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 JUNE 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 July 30, 1999:
11,105,583.
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
JUNE 30, 1999
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of June 30, 1999
and December 31, 1998 3
Condensed Statements of Operations for the three and six
months ended June 30, 1999 and June 30, 1998 4
Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and June 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 13
-2-
<PAGE>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,743 $ 7,794
Short-term investments 15,661 25,398
Receivables, prepaid expenses and other current assets 2,421 590
-------- --------
Total current assets 27,825 33,782
Property and equipment, net 8,762 9,755
Other assets 911 953
-------- --------
Total assets $ 37,498 $ 44,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160 $ 642
Accrued compensation 717 920
Current portion of notes payable 1,261 1,129
Deferred revenue 337 300
Other accrued liabilities 654 522
-------- --------
Total current liabilities 3,129 3,513
Long-term portion of notes payable 2,267 2,912
Accrued rent 229 127
Stockholders' equity:
Common stock 66,993 66,902
Deferred compensation (212) (464)
Accumulated deficit (34,863) (28,497)
Accumulated other comprehensive loss (45) (3)
-------- --------
Total stockholders' equity 31,873 37,938
-------- --------
Total liabilities and stockholders' equity $ 37,498 $ 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>
<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License, milestone and other revenues $ -- $ -- $ 299 $ --
Research revenue 1,545 2,800 3,938 5,835
-------- -------- -------- --------
Total revenues 1,545 2,800 4,237 5,835
Operating expenses:
Research and development 4,457 4,815 9,205 9,876
General and administrative 979 953 1,984 2,011
-------- -------- -------- --------
Total operating expenses 5,436 5,768 11,189 11,887
-------- -------- -------- --------
Loss from operations (3,891) (2,968) (6,952) (6,052)
Interest income 365 504 775 1,030
Interest expense (117) (12) (188) (30)
-------- -------- -------- --------
Net loss $ (3,643) $ (2,476) $ (6,365) $ (5,052)
======== ======== ======== ========
Net loss per share $ (0.33) $ (0.23) $ (0.58) $ (0.46)
======== ======== ======== ========
Shares used in calculation of
net loss per share 11,078 10,957 11,052 10,941
<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
(unaudited)
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (6,365) $ (5,052)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,396 1,466
Amortization of deferred compensation 251 264
Accrued rent 102 (62)
Net unrealized loss on securities (42) (14)
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets (1,831) (641)
Other assets 42 (314)
Accounts payable (482) (326)
Accrued compensation and other accrued liabilities (71) 76
Deferred revenue 37 89
-------- --------
Net cash used in operating activities (6,963) (4,514)
-------- --------
Cash flows used in investing activities:
Purchase of short-term investments (16,170) (26,410)
Maturities of short-term investments 25,907 24,010
Capital expenditures (403) (1,708)
-------- --------
Net cash provided by (used in) investing activities 9,334 (4,108)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable (513) (377)
Net proceeds from issuance of common stock 91 126
-------- --------
Net cash used in financing activities (422) (251)
-------- --------
Net decrease in cash and cash equivalents 1,949 (8,873)
Cash and cash equivalents, beginning of period 7,794 11,763
-------- --------
Cash and cash equivalents, end of period $ 9,743 $ 2,890
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 1 $ 2
======== ========
Interest paid $ 189 $ 30
======== ========
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
-5-
<PAGE>
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 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 six months ended June 30, 1999 and
1998, the Company's comprehensive loss amounted to $6,407,000 and $5,066,000,
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.
Through June 30, 1999, the Company had received in the aggregate $43.9
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 $12.5 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, 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 or animals in clinical trials, or that the
identification, selection, manufacture, pre-clinical
-7-
<PAGE>
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 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 June 30, 1999 and June 30, 1998
Revenues. Total revenues for the second quarter of 1999 were $1.5 million, a
decrease of 46% from the $2.8 million in revenues recognized in the second
quarter of 1998. Revenues were largely derived from corporate partnerships with
Pfizer, Daiichi 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 in 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
second quarter decreased approximately 6% from $4.8 million in 1998 to $4.5
million in 1999. The decrease was due primarily to a decrease in research
expenses, outside consulting services and facilities expenses, 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 third quarter.
General and Administrative Expenses. General and administrative expenses for the
second 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
third quarter.
Interest Income, net. Interest income for the second quarter decreased from
$504,000 in 1998 to $365,000 in 1999, primarily due to a decrease in average
cash balances. Interest expense for the second quarter increased from $12,000 in
1998 to $117,000 in 1999, primarily due to an equipment financing arrangement
entered into at the end of 1998.
Six Months Ended June 30, 1999 and June 30, 1998
Revenues. Total revenues for the first half of 1999 were $4.2 million, a
decrease of 28% from the $5.8 million in revenues recognized in the first half
of 1998. Revenues were largely derived from corporate partnerships with Pfizer,
Daiichi 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 in 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 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 half decreased approximately 7% from $9.9 million in 1998 to $9.2 million
in 1999. The decrease was due primarily to a decrease in spending for
facilities, acquisitions of molecular diversity, and other research expenses
associated with lower headcount in support of the Company's corporate
collaborations and internal programs. These decreases were partially offset by
higher research support expenses associated with the Company's antiviral
-8-
<PAGE>
discovery program with Iconix. Research and development expenses are not
expected to materially change in the second half of 1999.
General and Administrative Expenses. General and administrative expenses for the
first half were approximately equal at $2.0 million in both 1999 and 1998.
General and administrative expenses are not expected to materially change in the
second half of 1999.
Interest Income, net. Interest income for the first half decreased from $1.0
million in 1998 to $775,000 in 1999, primarily due to a decrease in average cash
balances. Interest expense for the first half increased from $30,000 in 1998 to
$188,000 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 June 30, 1999, the
Company had received approximately $67.0 million in net proceeds from the sale
of equity, and approximately $43.9 million from license fees, milestone payments
and research support payments under collaborative agreements.
Cash, cash equivalents and short-term investments at June 30, 1999 were
$25.4 million compared to $33.2 million at December 31, 1998. The decrease
during the first half of 1999 was due primarily to cash used by operations of
$7.0 million, $403,000 in capital expenditures and $513,000 utilized in
financing activities which predominantly consisted of principal payments on the
Company's equipment financing arrangement. This was offset by $91,000 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.
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 June 30, 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
-9-
<PAGE>
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.
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
June 30, 1999 was $24.1 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 or
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
(a) The Annual Meeting of Stockholders of Microcide Pharmaceuticals, Inc.
was held on June 24, 1999.
(b) The following Class III Directors were elected to serve for a term of
three years to expire at the Company's 2002 Annual Meeting of
Stockholders:
Name Position Term Expires
---- -------- ------------
Keith A. Bostian, Ph.D. Class III Director 2002
James E. Rurka Class III Director 2002
The following Class I and II Directors continue to serve their
respective terms which expire at the Company's Annual Meeting of
Stockholders in the year as noted:
Name Position Term Expires
---- -------- ------------
Daniel L. Kisner, M.D. Class I Director 2000
Hugh Y. Rienhoff, Jr., M.D. Class II Director 2001
David Schnell, M.D. Class I Director 2000
Mark B. Skaletsky Class I Director 2000
John P. Walker Chairman, Class II Director 2001
(c) The matters voted upon at the meeting and the voting results were as
follows:
(i) The election of two Class III Directors for a term of three
years:
Name For Against Not Voted
---- --- ------- ---------
Keith A. Bostian, Ph.D. 9,522,387 55,101 1,464,270
James E. Rurka 9,520,981 56,507 1,464,270
(ii) Approval of amendment to the Company's 1993 Amended Incentive
Stock Plan, increasing the number of shares of Common Stock
reserved for issuance from 2,280,000 to 2,580,000:
For Against Abstain Not Voted
--- ------- ------- ---------
8,977,070 584,530 15,888 1,464,270
-11-
<PAGE>
(iii) Approval of amendment to the Company's 1996 Director Plan,
increasing the number of shares of Common Stock reserved for
issuance from 80,000 to 150,000:
For Against Abstain Not Voted
--- ------- ------- ---------
9,168,957 392,881 15,650 1,464,270
(iv) Approval of amendment to the Company's 1996 Employee Stock
Purchase Plan, increasing the number of shares of Common Stock
reserved for issuance from 120,000 to 220,000:
For Against Abstain Not Voted
--- ------- ------- ---------
9,302,692 261,158 13,638 1,464,270
(v) Ratification of the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31,
1999:
For Against Abstain Not Voted
--- ------- ------- ---------
9,543,086 25,697 8,705 1,464,270
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 June 30,
1999.
-12-
<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: August 16, 1999
MICROCIDE PHARMACEUTICALS, INC.
(Registrant)
/s/ James E. Rurka
-------------------------------------
President, Chief Executive Officer,
Acting Financial Officer and Director
(principal executive officer and
principal financial officer)
-13-
<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> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 9,743
<SECURITIES> 15,661
<RECEIVABLES> 1,318
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,825
<PP&E> 19,747
<DEPRECIATION> (10,985)
<TOTAL-ASSETS> 37,498
<CURRENT-LIABILITIES> 3,129
<BONDS> 0
0
0
<COMMON> 66,993
<OTHER-SE> (35,120)
<TOTAL-LIABILITY-AND-EQUITY> 37,498
<SALES> 0
<TOTAL-REVENUES> 1,545
<CGS> 0
<TOTAL-COSTS> 5,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> (3,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,643)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
