<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19171
ICOS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 91-1463450
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22021 - 20th Avenue S.E., Bothell, WA 98021
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(Address of principal executive offices) (Zip code)
(425) 485-1900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
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Common Stock, $0.01 par value 39,914,049
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ICOS CORPORATION
TABLE OF CONTENTS
PAGE NO.
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PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 1
Consolidated Statements of Comprehensive Operations
for the three months ended March 31, 1998 and 1997 2
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. Other Information
ITEM 1: Legal Proceedings *
ITEM 2: Changes in Securities *
ITEM 3: Defaults Upon Senior Securities *
ITEM 4: Submission of Matters to a Vote of Security Holders *
ITEM 5: Other Information *
ITEM 6: Exhibits and Reports on Form 8-K 12
SIGNATURE 13
EXHIBITS 14
* No information provided due to inapplicability of item.
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
-------------------------
1998 1997
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<S> <C> <C>
Revenues:
Collaborative research and development from related parties $ 6,084 $ 1,717
Other 500 500
------ ------
Total revenues 6,584 2,217
Operating expenses:
Research and development 14,449 9,129
General and administrative 791 750
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Total operating expenses 15,240 9,879
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Operating loss (8,656) (7,662)
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Other income (expense):
Investment income 511 526
Other, net (37) (5)
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474 521
------ ------
Net loss $(8,182) $(7,141)
======= =======
Net loss per common share - basic and diluted $ (0.21) $ (0.18)
======= =======
Weighted average common shares
outstanding - basic and diluted 39,898 39,444
Form 10-Q See accompanying notes to consolidated financial statements. Page 1
</TABLE>
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<TABLE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
(unaudited)
Three months ended
March 31,
----------------------
1998 1997
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<S> <C> <C>
Net loss $(8,182) $(7,141)
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period 20 (13)
Less reclassification adjustments for gains included
in net loss (19) (2)
-------- --------
Total other comprehensive income (loss) 1 (15)
-------- --------
Comprehensive loss $(8,181) $(7,156)
======== ========
Form 10-Q See accompanying notes to consolidated financial statements. Page 2
</TABLE>
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<TABLE>
ICOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
ASSETS
March 31, December 31,
1998 1997
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,690 $ 1,404
Investment securities available for sale, at market value 15,870 23,845
Interest receivable 579 524
Receivables under collaborative arrangements 2,593 2,270
Other receivables 241 177
Prepaid expenses 600 509
----------- -----------
Total current assets 22,573 28,729
Property and equipment, at cost:
Land 2,310 2,310
Buildings and improvements 9,454 9,454
Leasehold improvements 8,401 8,361
Furniture and equipment 16,701 15,450
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36,866 35,575
Less accumulated depreciation and amortization 18,545 17,676
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18,321 17,899
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Construction in progress 158 51
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Net property and equipment 18,479 17,950
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Loan receivable from related party 7,341 7,341
Other assets 9 45
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$ 48,402 $ 54,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,102 $ 2,363
Accrued payroll and benefits 975 873
Other accrued expenses 1,154 957
Deferred research and development revenue 500 -
----------- -----------
Total current liabilities 5,731 4,193
Stockholders' equity:
Preferred stock, $.01 par value. 2,000,000 shares authorized; none issued - -
Common stock, $.01 par value. 100,000,000 shares authorized; 39,908,499 issued
and outstanding at March 31, 1998 and 39,885,414 issued and outstanding
at December 31, 1997 399 399
Additional paid-in capital 172,859 171,879
Net unrealized gain on investment securities available for sale 20 19
Accumulated deficit (130,607) (122,425)
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Total stockholders' equity 42,671 49,872
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$ 48,402 $ 54,065
=========== ==========
Form 10-Q See accompanying notes to consolidated financial statements. Page 3
</TABLE>
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<TABLE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31,
--------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,182) $ (7,141)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 869 1,081
Amortization of investment premiums/discounts 132 268
Gain on sale of investment securities (20) (2)
Change in operating assets and liabilities:
Interest receivable (55) 62
Receivables under collaborative arrangements from related parties (323) (1,717)
Other receivables (64) 22
Prepaid expenses (132) (55)
Accounts payable 739 (143)
Accrued payroll, benefits and other expenses 299 34
Deferred research and development revenue 500 -
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Net cash used in operating activities (6,237) (7,591)
Cash flows from investing activities:
Purchases of investment securities (11,118) (9,931)
Maturities of investment securities - 11,700
Sales of investment securities 19,021 11,558
Acquisitions of property and equipment (1,398) (346)
Decrease (increase) in other assets 37 -
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Net cash provided by investing activities 6,542 12,981
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Cash flows from financing activities:
Proceeds from exercise of stock options 159 345
Proceeds from issuance of warrants 822 -
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Net cash provided by financing activities 981 345
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Net increase in cash and cash equivalents 1,286 5,735
Cash and cash equivalents at beginning of period 1,404 2,159
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Cash and cash equivalents at end of period $ 2,690 $ 7,894
============ ==============
Supplemental disclosure of noncash financing and investing activities:
Acquisition of property and equipment financed through
accounts payable 171 -
Receivable for issuance of warrants 181 -
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Form 10-Q See accompanying notes to consolidated financial statements. Page 4
</TABLE>
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ICOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (unaudited) and December 31, 1997
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. In the opinion of management of ICOS Corporation
("ICOS" or the "Company"), the information reflects all adjustments necessary
to make the results of operations for the interim period a fair statement of
such operations. All such adjustments are of a normal recurring nature.
Interim results are not necessarily indicative of results for a full year.
For a presentation including all disclosures required by generally accepted
accounting principles, these consolidated financial statements should be read
in conjunction with the audited consolidated financial statements for the year
ended December 31, 1997, included in the Company's Annual Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, ICOS Development Corporation. All
significant intercompany transactions and balances have been eliminated.
2. Research and Development Arrangements
Suncos
The Company owns a 50% interest in Suncos Corporation ("Suncos"), a
corporation formed for the development and commercialization of rPAF-AH.
Pursuant to the terms of agreements entered into with Suncos, the Company
conducts certain research and development activities on behalf of Suncos and
is paid for such services based upon costs incurred. For the three months
ended March 31, 1998, the Company recognized research and development cost
reimbursement revenue of $2.4 million under this arrangement.
ICOS Clinical Partners, L.P.
In 1997, ICOS Clinical Partners, L.P. (the "Partnership"), an affiliate
of the Company, completed the sale to private investors of interests in the
Partnership. Proceeds from the offering will be used by the Partnership to
Form 10-Q Page 5
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fund continued development of product candidates by the Company pursuant to
the terms of a Product Development Agreement based on three compounds:
Hu23F2G, rPAF-AH and ICM3.
For the three months ended March 31, 1998, the Company recognized cost
reimbursement revenue of $3.7 million from the Partnership.
3. Net Loss Per Common Share
In 1997, the FASB issued SFAS No. 128, Earnings Per Share ("Statement
128"). Statement 128 establishes standards for the computation, presentation,
and disclosure of earnings per share ("EPS"), replacing the presentation of
the previously required primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for entities with complex capital structures. Basic EPS is
based on the weighted average number of common shares outstanding during the
period. Diluted EPS is based on the potential dilution that would occur on
exercise or conversion of securities into common stock using the treasury
stock method. Under the provisions of Statement 128, common shares that are
considered to be antidilutive are excluded from the computation of diluted
EPS. As the Company has a loss from continuing operations, inclusion of
potential common shares in the diluted EPS computation will result in an
antidilutive per share amount. Therefore, as any potentially dilutive common
stock equivalents are antidilutive, the adoption of this statement does not
have an impact on reported EPS. Securities that could potentially dilute
basic EPS in future periods include all outstanding stock options, stock
warrants and contingently issuable stock warrants.
For the period ended March 31, 1998, options to acquire 6.3 million shares
of common stock with a weighted average exercise price of $8.58 per share,
warrants to acquire 7.6 million shares of common stock with a weighted average
exercise price of $9.45 per share and contingently issuable stock warrants to
acquire 7.6 million shares of common stock have been excluded from the
computation of diluted net loss per common share. For the period ended
March 31, 1997, options to purchase 5.5 million shares of common stock have
been excluded from the computation of diluted net loss per common share.
4. New Accounting Standard
In 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (Statement 130). The objective of Statement 130 is to report a measure
of all changes in equity of an enterprise that do not result from transactions
with owners ("comprehensive income"). Comprehensive income is the total of
net income (loss) and all other nonowner changes in equity.
Form 10-Q Page 6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Risks and Uncertainties
- -----------------------
This discussion contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The Company's future cash requirements and
expense levels will depend on many factors, including continued scientific
progress in its research and development programs; the results of research and
development, preclinical studies and clinical trials; acquisitions of products
or technology, if any; relationships with corporate collaborators; competing
technological and market developments; the time and costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of manufacturing
scale-up and commercialization activities; and other factors. Reference is
made to the Company's Annual Report on Form 10-K for more detailed description
of such factors. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
Overview
The Company is developing and commercializing proprietary pharmaceutical
candidates for the treatment of inflammatory diseases and other serious
medical conditions by understanding the underlying mechanisms and identifying
the molecular entities involved.
The Company's strategy is to identify therapeutic targets through an
understanding of inflammation at the molecular level. The Company is
developing pharmaceutical products that address important cellular and
molecular mechanisms in three separate, yet interrelated, areas of the
inflammatory process: directed cell movement, the inhibition of
proinflammatory mediators and intracellular signal transduction. Each of
these different mechanisms may provide broad opportunities in the treatment of
chronic diseases that have inflammatory components, such as multiple
sclerosis, and in the treatment of acute inflammatory conditions, such as
those associated with acute respiratory distress syndrome,
Form 10-Q Page 7
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hemorrhagic shock and myocardial infarction. In addition, the Company's other
programs have yielded additional approaches that may be useful in treating
cardiovascular diseases and cancer. The Company believes that its discoveries
will allow it to develop novel therapeutics that are more selective in their
activities than existing drugs.
Financial results for the first quarter of 1998 reflect planned increases
in operating expenses necessary for advancing multiple product candidates
through the therapeutic product development process. Development activities
include product development, process development and the establishment and
management of clinical trials. The Company expects increased clinical,
regulatory, process development and product development activities over the
remainder of the year and in future periods.
The Company has an accumulated deficit at March 31, 1998 of
$130.6 million. The Company's results of operations may vary significantly
from quarter to quarter and will depend, among other factors, on the timing
of certain expenses and payments received from certain collaborations, joint
ventures and other business relationships, as well as the progress of the
Company's own research and development efforts, timing of clinical trials
and the regulatory process. The Company expects increased expenditures over
the next several quarters as it continues to expand the size and number of
clinical trials of its product candidates, continues to expand preclinical
research and development activities in support of additional potential
products, and initiates clinical trials of those product candidates deemed
most promising.
Revenues
Revenues for the quarter ended March 31, 1998 totaled $6.6 million and
consisted of (i) $3.7 million from ICOS Clinical Partners, L.P. (the
"Partnership"), (ii) $2.4 million in cost reimbursement revenue from Suncos
Corporation ("Suncos"), the Company's joint venture with Suntory Limited of
Japan ("Suntory"), and (iii) $0.5 million received under the Company's
research and development agreement with Abbott Laboratories. Revenue for the
first quarter of 1997 totaled $2.2 million, and consisted of $1.7 million in
cost reimbursement revenue from Suncos and $0.5 million received under the
Company's agreement with Abbott Laboratories.
Operating Expenses
Total operating expenses for the quarter ended March 31, 1998 increased
to $15.2 million from $9.9 million for the quarter ended March 31, 1997.
Research and development expenses for the first quarter of 1998 increased
to $14.4 million from $9.1 million for the first quarter of 1997. The increase
in research and development expenses was due primarily to costs associated
with the progression of clinical trials for Hu23F2G, rPAF-AH, ICM3 and IC351,
and the expansion of other product development efforts.
Form 10-Q Page 8
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General and administrative expenses for both the first quarter of 1998
and 1997 totaled $0.8 million.
Other Income and Expense
Other income primarily represents investment income earned on the
Company's investment securities and interest accrued on the Company's loan to
the Partnership. Investment income for the first quarter of 1998 totaled $0.3
million compared to $0.5 million for the first quarter of 1997. This decrease
was due primarily to lower average cash and investment balances during the
first quarter of 1998 compared to the first quarter of 1997. Total interest
accrued on the loan to the Partnership totaled $0.2 million for the first
quarter of 1998.
Net Loss
For the quarter ended March 31, 1998, the Company's net loss increased to
$8.2 million or $0.21 per share from $7.1 million or $0.18 per share for the
first quarter of 1997. The increase in net loss was due primarily to costs
associated with the progression of clinical trials for Hu23F2G, rPAF-AH and
ICM3 and IC351, and the expansion of other product development efforts, which
were partially offset by increased revenues from Suncos and the Partnership.
Liquidity & Capital Resources
The Company has financed its operations since inception through private
and public sales of common stock, investment income, revenue from research
collaborations, license payments and grants and capital lease obligations.
At March 31, 1998, the Company had $19.1 million in cash and cash
equivalents, investment securities, and interest receivable, a decrease of
$6.6 million from December 31, 1997. This decrease is primarily attributable
to increased costs associated with clinical trials for Hu23F2G, rPAH-AH, ICM3
and IC351, increased production of materials to support these and future
clinical trials, regulatory submissions and expansion of the Company's other
research and development programs. These increased costs were partially
offset by increased revenues from Suncos and the Partnership.
For the three months ended March 31, 1998, the Company spent $1.4 million
for the purchase of capital equipment and leasehold improvements to support
research and development activities. To support its ongoing and future
research and product development efforts over the next several years, the
Company will need to purchase additional capital equipment and lease or
purchase additional laboratory and administrative facilities.
Form 10-Q Page 9
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In 1997, the Partnership completed the sale to private investors of
interests in the Partnership. Proceeds from the offering will be used by the
Partnership to fund continued development by the Company of product candidates
based on three compounds: Hu23F2G; rPAF-AH; and ICM3, pursuant to the terms
of a product development agreement. The product candidates were licensed to
the Partnership by the Company in connection with the sale of the
Partnership units.
The sale will result in net proceeds to the Partnership of approximately
$79.8 million. Approximately $25.9 million, before payment of offering costs,
was paid to the Partnership on closing and the balance will be paid in
installments over a three-year period. In connection with the offering of
Partnership units, the Company issued warrants to purchase an aggregate of 7.6
million shares of the Company's common stock.
During 1997, the Company loaned the Partnership $7.3 million to fund
certain initial expenditures of the Partnership that consist primarily of
organizational expenses, selling commissions and financial advisory and other
fees. Interest is payable on June 1, 1998, June 1, 1999 and at maturity on
June 1, 2000.
The Company anticipates that its operating expenses will continue to
increase during 1998 and in subsequent years as it adds personnel and
facilities associated with advancing several potential product candidates
through development and clinical trials. Foreseeable incremental costs may
include, but are not limited to, those associated with the Company's own
product development, preclinical studies and clinical trials, patent filings
and administrative activities. The Company may also incur costs and make
capital contributions under its joint venture agreement with Suntory related
to its obligations to develop rPAF-AH. Under provisions of the development
agreement with Suncos, the Company will be reimbursed for certain of these
costs, however, there can be no assurance that all such costs will be
reimbursed. The Company may also incur costs associated with the development
of Hu23F2G, rPAF-AH and ICM3, pursuant to the terms of the Partnership
Agreement.
The Company intends to use its financial resources for ongoing and future
clinical trials of certain of its current product candidates including
Hu23F2G, rPAF-AH, ICM3, and IC351, expansion of preclinical research and
development activities for additional potential product candidates and the
initiation of clinical trials for those product candidates deemed most
promising, expansion of the Company's facilities and general corporate purposes.
The Company anticipates that its existing cash, including interest income
from cash investments and payments from Abbott Laboratories, Suncos and the
Partnership, will be adequate to satisfy its cash requirements through at
least the third quarter of 1998. The Company will need to raise substantial
additional funds for its programs. The Company is currently evaluating several
financing alternatives, some of which may involve the sale of additional stock,
commencement of additional corporate partnerships and other methods of raising
operating capital from public, private and corporate sources. The Company
anticipates completion of one or more of these financing events during 1998.
Form 10-Q Page 10
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The Company has been successful in negotiating collaborations and joint
development agreements with other parties where the work and strategies of the
other parties complement those of the Company. In some instances, these
relationships may involve commitments by the Company to fund some or all of
certain development programs. Although corporate collaborations and joint
ventures have provided cost reimbursement revenue to the Company in the past,
there can be no assurance that such funds will be available to the Company in
the future. The Company intends to expand its operations and hire the
additional personnel deemed necessary to continue development of its current
portfolio of product candidates in clinical trials, as well as continuing
discovery and preclinical research to identify additional potential drug
candidates. The Company anticipates that expansion of these activities will
increase operating expenses in future quarters. Further, incremental
expenditures will be required for additional laboratory, production and office
facilities to accommodate activities and the personnel associated with this
increased development activity. As such, the Company will need to raise
substantial additional funds to conduct its research and development
activities, preclinical studies and clinical trials necessary to bring its
product candidates to market and to establish marketing capabilities if and
when a product candidate is ready for commercialization. There can be no
assurance that additional funds will be available as needed or on terms that
are acceptable to the Company. Insufficient funding will require the Company
to delay, scale-back or eliminate some or all of its research and development
activities, planned clinical trials and administrative programs.
The amounts and timing of operating expenditures will depend on the
progress of ongoing research and development of the Company's potential
products, as well as the activities of corporate collaborators and joint
venture partners related to collaborative research and development activities,
the FDA regulatory process and other factors, many of which are beyond the
Company's control.
Form 10-Q Page 11
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PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) See Exhibit Index
Form 10-Q Page 12
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICOS CORPORATION
Date: May 15, 1998 By: /S/ GEORGE B. RATHMANN
-----------------------
George B. Rathmann
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: May 15, 1998 By: /S/ HOWARD S. MENDELSOHN
------------------------
Howard S. Mendelsohn
Chief Accounting Officer
Form 10-Q Page 13
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Index to Exhibits
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Page
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27.1 Financial Data Schedule #
___________________________________
# Filed with this document
Form 10-Q Page 14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,690
<SECURITIES> 15,870
<RECEIVABLES> 3,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,573
<PP&E> 36,866
<DEPRECIATION> 18,545
<TOTAL-ASSETS> 48,402
<CURRENT-LIABILITIES> 5,731
<BONDS> 0
0
0
<COMMON> 399
<OTHER-SE> 42,272
<TOTAL-LIABILITY-AND-EQUITY> 48,402
<SALES> 0
<TOTAL-REVENUES> 6,854
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,277
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,182)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,182)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
