued liabilities 29,297 18,409
Deferred revenue, current portion 29,913 20,212
Notes payable, current portion 40 292
---------- ----------
Total current liabilities 61,866 42,392
Notes payable, long-term portion 187 -
Other long-term liabilities 52 69
Deferred revenue, long-term 3,023 5,052
Commitments and contingencies
Stockholders' equity:
Capital stock 2 1
Additional paid-in capital 275,100 148,862
Accumulated deficit (73,722) (69,049)
Accumulated comprehensive loss 3,022 (1,068)
---------- ----------
Total stockholders' equity 204,402 78,746
---------- ----------
Total liabilities and stockholders' equity $ 269,530 $ 126,259
========== ==========
</TABLE>
See accompanying notes to these unaudited financial statements.
3
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Drug discovery services $ 7,933 $ 7,935 $ 30,700 $ 25,239
Software license, service and other 17,929 14,149 44,176 38,966
Hardware 1,278 2,166 4,006 6,605
-------- -------- -------- --------
Total revenue 27,140 24,250 78,882 70,810
Cost of revenue:
Drug discovery services 5,766 4,482 17,865 15,411
Software license, service and other 2,613 1,587 6,599 5,016
Hardware 1,097 1,953 3,527 5,926
-------- -------- -------- --------
Total cost of revenue 9,476 8,022 27,991 26,353
-------- -------- -------- --------
Gross margin 17,664 16,228 50,891 44,457
Operating costs and expenses:
Research and development 6,620 7,243 18,409 20,953
Sales, general and administrative 12,287 9,579 32,323 27,907
Amortization of goodwill 1,064 123 2,136 246
Write-off of in-process research and development 2,340 - 8,740 -
-------- -------- -------- --------
Total operating costs and expenses 22,311 16,945 61,608 49,106
-------- -------- -------- --------
Operating loss (4,647) (717) (10,717) (4,649)
Interest and other income, net 2,923 1,089 6,785 2,931
-------- -------- -------- --------
Income (loss) before provision for income taxes (1,724) 372 (3,932) (1,718)
Provision for income taxes 221 36 741 104
-------- -------- -------- --------
Net income (loss) $ (1,945) $ 336 $ (4,673) $ (1,822)
======== ======== ======== ========
Net income (loss) per share - Basic $ (0.08) $ 0.02 $ (0.21) $ (0.09)
======== ======== ======== ========
Net income (loss) per share - Diluted $ (0.08) $ 0.02 $ (0.21) $ (0.09)
======== ======== ======== ========
Weighted average number of common stock
outstanding - Basic 23,165 19,819 22,423 19,583
Weighted average number of common stock
outstanding - Diluted 23,165 20,896 22,423 19,583
</TABLE>
See accompanying notes to these unaudited financial statements.
4
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,673) $ (1,822)
Adjustments to reconcile net loss to net cash
provided by (used in) operations
Depreciation 3,867 4,078
Amortization 5,048 1,571
Contribution of stock to 401 (k) members 669 623
Write-off of in-process research and development 8,740 -
Changes in assets and liabilities:
Accounts receivable 9,818 2,692
Prepaid and other current assets 1,261 119
Accounts payable (1,524) (2,966)
Accrued liabilities (5,507) (7,841)
Deferred revenue 1,211 1,313
Other 286 (1,755)
--------------- --------------
Net cash provided by (used in) operating activities 19,196 (3,988)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,798) (2,436)
Purchases of marketable securities (172,245) (47,192)
Proceeds from sales of marketable securities 112,289 42,807
Acquisition of businesses, net of cash acquired (41,678) -
Acquisition of distribution rights and joint venture interest - (10,037)
Increase in capitalized software development costs (1,495) (1,326)
--------------- --------------
Net cash used in investing activities (105,927) (18,184)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 124,371 1,806
Principal payments on notes payable - (700)
Principal payments under capital lease obligations (309) (487)
--------------- --------------
Net cash provided by financing activities 124,062 619
Exchange rate effect on cash and equivalents 32 18
--------------- --------------
Net increase (decrease) in cash and equivalents 37,363 (21,535)
Cash and equivalents, beginning of period 17,157 36,863
--------------- --------------
Cash and equivalents, end of period $ 54,520 $ 15,328
=============== ==============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18 $ 206
=============== ==============
Income taxes $ 338 $ 78
=============== ==============
</TABLE>
See accompanying notes to these unaudited financial statements.
5
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE (1) - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these unaudited financial statements 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 of the financial statements 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 included in the Company's Annual Report on Form
10-K/A for the year ended December 31, 1999.
NOTE (2) - SEGMENT INFORMATION
The Company operates in two business segments: drug discovery services and
software (which includes software licenses, maintenance, hardware and other).
Summarized information concerning industry segment operations for the three and
nine month periods ended September 30, 2000 and 1999, and for industry segment
assets as of September 30, 2000 and December 31, 1999, is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
-------------------------------------------- --------------------------------------------
Drug Drug
Discovery Discovery
Software Services Total Software Services Total
------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Drug discovery services $ - $ 7,933 $ 7,933 $ - $ 30,700 $ 30,700
Software licenses, service and other 17,929 - 17,929 44,176 - 44,176
Hardware 1,278 - 1,278 4,006 - 4,006
------------ ------------- ------------- ------------- -------------- ------------
Total revenue $ 19,207 $ 7,933 $ 27,140 $ 48,182 $ 30,700 $ 78,882
============ ============= ============= ============= ============== ============
Operating income (loss) $ (2,955) $ (1,692) $ (4,647) $ (11,411) $ 694 $ (10,717)
============ ============= ============= ============= ============== ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------------------------------- --------------------------------------------
Drug Drug
Discovery Discovery
Software Services Total Software Services Total
------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Drug discovery services $ - $ 7,935 $ 7,935 $ - $ 25,239 $ 25,239
Software licenses, service and other 14,149 - 14,149 38,966 - 38,966
Hardware 2,166 - 2,166 6,605 - 6,605
------------ ------------- ------------- ------------- -------------- ------------
Total revenue $ 16,315 $ 7,935 $ 24,250 $ 45,571 $ 25,239 $ 70,810
============ ============= ============= ============= ============== ============
Operating income (loss) $ 2,053 $ (2,770) $ (717) $ 2,652 $ (7,301) $ (4,649)
============ ============= ============= ============= ============== ============
</TABLE>
<TABLE>
<CAPTION>
Drug
Discovery
Software Services Total
------------ ------------- -------------
<S> <C> <C> <C>
Total assets - September 30, 2000 $ 103,196 $ 166,334 $ 269,530
============ ============= =============
Total assets - December 31, 1999 $ 59,985 $ 66,274 $ 126,259
============ ============= =============
</TABLE>
6
<PAGE>
NOTE (3) - ACQUISITIONS
On February 29, 2000, the Company acquired Synopsys Scientific Systems, Ltd.
("Synopsys"), a U.K.-based company providing chemical database software,
chemical data content and system integration services to the pharmaceutical,
biotechnology and chemical industries. The Company paid $25.6 million for
Synopsys, consisting of $23.7 million in cash, $0.7 million in transaction
costs, and 19,142 shares of the Company's common stock valued at $1.2 million.
The common stock issued in this transaction was unregistered and was valued at
$62.62 per share (representing an 8% discount to its traded market value at the
time the transaction closed). The operating results of Synopsys have been
included in the Company's results of operations since the acquisition date.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed have been recorded at
their estimated fair values. Based on an independent valuation, the Company
recorded a first quarter 2000 charge of $6.4 million related to the write-off of
the portion of the purchase price that was allocated to in-process research and
development. The remainder of the purchase price was allocated as follows: $0.3
million to net tangible assets (including cash acquired of $0.5 million), $3.0
million to developed software, $3.4 million to customer lists and other
identified intangible assets, and $12.5 million to goodwill. The developed
software is being amortized over three years within cost of revenue, the
customer lists and other identified intangible assets are being amortized over
three years within sales, general and administrative expenses, and the goodwill
is being amortized over five years.
On September 6, 2000, the Company acquired the software subsidiaries of Oxford
Molecular Group Plc (the "Software Subsidiaries"). The acquired assets of the
Software Subsidiaries, constituting plant, equipment or other physical property
were used by the Software Subsidiaries in the design and marketing of
bioinformatics and cheminformatics products for the pharmaceutical,
biotechnology and chemical industries. The Company intends to use these assets
in the same manner in which they were used prior to the acquisition.
The Company paid $29.9 million for the Software Subsidiaries, consisting of
$18.7 million in cash, $9.7 million in assumed liabilities and $1.5 million
in transaction costs. Of the $18.7 million paid in cash, $2.0 million was
paid into a one year escrow account as security against the representations
and warranties made by the seller in the related contract. The acquisition
has been accounted for by the purchase method of accounting and, accordingly,
the assets acquired and liabilities assumed have been recorded at their
estimated fair values.
Based on an independent valuation, the Company recorded a third quarter 2000
charge of $2.3 million related to the write-off of the portion of the purchase
price that was allocated to in-process research and development. The remainder
of the purchase price was allocated as follows: $5.3 million to net liabilities
(net of cash acquired of $0.2 million), $11.7 million to developed software,
$2.1 million to customer lists and other identified intangible assets, and $19.1
million to goodwill. The developed software is being amortized over three years
within cost of revenue, the customer lists and other identified intangible
assets are being amortized over three years within sales, general and
administrative expenses, and the goodwill is being amortized over five years.
The operating results of the Software Subsidiaries have been included in the
Company's results of operations since the acquisition date.
7
<PAGE>
Assuming that the acquisition of Synopsys and of the Software Subsidiaries
had occurred on January 1 of the respective years, the pro forma consolidated
results of operations would be as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------------------------------
<S> <C> <C>
Total Revenue $ 90,237 $ 88,301
Net Loss $ (26,165) $ (26,959)
Loss per Share:
Basic $ (1.17) $ (1.38)
Diluted $ (1.17) $ (1.38)
</TABLE>
The above pro forma results of operations for both periods presented do not give
effect to the write-off of allocated in-process research and development of $8.7
million.
NOTE (4) - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements, including the recognition of nonrefundable up-front fees received
in conjunction with a research and development arrangement. The Company is
required to adopt SAB 101 in the fourth quarter of 2000. The Company does not
expect the adoption of SAB 101 to have any material impact on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Financial Instruments and for Hedging Activities" (SFAS 133). The
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement will require the
recognition of all derivatives on the Company's balance sheet at fair value.
In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" which defers the adoption
requirement to the first quarter of 2001. The Company does not believe either
standard will have a material effect on the Company's financial position or
results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of Pharmacopeia, Inc. ("Pharmacopeia" or the "Company") should be
read in conjunction with the Unaudited Financial Statements and related notes
included elsewhere in this Form 10-Q, and also in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
Form 10-K/A for the year ended December 31, 1999. This Management's Discussion
and Analysis of Financial Condition and Results of Operations and other parts of
this Form 10-Q contain forward-looking statements that involve risks and
uncertainties that may cause actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "could," "would,"
"expect," "plan," "anticipate," "believe," "estimate," "continue," or the
negative of such terms or expressions. All forward-looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.
The Company's registration statement on Form S-3 (Reg. No. 333-34478) and most
recent Form 10-K/A describe certain risk factors and uncertainties that may
cause actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by such forward-looking statements. These
risk factors and uncertainties should be considered in connection with any
investment in the Company's common stock. These uncertainties include the
acceptance by potential customers of combinatorial chemistry and analysis of
compounds provided by the Company as an effective tool in drug discovery, the
ability of the Company to establish additional collaborative or licensing
arrangements on terms favorable to the Company, the expertise of third parties
in developing and commercializing products based on library compounds produced
and lead compounds discovered by the Company, and the ability of the Company's
Software Segment to achieve increased market acceptance and penetration.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenue grew 12% to $27.1 million in the third quarter of 2000 compared to
$24.3 million in the third quarter of 1999.
Drug discovery services revenue was $7.9 million in the quarter ended September
30, 2000, consistent with $7.9 million in the third quarter of 1999. Library
outlicensing revenue decreased, as expected, by $0.7 million, or 50%, while an
early contract termination in June 2000 of a lead discovery services contract
resulted in a decrease in revenue of $0.9 million. Offsetting these decreases
were increases in lead discovery and lead optimization revenue, primarily from
new collaborations. Drug discovery services revenue for the quarters ended
September 30, 2000 and 1999 included no one-time milestone or up front license
fee payments.
9
<PAGE>
Total revenue (including software license, service, and other revenue and
hardware revenue) generated from the Software Segment increased 18% to $19.2
million in the third quarter of 2000 compared to $16.3 million in the comparable
quarter of 1999. This increase in Software Segment revenue can be attributed to
a $3.8 million (27%) increase in software license, service and other revenue,
partially offset by a $0.9 million (41%) decrease in hardware revenue. Hardware
revenue decreased primarily because of reorganization in the distribution
channel of the Company's sole supplier of hardware for resale.
Software license, service and other revenue increased 27% to $17.9 million in
the third quarter of 2000 compared to $14.1 million in the third quarter of
1999. This increase is due in part to revenue totaling $1.8 million generated
from the acquisitions of Synopsys and the Software Subsidiaries (see also Notes
to Financial Statements included elsewhere herein). Absent the benefit resulting
from these acquisitions, software license, service and other revenue in the 2000
third quarter increased by $2.0 million, or 14%, compared to the third quarter
of 1999. This increase is due primarily from new formulations, functional
genomics and X-ray crystallography consortia, and from increased demand for the
Company's expert modeling and simulation solutions.
Gross margin generated from the Drug Discovery Services Segment decreased 37% to
$2.2 million (27% of related sales) in the third quarter of 2000 compared to
$3.5 million (44% of related sales) in the comparable quarter of 1999. This
decrease in gross margin resulted from the absorption by funded collaborative
research projects of a larger portion of overhead as a result of the Company's
1999 decision to decrease its internally funded drug discovery research efforts.
In addition, the shift from library out-licensing revenue to optimization
service revenue tended to decrease gross margins.
Gross margin generated from the Software Segment increased 21% to $15.5 million
(81% of related sales) in the 2000 third quarter compared to $12.8 million (78%
of related sales) in the 1999 third quarter. The increase in the amount of gross
margin resulted from the increase in Software Segment revenue. The increase in
gross margin as a percentage of related sales resulted from a change in the mix
of sales from hardware to software, partially offset by the amortization of
acquired developed software included in current year results.
Research and development expenses declined 9% to $6.6 million in the third
quarter of 2000 compared to $7.2 million in the third quarter of 1999. Research
and development costs include costs associated with internal drug discovery
programs, software development, ultra high-throughput screening and informatics.
The decline in research and development expenses is attributable to a $2.1
million reduction at the Drug Discovery Services Segment primarily resulting
from the reduction of internally funded drug development activities, partially
offset by a $1.5 million increase in research and development activity within
the Software Segment (primarily the effects of the acquisitions described
above).
Within its Drug Discovery Services Segment, the Company began to decrease its
internally funded drug discovery efforts in 1999, and the Company has been
focusing primarily on externally funded drug discovery services in 2000.
However, future research and development expenses may increase in total, even as
internally funded drug discovery activities decrease, because the Company may
further expand its software, ultra high-throughput screening, compound design
and development, informatics and other development endeavors.
10
<PAGE>
Sales, general and administrative expenses increased by 28% to $12.3 million
(45% of total revenue) in the third quarter of 2000 compared to $9.6 million
(40% of total revenue) in the third quarter of 1999. The increase of $2.7
million is primarily attributable to a $1.6 million increase (including $0.3
million of amortization) resulting from the current year acquisitions described
above. Also contributing to the increase was an increase in the Software
Segment's sales and marketing head count to support growth.
On September 6, 2000 the Company acquired the Software Subsidiaries as more
fully described in the Notes to Financial Statements included elsewhere herein.
As a result of this acquisition the Company recorded a third quarter 2000 charge
of $2.3 million related to the write-off of the portion of the purchase price
that was allocated to in-process research and development. In the third quarter
of 1999 there were no acquisition-related write-offs of in-process research and
development. In addition, the third quarter 2000 results include amortization of
goodwill related to this and other acquisitions of $1.1 million as compared to
$0.1 million in the third quarter of 1999.
The Company recorded interest and other income of $2.9 million and $1.1 million
for the third quarters of 2000 and 1999, respectively. This increase of $1.8
million resulted primarily from increased interest income resulting from the
investment of the proceeds from a $110 million private placement of the
Company's common stock in March 2000.
The Company recorded an income tax provision of $221,000 for the third quarter
of 2000 and $36,000 for the third quarter of 1999. The 2000 and 1999 tax
provisions are primarily due to foreign and state taxable income generated from
the Software Segment. These provisions differ from the Federal tax rate
primarily because of the effect of permanent book-tax differences, and the
utilization of net operating loss carryforwards and net operating loss
carrybacks.
As a result of the increased revenue, the increased gross margins, the decreased
research and development costs, the increased acquisition related charges, and
the other matters described above, the Company generated a net loss of $1.9
million ($0.08 per diluted share) in the current quarter compared to net income
of $0.3 million ($0.02 per diluted share) in the comparable prior year quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenue grew 11% to $78.9 million for the nine months ended September 30,
2000 compared to $70.8 million for the nine months ended September 30, 1999.
Drug discovery services revenue increased 22% to $30.7 million for the nine
months ended September 30, 2000 compared to $25.2 million for the nine months
ended September 30, 1999. This increase of $5.5 million was attributable to a
first quarter 2000 technology out-license fee of $3.0 million, $1.3 million of
milestone payments in the second quarter 2000, and a second quarter 2000
contract termination whereby $2.5 million was earned in the second quarter 2000
that would have otherwise been earned ratably over the third and fourth quarters
of 2000. Drug discovery services revenue for the nine months ended September 30,
1999 did not include any up-front out-license fees, termination fees or
milestone payments.
Total revenue (including software license, service, and other revenue and
hardware revenue) generated from the Software Segment increased 6% to $48.2
million for the nine months ended September 30, 2000 compared to $45.6 million
for the nine months ended September 30, 1999. This increase in Software Segment
revenue can be attributed to a $5.2 million (13%) increase in
11
<PAGE>
software license, service and other revenue, partially offset by a $2.6 million
(39%) decrease in hardware revenue. Hardware revenue decreased primarily because
of reorganization in the distribution channel of the Company's sole supplier of
hardware for resale.
Software license, service and other revenue increased 13% to $44.2 million for
the nine months ended September 30, 2000 compared to $39.0 million for the nine
months ended September 30, 1999. This increase is primarily the result of
revenue totaling $3.1 million generated from the acquisitions of Synopsys and
the Software Subsidiaries (see also Notes to Financial Statements included
elsewhere herein). Absent the benefit resulting from these acquisitions,
software license, service and other revenue increased by $2.1 million, or 5%,
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. This increase is due primarily from new formulations,
functional genomics and X-ray crystallography consortia.
Gross margin generated from the Drug Discovery Services Segment increased 31% to
$12.8 million (42% of related sales) for the nine months ended September 30,
2000 compared to $9.8 million (39% of related sales) for the nine months ended
September 30, 1999. This improvement resulted from the up-front out-license,
termination and milestone payments described above, offset partially by the fact
that funded collaborative research projects now absorb a larger portion of
overhead as a result of the Company's 1999 decision to decrease its internally
funded drug discovery research efforts.
Gross margin generated from the Software Segment increased 10% to $38.0 million
(79% of related sales) for the nine months ended September 30, 2000 compared to
$34.6 million (76% of related sales) for the nine months ended September 30,
1999. The increase in the amount of gross margin and the increase in gross
margin as a percentage of related sales resulted from a change in the mix of
sales from hardware to software, primarily offset by the amortization of
acquired developed software included in the current year results.
Research and development expenses declined 12% to $18.4 million for the nine
months ended September 30, 2000 compared to $21.0 million for the nine months
ended September 30, 1999. Research and development costs include costs
associated with internal drug discovery programs, software development, ultra
high-throughput screening and informatics. The decline in research and
development expenses is attributable to a $4.8 million reduction at the Drug
Discovery Services Segment primarily resulting from the reduction of internally
funded drug development activities, partially offset by a $2.2 million increase
in research and development activity within the Software Segment (primarily the
effects of the acquisitions described above).
Sales, general and administrative expenses increased by 16% to $32.3 million
(41% of total revenue) for the nine months ended September 30, 2000 compared
to $27.9 million (39% of total revenue) for the nine months ended September
30, 1999. The increase of $4.4 million is primarily attributable to a $2.3
million increase (including $0.7 million of amortization) resulting from the
current year acquisitions described above. Also contributing to the increase
was an increase in the Software Segment's sales and marketing head count to
support growth.
Amortization of goodwill increased to $2.1 million for the nine months ended
September 30, 2000 as compared to $0.2 million for the nine months ended
September 30, 1999. The increase of $1.9 million is primarily the result of
seven months of amortization expense totaling $1.5 million in 2000 associated
with the acquisition of Synopsys and one month of amortization expense totaling
$0.3 million in 2000 associated with the acquisition of the Software
Subsidiaries. In addition, goodwill amortization expense for the nine months
ended September 30, 2000 includes nine
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months of amortization expense associated with the Company's March 1999
acquisition of Japanese distribution rights and remaining joint venture interest
as compared to six months of amortization expense for the comparable period in
1999.
As a result of the February 2000 acquisition of Synopsys, the Company recorded a
first quarter 2000 charge of $6.4 million related to the write-off of the
portion of the purchase price that was allocated to in-process research and
development. In addition, as a result of the September 2000 acquisition of the
Software Subsidiaries, the Company recorded a third quarter 2000 charge of $2.3
million related to the write-off of the portion of the purchase price that was
allocated to in-process research and development. There were no write-offs of
in-process research and development for the nine months ended September 30,
1999.
The Company recorded interest and other income of $6.8 million and $2.9 million
for the nine months ended September 30, 2000 and 1999, respectively. This
increase of $3.9 million resulted primarily from increased interest income
resulting from the investment of the proceeds from a $110 million private
placement of the Company's common stock in March 2000.
The Company recorded an income tax provision of $741,000 for the nine months
ended September 30, 2000 compared to $104,000 for the nine months ended
September 30, 1999. The 2000 and 1999 tax provisions are primarily due to
foreign and state taxable income generated from the Software Segment. These
provisions differ from the Federal tax rate primarily because of the effect of
permanent book-tax differences, and the utilization of net operating loss
carryforwards, and net operating loss carrybacks.
As a result of the increased revenue, the increased gross margins, the decreased
research and development costs, the increased acquisition related charges, and
the other matters described above, the Company generated a net loss of $4.7
million ($0.21 per diluted share) for the nine months ended September 30, 2000
compared to a net loss of $1.8 million ($0.09 per diluted share) for the nine
months ended September 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities to date primarily through the sale of
equity securities, drug discovery services, software licenses, software
maintenance services and hardware. As of September 30, 2000, the Company had
working capital of $129.4 million compared to $58.7 million as of December 31,
1999. The majority of this $70.7 million increase in working capital was
generated from a $110 million private placement of common stock by the Company
in March 2000 and from $14.4 million received by the Company upon the exercise
of stock options, offset by the $23.2 million of net cash paid for the
acquisition of Synopsys, and $18.5 million of net cash paid and $9.7 million of
liabilities assumed for the acquisition of the Software Subsidiaries, both of
which are described more fully in the Notes to Financial Statements included
elsewhere herein.
As of September 30, 2000, the Company's cash, cash equivalents and marketable
securities totaled $166.5 million, which are invested in U.S. Treasury and
government agency obligations, investment grade commercial paper and other
short-term money market instruments. This represents an increase of $97.5
million from the 1999 year end level of $69.0 million. This increase was
primarily the result of the factors contributing to the $70.7 million
increase in working capital described above, absent the $9.7 million of
liabilities assumed for the acquisition of the Software Subsidiaries, plus a
$9.8 million reduction in accounts receivable.
As of September 30, 2000, the Company had outstanding commitments for equipment
purchases totaling $0.1 million. The Company anticipates that its capital
requirements may increase in future periods as the Company expands its research
and development activities, expands its facilities and acquires additional
equipment. However, as the Company curtails its internally funded drug discovery
activities, these increases may be temporarily offset or delayed by the
Company's redeployment of laboratory equipment and facilities from internal drug
discovery work to collaborative work, if and when needed for such collaborative
work. The Company's capital requirements may also increase in future periods as
the Company seeks to expand its technology platform through investments,
licensing arrangements, technology alliances or acquisitions.
The Company anticipates that its existing capital resources will be adequate to
fund the Company's operations at least through 2001. However, there can be no
assurance that changes will not occur that would consume available capital
resources before such time. The Company's capital requirements depend on
numerous factors, including the ability of the Company to extend existing drug
discovery services agreements and to enter into additional arrangements, the
ability of the Company to continue to generate software sales, 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 and the outcome
of related litigation, the purchase of additional capital equipment,
acquisitions of other businesses or technologies, and the progress of the
Company's customers' milestone and royalty producing activities. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all. The factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's international operations are subject to risks inherent with
exchange rate fluctuations. Through the third quarter of 2000, approximately 35%
of the Company's consolidated revenue was derived from customers outside the
United States. Approximately 25% of the Company's revenue was derived from
customers in Europe and approximately 10% was derived from customers in the
Asia/Pacific region for the same period. The Company's exchange rate risk is
greatest for dollar/euro, dollar/pound sterling and dollar/yen fluctuations. The
Company's direct international sales generally are denominated in local
currencies. Fluctuations in the value of currencies in which the Company
conducts business relative to the United States dollar result in currency
transaction gains and losses. When deemed appropriate, the Company engages in
exchange rate-hedging transactions in an attempt to mitigate the impact of
adverse exchange rate fluctuations. At September 30, 2000, the Company had no
material hedging transactions in effect.
The Company does not use derivative financial instruments in its operations or
investment portfolio. However, the Company regularly invests excess cash in
overnight repurchase agreements that are subject to changes in short-term
interest rates. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of the Company's interest-sensitive financial instruments as of September
30, 2000.
The Company does not have exposure to market risks associated with changes in
interest rates because it has no variable interest rate debt outstanding. The
Company does not believe it has any other material exposure to market risks
associated with interest rates.
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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not a party to any material litigation and is
not aware of any threatened material litigation.
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index on Page 18
(b) Reports on Form 8-K
(i) Current report on Form 8-K filed August 16,
2000 reported under Item 5 relating to the
execution of a definitive agreement for the
acquisition of the software subsidiaries of
Oxford Molecular Group Plc.
(ii) Current report on Form 8-K filed September
20, 2000 reported under Item 2 relating to
the completion of the acquisition of the
software subsidiaries of Oxford Molecular
Group Plc.
(iii) Current report on Form 8-K/A filed November
13, 2000 reported under Item 7 relating to
the financial statements and pro forma
financial information of the software
subsidiaries of Oxford Molecular Group Plc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHARMACOPEIA, INC.
By: /s/ BRUCE C. MYERS
---------------------------------------
Bruce C. Myers
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Chief
Accounting Officer)
Date: November 14, 2000
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PHARMACOPEIA, INC.
INDEX TO EXHIBITS
No. EXHIBIT
27.1 Financial Data Schedule, September 30, 2000
18
