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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-28006
MICROCIDE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3186021
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
850 MAUDE AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (650) 428-1550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the issuer held by
non-affiliates of the issuer on December 31, 1999 was approximately $78.0
million, based upon the closing price of such stock on December 31, 1999.
As of February 29, 2000, 11,261,887 shares of Common Stock of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference from the Registrant's Proxy Statement for the 2000
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's fiscal
year ended December 31, 1999.
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PART I
The information set forth in this Business Section contains
forward-looking statements, including but not limited to statements concerning
the use of the Company's discovery and technology platform to identify
potential product candidates, expectations regarding the anticipated date of
selection of clinical development candidates, the expected date of commencement
of clinical trials, development timelines, the timing and likelihood of
regulatory approvals, the continuation of the Company's collaborations with its
corporate partners, the Company's future capital requirements and the expected
time period during which the Company's existing financial resources will meet
such capital requirements, and business conditions and growth in the
biopharmaceutical industry and general economy. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of the factors set forth in this Business Section, as
well as those set forth elsewhere in this Form 10-K.
ITEM 1. BUSINESS
INTRODUCTION
Microcide 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 Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) it is the
third largest pharmaceutical market, with systemic antibiotics in 1999 totaling
$24.7 billion in worldwide sales, including $8.45 billion in the United States;
(ii) there are significant unmet clinical needs, caused by growing bacterial
resistance problems, that require new antibacterial therapies; and (iii) the
pre-clinical and clinical development process for antibiotics generally follows
an efficient and well-defined path to the market. The Company believes that the
systemic antifungals market, totaling approximately $2.6 billion in 1999, also
represents an attractive opportunity because there currently are relatively few
effective and low toxicity agents to treat the population of immunocompromised
patients with systemic fungal infections. Despite recent progress by the
industry in introducing new antiviral agents, which have contributed to the
market expanding 16% between 1998 and 1999 to $4.6 billion, the Company believes
that there is a clear clinical need for additional and improved treatments for
viral infections.
TARGETED ANTIBIOTICS programs seek to rapidly develop:
(i) clinically useful antibiotics from known classes, tailored to overcome
resistance pathways, and
(ii) antibiotic potentiators, to restore usefulness to existing antibacterial
and antifungal agents that have been rendered ineffective.
The specific problematic bacteria being addressed by the Company
(staphylococci, enterococci, Pseudomonas aeruginosa and Streptococcus
pneumoniae) are responsible for 44% of the approximately two million
hospital-acquired infections occurring annually in the United States. These
infections are estimated to result in approximately eight million days of
extended hospital stay and account for more than $4.0 billion in additional
health care costs each year. The US Centers for Disease Control ("CDC") has
estimated that in 1999 over 70% of hospital acquired Staphylococcal infections
in US Intensive Care Units ("ICU") are resistant to most antibiotics, including
the beta-lactam methicillin; over 20% of hospital acquired Pseudomonas
aeruginosa infections in the ICU are resistant to quinolones, and over 25% of
hospital acquired Enterococcal infections in the ICU are resistant to
vancomycin. The specific problematic fungi being addressed by the Company
include such pathogens as Candida and Aspergillus. The CDC has estimated that in
the first half of 1999 over 15% of all serious urinary tract infections and 5%
of all bloodstream infections in the ICU were a result of Candida albicans.
TARGETED GENOMICS programs seek to identify novel classes of antimicrobial
agents that will act upon microbes which are resistant to currently available
therapeutic agents. These programs seek inhibitors of new genetic targets that
are essential to:
(i) Bacterial viability in vitro - In the Bacterial Essential Genes Program,
Microcide has identified over 100 essential gene targets in
Staphylococcus aureus, which have been selectively incorporated into the
Company's high-throughput, multi-channel screening system to discover new
classes of antibiotics. In the Animal Health Program, over 65 essential
gene targets have been identified in Salmonella typhimurium and
prioritized for use in developing products for animal health use.
(ii) Fungal viability in vitro - In the Fungal Genomics Program, a proprietary
collection of fungal mutants has been specifically created by the Company
to target over 100 essential genes in six pharmaceutically-relevant
pathways, a subset of which is selectively being incorporated into the
Company's high-throughput, whole-cell assay system to search for novel,
small molecule antifungal agents.
(iii) Bacterial growth in vivo - In the Bacterial In Vivo Survival Genes
Program, Microcide has used proprietary molecular genetic strategies to
identify over 65 novel gene targets in S. aureus. These new gene targets
will be used to discover and develop novel therapeutic agents based on
interference with the function of bacterial genes required for the
pathogen's survival in vivo.
(iv) Viral infectivity - Microcide has established a Viral Genomics Program
based on applying Iconix's genetic technologies to create drug screens
for a number of viral disease targets, in order to search for improved
antiviral agents.
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Microcide has collaborative agreements with three major pharmaceutical
companies which enhance its discovery and development programs. As of December
31, 1999, the Company has received $49.7 million in license fees, milestone
payments and research support payments and $10.0 million in equity investments.
Assuming each of the collaborative agreements continues until its scheduled
expiration, the Company can receive an additional $3.4 million in research
support payments, as well as potential future milestone payments and royalties
on sales of products which may result from these collaborations. The Company has
retained full rights to products which may result from its own internal,
self-funded programs in Bacterial In Vivo Survival Genes, Bacterial and Fungal
Efflux Pumps and Fungal Genomics. Microcide's longer-term development strategy
is to continue to utilize strategic collaborations selectively to complement
internal efforts.
J&J. Microcide established a collaboration in October 1995 with Ortho-McNeil
Pharmaceuticals and the R.W. Johnson Pharmaceutical Research Institute,
affiliates of Johnson & Johnson, collectively referred to as "J&J", to discover
and develop novel beta-lactam antibiotics, antibiotic potentiators and
inhibitors of bacterial signal transduction targeted at problematic
Gram-positive bacteria, including staphylococci and enterococci. The Company and
J&J selected an initial beta-lactam antibiotic candidate (cephalosporin) for
pre-clinical development in October 1996 and in November 1999, J&J entered into
Phase I clinical trials with this antibiotic candidate. A second cephalosporin
antibiotic was selected for pre-clinical development as a back-up and potential
"second generation" compound, which may improve the likelihood of ultimately
bringing one or more products to the market. If specified research and
development milestones are achieved, the Company will be entitled to receive up
to $16.5 million for the initial product and up to $15.5 million for each
subsequent product developed within the collaboration, plus royalties based on
worldwide sales of products arising from the collaboration.
DAIICHI. Microcide established a collaboration in November 1995 with Daiichi
to discover and develop bacterial efflux pump inhibitors to be used in
combination with Daiichi's quinolone antibiotics to target Gram-negative
bacteria, including pseudomonas. If specified research and development
milestones are achieved, Microcide will be entitled to receive up to $13.0
million for each product developed within the collaboration, plus royalties
based on worldwide sales of products arising from the collaboration.
PFIZER. Microcide established a collaboration in March 1996 with Pfizer to
implement its bacterial in vitro essential gene and multi-channel screening
system to discover novel classes of antibiotics. If specified research and
development milestones are achieved, Microcide will be entitled to receive
milestone payments of up to $32.5 million for each product developed within the
collaboration, plus royalties based on worldwide sales of products arising from
the collaboration. In January 1999, Microcide and Pfizer established a separate
collaboration to utilize bacterial genetic approaches with in vitro essential
genes to discover products for the treatment of bacterial infections in animals.
If specified research and development milestones are achieved, Microcide will be
entitled to receive certain milestone payments for each product developed within
the collaboration, plus royalties based on worldwide sales of products arising
from the collaboration; such milestone payments and royalties are lower in
amount than those applicable to human health applications.
ICONIX. In January 1998, Microcide entered into a collaboration with Iconix
Pharmaceuticals, Inc. ("Iconix"), a biotechnology company in which Microcide
holds approximately a 32% interest, and to which Microcide licensed or assigned
certain technology related to Iconix's genetic technology. Iconix will apply the
genetics technology to a number of viral disease targets in a search for novel
antiviral agents. Microcide may provide Iconix with research support payments of
up to $2.5 million in 2000. Microcide has been granted worldwide development,
manufacturing and marketing rights to any antiviral products which may emerge
from the collaboration and, if specified research and development milestones are
achieved, Iconix will be entitled to receive milestone payments from Microcide
of up to $11.0 million for the first product and up to $10.5 million for each
subsequent product developed within the collaboration, in addition to royalties
on worldwide sales.
The Company was founded in December 1992, has advanced with its partner J&J
one antibiotic compound into Phase I clinical trials, and does not expect that
any drugs resulting from its collaborative partners' research and development
efforts will be commercially available for a number of years, if at all. Since
inception, the Company has focused its activities on the development of a gene
function-based technology platform and other proprietary information to identify
and commercialize novel antimicrobials for the treatment of serious infections.
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It is difficult to predict when, if ever, the Company will be able to
successfully discover additional novel lead compounds for potential development
as product candidates. All compounds discovered by the Company will require
extensive pre-clinical and clinical testing prior to submission of any
regulatory application for commercial use. Extensive pre-clinical and clinical
testing required to establish safety and efficacy will take a number of years,
and the time required to commercialize new drugs cannot be predicted with
accuracy. There can be no assurance that the Company's approach to drug
discovery, or the efforts of any collaborative partner of the Company, will
result in the successful development of any drugs, or that any drugs, if
successfully developed, will be proven to be safe and effective in clinical
trials, meet applicable regulatory standards, be capable of being manufactured
in commercial quantities at reasonable costs or be successfully commercialized.
Product development of new pharmaceuticals is highly uncertain, and
unanticipated developments, clinical or regulatory delays, unexpected adverse
effects or inadequate therapeutic efficacy would slow or prevent product
development efforts of the Company or its collaborative partners and have a
material adverse effect on the Company's operations. The Company will not
receive revenues or royalties from sales of drugs for a significant number of
years, if at all. Failure to receive significant revenue or achieve profitable
operations could impair the Company's ability to sustain operations, and there
can be no assurance that the Company will ever receive significant revenues or
achieve profitable operations.
INFECTIOUS DISEASE ENVIRONMENT
BACTERIAL INFECTIONS AND ANTIBIOTICS OVERVIEW
Bacterial infections are a significant and growing medical problem. They
occur when the body's immune system cannot prevent invasion and colonization by
disease-causing bacteria. These infections may be confined to a single organ or
tissue, or disseminated throughout the body, and can cause many serious clinical
conditions, including pneumonias, endocarditis, osteomyelitis, meningitis,
deep-seated soft tissue infections, complicated urinary tract infections,
bacteremia and septicemia.
According to estimates by the CDC, approximately 2.0 million
hospital-acquired infections (also called "nosocomial infections") occur
annually in the United States and contribute to more than 50,000 deaths. The
additional health care costs due to nosocomial infections now account for more
than $3.5 billion per year. While overall per capita mortality rates declined in
the United States from 1980 to 1992, the per capita mortality rate due to
infectious diseases increased 58% over this period, continuing to make
infectious diseases a leading cause of death in the United States. The Company
believes that bacterial infections, especially infections caused by
difficult-to-treat, antibiotic-resistant bacteria, cause or contribute to a
substantial majority of these deaths.
Antibiotics are administered both to prevent bacterial infections and to
treat established bacterial diseases. When administered to prevent an infection,
antibiotics are given prophylactically, before definitive clinical signs or
symptoms of an infection are present. When administered to treat an established
infection, antibiotics are often chosen empirically, before diagnostic testing
has established the causative bacterium and its susceptibility to specific
antibiotics.
Antibiotics work by interfering with a vital bacterial cell function at a
specific cellular target, either killing the bacteria or inhibiting their
multiplication, thereby allowing the patient's immune system to clear the
bacteria from the body. Currently available antibiotics work on relatively few
targets, through mechanisms such as inhibiting protein or cell wall
biosynthesis. These targets tend to be present in all bacteria and are highly
similar in structure and function, such that certain antibiotics kill or inhibit
growth of a broad range of bacterial species (i.e., broad-spectrum antibiotics).
Major structural classes of antibiotics include beta-lactams,
fluoroquinolones, macrolides, tetracyclines, aminoglycosides, glycopeptides and
trimethoprim combinations. Penicillin, a member of the beta-lactam class (which
also includes extended-spectrum penicillins, cephalosporins and carbapenems),
was first developed in the 1940s. Nalidixic acid, the earliest member of the
quinolone class, was discovered in the 1960s. The creation of broad-spectrum
antibiotics began in the 1970s and 1980s, with major advances seen in the 1970s
with the development of newer beta-lactams, and in the 1980s with the
development of fluoroquinolones. These antibiotics remain the mainstay of
therapy, since no major new class of antibiotics has been discovered and
commercialized in the last 20 years.
According to sales data compiled by IMS International, an independent
pharmaceutical industry research firm, the market for systemic (orally or
parenterally administered) antibiotics constitutes the third largest worldwide
pharmaceutical market, generating $24.7 billion in worldwide sales in 1999,
including $8.45 billion in the United States. The in-hospital antibiotic market,
where bacterial resistance poses the most serious threat, totaled $7.5 billion
worldwide during this period.
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FUNGAL INFECTIONS
Invasive infections due to fungi are a continuing problem, particularly among
patient populations with compromised host defenses due to immunosuppressive
drugs (e.g., in organ transplant patients or cancer chemotherapy) or underlying
diseases (e.g., AIDS). Despite the limitations of existing therapeutics,
systemic antifungal agents generated worldwide sales of approximately $2.5
billion in 1999, according to IMS International. The two major classes of
clinically important systemic antifungal agents utilize essentially only two
targets: ergosterol (membrane) and cell wall biosynthesis. Amphotericin B, while
fungicidal, has toxicity limitations in many patients. In contrast, the azole
class of compounds is limited by suboptimal efficacy in the treatment of
deep-seated fungal infections in immunocompromised patients, due to its
fungistatic mode-of-action and emerging drug resistance.
VIRAL INFECTIONS
Viral infections continue to be a major medical problem in both
immune-competent and immunosuppressed patients. Over 42 million people are
estimated to have been infected with the human immunodeficiency virus (HIV)
since its discovery. Newer combination therapies with HIV-protease inhibitors or
newer reverse-transcriptase inhibitors have markedly improved survival and
reduced the occurrence of opportunistic infections. However, these agents are
often poorly tolerated by patients due to drug-to-drug interactions and adverse
effects, require frequent administration of multiple pills that makes adherence
to prescribed regimens difficult, and are subject to viral resistance to
therapy, resulting in a need for new agents. There is a vast unmet clinical need
for effective and well-tolerated antiviral therapy in other viral infections
with a high prevalence and morbidity. Hepatitis B (HBV) afflicts a major
proportion of the global population; CDC estimates that approximately 3.0
million people in the U.S. have hepatitis C infection (HCV). Both forms of
hepatitis can cause chronic infections that can lead to the need for liver
transplantation and other complications. Well-tolerated treatment regimens that
produce a durable antiviral response would represent a considerable advance in
the long-term management of such chronically-infected patients. Cytomegalovirus
(CMV) infection remains a complication in transplant patients as well as in
certain pediatric populations, and existing antiviral therapies for CMV are
often poorly tolerated.
ANIMAL HEALTH INFECTIONS
Bacterial infections represent a major problem for the animal health
industry, with respect to both livestock animals and companion animals. In
particular, livestock animals undergo periods of stress-induced suppression of
immunity during which there is increased susceptibility to bacterial infection.
Important bacterial pathogens of livestock include species responsible for
bovine and porcine respiratory diseases, enteric diseases, and mastitis. The
Company estimates that global sales of antiinfective products for use in animal
health applications are in excess of $2.0 billion.
RESISTANCE PROBLEMS
One of the key contributors to the increase in mortality and morbidity due to
bacterial infections is the increasing prevalence of drug-resistant bacteria.
Evidence of bacterial resistance to penicillin was first seen in the 1940s
shortly after its introduction. Methicillin and subsequent second-generation
penicillins were developed to overcome these penicillin-resistant organisms, but
resistance to methicillin in turn began to occur in the 1970s shortly after its
release, and has continued to increase. Similar resistance problems are now seen
with a number of clinically important bacteria targeted by the Company's initial
products, including staphylococci, enterococci, pneumococci and pseudomonas.
Strains of these bacteria have become resistant to all but a few antibiotics.
According to estimates based on CDC data, these four groups of bacteria are
responsible for 44% of all hospital-acquired infections and for 63% of
hospital-acquired blood stream infections in the United States.
A number of factors are believed to contribute to the increased rate of
bacterial drug resistance:
(i) physician reliance on broad-spectrum antibiotics for empiric treatment of an
infection prior to definitive diagnoses
(ii) repeated exposure of bacteria to long-term antibiotic therapy, providing a
competitive advantage to bacteria that harbor drug resistance
(iii) antibiotic use in immunosuppressed patients (from cancer chemotherapy,
AIDS and organ transplantation)
(iv) the growing number of institutionalized, often elderly, patients receiving
multiple courses of antibiotics
(v) the increased frequency of invasive medical procedures
(vi) societal and technological changes, including air travel, that accelerate
the spread of drug-resistant bacteria
One example of the seriousness of antibiotic resistance is
methicillin-resistant staphylococci ("MRS"), which has become resistant to
virtually all currently used antibiotics, except vancomycin. The heavy use of
vancomycin to treat MRS infections may in turn have contributed to the emergence
of new strains of enterococci that are resistant to vancomycin. Infections
caused by these
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vancomycin-resistant enterococci ("VRE") frequently do not respond to any
current therapies, and in many cases prove fatal. The transfer of vancomycin
resistance from enterococci to staphylococci has been demonstrated
experimentally. If vancomycin resistance is transferred in the clinical setting
by VRE to staphylococci, the leading cause of hospital-acquired bacterial
infections, no effective antibiotic therapy will remain to treat MRS infections.
The first report of vancomycin intermediate-susceptible Staphylococcus aureus in
a clinical setting occurred in 1997 in Japan, followed by subsequent reports of
strains with decreased susceptibility in patients in various parts of the United
States. Although caused by a different mechanism-of-action than occurs in VRE,
the Company believes that these reports are suggestive of future resistance
problems in staphylococci.
As a result of increasing bacterial resistance to existing antibiotics,
numerous clinical infections occur that resist first-line therapy. When bacteria
develop resistance to established first-line antibiotics, it is often necessary
to use a combination of two or more antibiotics to treat these resistant
infections. Such therapy is generally more costly and potentially more toxic to
the patient due to additive and sometimes synergistic side effects. The table
below outlines some of the major problematic drug-resistant bacteria, the
classes of antibiotics to which they already show clinically significant levels
of resistance, and the remaining recommended treatments:
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PROBLEMATIC DRUG-RESISTANT BACTERIA
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BACTERIA ANTIBIOTIC TREATMENTS REMAINING RECOMMENDED
WITH SIGNIFICANT TREATMENTS
RESISTANCE PROBLEMS
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Staphylococcus sp. Beta-lactams o Vancomycin
Fluoroquinolones o Combination Therapy
Aminoglycosides
Macrolides
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Enterococcus sp. Beta-lactams o Multiple Antibiotic Therapy
Aminoglycosides o Quinupristin/ Dalfopristin
Glycopeptides (Synercid(R))
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Pseudomonas aeruginosa Beta-lactams o Combination Therapy
Fluoroquinolones
Aminoglycosides
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Streptococcus pneumoniae Beta-lactams o Cephalosporin or Carbapenem
Macrolides o Vancomycin
Tetracyclines o Fluoroquinolones
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STRATEGY
The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) there are
significant unmet clinical needs caused by growing bacterial resistance problems
that require new antibacterial therapies and (ii) the pre-clinical and clinical
development process for antibiotics typically follows an efficient and
well-defined path to the market, with early testing generally predictive of
later stage results. The Company believes these factors will lead to shorter
overall development timelines and higher approval rates for its products than
for products in most other therapeutic categories. Microcide's strategy is to
focus near-term pre-clinical research activities on drug resistance mechanisms
and to conduct longer-term drug discovery using novel antibacterial targets
identified through its Targeted Genomics programs. In addition, the Company has
extended its genetic discovery technology platform beyond bacteria to include
fungi and viruses. The Company's strategy is comprised of the following five key
elements:
Develop Novel Antibiotics by Targeting Drug Resistance Mechanisms.
Microcide's near-term research programs focus on rapidly identifying and
optimizing proprietary compounds that are effective against problematic
antibiotic-resistant microbes, including such antibiotic-resistant bacterias
MRS, VRE, beta-lactam-resistant pneumococci and quinolone-resistant pseudomonas;
and resistant fungal pathogens, such as Candida and Aspergillus. Since
antibiotic resistance problems are often due to a single defined resistance
pathway, the Company believes that targeting those pathways will enable it to
rapidly develop novel antibiotics tailored to specific resistant microbes, as
well as to develop antibiotic potentiators that overcome resistance mechanisms
and restore the usefulness of
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established antibiotics that have been rendered ineffective. The Company's
Gram-Positive (Cephalosporin), Bacterial Efflux Pump, and Fungal Efflux Pump
programs are focused in this area.
Accelerate the Discovery of New Antibiotic Classes through Targeted Genomics.
Microcide has developed a technology platform which utilizes microbial genetics
to discover the genes which are essential for a microbe's in vitro survival.
Microcide is utilizing essential bacterial genes discovered in its Bacterial
Essential Genes Program as the basis for identifying and characterizing novel
antibiotic targets. The Company has developed an innovative methodology for
parallel high-throughput screening of these targets against molecular diversity
libraries to identify a large number of active lead compounds. Microcide's
Fungal Genomics program seeks to identify essential fungal gene targets which
are functionally conserved among pathogens and distinct from human genes, and
to utilize these genes in its proprietary multichannel screening system for
antifungal drug discovery. The Company believes that this microbial genetics
technology platform will enable it to rapidly identify new classes of antibiotic
drug candidates.
Extend Targeted Genomics to Additional Gene Targets and Other Important
Infectious Pathogens. Microcide has extended its molecular genetics technologies
to identify and characterize genes that are critical to bacterial growth in
vivo. The Company believes that inhibitors of such targets have not been
previously systematically sought in antibiotic discovery programs, and that its
Bacterial In Vivo Survival Genes program utilizes proprietary methods to
discover inhibitors of these genes for development as novel antibiotics. In
addition, through a collaboration with Iconix, the Company seeks to apply
surrogate genetics technology to screen against a number of viral disease
targets in the search for novel inhibitors.
Enhance Research and Development and Reduce Capital Requirements through
Collaborative Agreements. The Company has entered into collaborations with three
major pharmaceutical companies to develop its initial products. Such
collaborations are expected to provide Microcide with funding, discovery
technologies, research staffing, access to molecular diversity, and development
and commercialization capabilities. By utilizing the resources of its
collaborators, Microcide expects to lower its capital requirements and reduce
the time needed to commercialize its products worldwide. Microcide is developing
certain defined joint technologies in collaboration with Iconix, an arrangement
which it believes will enhance the quality and reduce the costs of development
of these technologies as compared to working independently.
Retain the Ability to Independently Develop and Market Certain Products.
Microcide's longer-term development strategy is to continue to utilize strategic
collaborations selectively to complement internal efforts. Microcide plans to
retain certain rights to products resulting from its unpartnered programs,
including the Company's Bacterial In Vivo Survival Genes, Fungal Genomics and
Fungal Efflux Pump programs, as well as certain aspects of its Bacterial Efflux
Pump Inhibitors programs that lie outside of the collaboration with Daiichi. In
general, Microcide plans to take certain discovery leads forward into late
pre-clinical and early clinical development stages alone before entering into
collaborative relationships for final product development and commercialization.
MICROCIDE'S RESEARCH PROGRAMS
Microcide's research programs employ an interdisciplinary approach that
incorporates several drug discovery and research technologies, including
targeted genomics, synthetic and natural product diversity, high-throughput and
multi-channel screening, DNA microarrays, combinatorial and medicinal chemistry,
computer-assisted drug design and bioinformatics. The Company believes that its
interdisciplinary approach more effectively utilizes a broader range of novel
microbial targets for new compound discovery than traditional biochemical
approaches. Microcide believes that drug resistance genes and in vitro and in
vivo essential genes can be developed into screens for selective inhibitors and
that these methods can be widely employed in the lead discovery process. Access
to molecular diversity libraries for screening targets is critical to drug
discovery. In some instances, the Company's collaborative partners are providing
molecular diversity libraries to support the screening process. However, the
Company has also established a stand-alone molecular diversity capability for
its programs, and has built libraries of structurally distinct synthetic
compounds and natural product extracts for this purpose. The Company's natural
products program provides access to broad-based molecular diversity not
achievable by synthetic compound libraries alone. The Company believes that both
of its libraries contain significant structural diversity. More than 250,000
molecular diversity samples have been available for high-throughput screening
since 1997. The structural diversity of the library and the molecular diversity
needs of Microcide's programs continue to be monitored, and the Company expects
that strategic supplementation of these diversity libraries will occur in 2000
and beyond.
The Company's discovery and pre-clinical research activities center on two
themes: Targeted Antibiotics and Targeted Genomics. The Company's Targeted
Antibiotics programs focus on overcoming bacterial and fungal drug resistance,
either by interfering with resistance pathways to potentiate existing
antimicrobials, or by developing novel lead compounds which avoid such
resistance pathways. The Company's Targeted Genomics programs utilize microbial
genetics and genomics approaches to discover inhibitors of novel drug targets
for further development as small molecule therapeutics.
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MICROCIDE'S RESEARCH PROGRAMS
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PROGRAM PROGRAM GOAL CURRENT STAGE(1) PARTNER
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TARGETED ANTIBIOTICS
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Beta-lactam Antibiotics for treatment of Phase I Clinical J&J
Gram-positive bacteria, including Trials (RWJ-
resistant strains (MRS, VRE and 54428/MC002,479);
beta-lactam-resistant S. pneumoniae) Pre-Clinical
Candidate (2nd
cephalosporin
compound)
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Bacterial Efflux Pump Potentiators principally for use with Drug Design Daiichi
Inhibitors - Quinolone and existing quinolones against P.
beta-lactam efflux aeruginosa
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Bacterial Efflux Pump Potentiators principally for use with Screening and Internal
Inhibitors - existing non-quinolone and Drug Design
Non-Quinolone, non-beta-lactam antibiotic classes for
non-beta-lactam antibiotics human and animal health applications
- --------------------------------------------------------------------------------------------------
Fungal Efflux Pump Potentiators to improve the efficacy of Screening and Internal
Inhibitors existing and new agents against fungal Lead
pathogens, including Candida sp. and Identification
Aspergillus
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TARGETED GENOMICS
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Bacterial Essential Genes Novel classes of broad- and Drug Design Pfizer
narrow-spectrum antibiotics
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Animal Health Novel agents active against animal Target Pfizer
health pathogens Identification
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Bacterial In Vivo Survival Novel classes of antibiotics Target Internal
Genes Identification and
Screening
- --------------------------------------------------------------------------------------------------
Fungal Genomics Novel systemic antifungal agents Lead Internal
Identification
- --------------------------------------------------------------------------------------------------
Viral Drug Discovery Novel antiviral therapeutics for HIV, Screening Iconix
HCV, rhinovirus, CMV, HBV, influenza,
HPV and RSV
- --------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) The Company's pre-clinical research programs generally consist of the
following stages, listed chronologically: "Target Identification" --
development and implementation of methods to identify appropriate gene
targets to be used in screening.
"Screening" -- development and implementation of assay technologies to
identify selective target inhibitors ("leads").
"Lead Identification" -- lead compounds whose in vitro and in vivo
characteristics are being evaluated in biochemical, microbiological,
pharmacological and toxicological tests for entry into drug design
programs.
"Drug Design" -- structure-activity relationships of selected compounds are
being defined and such compounds optimized through medicinal chemistry
efforts.
"Candidate Selection" -- optimized leads are being scaled-up and evaluated
in key efficacy, toxicological and pharmacological tests in advance of
selection as pre-clinical development candidates.
"Pre-clinical Candidate" -- a lead compound undergoing extensive
pre-clinical investigation including pharmaceutical characterization,
product formulation, process scale-up for manufacturing, and animal safety
and tolerability studies, all requisite to entering into human clinical
trials.
"Phase I Clinical Trials" -- a compound has entered human clinical trials
for determination of safety, tolerability and pharmacokinetic/
pharmacodynamic characteristics.
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<PAGE> 9
TARGETED ANTIBIOTICS
Microcide's Targeted Antibiotics programs involve two approaches: (i) the
development of novel antibiotic compounds which avoid bacterial resistance
mechanisms and (ii) the development of novel antibiotic potentiators which
overcome bacterial resistance by interfering with resistance mechanisms. The
Company's Targeted Antibiotics programs include the Gram-Positive
(Cephalosporin), Bacterial Efflux Pump, and Fungal Efflux Pump programs.
GRAM-POSITIVE CEPHALOSPORIN PROGRAM
Microcide's Gram-Positive Cephalosporin program is focused on discovering and
developing novel antibiotics for the treatment of infections caused by
drug-resistant Gram-positive bacteria, including MRS, VRE and pneumococci.
Gram-positive and Gram-negative bacteria have fundamentally different surface
characteristics. These surface properties greatly affect the ability of an
antibiotic to penetrate the bacterium and reach its target site. As a result,
antibiotics that are effective against Gram-positive bacteria are often less
effective against Gram-negative bacteria, and vice versa. The problematic
Gram-positive bacteria targeted by this program cause serious infections,
including endocarditis, osteomyelitis, meningitis, deep-seated soft tissue
infections, complicated urinary tract infections, pneumonias, bacteremia and
septicemia.
The Gram-Positive Cephalosporin program is being conducted in collaboration
with J&J and consists of the discovery and development of beta-lactam
antibiotics with specific efficacy against resistant Gram-positive bacteria.
Traditional beta-lactam antibiotics work by inhibiting enzymes
(penicillin-binding proteins, or PBPs) that carry out crucial steps in the
biosynthesis of the bacterial cell wall. Resistance to beta-lactam antibiotics
in MRS is primarily caused by bacterial production of PBP2a, an enzyme capable
of conducting cell wall biosynthesis in the presence of such antibiotics, as
well as by the production of beta-lactamases, which render beta-lactams
ineffective.
Microcide's Gram-Positive Cephalosporin program has identified novel
beta-lactam antibiotics which are beta-lactamase-stable and inhibit PBPs,
including PBP2a, thereby gaining efficacy against MRS. Compounds emerging from
the Company's Cephalosporin program are active against staphylococci (including
MRS), enterococci (including VRE), and other Gram-positive bacteria. The Company
has prepared hundreds of new synthetic analogs and has made significant advances
in drug design, resulting in several compounds with desirable in vitro potency,
in vivo efficacy, favorable pharmacokinetics and solubility, and low toxicity.
Antibiotics developed within this program are expected to be parenterally
administered in the institutional setting to prevent or treat infections caused
by Gram-positive bacteria, including those resistant to other antibiotics. Such
antibiotics could potentially be clinically adopted for the following uses: as a
single agent following treatment failure in patients with a documented
drug-resistant infection, or empirically as a single agent or in combination
with a broad-spectrum antibiotic to extend coverage to resistant bacterial
strains. The Company believes that the clinical adoption of such antibiotics
could be similar to that of vancomycin as a single agent, or ceftazidime or an
aminoglycoside in combination use for empiric therapy.
The Company, in collaboration with J&J, selected an initial cephalosporin
candidate for pre-clinical development in October 1996. Pre-clinical studies
including product formulation and process scale-up for manufacturing of large
quantities of drug substance was completed in early 1999. Sufficient drug
substance was produced in this effort to allow the anticipated pre-clinical
animal safety and tolerability studies as well as Phase I clinical trials.
Pre-clinical animal safety and tolerability studies were successfully completed,
and Phase I clinical trials were initiated in November 1999. The Company has
filed patent applications in the United States and elsewhere on fourteen (14)
series of lead structures discovered in this program, and nine (9) such patents
have issued in the United States.
In December 1999, the Company, in collaboration with J&J, committed to the
pre-clinical development of a second cephalosporin compound. This compound is
currently undergoing pharmaceutical characterization, product formulation and
process scale-up for manufacturing of sufficient bulk drug substance to conduct
requisite pre-clinical animal safety and tolerability studies. The Company
expects that these activities will occur in parallel with the early phase
clinical development of the initial cephalosporin candidate.
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<PAGE> 10
BACTERIAL EFFLUX PUMP PROGRAM
The high intrinsic resistance of P. aeruginosa to many antibiotics, including
quinolones, has generally been attributed to the impermeable outer membrane of
this Gram-negative bacterium. Recent information indicates that this intrinsic
resistance is due to the combined effects of low membrane permeability and the
production of certain membrane proteins (efflux pumps) that bind to antibiotics
of many different classes as they enter the bacterial cell and eject (efflux)
them from the bacterium, preventing their interaction with specific
intracellular targets.
The Company believes that the combination of bacterial efflux pump inhibitors
with existing antibiotics could restore the activity of antibiotics against
bacteria expressing efflux pump-mediated antibiotic resistance. In addition,
many bacterial species have active efflux pumps that contribute to the overall
intrinsic susceptibility of the species to certain antibiotics; thus the Company
believes that the combination of bacterial efflux pump inhibitors with existing
antibiotics could increase the susceptibility of many Gram-negative and
Gram-positive bacteria to these antibiotics, thereby lowering required
therapeutic doses. The Company has established a genetics and molecular biology
program which focuses on microbial efflux systems, and has developed novel
screening and lead evaluation technologies to permit the identification of lead
compounds for subsequent drug design efforts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
EFFLUX-MEDIATED ANTIBIOTIC RESISTANCE IN BACTERIA
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
BACTERIA ANTIBIOTIC PUMP - ANTIBIOTIC EFFLUXED
SELECTIVITY OF STRUCTURAL
EFFLUX PUMP FAMILY
- --------------------------------------------------------------------------------------
Staphylococcus aureus Multi-drug Major Fluoroquinolones
resistance Facilitator,
ABC-transporter Macrolides
Streptogramins
- --------------------------------------------------------------------------------------
Staphylococcus Specific drug Major Tetracyclines
resistance Facilitator
Enterococcus
Streptococcus
- --------------------------------------------------------------------------------------
Streptococcus pyogenes Specific drug Major Macrolides
resistance Facilitator
- --------------------------------------------------------------------------------------
Streptococcus pneumoniae Multi-drug Major Macrolides
resistance Facilitator
Fluoroquinolones
- --------------------------------------------------------------------------------------
Pseudomonas aeruginosa Multi-drug RND-class Fluoroquinolones
resistance Beta-lactams
- --------------------------------------------------------------------------------------
</TABLE>
The Company is designing compounds based on efflux pump inhibitor leads,
which it discovered during its collaboration with Daiichi. The Company has
maintained a continuing scientific collaboration with Daiichi which may help
progress the lead compounds toward pre-clinical development. The primary
objective of this program has been to develop potentiators which will be
combined with Daiichi's oral and parenteral quinolone antibiotics to overcome
efflux pump-mediated resistance in P. aeruginosa and other bacteria. In
addition, the Company believes that inhibitors could be combined with other
classes of antibiotics for which efflux pump-mediated resistance limits clinical
utility and is investigating new opportunities in this area. The Company
believes that several antibiotic-efflux pump inhibitor combinations could be
usefully developed based on different antibiotics and different structural
families of bacterial efflux pumps. The Company has filed patent applications in
the U.S. and elsewhere, on various lead structures discovered under this
program, and one patent has issued in the U.S.
FUNGAL EFFLUX PUMP PROGRAM
The azoles (inhibitors of the ergosterol biosynthesis pathway) are currently the
most widely used class of agents in the treatment of fungal diseases. Among the
azoles, fluconazole is the most extensively used, but there are increasing
reports of fluconazole therapy failures due to emergence of resistance.
Recently, multi-drug efflux pumps have been implicated in Candida resistance to
fluconazole (and other azoles). As with bacterial efflux, intrinsic fungal
resistance to fluconazole, such as found in C. glabrata, C. krusei and in
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<PAGE> 11
Aspergillus, may arise from naturally-occurring multi-drug efflux pumps.
Therefore, similar to its approach with regard to bacteria, the Company believes
that by inhibiting the activity of efflux pumps in fungal pathogens, it may be
possible to achieve a significant decrease of both intrinsic and acquired
resistance, thereby extending the useful life of existing agents, broadening the
antifungal spectra of existing agents, or allowing newer agents to be more
clinically efficacious. Patent applications on this technology have been filed.
TARGETED GENOMICS
Microcide believes that it has developed a unique approach to anti-infective
research using microbial genetics as a foundation for drug discovery. The
Company believes that this approach will yield a large number of relevant novel
drug targets that in turn are expected to lead to the development of new classes
of antimicrobials. The Company's strategy is to focus its gene discovery efforts
on the pharmaceutically-relevant portion of bacterial and fungal genomes, by
identifying genes that are essential to a pathogen's viability in vitro (the
Bacterial Essential Genes Program, the Animal Health Program and the Fungal
Genomics Program) or in vivo (the Bacterial In Vivo Survival Genes Program).
These target genes, once identified, are incorporated into the Company's
high-throughput screening systems to identify compounds for further development.
The Company has applied its targeted genomics approach to bacterial and fungal
cellular systems, and more recently has begun to apply this approach to viruses
through its collaboration with Iconix. The Company believes that this approach
offers significant advantages over traditional pharmaceutical industry
biochemical assay approaches, as well as the more recent microbial genomic
sequencing approaches.
Traditional approaches to antibiotic drug discovery have centered on
biochemically-defined targets. In such approaches, screening assays are
developed based on selected enzyme or receptor targets. Appropriately designed
biochemical assays can be highly effective but have several significant
drawbacks. First, such an approach is limited in its application since it
requires pre-existing data with respect to the function or mechanism of an
identified target, and can only identify inhibitors of that specific target.
Since many targets lack such information, the range of targets that can be
employed to find inhibitors is limited. Second, such target-specific assays have
relatively long set-up times and high costs. Third, these techniques often
employ an extracellular biochemical approach which may identify compounds that
are excellent inhibitors of essential biochemical enzymes, but subsequently
prove not to be good drug candidates because sufficient concentrations within
the bacterium are not achieved at the target site.
Drug discovery efforts have more recently employed whole-genome sequencing
approaches to antibiotic target identification. Although such approaches reveal
all of the genetic information in a bacterium, the Company believes that only an
estimated 5% to 10% of the total bacterial genetic material encodes proteins
that are pharmaceutically-relevant as drug targets. Genome sequencing approaches
can only address gene function through sequence analysis and comparison, and do
not adequately address the issue of the relevance of a particular gene as a drug
target. Thus, while numerous microbial genomes have been completely or partially
sequenced, considerable research remains necessary to identify the
pharmaceutically-relevant target genes from this information, and to then
develop screens for potential inhibitors. Such screens will then face many of
the same limitations as traditional biochemical screening approaches.
BACTERIAL ESSENTIAL GENES PROGRAM
In contrast, Microcide's Bacterial Essential Genes Program utilizes a
targeted genomics approach to discover the pharmaceutically-relevant genes
present in bacterial genomes, and focuses on several important and diverse
pathogenic bacteria. The Company has created unique molecular tools and
approaches in bacterial molecular genetics, which allow it to create and use
gene mutants to quickly and directly clone essential bacterial genes. These same
mutants are then used to characterize and prioritize drug targets. This targeted
genomics approach accelerates the entire discovery process by focusing only on
the functionally important portions of the genome and thereby bypassing the task
of sequencing and characterizing irrelevant portions of the genome.
By the end of 1999, Microcide had identified over 100 of the estimated 150 to
200 essential genes in Staphylococcus aureus and over 65 of the estimated 150 to
200 essential genes in Salmonella typhimurium. Because essential genes are
generally common among different bacteria, the Company believes that a number of
the drug targets identified to date could lead to the discovery of new classes
of broad-spectrum antibiotics. The Company has filed patent applications
covering 82 essential genes and related screening methods in the United States.
The Company has also created a multi-channel screening process that it
believes will accelerate antibiotic discovery in several important ways.
Foremost is the ability to move directly and rapidly from gene identification to
drug screening using gene mutants. Using genetic assays, many targets can be
utilized simultaneously to evaluate compounds, as opposed to the traditional
screening approach which utilizes few targets in single assay format. This
multi-channel process creates a multi-dimensional profile or
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<PAGE> 12
"phenoprint" of biological activity for each compound tested. Both multiple
targets and multiple biological properties of compounds can thus be
simultaneously evaluated during primary screening. Using defined testing
algorithms and statistical analyses of resulting data, many compounds are tested
in high-throughput mode. Collectively, the resulting compound phenoprints, along
with other data on the properties of the genes and the compounds, form a
database of information correlating biological effects of compounds and their
structures to the various targets early in the development process. This
facilitates and enhances the selection of optimal hits and most promising leads
prior to commitment to drug design efforts.
12
<PAGE> 13
[PICTURE]
The Company's multi-channel screening method has the following benefits: (i)
it is broadly applicable to all of the pharmaceutically-relevant essential genes
identified; (ii) it identifies compounds that can enter cells and effect
inhibitory action, given its whole-cell based nature; (iii) it utilizes more
sensitive assays than traditional whole-cell screens, allowing for the
identification of a broader range of potential drug candidates; and (iv) it can
be applied even before the novel genes or biochemical targets are fully
characterized. The database created by the Company's Bacterial Essential Genes
program is expected to grow in information content and ability to discriminate
among compounds as each new gene or compound is evaluated and added to the
database. The Company believes this database represents a significant
competitive advantage in antibiotic discovery and development.
The Company, in collaboration with Pfizer, has implemented its essential gene
and multi-channel screening systems to discover and develop multiple new
antibiotic classes. The molecular diversity libraries of the Company and Pfizer
have been extensively applied to these screening efforts. Biological
characterization of screen hits is being followed by exploratory medicinal
chemistry on selected lead compounds. Potential products resulting from the drug
design efforts of this program are expected to constitute new classes of
broad-spectrum antibiotics. The Company believes that the clinical use of such
compounds could be similar to that of clarithromycin, ciprofloxacin or imipenem.
In addition to patent applications covering essential genes, the Company has
filed patent applications covering its multi-channel screening technology in the
United States and elsewhere.
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<PAGE> 14
ANIMAL HEALTH PROGRAM
The Animal Health Program is based on genetic strategies for gene
identification that have been developed successfully in Microcide's Bacterial
Essential Genes Program and Bacterial In Vivo Survival Genes Programs. In
collaboration with Pfizer, Microcide has undertaken molecular genetic approaches
to identify essential gene targets in pathogens important to the animal health
market. Over 65 essential genes have been identified in Salmonella typhimurium.
The collaboration plans to develop products based on this research.
BACTERIAL IN VIVO SURVIVAL GENES PROGRAM
Bacteria possess a set of genes, encoding both metabolic functions and
non-redundant virulence factors and regulators, that are necessary for pathogen
growth in a mammalian environment (in vivo), but which are not required for
bacterial growth in enriched media in a petri dish (in vitro). Microcide refers
to such genes as In Vivo Survival ("ivs") genes. Microcide scientists have
developed a proprietary method (Size-based Marker Identification Technology,
"SMIT") to identify the ivs mutants from among the more than 10,000 mutants
which have been evaluated in infection models. Many of these genes constitute
targets not previously directly utilized in drug discovery programs. The Company
has created a library of over 65 ivs genes which have been characterized in
vitro and in animal systems for selection of priority targets for screening.
High-throughput whole cell screens are being developed using the mutant strains,
and biochemical assays will be developed for some targets. An extension of the
SMIT technology is expected to be useful as a novel method to enable high-
throughput in vivo evaluation of lead compounds. Products that may emerge from
this program are expected to be bactericidal antibiotics which may be applied to
either the human or animal health market.
The Company has retained all rights to this program and is self-funding it.
The Company has filed patent applications in the United States covering methods
for discovery and characterization of Bacterial In Vivo Survival genes.
FUNGAL GENOMICS PROGRAM
Microcide's Fungal Genomics Program seeks to identify and utilize for drug
discovery essential fungal gene targets that are functionally conserved among
pathogens and distinct from human genes. The Company has prescreened its
synthetic compound collection against four fungal species and identified a
subset of approximately 5000 compounds with antifungal activity against one or
more of these organisms. This compound subset has been prioritized according to
a number of pharmacological criteria. In addition, the Company has created a
proprietary collection of conditional growth mutants in over 100 essential genes
of interest in 6 pharmaceutically-relevant pathways. These mutant strains
provide the basis for hypersensitive, target-directed whole cell screens, and
together with DNA microarrays, information about potential mechanism-of-action.
The Company is also using genomic technologies to provide preliminary
information on resistance development. The Company intends to apply these
methods, in combination with more classical pharmacological tests, to provide
guidance into the selection of lead structures to be taken into medicinal
chemistry.
The Company has retained all rights to this program and is self-funding it.
The Company has filed patent applications in the United States covering its
multiplex screening technology.
VIRAL DRUG DISCOVERY PROGRAM
Viruses are obligate intracellular parasites requiring host cell factors for
their replication. Because of this close relationship, traditional drug
discovery via "whole cell-virus" assays has produced only a limited number of
therapeutically efficacious and non-cytotoxic antiviral drugs. The discovery
efforts in the past decade or so have largely been directed to biochemical
screening and, more recently, to structure-based rational drug design. However,
the rate-limiting step of these approaches is that the biochemical, functional,
or structural information of the target proteins must be known prior to assay
development. Most available antivirals target protein families with
well-characterized enzymatic activities, namely polymerases, reverse
transcriptases and proteases.
The Microcide-Iconix collaboration in antiviral drug discovery builds on
expertise in microbial genetics and pharmacology and applies proprietary
surrogate assay technology that may provide advantages over other drug discovery
processes. The premise of this technology is based on the concept that
expression of a viral protein in a surrogate microbial organism (e.g. yeast or
E. coli) can produce discrete changes in the cellular physiology that will
reflect the native function of that viral protein. These changes (or phenotypes)
can include complementation of a defective host gene, a reporter-linked activity
readout, or simply an inhibition of cell growth. The most powerful feature of
this technology is that the precise function of a target protein need not be
known prior to assay development. For example, if expression of a viral protein
causes growth inhibition in yeast, then this phenotype can be used to
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<PAGE> 15
screen for potential inhibitors that reverse this growth inhibition. During
1999, the program focused on surrogate assay development and implementation of
high-throughput screens for targets in HIV, HCV, CMV, HBV, influenza,
rhinovirus, HPV and RSV.
COLLABORATIVE AGREEMENTS
The Company's strategy is to enter into collaborations with major
pharmaceutical companies to develop its initial products. Such collaborations
are expected to provide the Company with funding, discovery technologies,
research staffing, access to molecular diversity, and development and
commercialization capabilities. To date the Company has entered into
Collaborative Agreements with three major pharmaceutical companies: J&J with
regard to the Gram-Positive Cephalosporin program; Daiichi with regard to the
Bacterial Efflux Pump program; and Pfizer with regard to the Bacterial Essential
Genes and Animal Health programs. The Company has certain rights to
co-promote in North America products developed pursuant to each of these
collaborations.
In addition, the Company has entered into a series of agreements with Iconix
Pharmaceuticals, a company which it formed in January 1998. These agreements
include a Core Technology and License Agreement, an Antiviral and Surrogate
Genetics Research Collaboration, and a Support Services Agreement.
J&J -- GRAM-POSITIVE CEPHALOSPORIN PROGRAM
In October 1995, Microcide and J&J entered into agreements (the "J&J
Agreements") pursuant to which they agreed to collaborate to discover and
develop certain antibiotics and antibiotic potentiators targeted at
Gram-positive bacteria. The term of the J&J Agreements was three years with J&J
having an option to extend the term for an additional one-year period. J&J
provided the Company with $3.5 million per year in research support payments
throughout the original term of the J&J Agreements. J&J extended this
collaboration with respect to cephalosporins through the end of 1999 at a
funding level approximately 40% that of the prior level reflecting the focused
scope of the research effort. No additional research support funding for this
program is expected in the year 2000. J&J made a $3.0 million up-front license
payment to the Company and an affiliate of J&J made a $5.0 million equity
investment in the Company. Microcide received milestone payments upon the
selection of a pre-clinical development candidate in 1996, and upon the
commencement of Phase I clinical trials for compound MC002,479/RWJ-54428 in
November 1999. Microcide may receive from J&J milestone payments of up to $16.5
million for the first product and up to $15.5 million for each subsequent
product upon the achievement of product development milestones and, in addition,
royalties on the worldwide sale of drugs resulting from the collaboration. The
J&J Agreements provide J&J with exclusive worldwide rights to products developed
during the collaboration. The development, manufacture and sale of drugs
resulting from the collaboration will be conducted by J&J, provided that
Microcide has the right to undertake certain co-promotion activity in North
America subject to J&J's approval. There can be no assurance that J&J will elect
to proceed with the development of such potential products. As a result, there
can be no assurance that any of the future milestone or royalty payments
contemplated by the J&J Agreements will be made. See "Targeted Antibiotics --
Gram-Positive Cephalosporin Program."
DAIICHI -- EFFLUX PUMP PROGRAM
In November 1995, Microcide and Daiichi entered into an agreement (the
"Daiichi Agreement") pursuant to which they agreed to collaborate to discover
and develop antibiotics and antibiotic potentiators, acting through inhibition
of the efflux pump mechanism, primarily targeted at pseudomonas. The original
term of the research program under the Daiichi Agreement expired March 31, 1998.
Daiichi exercised its option to extend the collaboration for an additional year
(through March 31, 1999) during which Daiichi provided research support funding
to Microcide of $3.5 million. Pursuant to the Daiichi License Agreement,
Microcide is entitled to receive from Daiichi milestone payments of up to $13.0
million for each product developed during the collaboration upon the achievement
of certain drug development milestones and, in addition, royalties on the
worldwide sale of drugs resulting from the collaboration. The development,
manufacture and sale of drugs resulting from the collaboration will be conducted
by Daiichi subject to Microcide's right to co-promote such drugs in North
America, for which Microcide shall receive reasonable compensation. There can be
no assurance that any potential products will be discovered during the
collaboration or that, if discovered, Daiichi will elect to proceed with the
development of such potential products. As a result, there can be no assurance
that any of the milestone or royalty payments contemplated by the Daiichi
License Agreement will be made. See "Targeted Antibiotics -- Bacterial Efflux
Pump Program."
PFIZER -- BACTERIAL ESSENTIAL GENES PROGRAM
In March 1996, Microcide and Pfizer entered into agreements (the "Pfizer
Agreements") pursuant to which they agreed to collaborate to implement
genetics-based screening technology to identify and subsequently develop
antibacterial products. The term
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<PAGE> 16
of the Pfizer Agreements is five years, subject to Pfizer's right to earlier
terminate after February 1999 with six months' prior written notice. Pfizer has
made a $1.0 million up-front license payment to the Company and a $5.0 million
equity investment in the Company. Pfizer is obligated to provide Microcide with
up to $4.2 million per year in research support payments during the term of the
Pfizer Agreements. In March 2000, Pfizer and the Company amended the Pfizer
Agreements to shift research focus from chemistry prosecution of a lead compound
series identified during the screening phase to a biology-focused investigation
of the essential gene targets. In conjunction with this shift in focus, funding
for the fifth year commencing March 2000 will be reduced to $2.1 million.
Microcide may also receive from Pfizer milestone payments of up to $32.5 million
for each product developed during the collaboration upon the achievement of
product development milestones and, in addition, royalties on the worldwide sale
of drugs resulting from the collaboration. The first milestone payment of $1.0
million was received in February 1997 upon the identification, characterization
and sequencing of a specific number of essential genes. The Pfizer Agreements
provide Pfizer with exclusive worldwide rights to products developed during the
collaboration. The development, manufacture and sale of drugs resulting from the
collaboration will be conducted by Pfizer, subject to Microcide's right to
co-promote such products in North America. There can be no assurance that any
potential products will be discovered during the collaboration or that if
discovered, Pfizer will elect to proceed with the development of such potential
product. As a result, there can be no assurance that any of the future milestone
or royalty payments contemplated by the Pfizer Agreements will be made. See
"Targeted Genomics -- Bacterial Essential Genes Program."
PFIZER -- ANIMAL HEALTH PROGRAM
In January 1999, Microcide and Pfizer entered into agreements (the "Pfizer
Animal Health Agreements") pursuant to which they agreed to expand their
existing antibiotic research collaboration to include a focused effort on new
genetic targets for discovery of novel approaches to the control of bacterial
infections important in animal health. The term of the Pfizer Animal Health
Agreements is three years, subject to Pfizer's right to terminate earlier
beginning on January 2001 with six months' prior written notice. Pfizer is
obligated to provide Microcide with up to $630,000 per year in research support
payments during the term of the Pfizer Animal Health Agreement. Microcide may
also receive from Pfizer milestone payments for each product developed during
the collaboration upon the achievement of product development milestones and, in
addition, royalties on the worldwide sale of drugs resulting from the
collaboration. The Pfizer Animal Health Agreements provide Pfizer with exclusive
worldwide rights to products developed during the collaboration. The
development, manufacture and sale of products resulting from the collaboration
will be conducted by Pfizer. There can be no assurance that any potential
products will be discovered during the collaboration or that if discovered,
Pfizer will elect to proceed with the development of such potential product. As
a result, there can be no assurance that any of the milestone or royalty
payments contemplated by the Pfizer Animal Health Agreements will be made. See
"Targeted Genomics - Animal Health Program."
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<PAGE> 17
ICONIX
In January 1998, Microcide formed Iconix, a biotechnology company which will
seek to develop surrogate genetics and chemical informatics into a technology
platform with broad applicability to multiple human diseases. Through a private
placement, Iconix arranged a $12.5 million equity investment from institutional
investors during 1998. As of December 31, 1999, after giving effect to the
investment and including the stock option pool reserved for employees and
consultants of Iconix, Microcide holds approximately 32% of the fully diluted
outstanding equity of Iconix. In connection with this transaction, Microcide and
Iconix entered into a series of agreements covering the transfer of certain
technologies from Microcide to Iconix, joint technology development in core drug
discovery areas, an antiviral drug discovery and development program, and
support services to be provided by Microcide to Iconix for a three-year period.
Pursuant to the Core Technology Development and License Agreement, Microcide
and Iconix expect to work together over a three-year period to jointly develop
and utilize new technology in the areas of molecular diversity, high-throughput
screening, computational sciences and genome sciences. Pursuant to the Antiviral
and Surrogate Genetics Research Collaboration, Iconix plans to apply Surrogate
Genetics to a number of viral disease targets in the search for novel
inhibitors. Microcide is obligated to provide Iconix with research support
payments of up to $2.5 million over the remaining year of the collaboration
which is extendable at Microcide's option for two additional one-year periods.
Microcide is entitled to worldwide development, manufacturing and marketing
rights to antiviral products which may emerge from the collaboration and, if
specified research and development milestones are achieved, will be obligated to
pay Iconix milestone payments of up to $11.0 million for the first product and
up to $10.5 million for each subsequent product, in addition to royalties on
worldwide sales. Pursuant to the Support Services Agreement, Microcide will
provide Iconix with facilities and various business support services for which
Microcide will be reimbursed.
MANUFACTURING AND MARKETING
The Company does not have any expertise in the manufacture of commercial
quantities of drugs, and its current facilities and staff are inadequate for the
commercial production or distribution of drugs. The Company intends to rely on
its major pharmaceutical partners for the manufacturing, marketing and sale of
any products which result from such collaborations. The Company will be required
to contract with third parties for the manufacture of other products or to
acquire or build production facilities before it can manufacture any such
products itself. There can be no assurance that the Company will be able to
enter into such contractual manufacturing arrangements with third parties on
acceptable terms, if at all, or acquire or build such production facilities
itself. To date the Company has no experience with sales, marketing or
distribution. Consequently, in order to market any of its products, the Company
will be required to develop marketing and sales capabilities, either on its own
or in conjunction with others. There can be no assurance that the Company will
be able to develop any of these capabilities. In instances where the Company
relies on partners for the manufacturing, marketing and sales of any products
which result from such collaborations, there can be no assurance that these
partners will satisfactorily perform these functions.
There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The antimicrobial products which the Company is attempting to
develop will compete with a number of well-established drugs manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over existing treatment methods, and reimbursement policies
of government and third-party payors. There is no assurance that physicians,
patients or the medical community in general will accept and utilize any
products that may be developed by the Company or its collaborative partners.
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The ability of the Company and its collaborative partners to receive revenues
and income with respect to drugs, if any, developed through the use of the
Company's technology will depend, in part, upon the extent to which
reimbursement for the cost of such drugs will be available from third-party
payors, such as government health administration authorities, private health
care insurers, health maintenance organizations, pharmacy benefits management
companies and other organizations. Third-party payors are increasingly
challenging the prices charged for pharmaceutical products. There can be no
assurance that third-party reimbursement will be available or sufficient to
allow profitable price levels to be maintained for drugs developed by the
Company or its collaborative partners. The inability to maintain profitable
price levels for such drugs could adversely affect the Company's business.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
Protection of the Company's proprietary compounds and technology is essential
to the Company's business. The Company's policy is to seek, when appropriate,
protection for its lead compounds, gene discoveries, screening technologies and
certain other proprietary technology by filing patent applications in the United
States and other countries. The Company has filed 65 patent applications in the
United States, in addition to applications filed in other countries, covering
its inventions. As of March 1, 2000, the Company had been issued 14 patents in
the United States and various other patents relating to these inventions in
foreign countries.
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, there can be no assurance
that patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company in
the future. The patent position of biotechnology and pharmaceutical companies is
highly uncertain and involves many complex legal and technical issues. There can
be no assurance that patents will be granted with respect to any of the
Company's patent applications currently pending in the United States or in other
countries, or with respect to applications filed by the Company in the future.
The failure by the Company to obtain patents pursuant to the applications
referred to herein and any future applications could have a material adverse
effect on the Company. Furthermore, no assurance can be given that any patents
which may be issued to the Company will not be infringed, challenged,
invalidated or circumvented by others, or that the rights granted thereunder
will provide competitive advantages to the Company. In particular, it is
difficult to enforce patents covering methods of use of screening and other
similar technologies. Litigation to establish the validity of patents, to defend
against patent infringement claims and to assert infringement claims against
others can be expensive and time-consuming, even if the outcome is favorable to
the Company. If the outcome of patent prosecution or litigation is not favorable
to the Company, the Company could be materially adversely affected. Moreover,
because patent applications in the United States are maintained in secrecy until
patents issue, because patent applications in certain other countries generally
are not published until more than eighteen months after they are filed, because
publication of technological developments in the scientific or patent literature
often lags behind the date of such developments, and because searches of prior
art may not reveal all relevant prior inventions, the Company cannot be certain
that it was the first to invent the subject matter covered by its patent
applications or that it was the first to file patent applications for such
inventions.
The commercial success of the Company will depend in part on not infringing
patents or proprietary rights of others. There can be no assurance that the
Company will be able to obtain a license to any third-party technology it may
require to conduct its business or that if obtainable, such technology can be
licensed at reasonable cost. Failure by the Company to obtain a license to
technology that it may require to utilize its technologies or commercialize its
products may have a material adverse effect on the Company. In some cases,
litigation or other proceedings may be necessary to defend against or assert
claims of infringement, to enforce patents issued to the Company, to protect
trade secrets, know-how or other intellectual property rights owned by the
Company, or to determine the scope and validity of the proprietary rights of
third parties. Any potential litigation could result in substantial costs to and
diversion of resources by the Company and could have a material adverse impact
on the Company. There can be no assurance that any of the Company's issued or
licensed patents would ultimately be held valid or that efforts to defend any of
its patents, trade secrets, know-how or other intellectual property rights would
be successful. An adverse outcome in any such litigation or proceeding could
subject the Company to significant liabilities, require the Company to cease
using the subject technology or require the Company to license the subject
technology from the third party, all of which could have a material adverse
effect on the Company's business.
In addition to patent protection, the Company relies upon trade secrets,
proprietary know-how and continuing technological advances to develop and
maintain its competitive position. To maintain the confidentiality of its trade
secrets and proprietary information, the Company requires its employees,
consultants and collaborative partners to execute confidentiality agreements
upon the commencement of their relationships with the Company. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while in the employ of the Company will be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
in the event of any such breach or that the Company's trade secrets or
proprietary information will not otherwise become known or developed
independently by others.
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The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
As is commonplace in the biotechnology industry, the Company employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including competitors or potential competitors of the
Company. To the extent such Company employees are involved in research areas at
the Company which are similar to those areas in which they were involved at
their former employer, the Company may be subject to claims that such employees
and/or the Company have inadvertently or otherwise used or disclosed the alleged
trade secrets or other proprietary information of the former employers.
Litigation may be necessary to defend against such claims, which could result in
substantial costs and be a distraction to management, and which may have a
material adverse effect on the Company, even if the Company were successful in
defending such claims.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational pharmaceutical and biotechnology
companies, are actively engaged in activities similar to those of the Company.
Many of these companies may employ in such activities greater financial and
other resources, including larger research and development staffs and more
extensive marketing and manufacturing organizations, than the Company or its
collaborative partners. There are also academic institutions, governmental
agencies and other research organizations that are conducting research in areas
in which the Company is working. Competing technologies may be developed which
would render the Company's technologies obsolete or non-competitive. The Company
is aware of many pharmaceutical and biotechnology companies that are engaged in
efforts to treat each of the infectious diseases for which the Company is
seeking to develop therapeutic products.
The Company also expects to encounter significant competition with respect to
the drugs that it and its collaborative partners plan to develop. Companies that
complete clinical trials, obtain required Regulatory Agency approvals and
commence commercial sale of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent protection for its potential products and to
make those available selectively to pharmaceutical companies through
collaborative and licensing arrangements. There can be no assurance that
competitors of the Company will not develop competing drugs that are more
effective than those developed by the Company and its collaborative partners or
obtain regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drugs obsolete or noncompetitive. Moreover, there can be no assurance
that the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's or its collaborative
partners' ability to use the Company's technology or commercialize its or their
drugs.
GOVERNMENT REGULATION
The development, manufacture and marketing of drugs developed by the Company
or its collaborative partners are subject to regulation by numerous governmental
agencies in the United States and in other countries. The United States Food and
Drug Administration ("FDA") and comparable Regulatory Agencies in other
countries impose mandatory procedures and standards for the conduct of certain
pre-clinical testing and clinical trials and the production and marketing of
drugs for human therapeutic use. Product development and approval of a new drug
are likely to take a number of years and involve the expenditure of substantial
resources.
Any compound developed by the Company or its collaborative partners must
receive Regulatory Agency approval before it may be marketed as a drug in a
particular country. The regulatory process, which includes pre-clinical testing
and clinical trials of each compound in order to establish its safety and
efficacy, can take many years and requires the expenditure of substantial
resources. The steps required by the FDA before new drugs may be marketed in the
United States include: (i) pre-clinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (an "IND"); (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of a new drug application (an "NDA"); and (v) review and
approval of the NDA by the FDA before the drug may be shipped or sold
commercially.
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In the United States, pre-clinical testing includes both in vitro and in vivo
laboratory evaluation and characterization of the safety and efficacy of a drug
and its formulation. Laboratories involved in pre-clinical testing must comply
with FDA regulations regarding Good Laboratory Practices. Pre-clinical testing
results are submitted to the FDA as part of the IND and are reviewed by the FDA
prior to the commencement of human clinical trials. Unless the FDA objects to an
IND, the IND becomes effective 30 days following its receipt by the FDA. There
can be no assurance that submission of an IND will result in the commencement of
human clinical trials.
Clinical trials, which involve the administration of the investigational drug
to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with the FDA's Good Clinical Practices under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, biodistribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an acceptable
safety profile in the targeted patient population, Phase III clinical trials are
initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, pre-clinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Data obtained from pre-clinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent Regulatory Agency
approval. In addition, delays or rejections may be encountered based upon
changes in Regulatory Agency policy during the period of drug development and/or
the period of review of any application for Regulatory Agency approval for a
compound. Delays in obtaining Regulatory Agency approvals could adversely affect
the marketing of any drugs developed by the Company or its collaborative
partners, impose costly procedures upon the Company's and its collaborative
partners' activities, diminish any competitive advantages that the Company or
its collaborative partners may attain and adversely affect the Company's ability
to receive royalties. There can be no assurance that, even after such time and
expenditures, Regulatory Agency approvals will be obtained for any compounds
developed by or in collaboration with the Company. Moreover, if Regulatory
Agency approval for a drug is granted, such approval may entail limitations on
the indicated uses for which it may be marketed that could limit the potential
market for any such drug. Furthermore, approved drugs and their manufacturers
are subject to continual review, and discovery of previously unknown problems
with a drug or its manufacturer may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. In addition,
Regulatory Agency approval of prices is required in many countries and may be
required for the marketing of any drug developed by the Company or its
collaborative partners in such countries.
Timetables for the various phases of clinical trials and NDA approval cannot
be predicted with any certainty. The Company, its collaborative partners or the
FDA may suspend clinical trials at any time if it is believed that individuals
participating in such trials are being exposed to unacceptable health risks.
Even assuming that clinical trials are completed and that an NDA is submitted to
the FDA, there can be no assurance that the NDA will be reviewed by the FDA in a
timely manner or that once reviewed, the NDA will be approved. The approval
process is affected by a number of factors, including the severity of the
targeted indications, the availability of alternative treatments and the risks
and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance
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programs to monitor the side effects of the drug. Results of post-marketing
programs may limit or expand the further marketing of the drug. Further, if
there are any modifications to the drug, including changes in indication,
manufacturing process or labeling, an NDA supplement may be required to be
submitted to the FDA.
Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other federal, state
or local agencies.
There can be no assurance that the regulatory framework described above will
not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners may be, primarily responsible for pre-clinical testing,
clinical trials, regulatory approvals, manufacturing and commercialization of
drugs, the ability to obtain and the timing of regulatory approvals are not
within the control of the Company.
Prior to the commencement of marketing a product in other countries, approval
by the Regulatory Agencies in such countries is required, whether or not FDA
approval has been obtained for such product. The requirements governing the
conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than the
time required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country has its own
procedures and requirements.
The Company is also subject to regulation under other federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
The drug development process and regulatory framework for animal drugs are
similar in many respects to that for human therapeutics. In the United States,
the Center for Veterinary Medicine of the FDA is charged with assuring that a
new animal drug will not be introduced into interstate commerce unless it is the
subject of an approved new animal drug application ("NADA"). Like an NDA, an
NADA must be supported by proof that the drug is safe and effective. An NADA
application must include reports of adequate and well-controlled investigations.
Procedures for the initiation of studies on an investigational new animal drug
are similar to those for an IND. Compliance with Good Laboratory Practices and
Good Clinical Practices is required.
EMPLOYEES
As of December 31, 1999 the Company had 109 full-time, regular employees, 42
of whom hold Ph.D. degrees and 24 of whom hold other advanced degrees.
Approximately 94 of the 109 employees are engaged in scientific activities and
15 are engaged in general, managerial and administrative functions. None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company experienced work stoppages. The Company considers its relations with
its employees to be good.
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SCIENTIFIC CONSULTANTS
The Company supplements its internal scientific staff with consulting
arrangements with a number of leading academic and industrial scientists and
clinicians. Microcide's Scientific Advisory Board formally meets once or twice
per year to review the Company's programs and provide general scientific
guidance and direction. On a more frequent basis, the Company utilizes
consultants either in small focused groups or as individuals on an ad hoc basis
to provide detailed scientific guidance in such areas as Genetics and Molecular
Biology, Chemistry, Clinical Microbiology/Pharmacology and Molecular
Diversity/Natural Products.
Many of the Company's consultants have purchased shares of Common Stock or
have been granted options and have written contracts with the Company pursuant
to which they are required to provide to the Company a minimum number of days
per year of consulting services. In 1999, the Company paid its consultants
approximately $231,000 in the aggregate, as compared to approximately $407,000
in 1998 and approximately $490,000 in 1997.
None of the consultants is an employee of the Company. Most of the
consultants have other commitments to, or consulting or advisory contracts with,
their employers and other institutions.
RISKS AND UNCERTAINTIES
THE FOLLOWING IS A SUMMARY DESCRIPTION OF SOME OF THE MANY RISKS WE FACE IN OUR
BUSINESS. YOU SHOULD CAREFULLY REVIEW THESE RISKS IN EVALUATING OUR BUSINESS IN
ADDITION TO CONSIDERING THE OTHER INFORMATION CONTAINED IN THIS REPORT. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS OR
FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, AND THIS COULD CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
WE MAY FAIL TO SUCCESSFULLY DEVELOP PHARMACEUTICAL PRODUCTS.
Our first potential pharmaceutical product has only recently entered clinical
development, commencing Phase I Clinical Trials in November 1999. Our other
potential products are in the pre-clinical or research stage. Our potential
products will require significant additional research and development efforts
before we can sell them. These efforts include extensive pre-clinical and
clinical testing prior to submission to the FDA or other regulatory authority.
Pre-clinical and clinical testing will likely take several years. After
submission, such potential products will be subject to lengthy regulatory
review. We cannot predict with accuracy the time required to commercialize new
pharmaceutical products.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. We do not expect any of our potential
products to be commercially available for a number of years, if at all.
Pharmaceuticals that appear to be promising at early stages of development may
not reach the market for a number of reasons including the following:
- We or our collaborators may not successfully complete our
research and development efforts;
- Any pharmaceuticals we or our collaborators develop may be found
to be ineffective or to cause harmful side effects during
pre-clinical testing or clinical trials;
- We may fail to obtain required regulatory approvals for any
products we develop;
- We may be unable to manufacture enough of any potential products
at an acceptable cost and with appropriate quality;
- Our products may not be competitive with other existing or future
products; and
- Proprietary rights of third parties may prevent us from
commercializing our products.
WE MAY BE UNABLE TO MAINTAIN OUR CURRENT CORPORATE COLLABORATIONS OR ENTER INTO
NEW COLLABORATIONS, WHICH COULD DELAY DEVELOPMENT OF OUR POTENTIAL PRODUCTS.
Our strategy for enhancing our research and development capability and
funding, in part, our capital requirements involves entering into collaboration
agreements with major pharmaceutical companies. We have entered into such
collaboration agreements with J&J, Daiichi and Pfizer. Under such agreements,
our collaborative partners are responsible for:
- Selecting which compounds discovered in the collaboration will
proceed into subsequent development, if any;
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- Conducting pre-clinical testing, clinical trials and obtaining
required approvals for such potential products; and
- Manufacturing and commercializing any such approved products.
We cannot control the timing of such actions or the amount of resources
devoted to such activities by our partners. In addition, these agreements are
subject to cancellation or the election not to extend by our partners. As a
result, our receipt of revenue (whether in the form of continued research
funding, product development milestones, or royalties on sales) depends upon the
decisions made and the actions taken by our partners. Compounds that we may
discover may be viewed by our collaborative partners as competitive with such
partners products or potential products, and therefore such partner may elect
not to proceed with the development of our potential product. Our partners are
free to pursue their own existing or alternative technologies to develop
products in preference to our potential products. We cannot be certain that our
interests will continue to coincide with those of our partners, or that
disagreements concerning our rights, technology, or other proprietary interests
will not arise with our partners.
A large portion of our revenues to date have resulted from our
collaborations. We intend to continue to rely on our collaborations to fund a
substantial portion of our research and development activities over the next
several years. If our existing partners do not extend our collaborations or if
we are unable to enter into new collaborations, the development and
commercialization of our potential products may be delayed. In addition, we may
be forced to seek alternative sources of financing for such product development
and commercialization activities.
OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS WILL REQUIRE SUBSTANTIAL ADDITIONAL
FUNDING.
The development of our potential pharmaceutical products will require
substantially more money than we currently have. We intend to seek to raise such
additional funding from sources including other collaborative partners and
through public or private financings involving the sale of equity or debt
securities. We cannot be certain that any financings will be available when
needed, or if available will be on acceptable terms. Funding from collaborative
partners could limit our ability to control the research, development and
commercialization of potential products, and could limit our revenues in profits
from such products, if any. Pursuant to such agreements we may be required to
give up rights to products or technologies that we would otherwise seek to
develop or commercialize ourselves. Any additional equity financing will result
in dilution to our current shareholders. If we fail to secure sufficient
additional funding we will have to delay or terminate some or all of our drug
discovery and development programs.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND EXPECT TO CONTINUE TO INCUR
LOSSES FOR THE NEXT SEVERAL YEARS.
We have incurred substantial net losses in every year since our inception in
December 1992. We had net losses of $4.6 million in 1997, $9.8 million in 1998,
and $10.7 million in 1999. We had an accumulated deficit of $39.2 million
through December 31, 1999. We expect to continue to incur operating losses over
the next several years.
Substantially all of our revenues to date have resulted from license fees,
research support and milestone payments under our collaborative agreements. We
will not receive revenues or royalties from drug sales until we or our
collaborative partners successfully complete clinical trials with regard to a
drug candidate, obtain regulatory approval for such drug candidate, and
successfully commercialize the drug. We do not expect to receive revenues or
royalties from sales of drugs for a number of years, if at all. If we fail to
achieve sufficient revenues to become profitable or sustain profitability, we
may be unable to continue operations.
OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN AND WE MAY NOT SUCCEED IN IDENTIFYING
ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.
We are developing a gene function based technology platform and other
proprietary information to attempt to identify and commercialize novel
antibiotics. To date this technology has not identified any compounds that have
demonstrated clinical benefits. We cannot be certain that this or any other
technology we may develop will allow us to identify drug candidates that may
have clinical benefits. The failure to identify and develop new drug candidates
will have a material adverse effect on our business.
WE MAY FAIL TO SATISFY SAFETY AND EFFICACY REQUIREMENTS IN OUR CLINICAL TRIALS
FOR OUR POTENTIAL PRODUCTS.
Either we or our collaborators must show through pre-clinical studies and
clinical trials that each of our pharmaceutical products is safe and effective
in humans for each indication before obtaining regulatory clearance from the FDA
for the commercial sale of that pharmaceutical. If we fail to adequately show
the safety and effectiveness of a pharmaceutical, regulatory approval could be
delayed
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or denied. The results from pre-clinical studies and early clinical trials are
often different than the results that are obtained in large-scale testing. We
cannot be certain that we will show sufficient safety and effectiveness in our
clinical trials that would allow us to obtain the needed regulatory approval. A
number of companies in the pharmaceutical industry, including biotechnology
companies, have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials.
Any drug is likely to produce some level or toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. If we observe
unacceptable toxicities or side effect, we, our collaborators or regulatory
authorities may interrupt, limit, delay or halt the development of the drug. In
addition, these unacceptable toxicities or side effects could prevent approval
by the FDA or foreign regulatory authorities for any or all indications.
We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and other
required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to commercially manufacture and sell our
drug products. Even if we obtain regulatory approval, we may be required to
continue clinical studies even after we have started selling a pharmaceutical.
In addition, identification of certain side effects after a drug is on the
market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional pre-clinical
testing or clinical trials and changes in labeling of the product. This could
delay or prevent us from generating revenues from the sale of that drug or cause
our revenues to decline.
If regulatory approval is obtained, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we, our collaborators, or any third party that we use to
manufacture the drug will be required to adhere to regulations setting forth
current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we, our collaborators, or our third party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA before obtaining marketing
approval.
Failure to comply with the FDA or other relevant regulatory requirements may
subject us to administrative or legally imposed restrictions. These include:
warning letters, civil penalties, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending NDAs, or supplements to approved NDAs.
WE DEPEND ON EFFECTIVELY PROTECTING OUR INTELLECTUAL PROPERTY.
Our success depends in part on our ability to establish, protect and enforce
our proprietary rights relating to our lead compounds, gene discoveries,
screening technology and certain other proprietary technology. We have filed
approximately 65 patent applications in the United States, in addition to
applications filed in other countries, in order to protect lead compounds, gene
discoveries and screening technology, and 14 United States patents have been
issued to date on such applications. The patent position of biotechnology and
pharmaceutical companies is highly uncertain and involves many complex legal and
technical issues. We cannot be certain that patents will be granted with respect
to any of our patent applications currently pending in the United States or in
other countries, or with respect to applications filed in the future. Our
failure to obtain patents pursuant to our current or future applications could
have a material adverse effect on our business. Furthermore, we cannot be
certain that any patents that may be issued to us will not be infringed,
challenged, invalidated or circumvented by others, or that the rights granted
thereunder will provide competitive advantages to us. In particular, it is
difficult to enforce patents covering methods of use of screening and other
similar technologies. Litigation to establish the validity of patents, to defend
against copatent infringement claims and to assert infringement claims against
others can be expensive and time-consuming, even if the outcome is favorable to
us. If the outcome of patent prosecution or litigation is not favorable to us,
our business could be materially adversely affected.
Our commercial success also depends on our ability to operate without
infringing patents and proprietary rights of third parties. There can be no
assurance that our products will not infringe on the patents or proprietary
rights of others. We may be required to
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obtain licenses to patents or other proprietary rights of others. Such licenses
may not be available on terms acceptable to us, if at all. The failure to obtain
such licenses could delay or prevent our collaborative partners' activities,
including the development, manufacture or sale of drugs requiring such licenses.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and technological advances which we seek to protect, in part, by
confidentiality agreements with our collaborative partners, employees, and
consultants. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach, or that our
trade secrets, proprietary know-how and technological advances will not
otherwise become known or be independently discovered by others.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
We operate in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase. Many of our competitors have substantially greater
financial, technical and personnel resources than we have. Although we believe
that we have identified new and distinct approaches to drug discovery, there are
other companies with drug discovery programs, at least some of the objectives of
which are the same as or similar to ours. Competing technologies may be
developed which would render our technologies obsolete or non-competitive. We
are aware of many pharmaceutical and biotechnology companies that are engaged in
efforts to treat each of the infectious diseases for which we are seeking to
develop therapeutic products. There can be no assurance that our competitors
will not develop competing drugs that are more effective than those developed by
us and our collaborative partners or obtain regulatory approvals of their drugs
more rapidly than we and our collaborative partners, thereby rendering our and
our collaborative partners' drugs obsolete or noncompetitive. Moreover, there
can be no assurance that our competitors will not obtain patent protection or
other intellectual property rights that would limit our and our collaborative
partners' ability to use our technology or commercialize our or their drugs.
OUR POTENTIAL PRODUCTS MAY NOT BE ACCEPTABLE IN THE MARKET OR ELIGIBLE FOR THIRD
PARTY REIMBURSEMENT.
Any products successfully developed by us or our collaborative partners may
not achieve market acceptance. The antibiotic products which we are attempting
to develop will compete with a number of well-established traditional antibiotic
drugs manufactured and marketed by major pharmaceutical companies. The degree of
market acceptance of any of our products will depend on a number of factors,
including:
- the establishment and demonstration in the medical community of
the clinical efficacy and safety of such products,
- the potential advantage of such products over existing treatment
methods, and
- reimbursement policies of government and third-party payors.
Physicians, patients or the medical community in general may not accept or
utilize any products that may be developed by us or our collaborative partners.
Our ability to receive revenues and income with respect to drugs, if any,
developed through the use of our technology will depend, in part, upon the
extent to which reimbursement for the cost of such drugs will be available from
third-party payors, such as government health administration authorities,
private health care insurers, health maintenance organizations, pharmacy
benefits management companies and other organizations. Third-party payors are
increasingly challenging the prices charged for pharmaceutical products. If
third-party reimbursement was not available or sufficient to allow profitable
price levels to be maintained for drugs developed by us or our collaborative
partners, it could adversely affect our business.
WE DO NOT HAVE MANUFACTURING, MARKETING OR SALES CAPABILITIES.
We do not have any experience in the manufacture of commercial quantities of
drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our collaborative
partners for the manufacturing, marketing and sales of any products which result
from such collaborations. The current third party manufacturer of our
beta-lactam potential product has in the past encountered difficulties with the
manufacture of such compound in sufficient quantities for clinical trial
purposes. Manufacturers often encounter difficulties in scaling up to
manufacture commercial quantities of pharmaceutical products. We cannot be
certain that our current or any other manufacturer will not encounter similar
delays in the scale up to manufacture this or any other compound in commercial
quantities in the future.
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<PAGE> 26
We will be required to contract with third parties for the manufacture of our
products or to acquire or build production facilities before we can manufacture
any such products. There can be no assurance that we will be able to enter into
such contractual manufacturing arrangements with third parties on acceptable
terms, if at all, or acquire or build such production facilities ourselves.
To date we have no experience with sales, marketing or distribution. In order
to market any of our products, we will be required to develop marketing and
sales capabilities, either on our own or in conjunction with others. We cannot
be certain that we will be able to develop any of these capabilities.
HEALTH CARE REFORM MEASURES MAY IMPACT PHARMACEUTICAL PRICING.
The levels of revenue and profitability of pharmaceutical companies may be
affected by continuing governmental efforts to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is already subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Cost control initiatives could decrease the price
that we or our collaborative partners receive for any products which we or they
may develop in the future which would adversely effect on our business. Further,
to the extent that such proposals or initiatives have a material adverse effect
on our collaborative partners or potential collaborative partners, our ability
to commercialize our potential products may be materially adversely affected.
WE MAY EXPERIENCE PRODUCT LIABILITY CLAIMS.
We face an inherent business risk of exposure to potential product liability
claims in the event that drugs, if any, developed through the use of our
technology are alleged to have caused adverse effects on patients. Such risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. We do not carry product
liability insurance. We will, if appropriate, seek to obtain product liability
insurance with respect to drugs developed by us and our collaborative partners.
However, we may not be able to obtain such insurance. Even if such insurance is
obtainable, it may not be available at a reasonable cost or in a sufficient
amount to protect us against liability.
WE DEPEND ON KEY PERSONNEL.
We are highly dependent on its management and scientific staff, including
James E. Rurka, our President and Chief Executive Officer, George H. Miller,
Ph.D., our Senior Vice President-Research and Development, and on our other
executive officers. Loss of the services of any key individual could have an
adverse effect on the Company. We do not carry key-man life insurance on any of
our executives. We believe that our future success will depend, in part, on our
ability to attract and retain highly talented managerial and scientific
personnel and consultants. We face intense competition for such personnel from,
among others, biotechnology and pharmaceutical companies, as well as academic
and other research institutions. We cannot be certain that we will be able to
attract and retain the personnel we require on acceptable terms.
WE ARE SUBJECT TO STRINGENT REGULATIONS RELATING TO HAZARDOUS MATERIALS.
As with many biotechnology and pharmaceutical companies, our activities
involve the use of radioactive compounds and hazardous materials. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. Any violation of, and the cost of compliance with, these
regulations could materially adversely affect our operations. We are subject to
periodic inspections for possible violations of any environmental or safety law
or regulation.
WE HAVE CERTAIN ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS.
Certain provisions of our Restated Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of our company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of our Common Stock. Certain of these provisions
allow us to issue Preferred Stock without any vote or further action by the
stockholders, provide for staggered elections of our Board of Directors and
specify procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. None of these
provisions provide for cumulative voting in the election of directors. Certain
provisions of Delaware law applicable to us could also delay or make more
difficult a merger, tender offer or proxy contest involving us, including
Section 203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business
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<PAGE> 27
combination with any stockholder owning fifteen percent or more of the
Company's outstanding voting stock ("interested stockholder") for a period of
three years from the date a stockholder becomes an interested stockholder unless
certain conditions are met. The possible issuance of Preferred Stock, the
procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a change
in control of Microcide, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of our
Common Stock. These provisions could also limit the price that investors might
be willing to pay in the future for shares of our Common Stock.
ITEM 2. PROPERTIES
The Company has two facilities consisting of approximately 66,500 square feet
of leased laboratory and office space in Mountain View, California under a lease
agreement expiring in 2005. The Company has also entered into leases through
2005 on two additional buildings in Mountain View, comprising a total of
approximately 35,500 square feet; one of these buildings, comprising
approximately 18,000 square feet, has been sublet to another company through
April 30, 2001. The other building has been outfitted principally as office
space to meet the needs of Microcide and Iconix. From the Company's inception
through December 31, 1999, the Company has made capital expenditures aggregating
approximately $10.4 million in constructing and equipping its Mountain View
facilities. The Company believes that its facilities are sufficient to
accommodate the anticipated research and administrative needs of the Company
through 2001. Thereafter, the Company believes that it will be able to secure
adequate additional facilities for its continued operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol MCDE. The following table sets forth for the periods indicated
the high and low sale price for the Common Stock. The Company's stock was first
publicly traded on May 15, 1996.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR 1999
<S> <C> <C>
4th Quarter........................ $ 9.25 $6.38
3rd Quarter........................ 7.34 4.63
2nd Quarter........................ 4.75 3.82
1st Quarter........................ 4.50 3.97
FISCAL YEAR 1998
4th Quarter........................ $ 5.75 $3.69
3rd Quarter........................ 6.69 3.81
2nd Quarter........................ 9.63 6.69
1st Quarter........................ 10.38 7.25
</TABLE>
As of February 29, 2000, there were 145 holders of record of Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $ 9,448 $ 11,181 $ 14,894 $ 11,273 $ 4,985
Net loss.............................. (10,746) (9,758) (4,602) (670) (3,516)
Basic and diluted net loss per share.. (0.97) (0.89) (0.43) (0.10) (4.14)
Shares used in computing basic and
diluted net loss per share........... 11,085 10,962 10,817 7,034 849
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments....... $24,868 $33,192 $40,387 $47,508 $ 8,517
Working capital................ 21,447 30,269 37,235 42,542 6,388
Total assets................... 33,831 44,490 51,782 56,826 13,493
Long-term obligations.......... 2,164 3,039 450 952 2,075
Total stockholders' equity..... 27,803 37,938 46,896 50,574 9,151
</TABLE>
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<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Microcide 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.
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.
Pursuant to the Company's collaborative agreements with 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 samples to other pharmaceutical and
biotechnology companies for use in their research programs.
Through December 31, 1999, the Company had received in the aggregate $49.7
million in license fees, milestone payments and research support payments under
the Collaborative Agreements. Research support funding for Daiichi and J&J
concluded at the end of the first and fourth quarters of 1999, respectively. The
March 1996 Pfizer collaboration was amended and funding for the fifth year
effective March 2000 will be at a lower amount. Assuming that the Pfizer
Agreements are not terminated prior to their scheduled expiration, the Company
will be entitled to receive an additional $3.4 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, 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. The Company does not expect to receive
royalties based upon net sales of drugs for a significant number of years, if at
all.
In 1998, the Company formed Iconix Pharmaceuticals, Inc. Iconix is a
biotechnology company which will seek to develop surrogate genetics and chemical
informatics into a technology platform with broad applicability to multiple
human diseases. Through a private placement, Iconix arranged a $12.5 million
equity investment from institutional investors during 1998. As of December 31,
1999, after giving effect to the investment and including the stock option pool
reserved for employees and consultants of Iconix, Microcide holds approximately
32% of Iconix's outstanding equity on a fully diluted basis. Microcide accounts
for its investment using the equity method of accounting and since Microcide's
investment has a zero book basis, the losses of Iconix do not impact Microcide's
statement of operations. Pursuant to the Core Technology Development and License
Agreement, Microcide and Iconix expect to work together through January 14, 2001
to jointly develop and utilize new technology in the areas of molecular
diversity, high-throughput screening, informatics and genome sciences. Pursuant
to the Support Services Agreement, Microcide provides Iconix with facilities and
various business support services for which the Company is reimbursed. In
addition, through the Antiviral and Surrogate Genetics Research Agreement,
Microcide is obligated to provide Iconix with research support payments of up to
$6.1 million during 1998, 1999 and 2000. Microcide has made payments to Iconix
of $1.5 million during 1999, and $1.1 million during 1998. Microcide is entitled
to worldwide development, manufacturing and marketing rights to antiviral
products which may emerge from the collaboration and, if specified research and
development milestones are achieved, will be obligated to pay Iconix milestone
payments of up to $11.0 million for the first product and up to $10.5 million
for each subsequent product, in addition to royalties on worldwide sales.
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<PAGE> 30
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 Report contains forward-looking statements which involve risks and
uncertainties, including but not limited to statements concerning the
continuation of the Company's Collaborative Agreements with its strategic
partners and the continued receipt of research support payments and potential
receipt of milestone payments thereunder, the successful development and
commercialization of drugs and the receipt of royalties thereon or sales revenue
therefrom, and the expected period of time the Company's existing financial
resources will enable the Company to maintain its current and planned future
operations. The Company's actual results and timing of certain events may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause a difference include risks inherent in the Company's
business and the pharmaceutical industry in general, such as uncertainties with
regard to the successful continuation of the research and development activities
under the Collaborative Agreements and in the Company's own programs, the
possible decision of a strategic partner to cancel a collaborative program, the
achievement of research and product milestones, the successful completion of
clinical trials and obtaining of required regulatory approvals, and the
achievement of product commercialization goals, as well as other factors set
forth in this Form 10-K.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Total revenues decreased 16% from $11.2 million in 1998 to $9.4
million in 1999. The Company received a $2.0 million milestone payment from the
J&J research collaboration earned in conjunction with commencement of
cephalosporin Phase I clinical trials in 1999. In comparison, there were no
milestone revenues earned in 1998. Research revenues decreased from $11.1
million in 1998 to $7.1 million in 1999 principally due to the conclusion of the
extended Daiichi research collaboration at the end of the first quarter of 1999,
and reduced research funding during the extension period of the J&J
collaboration, offset by revenues from the initiation of research under the
Pfizer Animal Health agreement. Other revenues, consisting of the sale of
molecular diversity samples to other pharmaceutical and biotechnology companies
for use in their research programs, were $335,000 in 1999 as compared to $40,000
in 1998.
Research and Development Expenses. The Company's research and development
expenses decreased 8% from $18.8 million in 1998 to $17.3 million in 1999. The
decrease was due primarily to lower compensation expenses resulting from a
reduction in headcount, lower spending for research supplies, materials and
compounds, and lower spending for outside services, partially offset by higher
research support expenses associated with the Company's antiviral discovery and
joint technology programs with Iconix Pharmaceuticals.
General and Administrative Expenses. General and administrative expenses were
$4.0 million in 1999, the same as in 1998.
Interest and Other Income and Expense. Interest income decreased from $1.9
million in 1998 to $1.4 million in 1999 as a result of a decrease in average
investment balances. Interest expense increased from $32,000 to $345,000 as a
result of borrowing $4.4 million in December 1998 under a three-year debt
facility bearing an interest rate of approximately 11%.
Net Loss. Net loss increased from $9.8 million in 1998 to $10.7 million in
1999 as a result of the items discussed above.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues decreased from $14.9 million in 1997 to $11.2
million in 1998. There were no license and milestone revenues earned in 1998 as
compared to $1.0 million in 1997 when a milestone fee was received from Pfizer
related to identifying, validating and sequencing an agreed upon number of
bacterial essential genes. Research revenues decreased from $12.2 million in
1997 to $11.1 million in 1998 principally due to lower revenues recognized under
the Daiichi and J&J collaborations relative to the prior year. Other revenues,
consisting of the sale of molecular diversity samples to other pharmaceutical
and biotechnology companies for use in their research programs, were $40,000 in
1998 as compared to $1.7 million in 1997.
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<PAGE> 31
Research and Development Expenses. The Company's research and development
expenses increased 5% from $17.9 million in 1997 to $18.8 million in 1998. This
increase was due primarily to higher compensation and other expenses associated
with an increase in headcount to support the Company's corporate collaborations
and its internal programs, higher spending for research supplies and materials,
and the initiation of research support to Iconix Pharmaceuticals related to the
Viral Genomics Program, partially offset by decreases in molecular diversity
purchases.
General and Administrative Expenses. General and administrative expenses
decreased approximately 3% from $4.1 million in 1997 to $4.0 million in 1998.
This decrease was primarily due to the sharing of administrative costs with
Iconix.
Interest Income and Expense. Interest income decreased from $2.6 million in
1997 to $1.9 million in 1998 as a result of a decrease in average investment
balances. Interest expense declined from $144,000 to $32,000 as a result of the
repayment of capital lease obligations.
Net Loss. Net loss increased from $4.6 million in 1997 to $9.8 million in
1998 as a result of the items discussed above.
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 through equipment financing. As of December 31, 1999, the Company
had received $64.8 million from the sale of equity and $49.7 million in cash
from license and milestone fees and research support payments under the
Collaborative Agreements.
Cash, cash equivalents and short-term investments at December 31, 1999 were
$24.9 million compared to $33.2 million at December 31, 1998. This decrease was
due primarily to the net loss during 1999 and the repayment of $1.1 million on
its three-year debt obligations, offset by additional debt financing of $435,000
and proceeds from the sale of Common Stock of $210,000. Net cash used in the
Company's operations was $7.3 million in 1999 in contrast to net cash used by
the Company's operations of $7.5 million in 1998.
During 1999, the Company invested $473,000 in capital expenditures, primarily
research equipment, as compared to $3.1 million in 1998 which consisted
primarily of facilities expansion costs. The Company expects its capital
expenditures in 2000 to be similar to 1999 spending levels. At December 31,
1999, the Company had debt obligations of $3.3 million. The Company made
principal payments under its debt obligations of $1.1 million in 1999, and the
remaining capital leases of $41,000 at December 31, 1998 were repaid in February
1999.
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 2000. 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.
The Company has not generated significant taxable income to date. At December
31, 1999, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $31.7 million. Because the
Company has experienced ownership changes, future utilization of the
carryforwards may be limited in any one fiscal year pursuant to Internal Revenue
Code regulations. The carryforwards expire at various dates beginning in 2008
through 2019 if not utilized. As a result of the annual limitation, a portion of
these carryforwards may expire before becoming available to reduce the Company's
federal income tax liabilities.
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
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<PAGE> 32
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.
In late 1999, the Company completed its assessment, repair, upgrade and
replacement of its computer systems and research equipment with embedded chips
or software. The Company 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.
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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). The Company is required to adopt SFAS 133 for the year ending December
31, 2001. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments. Microcide does
not currently engage in hedging activities; adoption of SFAS 133 is expected to
have no material impact on Microcide's financial condition and results of
operations.
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 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.
ITEM 7A. 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
December 31, 1999 was $20.5 million, with a weighted-average maturity of 211
days and a weighted-average interest rate of 5.66%. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Company's Notice
of 2000 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days after December 31, 1999. Such information is incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. List of Financial Statements. The following financial statements of
Microcide Pharmaceuticals, Inc. and Report of Ernst & Young LLP,
Independent Auditors, are included in this report:
Balance Sheets as of December 31, 1999 and 1998, Statements of Operations
for the years ended December 31, 1999, 1998 and 1997, Statement of
Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997,
Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997 and Notes to Financial Statements.
2. List of all Financial Statement schedules:
(i) All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or notes
thereto.
3. List of exhibits required by Item 601 of Regulation S-K.
The following exhibits are filed as part of, or incorporated by reference into,
this report.
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
<S> <C>
2.1 Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) Series A
Preferred Stock Purchase Agreement. (2)
2.2* Core Technology Development and License Agreement by and between
Microcide Pharmaceuticals, Inc. and Iconix Pharmaceuticals, Inc.
(formerly EpiGenix, Inc.) (2)
2.3* Antiviral and Surrogate Genetics Research Collaboration
Agreement by and between Microcide Pharmaceuticals, Inc. and
Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) (2)
3.2 Restated Certificate of Incorporation of the Registrant. (1)
3.5 Bylaws of the Registrant. (1)
4.2 Form of Common Stock Certificate. (1)
4.3 Series A Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated May 10,
1993. (1)
4.4 Series B Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated May 10,
1993. (1)
4.5 Series C Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated June
10, 1994. (1)
4.6 Series B Preferred Warrant Agreement between Comdisco, Inc. and
the Registrant dated September 1, 1993. (1)
4.7 Series C Preferred Warrant Agreement between Comdisco, Inc. and
the Registrant dated September 1, 1993. (1)
10.1 Information and Registration Rights Agreement, dated June 29,
1994 as amended. (1)
10.2 1993 Amended Incentive Stock Plan. (1)
10.3 1996 Employee Stock Purchase Plan. (1)
10.4 1996 Director Option Plan. (1)
10.5 401(k) Plan. (1)
10.6* Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
Research Institute dated October 24, 1995. (1)
10.7* Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
Research Institute dated October 24, 1995. (1)
10.8* Joint Research Agreement between the Registrant and Daiichi
Pharmaceutical Co., Ltd. dated November 6, 1995. (1)
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
<S> <C>
10.9* Collaborative Research Agreement between the Registrant and
Pfizer Inc dated March 1, 1996.(1)
10.10* License and Royalty Agreement between the Registrant and Pfizer
Inc dated March 1, 1996. (1)
10.11 Master Lease Agreement between Dominion Ventures, Inc. and the
Registrant, dated May 10, 1993, as amended on June 10, 1994 and
November 22, 1994. (1)
10.12 Master Lease Agreement between the Registrant and Comdisco, Inc.
dated September 1, 1993. (1)
10.13 Lease Agreement between the Registrant and Portola Land Company
dated April 1993. (1)
10.14 Form of Indemnification Agreement between the Registrant and its
Officers and Directors. (1)
10.15 Employment Agreement dated January 31, 1994 between the
Registrant and James E. Rurka. (1)
10.16 Employment Agreement dated December 23, 1992 between the
Registrant and Keith A. Bostian, Ph.D. (1)
10.17 Lease Agreement commencing November 1, 1996 between the
Registrant and Logue Investments L.P., a California limited
partnership. (3)
10.18* Synthetic Compound Purchase Agreement between the Registrant and
Daiichi Pharmaceutical Co., Ltd. dated June 25, 1997. (4)
10.19 Sublease agreement between the Registrant, Quickturn Design
Systems, Inc. and Portola Land Co. dated September 1997. (5)
10.20 Sub-sublease agreement between the Registrant, Alpha Blox
Corporation, Quickturn Design Systems, Inc. and Portola Land Co.
dated September 1997. (5)
10.21 Consulting Agreement dated January 14, 1998 between the
Registrant and Keith Bostian, Ph.D. (6)
10.22 Lease Agreement between the Registrant and Portola Land Co.
dated May 11, 1998. (7)
10.23 Promissory Note between the Registrant and Heller Financial
Leasing, Inc. dated December 22, 1998. (9)
10.24 Security Agreement between the Registrant and Heller Financial
Leasing, Inc. dated December 22, 1998. (9)
10.25+ Amendment of Research and License Agreement between the
Registrant and Ortho Pharmaceutical Corporation and the R.W.
Johnson Pharmaceutical Research Institute dated October 23,
1998. (9)
10.26+ Collaborative Research Agreement between the Registrant and
Pfizer Inc dated January 13, 1999. (9)
10.27+ License and Royalty Agreement between the Registrant and Pfizer
Inc dated January 13, 1999. (9)
10.28 Preferred Shares Rights Agreement dated February 2, 1999 between
the Registrant and Chase Mellon Shareholder Services, L.L.C. (8)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 31).
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference to the same-numbered exhibit in Registrant's
Registration Statement on Form S-1, registration number 333-2400, filed with
the Securities and Exchange Commission and dated May 14, 1996.
(2) Incorporated by reference to the same-numbered exhibit in Registrant's Form
8-K filed with the Securities and Exchange Commission and dated January 29,
1998.
(3) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended September 30, 1996, filed with the Securities and
Exchange Commission and dated November 8, 1996.
(4) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended June 30, 1997, filed with the Securities and
Exchange Commission and dated August 14, 1997.
(5) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended September 30, 1997, filed with the Securities and
Exchange Commission and dated November 14, 1997.
(6) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-K for the fiscal year ended December 31, 1997, filed with the Securities
and Exchange Commission and dated March 31, 1998.
(7) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended June 30, 1998, filed with the Securities and
Exchange Commission and dated August 14, 1998.
(8) Incorporated by reference to Exhibit 1 in Registrant's Form 8-A filed with
the Securities and Exchange Commission and dated February 4, 1999.
(9) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-K for the fiscal year ended December 31, 1998, filed with the Securities
and Exchange Commission and dated March 31, 1999.
* Confidential Treatment granted
+ Confidential Treatment requested
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) See part a(3) above.
(d) All schedules have been omitted because the information required to be set
forth therein is not applicable.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MICROCIDE PHARMACEUTICALS, INC.
a Delaware Corporation
By: /s/ JAMES E. RURKA
--------------------------------------------
James E. Rurka
President and Chief Executive Officer
Date: March 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James E. Rurka and, jointly and severally his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendment to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES E. RURKA President, Chief Executive Officer, Acting March 29, 2000
- -------------------------------------------- Chief Financial Officer and Director
James E. Rurka (Principal Executive Officer)
/s/ JOHN P. WALKER Chairman of the Board of Directors March 29, 2000
- --------------------------------------------
John P. Walker
/s/ KEITH A. BOSTIAN, Ph.D. Director March 29, 2000
- --------------------------------------------
Keith A. Bostian, Ph.D.
/s/ DANIEL L. KISNER, M.D. Director March 29, 2000
- --------------------------------------------
Daniel L. Kisner, M.D.
/s/ HUGH Y. RIENHOFF, JR., M.D. Director March 29, 2000
- --------------------------------------------
Hugh Y. Rienhoff, Jr., M.D.
/s/ DAVID SCHNELL, M.D. Director March 29, 2000
- --------------------------------------------
David Schnell, M.D.
/s/ MARK B. SKALETSKY Director March 29, 2000
- --------------------------------------------
Mark B. Skaletsky
</TABLE>
36
<PAGE> 37
MICROCIDE PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Financial Statements:
Balance Sheets................................................. F-3
Statements of Operations....................................... F-4
Statement of Stockholders' Equity.............................. F-5
Statements of Cash Flows....................................... F-6
Notes to Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Microcide Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Microcide
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microcide Pharmaceuticals,
Inc. at December 31, 1999 and 1998 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Palo Alto, California
February 8, 2000
F-2
<PAGE> 39
MICROCIDE PHARMACEUTICALS, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 5,660 $ 7,794
Short-term investments............................... 19,208 25,398
Prepaid expenses and other current assets............ 443 590
-------- --------
Total current assets..................................... 25,311 33,782
Property and equipment, net.............................. 7,592 9,755
Other assets............................................. 928 953
-------- --------
$ 33,831 $ 44,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 358 $ 642
Accrued compensation................................. 984 920
Current portion of notes payable..................... 1,440 1,129
Deferred revenue..................................... 387 300
Other accrued liabilities............................ 695 522
-------- --------
Total current liabilities................................ 3,864 3,513
Long-term portion of notes payable....................... 1,907 2,912
Accrued rent............................................. 257 127
Commitments
Stockholders' equity:
Preferred stock, par value $0.001; 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, par value $0.001; 50,000,000 shares
authorized, 11,146,789 and 11,017,429 shares issued
and outstanding at December 31, 1999 and 1998,
respectively......................................... 67,112 66,902
Deferred compensation.................................. -- (464)
Accumulated deficit.................................... (39,243) (28,497)
Accumulated other comprehensive loss................... (66) (3)
-------- --------
Total stockholders' equity............................... 27,803 37,938
-------- --------
$ 33,831 $ 44,490
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
MICROCIDE PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Research revenues..................................... $ 7,113 $ 11,141 $ 12,183
Milestone revenues.................................... 2,000 -- 1,000
Other revenues........................................ 335 40 1,711
-------- -------- --------
Total revenues.......................................... 9,448 11,181 14,894
Operating expenses:
Research and development.............................. 17,288 18,806 17,877
General and administrative............................ 3,956 3,971 4,091
-------- -------- --------
Total operating expenses................................ 21,244 22,777 21,968
-------- -------- --------
Loss from operations.................................... (11,796) (11,596) (7,074)
Interest and other income............................... 1,395 1,870 2,616
Interest expense........................................ (345) (32) (144)
-------- -------- --------
Net loss................................................ $(10,746) $ (9,758) $ (4,602)
======== ======== ========
Basic and diluted net loss per share.................... $ (0.97) $ (0.89) $ (0.43)
======== ======== ========
Shares used in computing basic and diluted net loss
per share............................................... 11,085 10,962 10,817
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
MICROCIDE PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK COMPENSATION DEFICIT INCOME (LOSS) EQUITY
------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 66,279 $ (1,577) $(14,137) $ 9 $ 50,574
Net loss............................... -- -- (4,602) -- (4,602)
Net unrealized loss on securities
available-for-sale.................. -- -- -- (53) (53)
--------
Comprehensive loss..................... (4,655)
Issuance of 24,749 shares of common
stock under the employee stock
purchase plan....................... 210 -- -- -- 210
Issuance of 140,626 shares of common
stock due to options exercised
by employees and consultants........ 60 -- -- -- 60
Deferred compensation.................. 378 (378) -- -- --
Reversal of deferred compensation
for terminated employees............ (32) 32 -- -- --
Amortization of deferred compensation.. -- 672 -- -- 672
Repayment of note receivable........... 35 -- -- -- 35
-------- -------- -------- -------- --------
Balances at December 31, 1997.......... 66,930 (1,251) (18,739) (44) 46,896
Net loss............................... -- -- (9,758) -- (9,758)
Net unrealized gain on securities
available-for-sale.................. -- -- -- 41 41
--------
Comprehensive loss..................... (9,717)
Issuance of 38,773 shares of
common stock under the employee
stock purchase plan................. 202 -- -- -- 202
Issuance of 71,613 shares of common
stock due to options exercised by
employees and consultants........... 34 -- -- -- 34
Reversal of deferred compensation
for terminated employees............ (264) 264 -- -- --
Amortization of deferred compensation.. -- 523 -- -- 523
-------- -------- -------- -------- --------
Balances at December 31, 1998.......... 66,902 (464) (28,497) (3) 37,938
Net loss............................... -- -- (10,746) -- (10,746)
Net unrealized loss on securities
available-for-sale.................. -- -- -- (63) (63)
--------
Comprehensive loss..................... (10,809)
Issuance of 48,406 shares of
common stock under the employee
stock purchase plan................. 160 -- -- -- 160
Issuance of 29,679 shares of common
stock due to options exercised by
employees and consultants........... 50 -- -- -- 50
Issuance of 51,275 shares of common
stock under vendor warrant
agreements.......................... -- -- -- -- --
Amortization of deferred compensation.. -- 464 -- -- 464
-------- -------- -------- -------- --------
Balances at December 31, 1999.......... $ 67,112 $ -- $(39,243) $ (66) $ 27,803
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
MICROCIDE PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Increase (Decrease) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss................................................... $ (10,746) $ (9,758) $ (4,602)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 2,636 2,874 2,988
Amortization of deferred compensation..................... 464 523 672
Accrued rent.............................................. 130 (99) 103
Changes in assets and liabilities:
Prepaid expenses and other current assets............. 147 694 (950)
Other assets.......................................... 25 (382) (412)
Accounts payable...................................... (284) (1,018) (210)
Construction payable.................................. -- -- (398)
Accrued compensation and other liabilities............ 237 64 626
Deferred revenue...................................... 87 (486) (403)
--------- --------- ---------
Net cash provided by (used in) operating activities........ (7,304) (7,588) (2,586)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of short-term investments......................... (32,280) (85,790) (102,264)
Maturities of short-term investments....................... 38,407 89,057 112,778
Capital expenditures....................................... (473) (3,089) (3,702)
--------- --------- ---------
Net cash provided by (used in) investing activities........ 5,654 178 6,812
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations............ (41) (795) (1,085)
Principal payments on equipment financing.................. (1,088) -- --
Proceeds from debt financing............................... 435 4,000 --
Proceeds from issuances of common stock.................... 210 236 270
Repayment of shareholder note.............................. -- -- 35
--------- --------- ---------
Net cash provided by (used in) financing activities........ (484) 3,441 (780)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (2,134) (3,969) 3,446
Cash and cash equivalents at beginning of period........... 7,794 11,763 8,317
--------- --------- ---------
Cash and cash equivalents at end of period................. $ 5,660 $ 7,794 $ 11,763
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid.......................................... $ 1 $ 2 $ 23
========= ========= =========
Interest paid.............................................. $ 345 $ 32 $ 144
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
MICROCIDE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 Company anticipates working on a number of long-term development
projects which involve experimental and unproven technology. The projects
require many years and substantial expenditures to complete, and may ultimately
be unsuccessful. Therefore, the Company will need to obtain additional funds
from outside sources to continue its research and development activities, fund
operating expenses, pursue regulatory approvals and build production, sales and
marketing capabilities, as necessary.
In January 1998, Microcide formed Iconix Pharmaceuticals, Inc. ("Iconix"), a
biotechnology company which will seek to develop surrogate genetics and chemical
informatics into a technology platform with broad applicability to multiple
human diseases. After giving effect to the investment and including the stock
option pool reserved for employees and consultants of Iconix, Microcide holds
approximately 32% of Iconix's outstanding equity on a fully diluted basis.
Microcide accounts for its investment using the equity method of accounting and
since Microcide's investment has a zero book basis, the losses of Iconix do not
impact Microcide's statement of operations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Company
maintains deposits with financial institutions in the United States and invests
its excess cash in commercial paper and corporate debt securities which bear
minimal risk.
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
At December 31, 1999 and 1998, respectively, all securities were designated as
available-for-sale. These securities are stated at fair value based upon market
quotes, with the unrealized gains and losses reported in stockholders' equity.
Amortization of premiums and discounts are included in interest income. Realized
gains and losses and declines in value judged to be other than temporary, if
any, are included in other income. The cost of securities sold is based on the
specific identification method.
F-7
<PAGE> 44
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
varies between one to seven years. Equipment under capital lease and leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
Revenue Recognition
Revenues related to research contracts are recognized ratably over the
related funding periods for each contract. The Company is required to perform
research activities as specified in each respective agreement on a best efforts
basis and the Company is reimbursed based on the costs associated with the
number of full-time equivalent employees working on each specific contract,
which is generally on a ratable basis over the term of the agreement. Deferred
revenue may result when the Company does not incur the required level of effort
during a specific period in comparison to funds received under the respective
contracts. Milestone payments will be recognized pursuant to collaborative
agreements upon the achievement of specified milestones, such as selection of
candidates for drug development, the commencement of clinical trials or receipt
of regulatory approvals. For collaborative arrangements which include both
revenue received on a cost reimbursement basis and funds received associated
with the purchase of the Company's equity, the Company accounts for the equity
component based on the estimated fair value of the Company's securities issued
at the date that the terms of the respective agreements were agreed upon. The
Company reports other revenues which principally related to the sale of
molecular diversity samples to pharmaceutical or biotechnology companies for use
in their drug discovery programs.
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.
Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations, and to adopt the "disclosure only" alternative described in
SFAS 123. Under APB 25, if the exercise price of the Company's employee stock
options equals or exceeds the fair market value on the date of the grant or the
fair value of the underlying stock on the date of the grant as determined by the
Company's Board of Directors, no compensation expense is recognized.
Net Loss Per Share
The Company's basic and diluted net loss per share amounts have been
computed using the weighted-average number of shares of common stock outstanding
during the period. Had the Company been in a net income position, diluted
earnings per share for 1999, 1998 and 1997 would have included the shares used
in the computation of pro forma basic net loss per share as well as an
additional 226,000, 349,000 and 567,000 shares, respectively, related to
outstanding options and warrants not included above (as determined using the
treasury stock method).
Comprehensive Loss
In accordance with Statement of Financial Accounting Standard No. 130,
("SFAS 130"), "Reporting Comprehensive Income," the Company presents
comprehensive income (loss) and its components in the Statement of
Stockholders' Equity.
F-8
<PAGE> 45
Segment Information
Effective January 1, 1998, the Company adopted Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. As the company operates in a single segment, the adoption
of Statement 131 had no significant effect on results of operations or the
financial position of the Company.
Other Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). The Company is required to adopt SFAS 133 for the year ending December
31, 2001. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments. Microcide does
not currently engage in hedging activities; adoption of SFAS 133 is expected to
have no material impact on Microcide's financial condition and results of
operations.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
2. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Johnson & Johnson
In October 1995, the Company entered into a research and development
agreement with Ortho Pharmaceutical Corporation and the R.W. Johnson
Pharmaceutical Research Institute, both Johnson & Johnson companies ("J&J"), to
discover and develop novel beta-lactam antibiotics, antibiotic potentiators and
inhibitors of bacterial signal transduction targeted at problematic
Gram-positive bacteria, including staphylococci and enterococci. 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. J&J subsequently exercised its option to extend the research
collaboration with respect to beta-lactam antibiotics for an additional year,
which has since concluded at the end of 1999. No additional research support
funding is expected in the year 2000. J&J received exclusive worldwide rights to
products developed during the collaboration in the field of use as defined in
the agreement. The development, manufacturing, marketing and sale of drugs
resulting from the collaboration will be conducted by J&J, provided that the
Company has the right to undertake certain co-promotion activities in North
America, subject to J&J's approval. Should the development efforts result in a
marketable product, the Company will receive royalty payments based on product
sales. In connection with the agreement, J&J made a nonrefundable $3,000,000
up-front license payment to the Company, and an affiliate of J&J made an equity
investment of $5,000,000 in return for 571,429 shares of Series D convertible
preferred stock which subsequently converted to common stock upon the Company's
initial public offering. In November 1999, J&J made a $2,000,000 milestone
payment in conjunction with the commencement of cephalosporin Phase I clinical
trials. Total revenue recognized under the agreement for the years ended
December 31, 1999, 1998 and 1997 was $3,384,000, $3,206,000 and $3,500,000,
respectively.
Daiichi Pharmaceutical Co. Ltd.
In November 1995, the Company entered into a research and development
agreement with Daiichi Pharmaceutical Co. Ltd. ("Daiichi") to discover and
develop bacterial efflux pump inhibitors to be used in combination with
Daiichi's quinolone antibiotics to target Gram-negative bacteria, including
pseudomonas. The agreement provided for certain revenue payments, including
payments for research and development costs for two years and nine months
commencing July 1, 1995 and for reaching certain research and development goals.
Daiichi
F-9
<PAGE> 46
subsequently exercised its option to extend the research collaboration for an
additional year, which concluded at the end of the first quarter of 1999. The
development, manufacturing, marketing and sale of drugs resulting from the
collaboration would be conducted by Daiichi, subject to the Company's right to
co-promote such drugs in North America. If development efforts result in a
marketable product, the Company would receive royalty payments based on product
sales. Total research revenue recognized under the agreement for the years ended
December 31, 1999, 1998 and 1997 was $875,000, $3,749,000 and $4,364,000,
respectively.
Pfizer Inc.
In March 1996, the Company entered into a research and development agreement
with Pfizer Inc. ("Pfizer") to implement the Company's essential gene and
multi-channel screening system to discover novel classes of antibiotics. The
agreement provides for certain revenue payments, including payments for research
and development costs for five 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. In March 2000, Pfizer and the
Company amended the agreement to shift research focus from chemistry prosecution
of a lead compound series identified in the screening phase to a biology-focused
investigation of the essential gene targets. In conjunction with this, funding
for the fifth year will be at a reduced amount. In connection with the
agreement, Pfizer made a $1,000,000 up-front license payment and a $5,000,000
equity investment in return for 571,429 shares of Series E convertible preferred
stock which subsequently converted to common stock upon the Company's initial
public offering (see Note 6). Revenue recognized under the agreement for the
years ended December 31, 1999, 1998 and 1997 was $4,200,000, $4,186,000 and
$5,319,000, respectively.
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. Revenue recognized under the
agreement for the year ended December 31, 1999 was $604,000.
Costs related to research revenues under the above agreements for the years
ended December 31, 1999, 1998 and 1997 approximated the related research revenue
recognized (exclusive of license and milestone fees).
Iconix Pharmaceuticals, Inc.
In January 1998, Microcide and Iconix entered into several collaborative
agreements. Through the Core Technology Development and License Agreement,
Microcide and Iconix expect to work together three years to jointly develop and
utilize new technology in the areas of molecular diversity, high-throughput
screening, computational sciences and genome sciences. During 1999 and 1998,
projects jointly undertaken pursuant to this agreement resulted in a net cost
to Microcide of approximately $385,000 and $274,000, respectively. Through the
Antiviral and Surrogate Genetics Research Collaboration, Iconix plans to apply
Surrogate Genetics to a number of viral disease targets in the search for novel
inhibitors. During 1999 and 1998, Microcide incurred research expense pursuant
to the antiviral collaboration of approximately $1,873,000 and $823,000,
respectively. As of December 31, 1999, Microcide is obligated to provide Iconix
with research support payments of up to $2.5 million over the remaining term of
the collaboration which is extendable at Microcide's option for two additional
one-year periods. Microcide is entitled to worldwide development, manufacturing
and marketing rights to antiviral products which may emerge from the
collaboration and, if specified research and development milestones are
achieved, will be obligated to pay Iconix milestone payments of up to $11.0
million for the first product and up to $10.5 million for each subsequent
product, in addition to royalties on worldwide sales. Pursuant to the Support
Services Agreement, Microcide
F-10
<PAGE> 47
provides Iconix with facilities and various business support services for which
Microcide is reimbursed. During 1999 and 1998, Microcide received approximately
$1,108,000 and $763,000, respectively, from Iconix pursuant to the Support
Services Agreement which it treated as a reduction of expenses.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Laboratory and office equipment....... $ 9,919 $ 9,547
Leasehold improvements................ 9,899 9,798
-------- --------
19,818 19,345
Less accumulated depreciation and
amortization.......................... (12,226) (9,590)
-------- --------
Property and equipment, net........... $ 7,592 $ 9,755
======== ========
</TABLE>
Properties leased under capital leases are included above with a cost of
approximately $20,000 and $655,000 at December 31, 1999 and 1998, with
accumulated amortization of approximately $5,000 and $609,000 at December 31,
1999 and 1998, respectively. Under an equipment financing arrangement with a
lender, a security agreement was executed, granting a lien and security interest
to specific property of the Company (see Note 5).
4. INVESTMENTS
The following is a summary of available-for-sale securities as of:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1999
Cash equivalents and short-term investments:
Money market funds.................... $ 1,333 $-- $ -- $ 1,333
Corporate debt securities............. 19,271 3 (66) 19,208
------ - ---- -------
$20,604 $3 $(66) $20,541
======= == ==== =======
December 31, 1998
Cash equivalents and short-term investments:
Money market funds.................... $2,520 $-- $ -- $ 2,520
Corporate debt securities............. 26,908 33 (36) 26,905
------ -- --- -------
$29,428 $33 $(36) $29,425
======= === ==== =======
</TABLE>
Maturities of securities available-for-sale were as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------
1999 1998
----------------------------------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
--------- -------------- --------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Due in less than 1 year..... $18,591 $18,545 $28,428 $28,425
Due in 1 to 2 years......... 2,013 1,996 -- --
Due in 2 to 3 years......... -- -- 1,000 1,000
------- ------- ------- -------
$20,604 $20,541 $29,428 $29,425
======= ======= ======= =======
</TABLE>
F-11
<PAGE> 48
5. LEASES AND DEBT FINANCING
In fiscal years 1998 and prior, the Company was making payments under
capital equipment lease lines of credit. In December 1998 and February 1999,
Microcide exercised its option to buy out equipment under the outstanding leases
whose terms were due to expire during 1998 and 1999. In December 1998, Microcide
borrowed $4.0 million under an equipment financing arrangement whose terms
include a fixed interest rate of 9.55% per annum with a repayment term of 36
months. Under this arrangement, Microcide could borrow up to an additional $1.0
million during 1999. In December 1999, the Company borrowed an additional
$435,000 at a fixed interest rate of 10.99% with a repayment term of 36 months.
This loan is collaterized by property and equipment.
The Company leases its office and research facilities under various
operating leases whose terms expire in 2005. The Company has options to extend
its facilities leases for an additional five years. Future principal payments on
equipment loans and minimum lease payments under noncancelable leases are as
follows:
<TABLE>
<CAPTION>
Equipment Operating
Financing Leases
-------------------------
Year ended December 31, (In thousands)
<S> <C> <C>
2000........................................ $ 1,441 $ 1,748
2001........................................ 1,597 2,064
2002........................................ 291 2,142
2003........................................ 18 2,221
2004........................................ -- 2,299
Thereafter.................................. -- 1,770
------- -------
Total minimum principal and lease payments,
respectively................................ 3,347 $12,244
=======
Less current portion of principal payments.. (1,440)
-------
Noncurrent portion of principal payments.... $ 1,907
=======
</TABLE>
Rent expense for operating leases was approximately $1,149,000, $1,215,000
and $947,000 in 1999, 1998 and 1997, respectively.
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock. The
Company's Board of Directors may set rights and privileges of any preferred
stock issued.
Preferred Share Purchase Rights
In February 1999, the Board of Directors approved the adoption of a
Preferred Share Purchase Rights Plan under which all stockholders of record as
of February 2, 1999, received rights to purchase shares of a new series of
Preferred Stock. The rights were distributed as a non-taxable dividend and will
expire February 2, 2009. The rights are exercisable only if a person or a group
acquires 20% or more of the Company's Common Stock or announces a tender offer
for 20% or more of the Company's Common Stock. If a person acquires 20% or more
of the Company's Common Stock, all rights holders except that person will be
entitled to acquire the Company's Common Stock at a discount. The effect will
be to discourage acquisitions of more than 20% of the Company's Common Stock
without negotiations with the Board.
Warrants
During 1999, warrants to purchase 51,275 shares of common stock were
exercised under vendor warrant agreements. At December 31, 1999, there were no
warrants outstanding.
1996 Stock Purchase Plan
During 1996, the shareholders ratified the adoption of the 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). The Company has reserved 220,000
shares of common stock for issuance to employees. Under the Purchase Plan,
employees may purchase common stock through payroll deductions in semi-annual
offerings at a price equal to the lower of 85% of the closing price on the
applicable offering commencement date or 85% of the closing price on the
applicable offering termination date. At December 31, 1999, 99,667 shares of
stock remained available for future purchase under the Purchase Plan.
F-12
<PAGE> 49
1996 Director Option Plan
During 1996, the shareholders approved the 1996 Directors' Stock Option Plan
(the "Director Plan"). The Company has reserved 150,000 shares of common stock
for issuance to non-employee directors pursuant to options granted under this
Plan. The Director Plan provides for the automatic grant of an option (the
"First Option") to purchase 16,000 shares of Common Stock to each non-employee
director provided that such director was not an employee director of the Company
immediately prior to becoming a non-employee director. Each non-employee
director, whether or not eligible to receive a First Option, is automatically
granted an option to purchase 4,000 shares of Common Stock (a "Subsequent
Option") each year on the date of the Company's annual stockholders meeting, if
on such date he or she has served on the Board for at least six months. First
Options and Subsequent Options have terms of ten years. First Options vest and
become exercisable as to 1/6th of the shares subject to the option six months
after the date of grant, and as to 1/36th of the shares each month thereafter.
Subsequent Options vest as to 1/12th of the shares subject to the option each
month after the date of grant. The exercise prices of First Options and
Subsequent Options are 100% of the fair market value per share of the Common
Stock, generally determined with reference to the closing price of the Common
Stock as reported on the Nasdaq National Market on the date of grant.
1993 Amended Incentive Stock Plan
At the Annual Shareholders' Meeting held on June 24, 1999, the shareholders
approved the amendment of the 1993 Amended Incentive Stock Plan (the "Plan"),
thereby increasing the number of shares of common stock reserved for issuance by
300,000. The total number of shares of common stock now reserved for issuance
under the Plan is 2,580,000.
Under the Plan, options and stock purchase rights may be granted by the
board of directors to employees and consultants. Options granted may be either
incentive stock options or nonstatutory stock options. Incentive stock options
may be granted to employees with exercise prices of no less than the fair value
and nonstatutory options may be granted to employees or consultants at exercise
prices of no less than 85% of the fair value of the common stock on the grant
date as determined by the board of directors. Initial options, usually granted
with an initial vesting date of the employee's date of hire, generally vest at
the rate of 25% at the end of the first year with the remaining balance vesting
ratably over the next three years. Stock award options are granted as determined
by the board of directors, with a vesting schedule in which 1/48 of the total
number of shares granted becomes exercisable one month from the date of grant
and each subsequent 1/48 becomes exercisable each full month thereafter.
Combined activity under the Director Option Plan and Amended Incentive Stock
Option Plan was as follows:
<TABLE>
<CAPTION>
Number of Range of Exercise Weighted-Average
Shares Prices Exercise Price
---------- ------------------ ----------------
<S> <C> <C> <C>
Balance at December 31, 1996... 773,700 $0.20-$12.50 $ 3.52
Options granted.............. 533,100 $9.44-$14.00 $ 11.53
Options exercised............ (140,626) $0.20-$2.50 $ 0.44
Options canceled............. (60,588) $0.20-$13.75 $ 8.01
----------
Balance at December 31, 1997... 1,105,586 $0.20-$14.00 $ 7.50
Options granted.............. 683,845 $3.81-$12.12 $ 6.58
Options exercised............ (71,613) $0.20-$2.50 $ 0.42
Options canceled............. (286,472) $0.38-$12.50 $ 10.99
----------
Balance at December 31, 1998... 1,431,346 $0.20-$14.00 $ 6.71
Options granted.............. 502,853 $3.94-$6.97 $ 5.32
Options exercised............ (29,679) $0.20-$6.25 $ 1.70
Options canceled............. (282,333) $0.38-$12.25 $ 8.11
----------
Balance at December 31, 1999... 1,622,187 $0.20-$14.00 $ 6.13
==========
</TABLE>
Under the Amended Incentive Stock Option Plan, options to purchase 729,121
and 515,433 shares of common stock were exercisable at December 31, 1999 and
1998, respectively. At December 31, 1999, 516,663 shares remained available for
grant under the Amended Incentive Stock Option Plan. Through December 31, 1999,
200,000 shares of common stock have been issued pursuant to stock purchase
rights granted under the Plan.
F-13
<PAGE> 50
Under the Director Plan, of the 96,000 shares outstanding, 52,667 shares
were exercisable at December 31, 1999. At December 31, 1999, 54,000 shares
remained available for grant under the Director Plan.
F-14
<PAGE> 51
The options outstanding at December 31, 1999 have been segregated into three
ranges for additional disclosures as follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
-------------------------------------------------- --------------------------
Weighted-
Weighted- Average Weighted-
Range of Average Remaining Average
Exercise Exercise Contractual Life Exercise
Prices Number Prices (In Years) Number Prices
-------------- -------- -------- ---------------- ------ ---------
<S> <C> <C> <C> <C> <C>
$0.20-$0.375 142,597 $ 0.34 5.12 142,585 $ 0.34
$2.50-$4.625 372,236 3.44 7.74 203,054 2.84
$5.00-$9.75 811,567 6.44 8.94 219,062 6.95
$10.063-$14.00 295,787 11.45 7.18 217,087 11.43
--------- -------
1,622,187 6.13 8.01 781,788 5.92
========= =======
</TABLE>
Stock Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized. Because SFAS 123 is applicable
only to options granted subsequent to 1994, its pro forma effect was not fully
reflected until 1999 since the options granted by Microcide generally vest over
four years.
The Company has recorded $2,315,000 in deferred compensation (net of
reversals for stock option cancellations) pursuant to APB 25 for the difference
between the grant price and the deemed fair value of the Company's common stock
for certain options in the 12-month period prior to the initial public offering.
The Company also recorded deferred compensation for stock options granted to
consultants. The deferred compensation has been fully amortized to expense at
December 31, 1999.
Pro forma information regarding the net income (loss) and earnings (loss)
per share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options granted subsequent to 1994 under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model for
the multiple option approach with the following assumptions for 1999, 1998 and
1997: weighted-average volatility factor of 0.7, 0.75 and 0.57, respectively; no
expected dividend payments; weighted-average risk-free interest rates in effect
of 5.34%, 4.76% and 6.10%, respectively; and a weighted-average expected life of
3.87, 3.63 and 3.42 years, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a single measure of the
fair value of the Company's employee stock options.
Based upon the above methodology, the weighted-average fair value of options
granted during the years ended December 31, 1999, 1998 and 1997 was $2.93, $3.51
and $5.21, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income (loss) over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss........... $ (11,665,817) $ (10,601,000) $ (5,789,000)
Pro forma loss per share..... $ (1.05) $ (0.97) $ (0.54)
</TABLE>
7. NOTES RECEIVABLE FROM RELATED PARTIES
F-15
<PAGE> 52
At December 31, 1999, the Company had notes receivable from employees in the
amount of $674,000. These notes generally bear interest at 6%, are secured by
property and are due within one year following termination of employment.
8. INCOME TAXES
As of December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $31,700,000 and $12,200,000, respectively. The
Company also had federal and State of California research and other tax credit
carryforwards of approximately $300,000 and $300,000, respectively. The federal
net operating loss and credit carryforwards will expire at various dates
beginning in the year 2008 through 2019, if not utilized. The State of
California net operating loss carryforwards will expire at various dates
beginning in 2000 through 2004, if not utilized.
Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change of ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating loss and credit
carryforwards before utilization.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.... $ 11,500 $ 8,100
Research and other credits.......... 600 600
Capitalized research expenses....... 500 500
Other............................... 2,100 1,700
-------- --------
Total Deferred Tax Assets............. 14,700 10,900
Valuation Allowance................... (14,700) (10,900)
-------- --------
Net Deferred Tax Assets............... $ -- $ --
======== ========
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $3,600,000 and $1,500,000 during the years ended December 31, 1998
and 1997, respectively.
F-16
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
2.1 Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) Series A
Preferred Stock Purchase Agreement. (2)
2.2* Core Technology Development and License Agreement by and between
Microcide Pharmaceuticals, Inc. and Iconix Pharmaceuticals, Inc.
(formerly EpiGenix, Inc.) (2)
2.3* Antiviral and Surrogate Genetics Research Collaboration
Agreement by and between Microcide Pharmaceuticals, Inc. and
Iconix Pharmaceuticals, Inc. (formerly EpiGenix, Inc.) (2)
3.2 Restated Certificate of Incorporation of the Registrant. (1)
3.5 Bylaws of the Registrant. (1)
4.2 Form of Common Stock Certificate. (1)
4.3 Series A Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated May 10,
1993. (1)
4.4 Series B Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated May 10,
1993. (1)
4.5 Series C Preferred Warrant Purchase Agreement and Warrant
between Dominion Ventures, Inc. and the Registrant dated June
10, 1994. (1)
4.6 Series B Preferred Warrant Agreement between Comdisco, Inc. and
the Registrant dated September 1, 1993. (1)
4.7 Series C Preferred Warrant Agreement between Comdisco, Inc. and
the Registrant dated September 1, 1993. (1)
10.1 Information and Registration Rights Agreement, dated June 29,
1994 as amended. (1)
10.2 1993 Amended Incentive Stock Plan. (1)
10.3 1996 Employee Stock Purchase Plan. (1)
10.4 1996 Director Option Plan. (1)
10.5 401(k) Plan. (1)
10.6* Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
Research Institute dated October 24, 1995. (1)
10.7* Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical
Research Institute dated October 24, 1995. (1)
10.8* Joint Research Agreement between the Registrant and Daiichi
Pharmaceutical Co., Ltd. dated November 6, 1995. (1)
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
10.9* Collaborative Research Agreement between the Registrant and
Pfizer Inc dated March 1, 1996.(1)
10.10* License and Royalty Agreement between the Registrant and Pfizer
Inc dated March 1, 1996. (1)
10.11 Master Lease Agreement between Dominion Ventures, Inc. and the
Registrant, dated May 10, 1993, as amended on June 10, 1994 and
November 22, 1994. (1)
10.12 Master Lease Agreement between the Registrant and Comdisco, Inc.
dated September 1, 1993. (1)
10.13 Lease Agreement between the Registrant and Portola Land Company
dated April 1993. (1)
10.14 Form of Indemnification Agreement between the Registrant and its
Officers and Directors. (1)
10.15 Employment Agreement dated January 31, 1994 between the
Registrant and James E. Rurka. (1)
10.16 Employment Agreement dated December 23, 1992 between the
Registrant and Keith A. Bostian, Ph.D. (1)
10.17 Lease Agreement commencing November 1, 1996 between the
Registrant and Logue Investments L.P., a California limited
partnership. (3)
10.18* Synthetic Compound Purchase Agreement between the Registrant and
Daiichi Pharmaceutical Co., Ltd. dated June 25, 1997. (4)
10.19 Sublease agreement between the Registrant, Quickturn Design
Systems, Inc. and Portola Land Co. dated September 1997. (5)
10.20 Sub-sublease agreement between the Registrant, Alpha Blox
Corporation, Quickturn Design Systems, Inc. and Portola Land Co.
dated September 1997. (5)
10.21 Consulting Agreement dated January 14, 1998 between the
Registrant and Keith Bostian, Ph.D. (6)
10.22 Lease Agreement between the Registrant and Portola Land Co.
dated May 11, 1998. (7)
10.23 Promissory Note between the Registrant and Heller Financial
Leasing, Inc. dated December 22, 1998. (9)
10.24 Security Agreement between the Registrant and Heller Financial
Leasing, Inc. dated December 22, 1998. (9)
10.25+ Amendment of Research and License Agreement between the
Registrant and Ortho Pharmaceutical Corporation and the R.W.
Johnson Pharmaceutical Research Institute dated October 23,
1998. (9)
10.26+ Collaborative Research Agreement between the Registrant and
Pfizer Inc dated January 13, 1999. (9)
10.27+ License and Royalty Agreement between the Registrant and Pfizer
Inc dated January 13, 1999. (9)
10.28 Preferred Shares Rights Agreement dated February 2, 1999 between
the Registrant and Chase Mellon Shareholder Services, L.L.C. (8)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 31).
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference to the same-numbered exhibit in Registrant's
Registration Statement on Form S-1, registration number 333-2400, filed with
the Securities and Exchange Commission and dated May 14, 1996.
(2) Incorporated by reference to the same-numbered exhibit in Registrant's Form
8-K filed with the Securities and Exchange Commission and dated January 29,
1998.
(3) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended September 30, 1996, filed with the Securities and
Exchange Commission and dated November 8, 1996.
(4) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended June 30, 1997, filed with the Securities and
Exchange Commission and dated August 14, 1997.
(5) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended September 30, 1997, filed with the Securities and
Exchange Commission and dated November 14, 1997.
(6) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-K for the fiscal year ended December 31, 1997, filed with the Securities
and Exchange Commission and dated March 31, 1998.
(7) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-Q for the period ended June 30, 1998, filed with the Securities and
Exchange Commission and dated August 14, 1998.
(8) Incorporated by reference to Exhibit 1 in Registrant's Form 8-A filed with
the Securities and Exchange Commission and dated February 4, 1999.
(9) Incorporated by reference to the same-numbered exhibit in Registrant's Form
10-K for the fiscal year ended December 31, 1998, filed with the Securities
and Exchange Commission and dated March 31, 1999.
* Confidential Treatment granted
+ Confidential Treatment requested
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) See part a(3) above.
(d) All schedules have been omitted because the information required to be set
forth therein is not applicable.
<PAGE> 55
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No.'s 333-11759, 333-32785, 333-58999 and 333-86383) pertaining to the
1993 Amended Incentive Stock Plan, the 1996 Employee Stock Purchase Plan, and
the 1996 Director Option Plan of Microcide Pharmaceuticals, Inc. of our report
dated February 8, 2000 with respect to the financial statements of Microcide
Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
ERNST & YOUNG LLP
Palo Alto, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,660
<SECURITIES> 19,208
<RECEIVABLES> 139
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,311
<PP&E> 19,818
<DEPRECIATION> (12,226)
<TOTAL-ASSETS> 33,831
<CURRENT-LIABILITIES> 3,864
<BONDS> 0
0
0
<COMMON> 67,112
<OTHER-SE> (39,309)
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<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> (10,746)
<EPS-BASIC> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
