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, 2000
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 incorporation (I.R.S. Employer
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 28,
2000: 11,293,622.
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MICROCIDE PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
MARCH 31, 2000
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 2000
and December 31, 1999 3
Condensed Statements of Operations for the three
months ended March 31, 2000 and March 31, 1999 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION 12
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
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MICROCIDE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 1999
------------ ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 4,704 $ 5,660
Short-term investments 16,230 19,208
Receivables, prepaid expenses and other
current assets 1,159 443
------------ ------------
Total current assets 22,093 25,311
Property and equipment, net 7,204 7,592
Other assets 923 928
------------ ------------
Total assets $ 30,220 $ 33,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 356 $ 358
Accrued compensation 854 984
Current portion of notes payable 1,486 1,440
Deferred revenue 26 387
Other accrued liabilities 686 695
------------ ------------
Total current liabilities 3,408 3,864
Long-term portion of notes payable 1,522 1,907
Accrued rent 239 257
Stockholders' equity:
Common stock 67,888 67,112
Accumulated deficit (42,763) (39,243)
Accumulated other comprehensive loss (74) (66)
------------ ------------
Total stockholders' equity 25,051 27,803
------------ ------------
Total liabilities and stockholders' equity $ 30,220 $ 33,831
============ ============
NOTE: The balance sheet at December 31, 1999 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.
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MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
-------------------------
2000 1999
----------- -----------
Revenues:
Research revenues $ 1,133 $ 2,393
License, milestone and other revenues --- 299
----------- -----------
Total revenues 1,133 2,692
Operating expenses:
Research and development 4,057 4,748
General and administrative 842 1,005
----------- -----------
Total operating expenses 4,899 5,753
----------- -----------
Loss from operations (3,766) (3,061)
Interest and other income, net 246 338
----------- -----------
Net loss $(3,520) $ (2,723)
=========== ===========
Basic and diluted net loss per share $ (0.31) $ (0.25)
=========== ===========
Weighted-average shares used in computing basic
and diluted net loss per share 11,213 11,026
See Notes to Condensed Financial Statements.
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<TABLE>
MICROCIDE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Increase (decrease) in cash and cash equivalents
(unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (3,520) $ (2,723)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 597 694
Amortization of deferred compensation --- 126
Accrued rent (18) 113
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets (716) (1,520)
Other assets 5 (16)
Accounts payable (2) (237)
Accrued compensation and other accrued liabilities (139) (97)
Deferred revenue (361) 64
---------- ----------
Net cash used in operating activities (4,154) (3,596)
---------- ----------
Cash flows used in investing activities:
Purchase of short-term investments (2,030) (6,174)
Maturities of short-term investments 5,000 7,300
Capital expenditures (209) (232)
---------- ----------
Net cash provided by (used in) investing activities 2,761 894
---------- ----------
Cash flows from financing activities:
Principal payments on notes payable (339) (216)
Net proceeds from issuance of common stock 776 1
---------- ----------
Net cash used in financing activities 437 (215)
---------- ----------
Net decrease in cash and cash equivalents (956) (2,917)
Cash and cash equivalents, beginning of period 5,660 7,794
---------- ----------
Cash and cash equivalents, end of period $ 4,704 $ 4,877
========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid $ 1 $ 1
========== ==========
Interest paid $ 77 $ 71
========== ==========
<FN>
See Notes to Condensed Financial Statements.
</FN>
</TABLE>
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MICROCIDE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(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, 1999.
2. Net Loss per Share
Basic earnings (loss) per share is calculated using the weighted
average number of common shares outstanding. Because the Company is in a net
loss position, diluted earnings per share is calculated using the weighted
average number of common shares outstanding and excludes the effects of options
which are antidilutive. Had the Company been in a net income position, diluted
earnings per share would have included the shares used in the computation of
basic net loss per share as well as an additional 1,620,499 and 1,589,205 shares
for 2000 and 1999, respectively, related to outstanding options not included
above (as determined using the treasury stock method at the estimated average
market value).
3. Comprehensive Loss
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net income (loss). Specifically,
unrealized holding gains and losses on our available-for-sale securities, which
were reported separately in stockholders' equity, is included in accumulated
other comprehensive income (loss). Comprehensive income (loss) for years ended
December 31, 1999, 1998 and 1997 has been reflected in the Statement of
Stockholders' Equity.
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4. Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain areas of the staff's views in applying
generally accepted accounting principles to revenue recognition. The Company has
completed its assessment of the impact of SAB 101 and does not expect that the
implementation of SAB 101 will have a material effect.
5. Subsequent Events
In May 2000, the Company signed a new agreement with Daiichi
Pharmaceutical Co., Ltd. for joint research to discover and develop inhibitors
that will overcome the effect of efflux pumps in Pseudomonas aeruginosa. The
agreement provides for payments to Microcide for research and development costs
for a one-year term, as well as potential milestone payments and royalties on
worldwide sales of any products resulting from this collaboration. The Company
has retained product co-promotion rights for North America.
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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 entered into collaborative agreements with three major pharmaceutical
companies. Pursuant to the Company's collaborative agreements with Johnson &
Johnson ("J&J"), Daiichi and Pfizer (the "Collaborative Agreements"), the
Company has received license fees, milestone payments and research support
payments, and can potentially receive additional research support payments,
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. In addition,
the Company has derived other revenues principally through the sale of molecular
diversity to other pharmaceutical and biotechnology companies for use in their
research programs, and through short-term contract research.
Through March 31, 2000, the Company had received in the aggregate $49.9
million in license fees, milestone payments and research support payments under
the Collaborative Agreements. The funded research portion of the Collaborative
Agreements with Daiichi and J&J concluded at the end of the first and fourth
quarters of 1999, respectively. In November 1999, J&J commenced Phase I clinical
trials of the cephalosporin compound developed during the Microcide-J&J
Gram-positive research collaboration. In February 2000, the November 1995
Daiichi agreement was amended to focus on advancing a particular class of efflux
pump inhibitor compounds for pre-clinical development. In May 2000, the Company
and Daiichi signed a new joint research agreement whereby Daiichi will provide
research support payments for discovering and developing inhibitors that will
overcome the effect of efflux pumps in Pseudomonas aeruginosa (see Subsequent
Events). The March 1996 Pfizer agreement was amended and funding for the fifth
year effective March 2000 is at a lower amount. Assuming that the Daiichi and
Pfizer Agreements are not terminated prior to their scheduled expiration dates,
the Company will be entitled to receive an additional $5.1 million in research
support payments.
In the event that the Company and its collaborators achieve the
specified research and product development milestones, it will be entitled to
receive milestone payments as follows: up to $16.5 million for the first product
and up to $15.5 million for each additional product developed pursuant to the
J&J Agreements, up to $13.0 million for each product developed pursuant to the
Daiichi Agreements and up to $32.5 million for each product developed pursuant
to the Pfizer Agreements. The Pfizer Animal Health collaboration provides for a
lower level of milestone payments than those applicable to human health
applications. Receipt of these milestone payments is contingent upon achieving
specified research and product development milestones, a number of which may not
be achieved for several years, if ever. While the Collaborative Agreements
provide for royalty payments on future products that may result, the Company
does not expect to receive royalties based upon net sales of drugs for a
significant number of years, if at all.
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 continue 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 successful development and
commercialization of drugs and the receipt of royalties thereon or sales revenue
therefrom, and the period of time for which the Company's existing financial
resources, interest income and future payments under Collaborative Agreements
will be
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sufficient to enable the Company to maintain current and planned operations, the
continuation of the Company's Collaborative Agreements with its strategic
partners, the potential impact of any latent Year 2000 issues and the market
risk of the Company's investments. Such forward-looking statements involve risks
and uncertainties, including, without limitation, the following. There is no
assurance that any compounds discovered will successfully proceed through
pre-clinical development and clinical trials, obtain requisite regulatory
approvals for marketing or result in a commercially useful product. There is no
assurance that the Company will successfully continue existing corporate
collaborations. There is no assurance that any development candidates will be
identified, that any selected development candidates will proceed through
pre-clinical trials or will prove safe and effective for treatment of humans or
animals in clinical trials. There is no assurance that the identification,
selection, manufacture, pre-clinical testing, and clinical testing of
development candidates will not take substantially longer or not be
substantially more expensive than contemplated by the Company. There is no
assurance that the Company will be able to obtain on a timely basis government
regulatory clearance required for clinical testing, manufacturing, and marketing
of its products. There is no assurance that any latent Year 2000 issues will not
have a material impact on the Company. For a discussion of other risks and
uncertainties affecting the Company's business, see the Company's annual report
on Form 10-K for the year ended December 31, 1999. The Company's actual results
and timing of certain events may differ significantly from the results discussed
in such forward-looking statements as a result of these or other factors.
Results of Operations
Three Months Ended March 31, 2000 and March 31, 1999
Revenues. Total revenues for the first quarter of 2000 were $1.1 million, a
decrease from $2.7 million in revenues recognized in the first quarter of 1999.
Revenues were largely derived from the corporate partnership with Pfizer. The
decline in comparative revenues during this period was due primarily to the
conclusion of the funded research portion of collaborations with Daiichi (see
Subsequent Events) and J&J in March 1999 and December 1999, respectively.
Research and Development Expenses. Research and development expenses for the
first quarter decreased from $4.7 million in 1999 to $4.0 million in 2000. The
decrease was due primarily to lower compensation expenses resulting from a
reduction in headcount, lower spending for research supplies and materials, and
lower research support expenses associated with the Company's antiviral
discovery program with Iconix.
General and Administrative Expenses. General and administrative expenses for the
first quarter decreased from $1.0 million in 1999 to $842,000 in 2000. The
decrease was due primarily to lower compensation expenses resulting from a
reduction in headcount and lower outside service costs.
Interest Income, net. Interest income for the first quarter decreased from
$405,000 in 1999 to $321,000 in 2000, primarily due to a decrease in average
cash balances. Interest expense for the first quarter of 2000 increased slightly
primarily due to additional debt financing of $435,000 in December 1999.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily
through the sale of equity securities, through funds provided under the
Collaborative Agreements, through other revenues principally consisting of sales
of molecular diversity and contract research and through equipment financing. As
of March 31, 2000, the Company had received $65.6 million from the sale of
equity and $49.9 million in cash from license and milestone fees and research
support payments under the Collaborative Agreements.
Cash, cash equivalents and short-term investments at March 31, 2000
were $20.9 million compared to $24.9 million at December 31, 1999. The decrease
during the first three months of 2000 was due primarily to cash used by
operations of $4.2 million, $209,000 in capital expenditures and $339,000
utilized in financing
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activities, mainly principal payments on the Company's equipment financing
arrangement. This was partially offset by $776,000 in net proceeds from the
issuance of common stock from the exercise of stock options.
The Company expects that its existing capital resources, interest
income and future payments due under the Collaborative Agreements will enable
the Company to maintain current and planned operations at least through 2001. In
the event that the Company requires additional funding at any point in the
future, the Company will seek to raise such additional funding from other
sources, including other collaborative arrangements, and through public or
private financings, including sales of equity or debt securities. Any such
collaborative or licensing arrangement could result in limitations on the
Company's ability to control the commercialization of resulting drugs, if any,
and could limit profits, if any, therefrom. Any such equity financing could
result in dilution to the Company's then-existing stockholders. There can be no
assurance that additional funds will be available on favorable terms or at all,
or that such funds, if raised, would be sufficient to permit the Company to
continue to conduct its operations. If adequate funds are not available, the
Company may be required to curtail significantly or eliminate one or more of its
research programs.
Impact of Year 2000
In prior periods, the Company has discussed its plans and status
relating to potential computer system malfunctions relating to the "Year 2000"
issue, whereby computer systems would not be able to distinguish between dates
in the 20th century versus the 21st century. In late 1999, the Company completed
its assessment, repair, upgrade and replacement of its computer systems and
research equipment, as well as an analysis of the readiness of third parties
with whom the Company interacts. As a result of its planning and remediation
efforts, the Company experienced no significant disruptions in its information
technology and non-information technology systems and believes that those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
computer systems or research equipment with embedded chips or software. The
Company will continue to monitor its information technology systems and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly. Management does not
believe that any latent Year 2000 changes will have a material impact on its
business, financial condition or results of operations. To date, costs related
to the Year 2000 issues have not been material.
10
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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
March 31, 2000 was $18.3 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 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.
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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:
10.29* Amendment to Joint Research Agreement between the
Registrant and Daiichi Pharmaceutical Co., Ltd. dated
February 4, 2000.
10.30* Amendment to Collaborative Research Agreement between the
Registrant and Pfizer Inc. dated March 1, 2000.
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, 2000.
* To be filed by amendment.
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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: June 19, 2000
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)
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