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, 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 May 4, 1999:
11,068,662.
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
MARCH 31, 1999
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 1999
and December 31, 1998 3
Condensed Statements of Operations for the three
months ended March 31, 1999 and March 31, 1998 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION 10
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 11
-2-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,877 $ 7,794
Short-term investments 24,272 25,398
Receivables, prepaid expenses and other current assets 2,110 590
-------- --------
Total current assets 31,259 33,782
Property and equipment, net 9,293 9,755
Other assets 969 953
-------- --------
Total assets $ 41,521 $ 44,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 405 $ 642
Accrued compensation 789 920
Current portion of notes payable 1,231 1,129
Deferred revenue 364 300
Other accrued liabilities 556 522
-------- --------
Total current liabilities 3,345 3,513
Long-term portion of notes payable 2,594 2,912
Accrued rent 240 127
Stockholders' equity:
Common stock 66,903 66,902
Deferred compensation (338) (464)
Accumulated deficit (31,220) (28,497)
Accumulated other comprehensive loss (3) (3)
-------- --------
Total stockholders' equity 35,342 37,938
-------- --------
Total liabilities and stockholders' equity $ 41,521 $ 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>
-3-
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
Revenues:
License, milestone and other revenues $ 299 $ --
Research revenue 2,393 3,035
-------- --------
Total revenues 2,692 3,035
Operating expenses:
Research and development 4,748 5,061
General and administrative 1,005 1,058
-------- --------
Total operating expenses 5,753 6,119
-------- --------
Loss from operations (3,061) (3,084)
Interest income 409 526
Interest and other expense (71) (18)
-------- --------
Net loss $ (2,723) $ (2,576)
======== ========
Net loss per share $ (0.25) $ (0.24)
======== ========
Shares used in calculation of net loss per share 11,026 10,929
See Notes to Condensed Financial Statements.
-4-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (2,723) $ (2,576)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 694 787
Amortization of deferred compensation 126 132
Accrued rent 113 35
Net unrealized loss on securities -- (31)
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets (1,520) 305
Other assets (16) (113)
Accounts payable (237) (776)
Construction payable -- (347)
Accrued compensation and other accrued liabilities (97) 221
Deferred revenue 64 (154)
-------- --------
Net cash used in operating activities (3,596) (2,517)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments (6,174) (26,746)
Maturities of short-term investments 7,300 25,075
Capital expenditures (232) (632)
-------- --------
Net cash provided by (used in) investing activities 894 (2,303)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable (216) (234)
Net proceeds from issuance of common stock 1 10
-------- --------
Net cash used in financing activities (215) (224)
-------- --------
Net decrease in cash and cash equivalents (2,917) (5,044)
Cash and cash equivalents, beginning of period 7,794 11,763
-------- --------
Cash and cash equivalents, end of period $ 4 ,877 $ 6,719
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 1 $ 2
======== ========
Interest paid $ 71 $ 18
======== ========
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
-5-
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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.
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 three months ended March 31, 1999 and
1998, the Company's comprehensive loss amounted to $2,723,000 and $2,607,000,
respectively.
-6-
<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. 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.
In January 1999, the Company expanded its existing antibiotic research
collaboration with Pfizer to include a focused effort to discover and develop
new classes of antibiotics specifically designed for animal health applications.
The agreement provides for certain revenue payments, including payments for
research and development costs for three years and for reaching certain research
and development goals. Pfizer received exclusive worldwide rights to products
developed during the collaboration. The development, manufacturing, marketing
and sale of drugs resulting from the collaboration will be conducted by Pfizer,
subject to the Company's right to co-promote such products in North America.
Should the development efforts result in a marketable product, the Company will
receive royalty payments based on product sales.
Through March 31, 1999, the Company had received in the aggregate $42.3
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 $11.5 million of research support
payments, including payments related to the Pfizer Animal Health collaboration.
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. 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.
-7-
<PAGE>
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, 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 March 31, 1999 and March 31, 1998
Revenues. Total revenues for the first quarter of 1999 were $2.7 million, a
decrease of 11% from the $3.0 million in revenues recognized in the first
quarter of 1998; the decrease was due to lower revenues recognized from the
Company's collaborations with Daiichi and Johnson & Johnson, partially offset by
additional revenues from the Pfizer Animal Health collaboration and the sale of
molecular diversity samples to Iconix Pharmaceuticals. 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 quarter decreased approximately 6% from $5.1 million in 1998 to $4.7
million in 1999. The decrease was due primarily to lower costs related to
assembling the Company's molecular diversity collection, lower expenses for
research supplies and materials, and lower expenses for outside consulting
services to support the Company's corporate collaborations and its internal
programs, partially offset by higher research support expenses associated with
the Company's antiviral discovery program with Iconix. Research and development
expenses are not expected to materially change in the second quarter.
General and Administrative Expenses. General and administrative expenses for the
first quarter were approximately equal at $1.0 million in both 1999 and 1998.
General and administrative expenses are not expected to materially change in the
second quarter.
Interest Income, net. Interest income for the first quarter decreased from
$526,000 in 1998 to $409,000 in 1999, primarily due to a decrease in average
cash balances. Interest expense for the first quarter increased from $18,000 in
1998 to $71,000 in 1999 primarily due to a new 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
-8-
<PAGE>
sales of molecular diversity samples and through equipment financing. As of
March 31, 1999 the Company had received approximately $64.6 million in net
proceeds from the sale of equity and approximately $42.3 million from license
fees and milestone payments, and research support payments under collaborative
agreements.
Cash, cash equivalents and short-term investments at March 31, 1999
were $29.1 million compared to $33.2 million at December 31, 1998. The decrease
during the first three months of 1999 was due primarily to cash used by
operations of $3.6 million, $232,000 in capital expenditures and $215,000
utilized in financing activities which predominantly consisted of principal
payments on the Company's new equipment financing arrangement.
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.
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
third 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 March 31, 1999, 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. 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>
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 March
31, 1999.
-10-
<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: May 14, 1999
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)
-11-
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,877
<SECURITIES> 24,272
<RECEIVABLES> 1,287
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,259
<PP&E> 19,578
<DEPRECIATION> (10,285)
<TOTAL-ASSETS> 41,251
<CURRENT-LIABILITIES> 3,345
<BONDS> 0
0
0
<COMMON> 66,903
<OTHER-SE> (31,561)
<TOTAL-LIABILITY-AND-EQUITY> 41,521
<SALES> 299
<TOTAL-REVENUES> 2,692
<CGS> 0
<TOTAL-COSTS> 5,753
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> (2,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,723)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
