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 MARCH 31, 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 of (I.R.S. Employer
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 April 30,
1998: 10,964,900.
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
MARCH 31, 1998
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 1998 3
and December 31, 1997
Condensed Statements of Operations for the three
months ended March 31, 1998 and March 31, 1997 4
Condensed Statements of Cash Flows for the three
months ended March 31, 1998 and March 31, 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
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<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,719 $ 11,763
Short-term investments 30,295 28,624
Prepaid expenses and other current assets 979 1,284
-------- --------
Total current assets 37,993 41,671
Property and equipment, net 9,385 9,540
Other assets 684 571
-------- --------
Total assets $ 48,062 $ 51,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 537 $ 1,313
Construction payable -- 347
Accrued compensation 874 746
Current portion of capital lease obligations 459 612
Deferred revenue 632 786
Other accrued liabilities 725 632
-------- --------
Total current liabilities 3,227 4,436
Long-term portion of capital lease obligations 143 224
Accrued rent 261 226
Stockholders' equity:
Common stock 66,940 66,930
Deferred compensation (1,119) (1,251)
Net unrealized loss on securities available-for-sale (75) (44)
Accumulated deficit (21,315) (18,739)
-------- --------
Total stockholders' equity 44,431 46,896
-------- --------
Total liabilities and stockholders' equity $ 48,062 $ 51,782
======== ========
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.
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
License and milestone fees $ -- $ 1,000
Research revenue 3,035 3,107
-------- --------
Total revenues 3,035 4,107
Operating expenses:
Research and development 5,061 4,101
General and administrative 1,058 1,022
-------- --------
Total operating expenses 6,119 5,123
-------- --------
Loss from operations (3,084) (1,016)
Interest income 526 688
Interest and other expense (18) (53)
-------- --------
Net loss $ (2,576) $ (381)
======== ========
Basic and diluted net loss per share $ (0.24) $ (0.04)
======== ========
Shares used in calculation of basic and diluted net loss per share 10,929 10,760
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
Cash flows used in operating activities:
Net loss $ (2,576) $ (381)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 787 528
Amortization of deferred compensation 132 145
Accrued rent 35 16
Net unrealized gain (loss) on securities (31) 68
Changes in assets and liabilities:
Prepaid expenses and other current assets 305 (231)
Other assets (113) 6
Accounts payable (776) (702)
Construction payable (347) (698)
Accrued compensation and other accrued liabilities 221 269
Deferred revenue (154) 610
-------- --------
Net cash provided by (used in) operating activities (2,517) (370)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments (26,746) (39,298)
Maturities of short-term investments 25,075 40,640
Capital expenditures (632) (683)
-------- --------
Net cash provided by (used in) investing activities (2,303) 659
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations (234) (295)
Repayment of shareholder note receivable -- 35
Net proceeds from issuance of common stock 10 14
-------- --------
Net cash provided by (used in) financing activities (224) (246)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,044) 43
Cash and cash equivalents, beginning of period 11,763 8,317
-------- --------
Cash and cash equivalents, end of period $ 6,719 $ 8,360
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2 $ 21
======== ========
Interest paid $ 18 $ 42
======== ========
See Notes to Condensed Financial Statements.
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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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.
On January 14, 1998, the Company announced the formation and financing
of Iconix Pharmaceuticals, Inc. ("Iconix"). Iconix is a chemical genetics
company which will seek to develop surrogate genetics and chemical informatics
research into a technology platform with broad applicability to multiple human
diseases. Through a private placement, Iconix arranged a $12.5 million equity
investment from institutional investors. After giving effect to the investment
and including the initial options pool reserved for employees and consultants of
Iconix, Microcide holds approximately 35% of the pro forma fully diluted
outstanding equity of Iconix. Microcide will account for its investment using
the equity method of accounting and since Microcide's investment has a zero book
basis, the losses of Iconix will not impact Microcide's Statement of Operations.
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.
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<PAGE>
2. Investments
Investment securities are classified as available-for-sale (estimated
fair value) and consist of the following investments (in thousands):
March 31, December 31,
1998 1997
------- -------
Cash equivalents and short-term investments:
Money market funds $ 884 $ 2,133
Corporate debt securities 34,443 37,417
------- -------
$35,327 $39,550
======= =======
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 three months ended March 31, 1998 and
1997, the Company's comprehensive loss amounted to $2,607,000 and $313,000,
respectively.
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<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 payments 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 March 31, 1998, the Company had received in the aggregate $33.0
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 an additional $18.0 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 March 1998, Daiichi Pharmaceutical Co., Ltd.
exercised its option to extend their collaborative agreement with Microcide for
another year.
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 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, the period of time the Company's existing
capital resources and future payments under collaborative agreements
-8-
<PAGE>
will be sufficient to satisfy the Company's funding requirements. 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, 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, 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.
Results of Operations
Three Months Ended March 31, 1998 and 1997
Revenues. Total revenues for the first quarter of 1998 were $3.0
million, a decrease of approximately 26% from the $4.1 million in revenues
earned in the first quarter of 1997. The decline in revenues for the first
quarter of 1998 relative to the first quarter of 1997 was largely due to the
fact that there were no license and milestone fees in the first quarter of 1998
as compared to a $1.0 million milestone fee earned in the first quarter of 1997.
Research and Development Expenses. Research and development expenses
for the first quarter increased approximately 23% from $4.1 million in 1997 to
$5.1 million in 1998, primarily due to increased compensation and other expenses
related to increased headcount to support the Company's corporate collaborations
and its internal programs. Additionally, expenditures for research materials and
outside research contributed to the increase in research and development
expenses. Research and development expenses are expected to further increase in
the second quarter as the Company adds research personnel to support its
corporate collaborations and internal programs, and due to increased expenses
associated with the Company's antiviral research program with Iconix.
General and Administrative Expenses. General and administrative expenses for the
first quarter increased approximately 4% from $1.0 million in 1997 to $1.1
million in 1998. This increase in expenses was due primarily to higher
facilities costs partially offset by a reduction of compensation expenses
attributable to management and administrative personnel. General and
administrative expenses are not expected to change significantly in the second
quarter as compared to the first quarter of 1998.
Interest Income and Expense. Interest income for the first quarter decreased
from $688,000 in 1997 to $526,000 in 1998, primarily due to a decrease in
average cash balances in the first quarter of 1998. Interest and other expense
for the first quarter decreased from $53,000 in 1997 to $18,000 in 1998 due to a
decrease in capital lease balances outstanding.
Net Loss. The net loss for the first quarter of 1998 was $2.6 million as
compared to a net loss of $381,000 in the first quarter of 1997, primarily as a
result of the items discussed above.
-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 March 31, 1998 the
Company had received $64.4 million from the sale of equity and $34.7 million in
cash from license and milestone fees, research support payments under
collaborative agreements and sales of molecular diversity samples.
Cash, cash equivalents and short-term investments at March 31, 1998
were $37.0 million compared to $40.4 million at December 31, 1997. The decrease
during the first quarter of 1998 was due primarily to cash used by operations of
$2.5 million, $632,000 in capital expenditures and $224,000 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.
-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
None.
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:
On January 29, 1998, the Company filed a report on Form 8-K, as amended
on January 30, 1998 and March 30, 1998, in connection with its
collaboration with Iconix Pharmaceuticals, Inc. (formerly EpiGenix,
Inc.). The Form 8-K/A filed March 30, 1998 contains financial statements
required by Article 11 of Reg. S-X.
-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: March 14, 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>
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<CIK> 0001010915
<NAME> MICROCIDE PHARMACEUTICALS, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
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0
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