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, 1999
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 November 1,
1999: 11,137,922.
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 1999
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 1999 3
and December 31, 1998
Condensed Statements of Operations for the three and nine
months ended September 30, 1999 and September 30, 1998 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
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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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
<TABLE>
CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,483 $ 7,794
Short-term investments 15,181 25,398
Receivables, prepaid expenses and other current assets 1,725 590
---------- ----------
Total current assets 25,389 33,782
Property and equipment, net 8,178 9,755
Other assets 912 953
---------- ----------
Total assets $ 34,479 $ 44,490
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 245 $ 642
Accrued compensation 646 920
Current portion of notes payable 1,291 1,129
Deferred revenue 326 300
Other accrued liabilities 1,092 522
---------- ----------
Total current liabilities 3,600 3,513
Long-term portion of notes payable 1,933 2,912
Accrued rent 230 127
Stockholders' equity:
Common stock 67,003 66,902
Deferred compensation (87) (464)
Accumulated deficit (38,156) (28,497)
Accumulated other comprehensive loss (44) (3)
---------- ----------
Total stockholders' equity 28,716 37,938
---------- ----------
Total liabilities and stockholders' equity $ 34,479 $ 44,490
========== ==========
<FN>
NOTE: The balance sheet at December 31, 1998 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>
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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Research revenue $ 1,560 $ 2,800 $ 5,498 $ 8,635
License, milestone and other revenues 32 43 331 43
-------- -------- -------- --------
Total revenues 1,592 2,843 5,829 8,678
Operating expenses:
Research and development 4,044 4,723 13,249 14,599
General and administrative 1,103 980 3,087 2,991
-------- -------- -------- --------
Total operating expenses 5,147 5,703 16,336 17,590
-------- -------- -------- --------
Loss from operations (3,555) (2,860) (10,507) (8,912)
Interest income, net 261 456 848 1,456
-------- -------- -------- --------
Net loss $ (3,294) $ (2,404) $ (9,659) $ (7,456)
======== ======== ======== ========
Net loss per share $ (0.30) $ (0.22) $ (0.87) $ (0.68)
======== ======== ======== ========
Shares used in calculation of
net loss per share 11,105 10,972 11,069 10,951
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (9,659) $ (7,456)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,075 2,241
Amortization of deferred compensation 377 401
Accrued rent 103 (49)
Net unrealized loss on securities (41) 75
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets (1,135) (1,103)
Other assets 41 236
Construction payable -- (330)
Accounts payable (397) (611)
Accrued compensation and other accrued liabilities 296 303
Deferred revenue 26 (558)
-------- --------
Net cash used in operating activities (8,314) (6,851)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments (24,190) (13,797)
Maturities of short-term investments 34,407 19,493
Capital expenditures (498) (2,628)
-------- --------
Net cash provided by investing activities 9,719 3,068
-------- --------
Cash flows from financing activities:
Principal payments on notes payable (817) (521)
Net proceeds from issuance of common stock 101 131
-------- --------
Net cash used in financing activities (716) (390)
-------- --------
Net increase (decrease) in cash and cash equivalents 689 (4,173)
Cash and cash equivalents, beginning of period 7,794 11,763
-------- --------
Cash and cash equivalents, end of period $ 8,483 $ 7,590
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 1 $ 2
======== ========
Interest paid $ 270 $ 21
======== ========
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
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<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(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 and fungal 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, 1998.
2. 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.
3. Changes in Accounting Standards
Effective 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, 1999
and 1998, the Company's comprehensive loss amounted to approximately $9.7
million and $7.4 million, respectively.
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<PAGE>
ITEM 2. 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. In addition, the Company has derived other
revenues principally through the sale of molecular diversity samples to other
pharmaceutical and biotechnology companies for use in their research programs.
Through September 30, 1999, the Company had received in the aggregate
$45.9 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 $10.6 million of research support
payments. In addition, in the event that any of the collaborative agreements is
extended beyond its current term, 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
for human use. 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, the
continuation of existing collaborative agreements, expectations concerning the
Company's future research and development and general and administrative
expenses, the potential impact of the Year 2000 issue and the market risk of the
Company's investments. 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
or animals in clinical trials, or that the identification, selection,
manufacture, pre-clinical testing, 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
-7-
<PAGE>
December 31, 1998. 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 September 30, 1999 and September 30, 1998
Revenues. Total revenues for the third quarter of 1999 were $1.6 million, a
decrease of 43% from the $2.8 million in revenues recognized in the third
quarter of 1998. Revenues were largely derived from corporate partnerships with
Pfizer and two affiliates of Johnson & Johnson ("J&J"). The decline in
comparative revenues during these periods was due to the conclusion of the
Daiichi collaboration at the end of the first quarter of 1999 and lower revenues
recognized from the J&J collaboration, partially offset by increased revenues
from Pfizer related to the initiation of research under the Pfizer Animal Health
agreement.
Research and Development Expenses. Research and development expenses for the
third quarter decreased approximately 15% from $4.7 million in 1998 to $4.0
million in 1999. The decrease was due primarily to lower compensation expenses
resulting from a reduction in headcount and lower spending for research supplies
and materials, partially offset by higher research support expenses associated
with the Company's antiviral discovery and joint technology programs with
Iconix. 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 increased approximately 10% from $1.0 million in 1998 to $1.1
million in 1999. The increase was due primarily to higher expenses for
recruiting and outside consulting services, partially offset by lower
compensation expenses resulting from a reduction in headcount. 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
$447,000 in 1998 to $343,000 in 1999, primarily due to a decrease in average
cash balances. Interest expense for the third quarter of 1999 was higher than in
1998, primarily due to an equipment financing arrangement entered into at the
end of 1998.
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. Total revenues for the first nine months of 1999 were $5.8 million, a
decrease of 33% from the $8.7 million in revenues recognized in the first nine
months of 1998. Revenues were largely derived from corporate partnerships with
Pfizer, Daiichi and J&J. The decline in comparative revenues during these
periods was due to the conclusion of the Daiichi collaboration at the end of the
first quarter of 1999 and lower revenues recognized from the J&J collaboration,
partially offset by increased revenues from Pfizer related to the initiation of
research under the Pfizer Animal Health agreement, and the sale of molecular
diversity samples to Iconix. Revenues related to the sale of molecular diversity
samples to Iconix were exactly offset by an increase in expenses charged to
Microcide as part of the antiviral research collaboration with Iconix.
Research and Development Expenses. Research and development expenses for the
first nine months decreased approximately 10% from $14.6 million in 1998 to
$13.2 million in 1999. The decrease was due primarily to lower compensation
expenses resulting from a reduction in headcount, lower spending for research
supplies and materials, lower depreciation costs, lower spending related to
assembling the Company's molecular diversity collection and lower spending for
outside consulting services and facility costs. These decreases were partially
offset by higher research support expenses associated with the Company's
antiviral discovery and joint technology programs with Iconix.
-8-
<PAGE>
General and Administrative Expenses. General and administrative expenses for the
first nine months increased approximately 3% from $3.0 million in 1998 to $3.1
million in 1999. The increase was due primarily to higher expenses for
recruiting and outside services.
Interest Income, net. Interest income for the first nine months decreased from
$1.5 million in 1998 to $1.1 million in 1999, primarily due to a decrease in
average cash balances. Interest expense for the first nine months increased from
$21,000 in 1998 to $270,000 in 1999, primarily due to an equipment financing
arrangement entered into at the end of 1998.
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, 1999, the
Company had received approximately $67.0 million in net proceeds from the sale
of equity, approximately $45.9 million from license fees, milestone payments and
research support payments under collaborative agreements and $4.0 million from
equipment financing.
Cash, cash equivalents and short-term investments at September 30, 1999
were $23.7 million compared to $33.2 million at December 31, 1998. The decrease
during the first nine months of 1999 was due primarily to cash used by
operations of $8.3 million, $498,000 in capital expenditures and $817,000
utilized in financing activities which predominantly consisted of principal
payments on the Company's equipment financing arrangement. This was partially
offset by $101,000 in net proceeds from the issuance of common stock.
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 2000.
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.
As of September 30, 1999, the Company has completed its assessment,
repair, upgrade and replacement of its computer systems and research equipment
with embedded chips or software and believes them to be Year 2000 compliant. The
Company has also completed its survey and analysis regarding the readiness of
third parties with whom the Company interacts, including the Company's research
and development partners, suppliers and vendors and believes them to be Year
2000 compliant. While there can be no assurance that the systems of these third
parties are Year 2000 compliant, the Company does not believe that its business,
operating results and financial condition would be adversely affected. Although
the Company believes its key financial, information and operational systems are
Year 2000 compliant, there can be no assurance that other defects will not be
discovered in the future. The Company is unable to control whether the third
parties 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 these third parties would be unable to provide services or ship
products. Expenditures to date have not been material and have consisted
primarily of the time of certain Company personnel. Management does not believe
the Year 2000 changes will have a material impact on its business, financial
condition or results of operations. Because of this, the Company does not have a
formal contingency plan; however, if deemed appropriate in the future, the
Company would implement one.
-9-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosure
involves forward-looking statements. The Company is exposed to market risk
related mainly to changes in interest rates. The Company does not invest in
derivative financial instruments.
Interest Rate Sensitivity
The fair value of the Company's investments in marketable securities at
September 30, 1999 was $21.3 million. The Company's investment policy is to
manage its marketable securities portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio. The Company's
marketable securities portfolio is primarily invested in corporate debt
securities with an average maturity of under one year and a minimum investment
grade rating of A, A-1 or better to minimize credit risk. Although changes in
interest rates may affect the fair value of the marketable securities portfolio
and cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold prior to maturity.
Foreign Currency Exchange Risk
At this time, the Company does not participate in any foreign currency
exchange activities; therefore, is not subject to risk of gains or losses for
changes in foreign exchange rates.
-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.
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
-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 15, 1999
MICROCIDE PHARMACEUTICALS, INC.
-----------------------------------
(Registrant)
/s/ James E. Rurka
-----------------------------------
President, Chief Executive Officer,
Acting Chief Financial Officer and Director
(principal executive officer and
principal financial officer)
-12-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010915
<NAME> MICROCIDE PHARMACEUTICALS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 8,483
<SECURITIES> 15,181
<RECEIVABLES> 754
<ALLOWANCES> 0
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<CURRENT-ASSETS> 25,389
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<DEPRECIATION> (11,665)
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<CURRENT-LIABILITIES> 3,600
<BONDS> 0
0
0
<COMMON> 67,003
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</TABLE>
