UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-28006
MICROCIDE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3186021
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification Number)
850 Maude Avenue, Mountain View, California 94043
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-428-1550
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, no par value, outstanding as of October 30,
1998: 10,996,683.
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 1998
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 1998 3
and December 31, 1997
Condensed Statements of Operations for the three and nine
months ended September 30, 1998 and September 30, 1997 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1998 and September 30, 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 11
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 12
-2-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,590 $ 11,763
Short-term investments 22,928 28,624
Receivables, prepaid expenses and other current assets 2,387 1,284
-------- --------
Total current assets 32,905 41,671
-------- --------
Property and equipment, net 9,927 9,540
Other assets 335 571
-------- --------
Total assets $ 43,167 $ 51,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 702 $ 1,313
Construction payable 17 347
Accrued compensation 840 746
Current portion of capital lease obligations 268 612
Deferred revenue 228 786
Other accrued liabilities 841 632
-------- --------
Total current liabilities 2,896 4,436
-------- --------
Long-term portion of capital lease obligations 47 224
Accrued rent 177 226
Stockholders' equity:
Common stock 66,799 66,930
Deferred compensation (588) (1,251)
Net unrealized gain (loss) on marketable securities 31 (44)
Accumulated deficit (26,195) (18,739)
-------- --------
Total stockholders' equity 40,047 46,896
-------- --------
Total liabilities & stockholders' equity $ 43,167 $ 51,782
======== ========
<FN>
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 Notes to Condensed Financial Statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
License, milestone and other revenues $ 43 $ 1,054 $ 43 $ 2,054
Research revenue 2,800 3,024 8,635 9,125
-------- -------- -------- --------
Total revenues 2,843 4,078 8,678 11,179
-------- -------- -------- --------
Operating expenses
Research and development 4,723 5,078 14,599 13,515
General and administrative 980 1,005 2,991 3,126
-------- -------- -------- --------
Total operating expenses 5,703 6,083 17,590 16,641
-------- -------- -------- --------
Loss from operations (2,860) (2,005) (8,912) (5,462)
Interest income, net 456 624 1,456 1,869
-------- -------- -------- --------
Net loss $ (2,404) $ (1,381) $ (7,456) $ (3,593)
======== ======== ======== ========
Net loss per share $ (0.22) $ (0.13) $ (0.68) $ (0.33)
======== ======== ======== ========
Shares used in calculation of net loss per share 10,972 10,843 10,951 10,800
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (7,456) $ (3,593)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,241 2,231
Amortization of deferred compensation 401 446
Accrued rent (49) 81
Net unrealized gain (loss) on securities 75 (70)
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets (1,103) (1,032)
Other assets 236 (414)
Construction payable (330) (209)
Accounts payable (611) (566)
Accrued compensation and other accrued liabilities 303 550
Deferred revenue (558) (145)
-------- --------
Net cash used in operating activities (6,851) (2,721)
-------- --------
Cash flows provided by investing activities:
Purchase of short-term investments (13,797) (21,289)
Maturities of short-term investments 19,493 25,710
Capital expenditures (2,628) (2,508)
-------- --------
Net cash provided by investing activities 3,068 1,913
-------- --------
Cash flows used in financing activities:
Principal payments on capital lease obligations (521) (843)
Repayment of shareholder note -- 35
Net proceeds from issuance of common stock 131 148
-------- --------
Net cash used in financing activities (390) (660)
-------- --------
Net decrease in cash and cash equivalents (4,173) (1,468)
Cash and cash equivalents at beginning of period 11,763 8,317
-------- --------
Cash and cash equivalents at end of period $ 7,590 $ 6,849
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2 $ 22
======== ========
Interest paid $ 21 $ 116
======== ========
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
-5-
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Microcide Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical
company whose mission is to discover, develop and commercialize novel
antimicrobials for the improved treatment of serious bacterial, fungal and viral
infections. The Company's discovery and development programs address the growing
problem of bacterial drug resistance and the need for improved antifungal and
antiviral agents through two principal themes: (i) Targeted Antibiotics, which
focuses on developing novel antibiotics and antibiotic potentiators to directly
address existing bacterial resistance problems, and (ii) Targeted Genomics,
which utilizes bacterial, fungal and viral genetics to discover new classes of
antimicrobials and other novel treatments for infectious diseases.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. 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. The results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire year.
This unaudited financial data should be read in conjunction with the
financial statements and footnotes contained in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
2. Investments
Investment securities are classified as available-for-sale (estimated
fair value) and consist of the following investments (in thousands):
September 30, December 31,
1998 1997
---------- ----------
Cash equivalents and short-term investments:
Money market funds $ 5,620 $ 2,133
Corporate debt securities 22,928 37,417
---------- ----------
$ 28,548 $ 39,550
========== ==========
-6-
<PAGE>
3. Per Share Information
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted-average number of shares of Common Stock outstanding during the period.
Diluted net loss per share has not been presented; given the Company's net loss
position, the result would be anti-dilutive.
4. Changes in Accounting Standards
As of January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement has no impact on the
Company's net loss or stockholders' equity. SFAS 130 requires, among other
things, unrealized gains or losses on the Company's securities to be included in
comprehensive income or loss. During the nine months ended September 30, 1998
and 1997, the Company's comprehensive loss amounted to $7,381,000 and
$3,663,000, respectively.
-7-
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
As part of the Company's strategy to enhance its research and
development capabilities and to fund, in part, its capital requirements,
Microcide has entered into collaborative agreements with three major
pharmaceutical companies. The Company has received license fees, research
support payments and milestone payments pursuant to these agreements and can
potentially receive additional research support payments, additional milestone
payments and royalty payments. License fees are typically nonrefundable up-front
payments for licenses to develop, manufacture and market products, if any, that
are developed as a result of the collaboration. Research support payments are
typically contractually obligated payments to fund research and development over
the term of the collaboration. Milestone payments are payments contingent upon
the achievement of specified milestones, such as selection of candidates for
drug development, the commencement of clinical trials or receipt of regulatory
approvals. If drugs are successfully developed and commercialized as a result of
the collaborative agreements, the Company will receive royalty payments based
upon the net sales of such drugs.
Through September 30, 1998, the Company had received in the aggregate
$38.9 million in license fees, milestone payments and research support payments
under the collaborative agreements. Assuming none of the existing collaborative
agreements is terminated prior to its scheduled expiration, the Company will be
entitled to receive up to an additional $15.8 million of research support
payments. In addition, in the event that any of the collaborative agreements are
extended beyond their current terms, the Company will be entitled to receive
additional research support payments.
In the event that the Company achieves the specified research and
product development milestones, the Company will be entitled to receive
milestone payments under its collaborative agreements with the three major
pharmaceutical companies ranging from $13.0 million to $32.5 million per
product. No royalty payments have yet been received and the Company does not
expect to receive royalties based upon the net sales of drugs for a significant
number of years, if ever.
Quarterly results of operations are subject to significant fluctuations
based on the timing and amount of certain revenues earned under the
collaborative agreements. The Company expects to incur operating losses in the
future.
This Form 10-Q contains forward-looking statements based upon current
expectations, including statements with regard to the potential receipt of
additional research support payments, milestone payments and royalties from the
Company's collaborative partners, and the period of time for which the Company's
existing capital resources and future payments under collaborative agreements
will be sufficient to satisfy the Company's funding requirements, expectations
concerning the Company's future research and development and general and
administrative expenses and the potential impact of the Year 2000 issue. Such
forward-looking statements involve risk and uncertainties, including without
limitation, the risk that the Company's collaborations will be terminated,
development candidates will not be identified, development candidates which are
selected will not proceed through pre-clinical trials or will not prove safe and
effective for treatment of humans in clinical trials, or that the
identification, selection, manufacture, pre-clinical, and clinical testing of
development candidates will take substantially longer or be substantially more
expensive than contemplated by the Company, or that the Company will not be able
to obtain on a timely basis government regulatory clearance required for
clinical testing, manufacturing, and marketing of its products, or that the Year
2000 issue will have a material impact on the Company, and the other risks and
uncertainties set forth in the Company's annual report on Form 10-K for the year
ended December 31, 1997. Actual results and timing of certain events could
differ materially from those indicated in the forward-looking statements as a
result of these or other factors.
-8-
<PAGE>
Results of Operations
Three Months Ended September 30, 1998 and 1997
Revenues. Total revenues for the third quarter of 1998 were $2.8 million, a
decrease of 30% from the $4.1 million in revenues recognized in the third
quarter of 1997; the decrease was largely due to $1.0 million in additional
revenues associated with the sale of molecular diversity samples in the third
quarter of 1997 as compared to the third quarter of 1998. In addition, research
support revenue decreased $0.2 million in the third quarter of 1998 due
primarily to lower revenues earned from the Daiichi collaborative agreement
resulting from a decrease in reimbursable costs associated with the program.
Research and Development Expenses. Research and development expenses for the
third quarter decreased approximately 8% from $5.1 million in 1997 to $4.7
million in 1998. The decrease was due primarily to lower costs related to
assembling the Company's molecular diversity collection and lower expenses for
research supplies and materials, partially offset by higher compensation and
other employee-related expenses associated with an increase in headcount to
support the Company's corporate collaborations and its internal programs, higher
costs relating to expanded research and development facilities, and costs
associated with providing research support to Iconix Pharmaceuticals related to
the viral research program. Research and development expenses are not expected
to materially change in the fourth quarter.
General and Administrative Expenses. General and administrative expenses for the
third quarter were approximately equal at $1.0 million in both 1997 and 1998.
General and administrative expenses are not expected to materially change in the
fourth quarter.
Interest Income, net. Interest income for the third quarter decreased from
$665,000 in 1997 to $462,000 in 1998, primarily due to a decrease in average
cash balances. Interest expense for the third quarter decreased from $41,000 in
1997 to $6,000 in 1998 due to a decrease in capital lease balances outstanding.
Nine Months Ended September 30, 1998 and 1997
Revenues. Total revenues for the first nine months of 1998 were $8.7 million, a
decrease of 22% from $11.2 million in revenues for the first nine months of
1997; the decrease was primarily due to an additional $2.0 million in milestone
payments and revenues associated with the sales of molecular diversity samples
in the first nine months of 1997 as compared to the first nine months of 1998.
In addition, research support revenue decreased $0.5 million primarily as a
result of lower revenues earned from the Daiichi collaborative agreement
resulting from a decrease in reimbursable costs associated with the program.
Research and Development Expenses. Research and development expenses for the
first nine months of 1998 were $14.6 million, an increase of approximately 8%
from $13.5 million in the first nine months of 1997, primarily due to increased
compensation and other employee-related expenses associated with an increase in
headcount to support the Company's corporate collaborations and its internal
programs, higher costs relating to expanded research and development facilities
and costs associated with providing research support to Iconix Pharmaceuticals
related to the viral research program, partially offset by lower expenses
related to assembling the Company's molecular diversity collection, as well as
lower expenses for research supplies.
General and Administrative Expenses. General and administrative expenses for the
first nine months of 1998 decreased approximately 4% from $3.1 million in 1997
to $3.0 million in 1998. Decreased expenses primarily consisted of lower payroll
and related expenses and lower operational costs partially offset by an increase
in outside service expenses associated with legal and insurance activities and
higher costs related to expansion of facilities.
Interest Income, net. Interest income for the first nine months of 1998
decreased from $2.0 million in 1997 to $1.5 million in 1998, primarily due to a
decrease in average cash balances. Interest expense decreased from $134,000 in
the first nine months of 1997 to $21,000 in the first nine months of 1998 due to
a decrease in capital lease balances outstanding.
-9-
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations since inception primarily
through the sale of equity, through funds provided under collaborative
agreements, through other revenues principally consisting of sales of molecular
diversity samples and through equipment financing. As of September 30, 1998 the
Company had received approximately $64.5 million in net proceeds from the sale
of equity and approximately $38.9 million from license fees and milestone
payments, research support payments under collaborative agreements and sales of
molecular diversity samples.
Cash, cash equivalents and short-term investments at September 30, 1998
were $30.5 million compared to $40.4 million at December 31, 1997. The decrease
during the first nine months of 1998 was due primarily to cash used by
operations of $6.9 million, $2.6 million in capital expenditures and $390,000
utilized in financing activities which predominantly consisted of principal
payments on capital lease obligations.
The Company believes that its existing capital resources, interest
income and future payments due under collaborative agreements will enable the
Company to maintain current and planned operations at least through 1999.
Impact of Year 2000
The "Year 2000" issue generally describes the various problems which
may result from the improper processing of dates and date-sensitive
calculations. Computers and other equipment containing computer-related
components (such as programmable logic controllers and other embedded systems)
using two digits to identify the year in a date may not be able to distinguish
between dates in the 20th century versus the 21st century. This issue could
cause system or equipment malfunctions resulting in material and adverse
interruptions in operations.
The Company has begun to assess the potential impact of the Year 2000
computer problem on its computer systems, research equipment with embedded chips
or software, and on the ability of third parties to supply critical materials
and services. The Company has completed the assessment of its computer systems
and believes them to be Year 2000 compliant. The Company expects to complete the
assessment of its embedded systems and certain third party suppliers by the
second quarter of 1999, and to take necessary remediation action by the end of
1999. Expenditures to date have not been material and have consisted solely of
the time of certain company personnel. Based on the partial assessment completed
through September 30, 1998, the Company does not currently expect the future
costs of completing the assessment and making equipment modifications to be
material. Although the Company believes its key financial, information and
operational systems are Year 2000 compliant, there can be no assurances that
other defects will not be discovered in the future. The Company is unable to
control whether the firms and vendors it does business with currently, and in
the future, will have systems which are Year 2000 compliant. The Company's
operations could be affected to the extent that firms and vendors would be
unable to provide services or ship products. However, management does not
believe the Year 2000 changes will have a material impact on its business,
financial condition or results of operations.
-10-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Deadline for Receipt of Stockholder Proposals
Stockholders are entitled to present proposals for action at a
forthcoming meeting if they comply with the requirements of the
proxy rules established by the Securities and Exchange Commission.
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 1999 Annual Meeting
of Stockholders must be received by the Company no later than
December 31, 1998 in order that they may be considered for
inclusion in the proxy statement and form of proxy relating to that
meeting.
If a stockholder intends to submit a proposal at the Company's
Annual Meeting, which is not eligible for inclusion in the proxy
statement relating to that meeting, the stockholder must give the
Company notice in accordance with the requirements set forth in the
Securities Exchange Act of 1934, as amended, no later than February
14, 1999. If such a stockholder fails to comply with the foregoing
notice provision, the proxy holders will be allowed to use their
discretionary authority when and if the proposal is raised at the
Company's Annual Meeting in 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits have been filed with this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
-11-
<PAGE>
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.
Dated: November 16, 1998
MICROCIDE PHARMACEUTICALS, INC.
-------------------------------
(Registrant)
/s/ James E. Rurka
---------------------
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Matthew J. Hogan
-----------------------
Chief Financial Officer
(principal financial and accounting officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010915
<NAME> MICROCIDE PHARMACEUTICALS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,970
<SECURITIES> 28,548
<RECEIVABLES> 1,743
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,905
<PP&E> 18,884
<DEPRECIATION> 8,957
<TOTAL-ASSETS> 43,167
<CURRENT-LIABILITIES> 2,896
<BONDS> 0
0
0
<COMMON> 64,484
<OTHER-SE> 1,759
<TOTAL-LIABILITY-AND-EQUITY> 43,167
<SALES> 0
<TOTAL-REVENUES> 2,843
<CGS> 0
<TOTAL-COSTS> 5,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (2,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,404)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
