<PAGE>
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 The Quarterly Period Ended September 30, 1999
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
incorporation or organization) Identification No.)
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 October 31, 1999
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Common Stock, $0.01 par value 44,211,520
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ICOS CORPORATION
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Consolidated Statements of Operations for the three months and nine
months ended September 30, 1999 and 1998 1
Consolidated Statements of Comprehensive Operations for the three months
and nine months ended September 30, 1999 and 1998 2
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 21
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 22
SIGNATURE 23
EXHIBITS 24
</TABLE>
* No information provided due to inapplicability of item.
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PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
------------------------- ------------------------
Revenues:
<S> <C> <C> <C> <C>
Collaborative research and development from related parties $ 17,622 $ 6,830 $ 49,287 $ 19,216
Other - 500 500 1,510
-------- ------- -------- --------
Total revenues 17,622 7,330 49,787 20,726
Operating expenses:
Research and development 28,363 16,306 77,252 46,612
General and administrative 1,553 738 3,558 2,409
-------- ------- -------- --------
Total operating expenses 29,916 17,044 80,810 49,021
-------- ------- -------- --------
Operating loss (12,294) (9,714) (31,023) (28,295)
-------- ------- -------- --------
Other income (expense):
Equity in losses of affiliates (5,393) (11) (10,168) (91)
Investment income 1,048 312 3,097 1,226
Other, net 240 - 550 23
-------- ------- -------- --------
(4,105) 301 (6,521) 1,158
-------- ------- -------- --------
Net loss $(16,399) $(9,413) $(37,544) $(27,137)
======== ======= ======== ========
Net loss per common share - basic and diluted $ (0.37) $ (0.24) $ (0.87) $ (0.68)
======== ======= ======== ========
Weighted average common shares
outstanding - basic and diluted 43,970 40,009 43,134 39,945
</TABLE>
See accompanying notes to consolidated financial statements.
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
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Net loss $(16,399) $(9,413) $(37,544) $(27,137)
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising during
the period 9 25 (191) 17
Less reclassification adjustments for losses (gains)
included in net loss 4 (8) 3 (25)
--------------- --------------- --------------- --------------
Total other comprehensive income (loss) 13 17 (188) (8)
--------------- --------------- --------------- --------------
Comprehensive loss $(16,386) $(9,396) $(37,732) $(27,145)
=============== =============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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ICOS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
-------------------- -------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,213 $ 69,584
Investment securities available for sale, at market value 46,382 8,090
Interest receivable 1,081 391
Receivables under collaborative arrangements from related parties 14,217 7,524
Other receivables 227 267
Prepaid expenses 670 501
-------------------- -------------------
Total current assets 74,790 86,357
Property and equipment, at cost:
Land 2,310 2,310
Buildings and improvements 9,461 9,461
Leasehold improvements 9,740 9,805
Furniture and equipment 22,851 18,865
-------------------- -------------------
44,362 40,441
Less accumulated depreciation and amortization 24,331 21,135
-------------------- -------------------
20,031 19,306
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Construction in progress 523 270
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Net property and equipment 20,554 19,576
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Loan receivable from related party 7,341 7,341
Investments in affiliates, at equity 115 64
Other assets 81 9
-------------------- -------------------
$ 102,881 $ 113,347
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,623 $ 6,080
Accrued payroll and benefits 1,343 1,005
Federal income taxes payable - 648
Other accrued expenses 5,079 6,881
Deferred research and development revenue from related parties 210 -
-------------------- -------------------
Total current liabilities 15,255 14,614
Stockholders' equity:
Preferred stock, $.01 par value. 2,000,000 shares authorized; none issued - -
Common stock, $.01 par value. 100,000,000 shares authorized; 44,152,552
issued and outstanding at September 30, 1999 and 41,482,043 issued and
outstanding at December 31, 1998 442 415
Additional paid-in capital 216,034 189,436
Accumulated other comprehensive loss (191) (3)
Accumulated deficit (128,659) (91,115)
-------------------- -------------------
Total stockholders' equity 87,626 98,733
-------------------- -------------------
$ 102,881 $ 113,347
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
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ICOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(37,544) $(27,137)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,197 2,495
Amortization of investment premiums/discounts 164 200
Loss (gain) on sale of investment securities 13 (25)
Equity in losses of affiliates 10,168 91
Change in operating assets and liabilities:
Interest receivable (690) 290
Receivables under collaborative arrangements from related parties (6,693) 980
Other receivables 40 (128)
Prepaid expenses (169) (195)
Accounts payable 2,543 1,368
Accrued payroll, benefits and other expenses (2,112) (195)
Deferred research and development revenue 210 4,547
Other (72) -
------------------- -------------------
Net cash used in operating activities (30,945) (17,709)
Cash flows from investing activities:
Purchases of investment securities (54,324) (12,579)
Maturities of investment securities 13,686 9,480
Sales of investment securities 1,981 24,965
Acquisitions of property and equipment (4,175) (4,549)
Equity investments in affiliates (10,219) (219)
------------------- -------------------
Net cash provided by (used in) investing activities (53,051) 17,098
------------------- -------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 23,605 926
Proceeds from issuance of warrants 3,020 3,346
------------------- -------------------
Net cash provided by financing activities 26,625 4,272
------------------- -------------------
Net increase (decrease) in cash and cash equivalents (57,371) 3,661
Cash and cash equivalents at beginning of period 69,584 1,404
------------------- -------------------
Cash and cash equivalents at end of period $ 12,213 $ 5,065
=================== ===================
Supplemental cash flow information:
Cash paid for income taxes $ 648 $ -
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
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ICOS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
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 the management of ICOS Corporation
("ICOS" or the "Company"), the information reflects all adjustments necessary to
make the results of operations for the interim periods 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, 1998, 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 in consolidation.
Reclassifications
Certain amounts reported in the previous year have been reclassified to
conform to the 1999 presentation.
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 Pafase. 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 quarter and nine months ended
September 30, 1999, the Company recognized cost reimbursement revenue under this
arrangement of $10.7 million and $21.8 million, respectively. For the quarter
and nine months ended September 30, 1998, the Company recognized cost
reimbursement revenue under this arrangement of $3.0 million and $8.3 million,
respectively.
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In March 1999, the Company and Suntory Limited of Japan ("Suntory") each
made an equity investment in Suncos of $10.0 million. Accordingly, for the
quarter and nine months ended September 30, 1999, the Company recognized $5.3
million and $10.0 million of expense, respectively, equal to its 50% share of
Suncos' net loss.
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 ("partnership
units") in the Partnership. Proceeds from the offering are being used by the
Partnership to fund continued development by the Company of product candidates
based on three compounds: LeukArrest/TM/, Pafase/TM/ and ICM3 pursuant to the
terms of a Product Development Agreement. For the quarter and nine months ended
September 30, 1999, the Company recognized cost reimbursement revenue from the
Partnership of $4.3 million and $13.4 million, respectively. For the quarter and
nine months ended September 30, 1998, the Company recognized cost reimbursement
revenue from the Partnership of $3.8 million and $10.9 million, respectively.
In connection with the Partnerships' 1997 sale of limited partnership
units, the Company issued, on June 5, 1997 and August 15, 1997, Series A
warrants to purchase an aggregate of 5.6 million and 2.0 million shares,
respectively, of the Company's Common Stock at exercise prices of $9.13 and
$10.35 per share, respectively. The Series A warrants issued in 1997 are
exercisable from October 1, 1998 through May 31, 2002. In addition to the Series
A warrants issued in 1997, the Company issued, on June 30, 1999, Series B
warrants to purchase an aggregate of $7.6 million shares of the Company's Common
Stock at an exercise price of $52.49 per share. The Series B warrants issued in
1999 are exercisable from July 31, 1999 through June 30, 2004. During the nine
month period ended September, 30 1999, approximately 2.3 million warrants were
exercised at a weighted-average exercise price of $9.51 per share resulting in a
total proceeds to the Company of $22.1 million. At September 30, 1999, warrants
to purchase approximately 11.5 million shares remain outstanding at an average
exercise price of $37.78 per share.
Lilly ICOS, LLC
In October 1998, the Company and Eli Lilly and Company ("Lilly") formed
Lilly ICOS LLC ("Lilly ICOS"), a 50/50 owned limited liability company, to
jointly develop and globally commercialize phosphodiesterase type 5 inhibitors
(PDE5) as oral therapeutic agents for the treatment of both male sexual
dysfunction and female arousal disorder. For the quarter and nine months ended
September 30, 1999, the Company recognized cost reimbursement revenue under this
arrangement of $2.6 million and $14.1 million, respectively.
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To date, the joint venture has been capitalized by Lilly through cash
infusions and the contribution by the Company of intellectual property
associated with IC351. The technology contributed to Lilly ICOS by the Company
had a zero basis for financial reporting purposes and accordingly, the Company
has recorded its investment in Lilly ICOS as zero. The Company will not report
its proportionate share of Lilly ICOS' results of operations until such time
that the Company makes capital contributions to Lilly ICOS, if ever.
3. Net Loss Per Common Share
-------------------------
Basic earnings per share ("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. Securities included in the
Company's calculation of diluted EPS include all dilutive stock options, stock
warrants and contingently issuable stock warrants.
For the quarter and nine months ended September 30, 1999, options to
acquire 8.6 million shares of common stock with a weighted average exercise
price of $17.60 per share and warrants to acquire 11.5 million shares of common
stock with a weighted average exercise price of $37.78 per share have been
excluded from the computation of diluted net loss per common share because they
are antidilutive. For the quarter and nine months ended September 30, 1998,
options to acquire 6.5 million shares of common stock with a weighted average
exercise price of $9.11 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 because they are antidilutive.
4. Business Segments
-----------------
In 1998, the Company adopted Statement of Financial Accounting Standard No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information based
on how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to one business segment,
the discovery and development of proprietary pharmaceuticals for the treatment
of inflammatory diseases and other serious medical conditions.
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Risks and Uncertainties
- -----------------------
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes included elsewhere in
this report. This discussion contains forward-looking statements that are
subject to certain risks and uncertainties including, without limitation,
statements of the Company's plans, objectives, expectations and intentions. The
Company's actual results could differ materially from those anticipated or
implied by the forward-looking statements discussed here. Factors that could
cause or contribute to such differences include those discussed below under
"Important Factors Regarding Forward-Looking Statements." 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 discovering and developing proprietary pharmaceuticals for
the treatment of inflammatory diseases and other serious medical conditions.
The Company's fundamental strategy is to identify and develop a number of
potential product candidates into breakthrough products with high commercial
potential. By understanding the underlying biochemical and physiological
mechanisms and identifying the cellular and molecular entities involved in the
disease process, the Company is developing product candidates that address
important opportunities in the treatment of acute and chronic diseases that have
inflammatory components as well as certain cardiovascular diseases and cancer.
Through this strategy, the Company believes it will be able to develop novel
therapeutics that are more selective than those presently available.
Financial results for the nine months ended September 30, 1999 reflect
anticipated increases in operating expenses which are necessary for advancing
multiple therapeutic product candidates through the development process.
Development activities include product development, process development and the
establishment and management of clinical trials. The Company expects to conduct
increased clinical, regulatory, process development and product development
activities over the remainder of the year and in future periods.
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The Company has an accumulated deficit at September 30, 1999 of $128.7
million. The Company's results of operations may vary significantly from quarter
to quarter and will depend on, among other factors, the timing of certain
expenses and payments received from certain collaborations, joint ventures,
partnerships 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 may increase expenditures over the next
several quarters as it begins pre-marketing activities in preparation of the
launch of potential products, continues to expand the size and number of
clinical trials of viable product candidates, continues to expand preclinical
research and development activities in support of additional potential product
candidates, and initiates clinical trials of those product candidates deemed
most promising.
Revenues
Revenues for the third quarter of 1999 increased $10.3 million to $17.6
million as compared to $7.3 million during the third quarter of 1998. Current
period revenues consisted of cost reimbursement of $4.3 million from ICOS
Clinical Partners. L.P. ("the Partnership"), $10.7 million from Suncos
Corporation ("Suncos") and $2.6 million from Lilly ICOS, LLC ("Lilly ICOS").
Revenues for the third quarter of 1998 consisted of cost reimbursement of $3.8
million from the Partnership, $3.0 million from Suncos and $0.5 million received
under the Company's research and development agreement with Abbott Laboratories
("Abbott").
Revenues for the nine months ended September 30, 1999 increased $29.1
million to $49.8 million as compared to $20.7 million during the nine month
period ended September 30, 1998. Current year-to-date revenues consisted of cost
reimbursement of $13.4 million from the Partnership, $21.8 million from Suncos,
$14.1 million from Lilly ICOS and $0.5 million received under the Company's
research and development agreement with Abbott. Revenues for the nine months
ended September 30, 1998 consisted of cost reimbursement of $10.9 million from
the Partnership, $8.3 million from Suncos and $1.5 million received under the
Company's research and development agreement with Abbott.
The increase in revenues, both on a quarter and year-to-date basis, were
primarily due to the progression of clinical trial activity associated with
Pafase/TM/ as well as the expansion of IC351 product development and clinical
trial activity pursuant to the Company's October 1998 agreement with Lilly ICOS.
Operating Expenses
Total operating expenses for the quarter ended September 30, 1999 increased
to $29.9 million from $17.0 million for the quarter ended September 30, 1998.
Total operating expenses for the nine months ended September 30, 1999 increased
to $80.8 million from $49.0 million for the nine months ended September 30,
1998.
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Research and development expenses for the third quarter of 1999 increased
to $28.4 million from $16.3 million for the third quarter of 1998. Research and
development expenses for nine months ended September 30, 1999 increased to $77.3
million from $46.6 million for the nine months ended September 30, 1998. The
increases in research and development expenses for both the quarter and nine
months ended September 30, 1999 were primarily due to costs associated with the
progression of clinical trials for IC351, LeukArrest/TM/, Pafase/TM/, ICM3, and
IC14 as well as the expansion of other product development efforts.
General and administrative expenses for the third quarter of 1999 increased
to $1.6 million from $0.7 million in the third quarter of 1998. General and
administrative expenses for the nine months ended September 30, 1999 increased
to $3.6 million from $2.4 million for the nine months ended September 30, 1998.
The increase in general and administrative expenses for both the third quarter
and nine months ended September 30, 1999 was due primarily to the addition of
management and administrative personnel to support the Company's increased
product development activities. In addition, the Company incurred costs during
the first half of 1999 to register common stock issuable upon exercise of
warrants issued to investors in the Partnership.
Other Income and Expense
Other income primarily represents investment income earned on the Company's
investment securities and interest earned on the Company's loan to the
Partnership. Investment income for the third quarter of 1999 totaled $1.0
million compared to $0.3 million for the third quarter of 1998. Investment
income for the nine months ended September 30, 1999 totaled $3.1 million
compared to $1.2 million for the nine months ended September 30, 1998. The
increase in investment income for both the third quarter and nine months ended
September 30, 1999 was due primarily to higher average cash and investment
balances during the third quarter and first nine months of 1999 compared to the
same periods of 1998. Interest earned on the loan to the Partnership was $0.2
million for both the third quarter of 1999 and 1998 and $0.4 million and 0.5
million, respectively, for the nine months ended September 30, 1999 and 1998.
During the third quarter of 1999 the Company recognized $5.4 million in
losses related to its equity interests in the third quarter losses of Suncos and
the Partnership. For the nine months ended September 30, 1999, the Company
recognized $10.2 million in losses related to its equity interests in these two
affiliates. Equity interests in affiliate net losses, both on a quarter and
year-to-date basis, are primarily related to the continued progression of the
Company's clinical trial activity.
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Net Loss
For the quarter ended September 30, 1999, the Company recognized a net loss
of $16.4 million or $0.37 per share compared to a net loss of $9.4 million or
$0.24 per share for the quarter ended September 30, 1998. For the nine months
ended September 30, 1999, the Company recognized a net loss of $37.5 million or
$0.87 per share compared to a net loss of $27.1 million or $0.68 per share for
the nine months ended September 30, 1998. The increase in net loss for both the
third quarter and nine months ended September 30, 1999 was due primarily to an
increase in costs associated with the progression of clinical trials for IC351,
LeukArrest/TM/, Pafase/TM/, ICM3, and IC14 and the expansion of other product
development efforts. These increased costs were partially offset by increased
cost reimbursement revenues for both the third quarter and nine months ended
September 30, 1999.
Liquidity & Capital Resources
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 and prosecuting patents and
enforcing patent claims, the regulatory process, the time and costs of
manufacturing scale-up and commercialization activities, and other factors. The
Company has financed its operations since inception primarily through private
and public sales of the Company's Common Stock, the exercise of stock options
and warrants, investment income, and revenue from research and development
collaborations, corporate joint ventures, limited partnerships and license
payments.
At September 30, 1999, the Company had $59.7 million in cash and cash
equivalents, investment securities, and interest receivable, a decrease of $18.4
million from December 31, 1998. This decrease is primarily attributable to
continuing costs associated with clinical trials for IC351, LeukArrest/TM/,
Pafase/TM/, ICM3, and IC14 and the Company's $10.0 million equity investment in
Suncos made in March 1999. These costs were partially offset by increased cost
reimbursement revenues as well as $23.6 million received from the exercise of
stock options and warrants. The decrease in cash and cash equivalents is also
attributable to the timing of payments from the Company's affiliates and the
corresponding increase in related party receivables.
For the nine months ended September 30, 1999, the Company spent $4.2
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 may need to purchase additional capital equipment and lease or purchase
additional laboratory and administrative facilities.
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The Company anticipates that its operating expenses may continue to
increase during the remainder of 1999 and in subsequent quarters as it adds the
personnel and facilities associated with advancing potential product candidates
through development and clinical trials and prepares for the commercial launch
of its potential products. Foreseeable incremental costs may include, but are
not limited to, those associated with the Company's own pre-marketing
activities, 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 agreements with Suntory and Lilly
related to the development of Pafase/TM/ and IC351, respectively. Under
provisions of these agreements, the Company is to be reimbursed for certain of
its costs. There can be no assurance that all such costs will be reimbursed.
In October of 1999, the Company received a $15.0 million milestone payment
from its joint venture partner Eli Lilly and Company following the initiation of
a global Phase 3 program related to IC351. Following the receipt of this
milestone payment, the Company anticipates that its existing cash, including
interest income from investments and anticipated payments from Suncos, Lilly
ICOS and the Partnership, will be adequate to satisfy its cash requirements
until the third quarter of 2000. However, the amounts and timing of future
expenditures will depend on the progress of ongoing research and development,
the rate at which operating losses are incurred, the execution of development
and licensing agreements with potential corporate partners, the Company's
development of products, the Food and Drug Administration ("FDA") regulatory
process, and other factors, many of which are beyond the Company's control.
The Company is evaluating several public and private financing
alternatives, some of which would involve the sale of additional stock, the
issuance of debt and/or entering into additional corporate partnerships. The
Company anticipates the completion of some form of financing event prior to the
end of the year 2000. Additional shares issued in conjunction with any
anticipated equity financing could result in some dilution to the Company's
existing shareholders.
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, partnerships
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 may 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 may
result in an increase in operating expenses in future quarters. Further,
incremental expenditures may 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, clinical trials and pre-marketing activities
necessary to
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bring its product candidates to market and to establish marketing capabilities
if and when product candidates are 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, and may require
the Company to consider other alternatives to develop and market the Company's
potential products and technologies.
Year 2000
- ---------
Overview
The Year 2000 problem is the result of computer programs being written
using two, rather than four, digits to define the applicable year. Unless
corrected, those systems with time-sensitive software may recognize a date
ending in "00" as the year 1900 rather than the year 2000, potentially resulting
in system failures or miscalculations.
Readiness
The Company has established a Year 2000 Task Force with representatives
from the major functional areas at ICOS. The Task Force has implemented a
comprehensive program in an effort to properly address Year 2000 issues with
respect to the Company's internal computer systems, software applications,
equipment utilizing date sensitive computer chips and key third party vendors.
The Task Force's plan to resolve the Year 2000 issues has been organized into
six phases:
1) Inventory/Assessment
2) Vendor Contact
3) Remediation
4) Risk Analysis
5) Contingency Planning
6) Testing
The Company has completed its inventory of critical computer systems,
software applications, date sensitive electronic equipment and key third party
vendors. The Company has contacted software and hardware manufacturers and key
third party vendors for Year 2000 readiness assurances and has received
assurances from all high risk manufacturers and vendors. The Company has
implemented a remediation program to repair, modify or replace computer systems,
software applications and date sensitive electronic equipment that fail to
conform to Year 2000 requirements. As of October 31, 1999, the Company's
remediation efforts are substantially complete. The Company plans to continue to
implement Year 2000 solutions, as warranted, to conclude the remediation program
during November and December of 1999.
Page 13
<PAGE>
The Company has completed its risk analysis for all functional areas at
ICOS. Based upon the results of this analysis, the Company has developed and is
in the process of implementing a contingency plan to address areas of material
risk. The Company expects the contingency plan to be completed in November or
December of 1999. In addition, the Company is currently in the process of
performing further tests of systems in the areas of material risk as additional
assurance that these systems will perform as expected in the year 2000.
Costs
An extensive review of the Company's computer systems showed that a
majority of the Company's software, hardware, and embedded controllers have been
purchased within the last five years and, as such, were manufactured with Year
2000 issues in mind. Furthermore, the majority of the Company's critical
software applications were purchased from third-party vendors who have already
provided upgrades designed to bring their products into Year 2000 compliance. As
such, the Company believes that the cost of correcting any internal Year 2000
issues will not be material.
Risks
It is possible that after making necessary upgrades and replacements to its
systems and testing its systems, the Company may still encounter Year 2000
problems. As part of its Year 2000 program the Company has relied on assurances
received from manufacturers and third party vendors. However, it is possible
that some of the Company's key third party associates will experience Year 2000
problems that are outside of the Company's control and which could have a
material impact on the Company's operations. The Company's risk analysis
indicates that its highest Year 2000 risks are in the manufacturing and clinical
areas, including key clinical research organizations, as failures in these areas
may delay development activities, increase the time to bring a product to market
or have other adverse effects on the Company's operations.
Important Factors Regarding Forward-Looking Statements
- ------------------------------------------------------
During the second quarter of 1999, we revised the factors included under
"Important Factors Regarding Forward-Looking Statements" in our annual report on
Form 10-K for the year ended December 31, 1998, to comply with the SEC's new
"plain English" requirements. So that you do not have to rely on the factors
included in our most recent annual report, which are not in the "plain English"
format, we have included the full text of the factors, as revised, in this
quarterly report. These factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report and presented elsewhere by management from time to time.
Page 14
<PAGE>
We have not generated revenues from the sale of products, and we may not be able
to generate enough product revenues in the future to achieve profitability.
We have not yet completed the development of any products and we do not
expect to have any products commercially available for several years.
Consequently, we have not generated revenues from the sale of products since we
started operations. Our operating expenses have increased in 1999 and may
increase in subsequent years as we attempt to complete development of our
potential products and introduce our potential products into the market.
Therefore, even if we do successfully develop products that can be marketed, we
will need to generate significant revenues from those products to achieve and
maintain profitability. If we do become profitable, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis.
Our clinical trials may fail to demonstrate the safety and efficacy of our
products, which could prevent or significantly delay the regulatory approval of
our products.
Before obtaining regulatory approvals for the sale of any of our potential
products, we must subject those products to extensive preclinical and clinical
testing to demonstrate their safety and effectiveness for humans. We may not
complete our clinical trials of potential products under development and the
results of the trials may fail to demonstrate the safety or effectiveness of
such products to the extent necessary to obtain regulatory approvals. This could
delay or prevent regulatory approval of our potential products.
At any time during the course of our clinical trials or commercial use of
our products, factors such as delays in patient enrollment in our clinical
trials, the discovery of unacceptable toxicities or side effects, or the
development of disease resistance or other physiological factors could cause us
to interrupt, limit, delay or abort the development or sale of our potential
products.
If we are unable to obtain the additional funding we need to develop and market
our potential products, we may be required to delay, scale back or eliminate
expenditures for some of our programs or contract with third parties to develop
and market our potential products or technologies.
The development of our potential products will require the commitment of
substantial financial resources to conduct the time-consuming research,
preclinical development and clinical trials necessary to bring our products to
market. We may seek additional funding through public or private financings,
including equity financings, and through other arrangements, including
collaborative arrangements. However, financing may be unavailable when we need
it or may be unavailable on acceptable terms. If adequate funds are unavailable,
we may be required to delay, scale back or eliminate expenditures for some of
our programs or contract with third parties to develop and market our potential
products or technologies.
Page 15
<PAGE>
If we fail to negotiate and maintain collaborative arrangements with third
parties, our development and marketing activities may be delayed or reduced.
We have entered into, and we expect to enter into in the future,
collaborative arrangements with experienced third parties who perform, or may in
the future perform, development, regulatory compliance, manufacturing and
marketing activities relating to some of our potential products. If we fail to
secure and maintain successful collaborative arrangements, our development and
marketing activities may be delayed or reduced. Currently, we have collaborative
arrangements with Suntory Limited, Eli Lilly and Company, and other companies
and research laboratories. We may enter into similar arrangements with other
collaborators in the future, but we may be unable to negotiate additional
collaborative arrangements or extensions of our existing arrangements on
acceptable terms. If we do, any extended or additional arrangements may not be
successful.
Our ability to obtain successful collaborative participation will depend on
a number of factors, including the achievement of research objectives by us and
our collaborators and any existing or potential collaborators' financial,
competitive, marketing and strategic considerations, such as the relative
advantages of alternative products being marketed or developed by others.
We could experience price pressure or reduced demand for our products as a
result of inadequate third-party reimbursement of the patient costs of our
products and the trend toward managed healthcare and government insurance
programs.
Our ability to sell products successfully in the future depends in part on
the extent to which various third parties are willing to reimburse the patient
costs of our products and related treatments. These third parties include
government authorities, private health insurers and other organizations, such as
health maintenance organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize or may
limit reimbursement for our products, even if our products are safer or more
effective than the alternatives. In addition, the trend toward managed
healthcare and government insurance programs could result in lower prices and
reduced demand for our products. Cost containment measures instituted by
healthcare providers, including, for example, practice protocols and guidelines
for use of products, and general healthcare reform may also affect our ability
to sell products in sufficient quantities, or at adequate prices, to become
profitable. We cannot predict the effect of future legislation or regulation
concerning the healthcare industry and third-party coverage and reimbursement on
our business.
Page 16
<PAGE>
We may be unable to establish the manufacturing and sales and marketing
capabilities necessary to become profitable.
Currently, we do not have facilities for the manufacture of small molecule
products, such as IC351, and we may not have sufficient manufacturing capacity
to manufacture all of our biological products in quantities necessary for
commercial sale. In addition, our manufacturing capacity may be inadequate to
complete all clinical trials contemplated by us over time. We expect to develop
our manufacturing capacity by expanding our current facilities, building new
facilities or contracting with other parties for manufacturing services. We may
not, however, be able to acquire all the manufacturing resources necessary to
become profitable.
We also do not have direct sales or marketing capabilities. If we decide to
market our potential products through a direct sales force, we would need to
either hire a sales force with expertise in pharmaceutical sales or contract
with a third party to provide a sales force to meet our needs. We may be unable
to develop a direct sales force or establish other distribution channels
necessary for us to generate enough sales to become profitable.
We may be unable to protect our intellectual property rights adequately.
Our success and ability to compete depend on our licensed and internally
developed technology. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy, develop independently or otherwise obtain and use
our products or technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners.
We cannot be sure that our pending patent applications will result in
issued patents. In addition, our issued patents or pending applications may be
challenged or circumvented by our competitors. Policing unauthorized use of our
intellectual property will be difficult, and we cannot be certain that we will
be able to prevent misappropriation of our technology, particularly in countries
where the laws may not protect our proprietary rights as fully as in the United
States.
Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to stop or delay selling, manufacturing or using products that
incorporate the challenged intellectual property, pay damages or enter into
licensing or royalty agreements which may be unavailable on acceptable terms.
Page 17
<PAGE>
We may be unable to compete successfully in the highly competitive market for
pharmaceutical and biotechnological products.
The market in which we compete is well established and intensely
competitive. We may be unable to compete successfully against our current and
future competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance.
Many entities are engaged in developing pharmaceutical and biotechnological
products for human therapeutic applications, including the applications targeted
by us. Our competitors include pharmaceutical companies, chemical companies,
specialized biotechnology companies, and research and academic institutions.
Many of these organizations have substantially more capital, research and
development, regulatory, manufacturing, marketing, human and other resources and
experience than we do. As a result, they may be able to adapt more quickly to
new technologies, devote greater resources to the promotion or sale of their
products, initiate or withstand substantial price competition, or take advantage
of acquisition or other opportunities more readily.
Rapid changes in technology and industry standards could render our potential
products unmarketable or obsolete.
We are engaged in a field characterized by extensive research efforts and
rapid technological development. New drug discoveries and developments in our
field and other drug discovery technologies are accelerating. Our competitors
may develop technologies and products that are more effective than any we
develop or that render our technology and potential products obsolete or
noncompetitive. In addition, our potential products could become obsolete or
unmarketable if new industry standards emerge. To be successful, we will need to
continually enhance our products and to design, develop and market new products
that keep pace with new technological and industry developments.
Our stock price has been and is likely to continue to be volatile, which could
cause the market price of our common stock to decline.
The market prices for our common stock and for securities of biotechnology
and pharmaceutical companies generally have been volatile in the past and are
likely to continue to be volatile in the future. If you decide to purchase our
shares, you may not be able to resell them at or above the price you paid due to
a number of factors, including actual or anticipated variations in quarterly
operating results, results and progress of preclinical studies and clinical
trials, changes in earnings estimates by analysts, announcements of
technological innovations or new products by our competitors, changes in the
structure of the healthcare financing and payment systems, general conditions in
the biotechnology and pharmaceutical industry, and significant sales of our
common stock by one or more of our principal stockholders.
Page 18
<PAGE>
Government regulatory authorities may not approve our potential products.
The U.S. Food and Drug Administration and comparable agencies in foreign
countries impose substantial requirements on biotechnology and pharmaceutical
companies during development of potential products. These requirements include
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures surrounding the
development and testing of proposed products. Governmental regulation also
affects the manufacture and marketing of pharmaceutical products. If we do not
receive the necessary governmental approvals to market our products, we will be
unable to sell our products and our business may fail.
Any future FDA or other governmental approval of our potential products may
entail limitations on the indicated uses for which these products may be
marketed. The effect of governmental regulation may be to delay marketing new
products for a considerable period of time, to impose costly requirements on our
activities or to provide a competitive advantage to our competitors. In
addition, compliance with the regulations of these agencies may delay or prevent
us from introducing new or improved products or require us to stop marketing our
products. If we fail to comply with the laws and regulations pertaining to our
business, we may be subject to sanctions, including the temporary or permanent
suspension of operations, product recalls and marketing restrictions.
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our products.
Product liability is a risk in the testing and marketing of biotechnology
and pharmaceutical products. We face an inherent business risk of exposure to
product liability claims in the event that the use of our technology or products
is alleged to have resulted in harm to others. This risk exists in human
clinical trials as well as in commercial distribution. The biotechnology and
pharmaceutical industry in general has been subject to significant medical
malpractice litigation. We may incur significant liability in the event of such
litigation. Although we maintain product liability insurance, we cannot be sure
that this coverage is adequate or that it will continue to be available on
acceptable terms.
We may be exposed to substantial environmental liability arising from our
activities involving the use of hazardous materials.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and radioactive compounds. In the event
of an accident involving these materials, we could be held liable for any
damages that result, and that liability could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous materials and certain
waste products. Although we believe that our operations comply with the
standards prescribed by these laws, the risk of accidental contamination or
injury from these materials cannot be completely eliminated.
Page 19
<PAGE>
We depend on highly qualified management and technical personnel who may not
remain with us.
We are highly dependent on the efforts and abilities of our current key
technical and managerial personnel. Our success will depend in part on retaining
the services of our existing management and key personnel and attracting and
retaining new highly qualified personnel. Failure to retain our existing key
management and technical personnel or to attract additional highly qualified
personnel could, among other things, inhibit our ability to negotiate additional
collaborative arrangements, delay preclinical or clinical testing of our
products, obstruct our ongoing discovery research, or delay the regulatory
approval process.
In our field, competition for qualified management and technical personnel
is intense. This competition is particularly acute at this time due to the low
unemployment rate experienced nationally. In addition, many of the companies
with which we compete for experienced personnel have greater financial and other
resources than we do. As a result of these factors, we may be unsuccessful in
recruiting and retaining sufficient qualified personnel.
If we or our key outside vendors encounter Year 2000 computer problems,
development of our products may be delayed.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries may produce erroneous results, or fail, unless they
are modified or upgraded to process date information correctly. Year 2000
problems with our computer systems or the systems of our key outside vendors
might cause delays in our development activities or in our clinical trials and
ultimately delay the launch of our potential products.
As discussed above, we have implemented a comprehensive program to properly
address Year 2000 issues with respect to our computer systems, software
applications, equipment utilizing date sensitive computer chips and key third
party vendors. We believe that we have already addressed many of our expected
internal Year 2000 issues through normal upgrades and new purchases of software
and computer equipment. However, it is possible that after analyzing our systems
for Year 2000 issues, making necessary upgrades and replacements to our systems
and testing our systems, we may still encounter Year 2000 problems. Furthermore,
it is possible that some of our key outside vendors will fail to correct in a
timely fashion, if at all, their own Year 2000 problems. We are also in the
process of establishing contingency plans for critical systems and business
processes. Such plans will continue to be refined throughout the remainder of
1999. While we believe that our contingency plans will be sufficiently
comprehensive in addressing material risks related to Year 2000 issues, there
are no assurances that such plans will be completed in a timely manner or that
such plans will adequately address all material Year 2000 issues.
Page 20
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts payable and a note receivable from a related
party. The Company does not use derivative financial instruments in its
investment portfolio. The Company's exposure to market risk for changes in
interest rates relates primarily to its short-term investments, thus,
fluctuations in interest rates would not have a material impact on the fair
value of these securities.
Page 21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
------ -----------
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the three months
ended September 30, 1999.
Page 22
<PAGE>
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: November 12, 1999 By: /S/ PAUL N. CLARK
----------------- ------------------
Paul N. Clark
Chief Executive Officer and President
Date: November 12, 1999 By: /S/ HOWARD S. MENDELSOHN
----------------- -------------------------
Howard S. Mendelsohn
Chief Accounting Officer
Page 23
<PAGE>
Index to Exhibits
-----------------
27.1 Financial Data Schedule
Page 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,213
<SECURITIES> 46,382
<RECEIVABLES> 15,525
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,790
<PP&E> 44,362
<DEPRECIATION> 24,331
<TOTAL-ASSETS> 102,881
<CURRENT-LIABILITIES> 15,255
<BONDS> 0
0
0
<COMMON> 442
<OTHER-SE> 87,184
<TOTAL-LIABILITY-AND-EQUITY> 102,881
<SALES> 0
<TOTAL-REVENUES> 49,787
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 87,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (37,544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,544)
<EPS-BASIC> (.87)
<EPS-DILUTED> (.87)
</TABLE>
