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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Commission file number: 0-27406
CONNETICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173928
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3400 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 843-2800
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 at least the past 90 days. Yes [X] No [ ]
As of April 30, 1998, 16,726,092 shares of the Registrant's common stock were
outstanding, at $0.001 par value.
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CONNETICS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at March 31, 1998 and December 31, 1997........ 3
Condensed Statements of Operations for the three months ended
March 31, 1998 and 1997................................................. 4
Condensed Statements of Cash Flows for the three months ended
March 31, 1998 and 1997................................................. 5
Notes to Condensed 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 Risks............. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................... 13
Item 3. Defaults Upon Senior Securities......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................... 13
Item 5. Other Information....................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................ 14
Exhibits............................................................ 14
Reports on Form 8-K................................................. 14
SIGNATURE ................ ................................................................ 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONNETICS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,722 $ 8,452
Short-term investments 4,498 5,894
Restricted cash 1,087 --
Accounts and other receivables 567 1,527
Other current assets 237 158
-------- --------
Total current assets 12,111 16,031
Property and equipment, net 1,487 1,663
Notes receivable from related parties 357 333
Deposits and other assets 135 160
License agreements and product rights 11,200 12,881
-------- --------
$ 25,290 $ 31,068
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,000 $ 1,492
Accrued and other current liabilities 1,023 1,100
Accrued process development expenses 599 586
Accrued payroll and related expenses 663 536
Current portion of notes payable and other liabilities 11,653 2,884
Current portion of capital lease obligations, capital loans and
long-term debt 2,219 2,746
-------- --------
Total current liabilities 17,157 9,344
Noncurrent portion of capital lease obligations, capital loans and
long-term debt 579 649
Other long-term liabilities 1,317 9,666
Redeemable convertible preferred stock, Series A -- 600
Stockholders' equity:
Common stock and additional paid-in capital 78,122 77,566
Notes receivable from stockholders (75) (75)
Deferred compensation, net (577) (763)
Accumulated deficit (71,187) (65,873)
Treasury stock, at cost (46) (46)
-------- --------
Total stockholders' equity 6,237 10,809
======== ========
$ 25,290 $ 31,068
======== ========
</TABLE>
See notes to condensed financial statements.
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CONNETICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1998 1997
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<S> <C> <C>
Product revenues $ 1,519 $ 1,453
Operating cost and expenses:
Cost of product revenues 295 226
License amortization 1,680 1,781
Research and development 2,178 5,165
Selling, general and administrative 2,462 1,621
-------- -------
Total operating expenses 6,615 8,793
Interest income 177 235
Interest expense (394) (452)
-------- -------
Net loss $ (5,313) $(7,557)
======== =======
Basic and diluted net loss per share $ (0.39) $ (0.84)
======== =======
Shares used to calculate basic and diluted net loss per share 13,489 9,078
======== =======
</TABLE>
See notes to condensed financial statements.
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CONNETICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,313) $ (7,557)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 1,909 1,956
Amortization of deferred compensation 116 135
Accrued interest on notes payable 288 277
Changes in assets and liabilities:
Current and other assets (230) (859)
Current and other liabilities (429) 2,356
Other long-term liabilities 132 (5,093)
------- --------
Net cash used by operating activities (3,527) (8,785)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (882) --
Sales and maturities of short-term investments, net 2,278 2,844
Capital expenditures (27) (354)
------- --------
Net cash provided by investing activities 1,369 2,490
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital loans and long-term debt -- 122
Payments of obligations under capital leases
and capital loans (597) (594)
Proceeds from issuance of common stock, net
of issuance costs 25 (58)
------- --------
Net cash used by financing activities (572) (530)
------- --------
Net change in cash and cash equivalents (2,730) (6,825)
Cash and cash equivalents at beginning of period 8,452 14,555
------- --------
Cash and cash equivalents at end of period $ 5,722 $ 7,730
======= ========
SUPPLEMENTARY INFORMATION:
Interest paid $ 105 $ 176
</TABLE>
See notes to condensed financial statements.
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CONNETICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Connetics
Corporation (the "Company" or "Connetics") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, such 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 accrual adjustments, considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
These financial statements and notes should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's Form 10-K Report.
2. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), which requires the Company to simplify the calculation of earnings per
share ("EPS") and achieve comparability with the recently issued International
Accounting Standard No. 33, "Earnings Per Share." Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods presented have been restated, where appropriate, to conform to the
Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(In thousands except per share amounts) 1998 1997
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<S> <C> <C>
Numerator:
Net loss $ (5,313) $(7,557)
Preferred stock dividends -- (46)
-------- -------
Numerator for basic and diluted earnings per share --
loss attributable to common stockholders (5,313) (7,603)
Denominator:
Denominator for basic and diluted earnings per share --
weighted-average shares 13,489 9,078
Basic and diluted net loss per share $ (0.39) $ (0.84)
======== =======
</TABLE>
Options to purchase 1,923,268 shares of common stock at exercise prices ranging
from $0.4448 to $11.00, warrants to purchase 1,289,193 shares of common stock at
exercise prices ranging from $4.89 to $11.00 were outstanding at March 31, 1998
but were not included in the computation of diluted earnings per share as their
effect would be antidilutive.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130). Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net
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income or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
During the three months ended March 31, 1998 and 1997, total comprehensive
income (loss) amounted to $(5.3) million and $(7.6) million, respectively. The
components of comprehensive income, net of related tax, for the three month
periods ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
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<S> <C> <C>
Net loss $(5,313) $(7,557)
Unrealized gains (loss) on securities (2) (1)
Foreign currency translation adjustment -- --
------- -------
Comprehensive income (loss) $(5,315) $(7,558)
------- -------
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
------- -------
<S> <C> <C>
Unrealized gains (loss) on securities $ -- $ 2
Foreign currency translation adjustments -- --
------- -------
Accumulated comprehensive income (loss) $ -- $ 2
------- -------
</TABLE>
4. SUBSEQUENT EVENT
On April 10, 1998, the Company entered into an agreement with Alta BioPharma
Partners, L.P. ("Alta") and certain funds affiliated with Alta (collectively the
"Investors"), to sell an aggregate of 2,162,163 shares of the Company's Common
Stock at a price of $4.625 per share, for an aggregate purchase price of
approximately $10,000,003.88. The financing closed on April 10, 1998 and the
Company has agreed to file within ninety days of the closing a registration
statement on Form S-3 covering the resale of the shares of Common Stock purchase
by the Investors.
Pursuant to its equity and asset purchase agreements with SmithKline Beecham
Properties, Inc. ("SBP"), the Company guaranteed a total value of the common
shares previously issued to SBP of $8,000,000 on April 1, 1998. As of April 1,
1998, the aggregate fair market value of the shares previously issued under the
agreement was less than $8,000,000 and, as a result, the Company was required to
issue additional shares. On April 10, 1998, the Company issued 1,037,779 shares
of its Common Stock to SBP in fulfillment of such obligation. The issuance
completes the Company's obligation to issue equity to SBP under its Stock
Issuance Agreement with SBP. The Company also paid SBP approximately $308,000 in
cash on May 4, 1998 in conjunction with the transaction to fulfill its
obligation to SBP related to this transaction. (See Note 5 of Notes to Financial
Statements for the year ended December 31, 1997 in the Company's Annual Report
on Form 10-K)
On April 28, 1998, the Company entered into a Second Omnibus Amendment with
SmithKline Beecham Corporation, SBP and related entities (collectively
"SmithKline"). Under this Amendment, the Company restructured its payment
obligations under a promissory note issued to SmithKline in connection with the
Ridaura acquisition. This amendment adjusts the December 18, 1997 amended note
repayments for the remaining principal payments of $10.0 million to SmithKline
as follows:
<TABLE>
<CAPTION>
Payment Due Date Amount Due
---------------- ----------
<S> <C>
July 1, 1998 $1,100,000
October 1, 1998 $1,100,000
January 4, 1999 $2,500,000
April 1, 1999 $ 800,000
July 1, 1999 $ 800,000
October 1, 1999 $ 700,000
January 3, 2000 $1,500,000
April 1, 2000 $1,500,000
</TABLE>
The Company is required to pay interest on the principal amount outstanding of
$4.7 million from April
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8, 1998 through January 4, 1999 at prime rate plus 2% per annum, and on the
principal amount outstanding of $5.3 million from January 4, 1999 through April
1, 2000 at prime rate plus 3% per annum.
5. LIQUIDITY AND FINANCIAL VIABILITY
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue over at least
the next few years. The Company plans to continue to finance its operating
activities with a combination of stock sales, such as the initial public
offering, self-managed private financings, payments from corporate partnering
arrangements, acquisition of revenue generating products such as Ridaura and/or
debt financing. Ultimately, the Company's ability to continue as a going concern
in the future is dependent upon obtaining substantial additional financings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED THEREIN, THE
FOLLOWING DISCUSSION CONSISTS OF FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, UNCERTAINTY OF PRODUCT DEVELOPMENT
AND MARKET ACCEPTANCE; UNCERTAINTY OF FUTURE RIDAURA(R) REVENUES AND COSTS;
UNCERTAINTY OF CLINICAL TRIALS; UNCERTAINTY OF FUTURE PROFITABILITY; FUTURE
CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING; AND RISKS ASSOCIATED
WITH POSSIBLE FUTURE PRODUCT ACQUISITIONS. ADDITIONAL INFORMATION CONCERNING
THESE AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE IN THE FORWARD LOOKING STATEMENTS IS CONTAINED UNDER THE HEADING
"ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" COMMENCING ON PAGE 20 OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997.
The following discussion should be read in conjunction with the unaudited
condensed financial statements and notes thereto included in Part I, Item 1 of
this Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
OVERVIEW
Connetics Corporation (the "Company") acquires, develops and markets products in
the areas of rheumatology and dermatology. The Company acquired the U.S. and
Canadian rights to Ridaura(R) (auranofin), a treatment for rheumatoid arthritis,
from SmithKline BeechaM Corporation and related entities ("SmithKline") in
December 1996, and in December 1997 the Company sold off its Canadian rights to
Ridaura. The Company's products under development include betamethasone mousse
for the treatment of scalp psoriasis and other dermatoses; clobetasol mousse for
the treatment of severe dermatoses; ConXn(TM) (relaxin) for the treatmeNt of
scleroderma, other fibrotic disorders and infertility; T-cell Receptor (TCR)
peptide vaccines for the treatment of multiple sclerosis and rheumatoid
arthritis; and gamma interferon for the treatment of keloids.
In December 1997, the Company submitted a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) for its betamethasone mousse product, a
novel foam formulation of betamethasone valerate for use in all
steroid-responsive dermatoses including psoriases. The NDA is based upon results
from the Company's Phase III clinical trial of betamethasone mousse which
demonstrated statistically significant improvement over placebo for the
treatment of scalp psoriasis, a condition that affects approximately three
million Americans. The 190-patient, placebo-controlled, randomized,
double-blind, multi-center Phase III study demonstrated that patients treated
with betamethasone mousse, administered twice-daily for 28 days, experienced a
statistically significant improvement over patients in the groups treated with
betamethasone lotion or placebo in all primary endpoints, including erythema
(redness of the skin), plaque thickness and scaling. In addition, study
investigators completed a physicians global assessment which showed that
overall, approximately 67% of patients treated with the mousse formulation had
complete or almost complete clearance compared with 46% for lotion and 19% for
placebo. Both betamethasone mousse and lotion were generally well tolerated. In
February 1998, the FDA confirmed acceptance of the Company's NDA for review.
In January 1998, the Company entered into a license agreement with Soltec
Research Pty Ltd. to exclusively develop and market clobetasol mousse in North
America. Clobetasol mousse is a quick break foam formulation of clobetasol
propionate, a super high-potency corticosteriod currently marketed in the United
States. Clobetasol mousse utilizes a drug formulation similar to the Company's
betamethasone mousse product, whereby it remains a foam at room temperature and
then liquefies when applied to the body, facilitating the delivery of active
dermatologic agent. The Company plans to begin a Phase III clinical trial of
this product in 1998 for the treatment of severe psoriasis and skin dermatoses.
The U.S. market for high and super high potency corticosteriods is estimated to
be $300 million per year.
Also in January 1998, the Company reported results from a multi-center Phase
I/II clinical testing of TCR peptide vaccines for the treatment of multiple
sclerosis. The Phase I/II study involved 106 patients with multiple sclerosis.
The trial evaluated safety and immunogenicity of the Company's proprietary TCR
vaccine being developed to elicit a heightened immune response against the
pathogenic T-cells believed to cause multiple sclerosis. Preliminary results
from this study indicate that administration of
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the TCR vaccine was safe and well tolerated following three months of treatment.
In this Phase I/II study, the response rate of vaccine treated patients was
approximately double the response rate of placebo treated patients, which was
similar to the response rate observed in previous studies. The Company was also
granted a patent covering TCR vaccine technology, EP Patent Number 0552142
addressed to the TCR second complementary determining region (CDR2), by the
European Patent Office.
There can be no assurance that any of the Company's potential products will be
successfully developed, receive the necessary regulatory approvals or be
successfully commercialized.
RESULTS OF OPERATIONS
The Company's revenues are derived from the sales of Ridaura and were $1.52
million and $1.45 million for the three months ended March 31, 1998 and 1997,
respectively. In December 1997, the Company sold the Canadian rights to Ridaura
to Pharmascience, Inc., a Canadian corporation. Revenue on a adjusted basis to
reflect the disposition of Riduara rights in Canada for the three months ended
March 31, 1997 was $1.36 million. The Company believes the increase in revenue
for the three months ended March 31, 1998 as compared to the same period in 1997
resulted from the promotion efforts of the Company's sales organization.
Under Transitional Services and Supply agreements between SmithKline and the
Company, SmithKline will manufacture and supply Ridaura in final package form
through December 2001 and managed distribution of the product, with no
additional consideration, through December 1997. The Company established a
distribution arrangement with CORD Logistics, Inc. ("CORD") under which CORD
will manage customer orders and distribution of Ridaura and any other future
products of the Company beginning in December 1997. As a result, the Company
began incurring distribution costs currently estimated to be approximately 3% of
net revenue.
The Company's cost of product sales includes the cost of Ridaura purchased from
SmithKline, a percentage royalty cost based on product sales, and distribution
costs from CORD. For the three months ended March 31, 1998 and 1997, the Company
recorded $0.3 million and $0.2 million, respectively, in cost of product sales
and recorded amortization expense of $1.7 million and $1.8 million,
respectively, associated with the acquisition of product rights to Ridaura.
Research and development expenses were $2.2 million for the three months ended
March 31, 1998, compared to $5.2 million for the same period in 1997. The
decrease in research and development expenses of $3.0 million was primarily due
to a reduction in clinical trial activities. In the first quarter of 1998, the
Company's clinical trial activities consisted of a 13 patient open label
clinical trial of ConXn(TM) for the treatment of scleroderma and a 41 patient
Phase II clinical of gamma interferon for the treatment of keloids compared with
a 555 patient Phase III clinical trial of gamma interferon for the treatment of
atopic dermatitis, a Phase II clinical trial of ConXn for the treatment of
scleroderma, a Phase I/II clinical trial of TCR peptide vaccines for the
treatment of multiple sclerosis and a the Phase II clinical trial of gamma
interferon for the treatment of keloids in the first quarter of 1997. Research
and development expenses are expected to increase over the next three quarters
due to the expected initiation of a Phase III clinical trial of clobetasol
mousse for the treatment of severe psoriasis and skin dermatoses, an expected
pivotal trial of ConXn for the treatment of scleroderma, and possible
acquisition of new technologies and products.
Selling, general and administrative expenses increased to $2.5 million for the
three months ended March 31, 1998 compared to $1.6 million for the same period
in 1997. The increase of $0.9 million was primarily due to the activities of an
established sales and marketing organization, costs associated with the
promotion and marketing of Ridaura and increases in personnel in the general and
administrative functions. Selling, general and administrative expenses are
expected to increase primarily due to increased staffing of the sales
organization, costs associated with marketing Ridaura and possible launching of
new approved or acquired products.
Interest income decreased to $177,000 in the three months ended March 31, 1998,
compared with $235,000 for the corresponding period in 1997 due to lower average
cash and investment balances held by the Company. Interest earned in the future
will depend on Company funding cycles and prevailing interest rates. Interest
expense decreased to $394,000 for the three months ended March 31, 1998 compared
with $452,000 for the corresponding period in 1997. The decrease in interest
expense was due
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to lower imputed interest expense, $130,000 in the first quarter of 1998
compared to $277,000 in the first quarter of 1997, attributable to the
non-interest bearing $11.0 million promissory note payable to SmithKline as
partial consideration for the acquisition of U.S. and Canadian rights to
Ridaura, and lower interest expense associated with lower balances outstanding
for obligations under capital leases and loans, and notes payable. The decrease
was offset in part by $159,000 in accrued interest payable pursuant to the
amended repayment terms of the SmithKline note by which the Company is required
to pay interest on the principal amount outstanding at prime rate plus 2% per
annum.
The Company incurred net losses of $5.3 million in the three months ended March
31, 1998 compared with $7.6 million for the corresponding period in 1997. The
decrease of $2.3 million in net losses, was primarily due to a lower level of
development activities and lower amortization costs due to the sale of Canadian
rights to Ridaura. The decrease in net loss was offset in part by higher
selling, general and administrative expenses. The Company expects to incur
additional losses over the next few years and losses are expected to fluctuate
from period to period based on timing of product revenues, clinical material
purchases, possible acquisitions of new products and technologies, scale-up
activities and clinical activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private sales
of equity securities, proceeds from its initial public offering in February 1996
and four self-managed financings, two in 1996 and two in 1997. At March 31,
1998, cash, cash equivalents, short-term investments, and restricted cash
totaled $11.3 million, a decrease of $3.0 million from $14.3 million at December
31, 1997. In April 1998, the Company completed a private placement of its common
stock which resulted in cash proceeds of approximately $10.0 million and also
entered into a development, commercialization and supply agreement with Suntory
Pharmaceuticals, a division of Suntory Limited of Osaka, Japan for ConXn which
resulted in an up-front license fee payment of approximately $1.5 million (net
of international withholding tax) to the Company.
Cash used in operations in the first quarter of 1998 was $2.4 million compared
with $8.8 million for the same period in 1997. Net loss for the first quarter of
1998 was affected by a number of charges that did not use cash, including $1.7
million of amortization expense and $130,000 imputed interest expense associated
with the acquisition of Ridaura. Cash outflow for the quarter was primarily for
operating activities. Receivables at March 31, 1998 were $0.6 million compared
with $1.4 million for the same period in 1997 due to a shorter collection cycle
as product sales in 1998 are direct to wholesalers with payment terms of 2%
discount, net 30 days. In 1997, the Company's sole customer was SmithKline who
in turn distributed Ridaura under a Transitional Services Agreement with the
Company. Payment terms under this arrangement were on a quarterly basis, thirty
days after the end of each quarter.
Investing activities, other than the changes in the Company's short-term
investments, consumed $27,000 in cash during the quarter ended March 31, 1998,
for equipment expenditures required for operations.
Cash used in financing activities was $0.6 million for the quarter ended March
31, 1998 compared with $0.5 million for the same period in 1997, primarily due
to payments on obligations under capital leases and loans.
Working capital decreased by $11.8 million to a negative $5.1 million at March
31, 1998 from $6.7 million at December 31, 1997. The decrease in working capital
was the result of lower cash, cash equivalents and short-term investments and
accounts receivables, and reclassification to current the note payable due to
SmithKline in 1999 for rights to Ridaura, offset in part by lower accounts
payable. On April 28, 1998, the Company entered into a second omnibus amendment
with SmithKline and restructured its payment obligations under the promissory
note such that $5.3 million of payments previously due within one year are now
due after March 31, 1999 (see Note 4 of Notes to Condensed Financial
Statements). Working capital on an adjusted basis to reflect these amended
payment terms would be $0.3 million for the quarter ended March 31, 1998. The
decrease in accounts payable was due to lower research and development
activities.
At March 31, 1998, the Company had an aggregate of $15.8 million in future
obligations of principal payments under capital leases, loans, long-term debt
and other obligations, of which $13.9 million is to
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be paid within the next year. After adjustment for the April 28, 1998 amendment
to the note repayment terms, the Company's payment obligations due within the
next year are $8.6 million.
The Company has a Structured Equity Line Flexible Financing Agreement (the
"Equity Line Agreement") with Kepler Capital LLC ("Kepler") that allows the
Company to access up to $25 million through sales of its Common Stock. The
equity line is potentially available for a three-year period beginning December
1, 1997. The Equity Line Agreement provides that the Company can, at its option,
obtain from $500,000 to $2,000,000 at any one time through a sale of its Common
Stock to Kepler, subject to the satisfaction of certain conditions, including
registration of shares for resale, minimum volume requirements, and a minimum
trading price of $7.00 per share over a specified period. In addition, the
Company must sell $500,000 of its Common Stock from time to time if the price
per share exceeds $10.00 and minimum volume requirements are met. Since the
Company's trading price is currently below the $7.00 minimum price requirement,
the Company is unable to draw under the equity line.
The Company believes that its existing cash, cash equivalents and short-term
investments, including $10.0 million cash raised through a self-managed private
sale of the Company's common stock in April 1998 and a $1.5 million license fee
payment from Suntory Pharmaceuticals in April 1998, along with cash generated
from sales of Ridaura, will be sufficient to fund the Company's operating
expenses, debt obligations and capital requirements through early 1999. The
Company's future capital uses and requirements depend on numerous factors,
including the progress of its research and development programs, the progress of
clinical and advanced-stage clinical testing, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, the ability of the Company to establish collaborative
arrangements, the level of product revenues, the possible acquisition of new
products and technologies, and the development of commercialization activities,
and therefore such capital uses and requirements may increase in future periods.
As a result, the Company will require substantial additional funds prior to
reaching profitability and may attempt to raise additional funds through equity
or debt financings, collaborative arrangements with corporate partners or from
other sources. There can be no assurance that additional funding will be
available for the Company to finance its ongoing operations on acceptable terms,
if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
-12-
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
On April 27, 1998, the Company entered into a development, commercialization
and supply agreement with Suntory Pharmaceuticals, a division of Suntory Limited
of Osaka, Japan for ConXn for the treatment of scleroderma. Under the terms of
the agreement, Suntory will pay approximately $14 million in license fees and
milestone payments to the Company, be responsible for all development and
commercialization expenses in Japan, and pay royalties on sales in Japan for the
treatment of scleroderma. On April 30, 1998, Suntory paid an up-front license
fee of $1.5 million (net of international withholding tax) to the Company and
will make milestone payments based upon development progress in the United
States and Japan.
On May 5, 1998, the Company entered into a license agreement with Genentech,
Inc. ("Genentech") under which the Company received an exclusive license under
certain patent rights and know-how to Actimmune(R) (gamma interferon) for the
treatment of chroniC granulomatous disease ("CGD") and several additional
indications (non-cancer dermatological diseases, infectious diseases,
osteopetrosis, pulmonary fibrosis and asthma) in the United States. Under the
terms of the agreement, the Company issued Genentech 340,048 shares of its
common stock valued at $2.0 million at the time of closing with a guaranteed
value of $4.0 million at December 28, 1998. In the event that the initial
issuance of shares is less that $4.0 million, the Company will either issue
additional shares or pay cash to Genentech. The Company will also be required to
pay certain development and commercialization milestones and royalties on sales.
The parties also entered into a Supply Agreement under which Genentech will
manufacture and supply gamma interferon, in bulk product or finished product,
with a termination date on the earlier of three years from date of closing or
the date on which a third party manufacturer, approved by the parties, enters
into a supply agreement with the Company. The Company expects to form a new
subsidiary corporation to further develop and market gamma interferon.
-13-
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<S> <C>
10.1* Agreement on Relaxin dated January 19, 1998 by and between the
Company and the Howard Florey Institute of Experimental Physiology
and Medicine.
10.2* License Agreement dated January 1, 1998 between the Company and
Soltec Research Pty Limited.
27.1 Financial Data Schedule (EDGAR - filed version only)
</TABLE>
* Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
(b) Reports on Form 8-K.
None
-14-
<PAGE> 15
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.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
------------------------------------------
John L. Higgins
Vice President, Finance and Administration
and Chief Financial Officer
Date: May 14, 1998
-15-
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,722
<SECURITIES> 4,498
<RECEIVABLES> 567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,111
<PP&E> 3,433
<DEPRECIATION> 1,946
<TOTAL-ASSETS> 25,290
<CURRENT-LIABILITIES> 17,157
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 6,223
<TOTAL-LIABILITY-AND-EQUITY> 25,290
<SALES> 1,519
<TOTAL-REVENUES> 1,519
<CGS> 295
<TOTAL-COSTS> 295
<OTHER-EXPENSES> 6,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394
<INCOME-PRETAX> (5,313)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,313)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
