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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, 2000
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 as of September 30, 2000
----- ------------------------------------
Common Stock, $0.01 par value 46,930,877
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ICOS CORPORATION
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TABLE OF CONTENTS
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<TABLE>
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PAGE NO.
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PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations for the three months and nine
months ended September 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk 16
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
EXHIBITS 19
</TABLE>
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PART 1: Financial Information
ITEM 1: Financial Statements
ICOS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Collaborative research and development from related
parties $ 11,460 $ 17,622 $ 31,698 $ 49,287
Other - - - 500
--------- --------- --------- ---------
Total revenue 11,460 17,622 31,698 49,787
Operating expenses:
Research and development 19,694 28,363 63,603 77,252
General and administrative 1,133 1,553 4,253 3,558
--------- --------- --------- ---------
Total operating expenses 20,827 29,916 67,856 80,810
--------- --------- --------- ---------
Operating loss (9,367) (12,294) (36,158) (31,023)
--------- --------- --------- ---------
Other income (expense):
Equity in losses of affiliates (13,436) (5,393) (18,922) (10,168)
Investment income 918 1,048 3,184 3,097
Other, net 200 240 897 550
--------- --------- --------- ---------
(12,318) (4,105) (14,841) (6,521)
--------- --------- --------- ---------
Net loss $ (21,685) $ (16,399) $ (50,999) $ (37,544)
========= ========= ========= =========
Net loss per common share - basic and diluted $ (0.47) $ (0.37) $ (1.11) $ (0.87)
========= ========= ========= =========
Weighted-average common shares outstanding - basic
and diluted 46,494 43,970 45,851 43,134
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ICOS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
---------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,140 $ 12,885
Investment securities, at market value 33,667 55,349
Interest receivable 503 1,020
Receivables from related parties under collaborative arrangements 20,415 9,780
Loan receivable from related party - 7,341
Other current assets 2,302 2,049
--------- ---------
Total current assets 76,027 88,424
Net property and equipment, at cost 19,683 21,042
Investments in affiliates 133 3,241
Other assets 123 81
--------- ---------
$ 95,966 $ 112,788
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,320 $ 4,854
Accrued clinical expenses 2,698 3,409
Due to affiliates 13,635 -
Other accrued expenses 3,802 5,126
--------- ---------
Total current liabilities 22,455 13,389
Stockholders' equity:
Common stock 469 448
Additional paid-in capital 248,391 223,477
Accumulated other comprehensive loss (40) (216)
Accumulated deficit (175,309) (124,310)
--------- ---------
Total stockholders' equity 73,511 99,399
--------- ---------
$ 95,966 $ 112,788
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ICOS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (50,999) $ (37,544)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,424 3,361
Loss on sale of investment securities - 13
Equity in losses of affiliates 18,922 10,168
Stock compensation costs 555 -
Change in operating assets and liabilities:
Interest receivable 517 (690)
Receivables from related parties under collaborative arrangements (11,036) (6,693)
Other current assets 397 (129)
Accounts payable (2,381) 2,543
Accrued clinical expenses (711) (1,547)
Other accrued expenses (1,324) (355)
Other (42) (72)
--------------- ---------------
Net cash used in operating activities (42,678) (30,945)
Cash flows from investing activities:
Purchases of investment securities (15,860) (54,324)
Maturities of investment securities 33,959 13,686
Sales of investment securities 3,999 1,981
Acquisitions of property and equipment (2,461) (4,175)
Proceeds upon repayment of related party loan 7,341 -
Equity investments in affiliates (2,179) (10,219)
--------------- ---------------
Net cash provided by (used in) investing activities 24,799 (53,051)
--------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 22,158 23,605
Proceeds from issuance of warrants 1,976 3,020
--------------- ---------------
Net cash provided by financing activities 24,134 26,625
Net increase (decrease) in cash and cash equivalents 6,255 (57,371)
Cash and cash equivalents at beginning of period 12,885 69,584
--------------- ---------------
Cash and cash equivalents at end of period $ 19,140 $ 12,213
=============== ===============
Supplemental disclosure concerning cash flow information:
Cash paid during the period for income taxes $ - $ 648
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ICOS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999, included in the Company's Annual Report on Form 10-K.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
ICOS and its wholly owned subsidiary. All significant intercompany transactions
and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the presentation of current year amounts.
2. Research and Development Arrangements
-------------------------------------
Abbott Laboratories
In April 1995, the Company formed a collaboration with Abbott Laboratories
("Abbott") to discover small molecule drugs that modulate the intracellular
signaling connections of certain intercellular adhesion molecules and integrins.
In September 1997, the Company expanded and extended this relationship to
include small molecule antagonists of the extracellular domains of certain
integrins and intercellular adhesion molecules. The research program under which
the Company received research funding from Abbott ended on April 1, 1999. Under
the terms of the agreement, each company had exclusive rights to drugs against
specific molecular targets with royalties and milestone obligations to the other
party. Each party was responsible for the development, registration and
commercialization of its own product candidates. In addition, the collaboration
provided the Company with a
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library of chemical compounds for use in the Company's own discovery programs.
In June 2000, the Company acquired Abbott's rights to drugs for indications
covered by the collaboration, and the Company now has marketing rights to all
compounds in all indications worldwide. Abbott will receive royalties on any
marketed products.
Suncos
In February 1997, the Company and Suntory Limited formed Suncos Corporation
("Suncos"), a joint venture to develop and commercialize PAFASE(R) worldwide.
Under the terms of the arrangement, the joint venture was established with a $30
million cash investment by Suntory to Suncos. The Company granted Suncos a
license to all rights to Pafase on a worldwide basis. Both the Company and
Suntory retain 50% ownership in Suncos. Suncos has granted Suntory exclusive
rights to develop and commercialize Pafase in Japan, and Suncos has granted the
Company exclusive rights to develop and commercialize Pafase in the United
States. Suncos retains the rights to develop and commercialize Pafase in Europe
and the rest of the world. Suncos is managed jointly by Suntory and the Company.
Suntory and the Company will each pay royalties to Suncos on sales of Pafase in
their respective territories.
For the quarter and nine months ended September 30, 2000, the Company
recognized cost reimbursement revenue under this arrangement of $4.5 million and
$10.6 million, respectively. 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, 2000, the Company
recognized $2.3 million and $5.5 million of equity in losses of affiliates,
respectively, representing its proportionate share of Suncos' net losses. For
the quarter and nine months ended September 30, 1999, the Company recognized
$5.3 million and $10.0 million of equity in losses of affiliates, respectively,
representing its proportionate share of Suncos' net losses.
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 ("partnership units"). Proceeds from the offering are dedicated to
fund the Company's development of certain product candidates including Pafase.
For the quarter and nine months ended September 30, 2000, the Company recognized
cost reimbursement revenue from the Partnership of $1.3 million and $6.8
million, respectively. 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.
In connection with the Partnership's 1997 sale of limited partnership
units, the Company issued Series A warrants to purchase 5.6 million and 2.0
million shares of the Company's common stock at exercise prices of $9.13 and
$10.35 per share, respectively. The Series A warrants are exercisable through
May 31, 2002. In June 1999, the Company issued Series B warrants to purchase 7.6
million shares of the Company's common stock at an exercise
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price of $52.49 per share. The Series B warrants issued are exercisable through
June 30, 2004. During the nine months ended September 30, 2000, warrants to
purchase 1,053,400 shares were exercised at a weighted-average exercise price of
$9.74 per share resulting in total proceeds to the Company of $10.3 million. At
September 30, 2000, warrants to purchase approximately 10.3 million shares
remain outstanding at a weighted-average exercise price of $40.88 per share.
Lilly ICOS, LLC
In October 1998, the Company and Eli Lilly and Company formed Lilly ICOS
LLC ("Lilly ICOS"), a 50/50-owned limited liability company, to develop and
globally commercialize PDE5 inhibitors. Lilly ICOS is developing CIALIS(TM) as
an oral therapeutic agent for the treatment of both erectile dysfunction and
female sexual dysfunction. Under the terms of the joint venture agreement, the
Company received a $75.0 million payment upon formation of the joint venture and
an additional $15.0 million payment in 1999 upon initiation of a Phase 3
clinical trial program for Cialis, and could receive additional payments based
on the progression of Cialis through development. The joint venture was
initially capitalized by Eli Lilly through cash contributions and the
contribution by the Company of intellectual property associated with Cialis and
its research platform. The joint venture will market any products resulting from
this collaborative effort in North America and Europe. For countries outside
North America and Europe, potential products will be licensed exclusively to Eli
Lilly for commercialization with a royalty paid to the joint venture.
For the quarter and nine months ended September 30, 2000, the Company
recognized cost reimbursement revenue under this arrangement of $4.8 million and
$13.3 million, respectively. 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.
The intellectual property contributed to Lilly ICOS by the Company had no
basis for financial reporting purposes and, accordingly, the Company recorded
its initial investment in Lilly ICOS at zero. The Company did not recognize any
portion of Lilly ICOS' operating losses during the time the joint venture
activities were funded exclusively by Lilly. In the third quarter of 2000, the
Company began recognizing its share of Lilly ICOS' losses because the Company
will now provide its proportionate share of the funding of joint venture
operations. For the quarter and nine months ended September 30, 2000, the
Company recognized $9.4 million of equity in losses of affiliates, representing
its share of the net losses of Lilly ICOS.
ICOS - Texas Biotechnology L. P.
In June 2000, the Company and Texas Biotechnology formed ICOS-Texas
Biotechnology L.P. ("ICOS-TBC"), a 50/50-owned limited partnership, to develop
and commercialize endothelin antagonists such as sitaxsentan. Under the terms of
this arrangement, the Company and Texas Biotechnology will equally fund the
development of endothelin antagonists and equally share in the profits of the
partnership. The Company made an initial $2.0 million
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payment to Texas Biotechnology and may make further milestone payments of up to
$53.5 million. Texas Biotechnology made an initial contribution of intellectual
property associated with endothelin antagonists, including patent rights and
technical information. Both parties will provide the partnership with research
and development services. The partnership will manufacture, market and sell any
products resulting from the collaboration worldwide.
For the quarter and nine months ended September 30, 2000, the Company
recognized $0.9 million and $1.0 million, respectively, in revenue under a
research and development agreement with Texas Biotechnology. During the same
periods, the Company also recognized equity in losses of affiliates of $1.6
million and $3.9 million, respectively, representing its proportionate share of
the ICOS-TBC net losses.
3. Comprehensive Loss
------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands) September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Net loss $(21,685) $(16,399) $(50,999) $(37,544)
Other comprehensive income (loss):
Unrealized holding gains (losses) 100 9 176 (191)
arising during the period
Less reclassification adjustment for
losses included in net loss - 4 - 3
------------------------- ------------------------
Total other comprehensive income (loss) 100 13 176 (188)
------------------------- ------------------------
Comprehensive loss $(21,585) $(16,386) $(50,823) $(37,732)
========================= ========================
</TABLE>
4. Net Loss Per Common Share
-------------------------
Net loss per common share is based on the weighted-average number of common
shares outstanding during the periods. For the quarter and nine months ended
September 30, 2000, options to acquire 7.7 million shares of common stock and
warrants to acquire 10.3 million shares of common stock have been excluded from
the computation of net loss per common share because their impact would be
antidilutive. For the quarter and nine months ended September 30, 1999, options
to acquire 8.6 million shares of common stock and warrants to acquire 11.5
million shares of common stock have been excluded from the computation of net
loss per common share because their impact would be antidilutive.
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5. Financing
---------
On October 11, 2000, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission (the "SEC") in connection with a
proposed offering of 5.0 million shares of the Company's common stock. The
Company anticipates that the proceeds from this offering, if consummated, along
with its existing cash, interest income from investments, anticipated payments
from affiliates, and cash flow from other operating activities, will be
sufficient to fund its cash requirements for at least the next 18 months.
However, the amounts and timing of 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's regulatory process, and other factors, many of which are beyond
the Company's control.
6. Operating Segments
------------------
The Company's operations are confined to one operating segment, the
discovery and development of proprietary pharmaceuticals for the treatment of
serious medical conditions.
7. Recent Accounting Pronouncements
--------------------------------
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B, or SAB
101B. SAB 101B delays the effective date of Staff Accounting Bulletin No. 101,
or SAB 101, "Revenue Recognition in Financial Statements," to no later than the
fourth quarter of fiscal years beginning after December 15, 1999. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues.
The interpretation of SAB 101 is currently uncertain as it relates to
biotechnology companies and, consequently, the impact on the Company's financial
statements is unknown. The Company is currently evaluating the impact of SAB
101 on the accounting for license fees received under collaboration agreements.
Should the Company determine that a change in the method of accounting for these
fees is necessary, such changes will be made in the fourth quarter of 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation; an Interpretation of Accounting Principles Board Opinion No. 25."
Interpretation No. 44 clarifies the application of Interpretation of Accounting
Principles Board Opinion No. 25, or APB 25, and became effective on July 1,
2000. Interpretation No. 44 clarifies the definition of "employee" for purposes
of applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. The Company's
adoption of Interpretation No. 44 on July 1, 2000 did not have a material impact
on its consolidated financial statements.
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not expect the adoption of SFAS 133 will have a
material impact on its consolidated financial statements as the Company does not
currently hold any derivative instruments.
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Risks and Uncertainties
-----------------------
The following discussion and analysis should be read in conjunction with
our condensed 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 our plans, objectives, expectations and intentions. The words
"believes," "intends," "anticipates," "plans to," "expects" and similar
expressions are intended to identify forward-looking statements. Our 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 risks associated with clinical
development, regulatory approvals, product commercialization, intellectual
property claims, litigation and other risks discussed under "Important Factors
Regarding Forward-Looking Statements" in our annual report on Form 10-K for the
year ended December 31, 1999, and under "Risk Factors" in our Registration
Statement on Form S-3 filed with the SEC on October 11, 2000. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. We undertake 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
--------
ICOS is a product-driven company that is developing and has expertise in
both protein-based and small molecule therapeutics. We combine our capabilities
in molecular, cellular and structural biology, high throughput drug screening,
medicinal chemistry and genomics to develop highly innovative products with
significant commercial potential. We and our partners currently have three
product candidates in late-stage clinical development: Cialis, which is in Phase
3 clinical trials; Pafase, which is anticipated to enter Phase 3 clinical trials
in the first quarter of 2001; and sitaxsentan, which is anticipated to enter
Phase 2b/3 clinical trials in the first quarter of 2001. We plan to submit a new
drug application for Cialis in the second half of 2001, subject to successfully
concluding our clinical trials. To enhance our internal development efforts, we
have established collaborations with other pharmaceutical and biotechnology
companies, including Eli Lilly, Suntory and Texas Biotechnology.
We recognize revenue for our contracts for research and development
efforts, including those under collaborative agreements, as the related expenses
are incurred. Payments received that are related to future performance are
deferred and recognized as revenue over the appropriate future performance
periods.
We recognize our share of the operating results of our collaborations in
proportion to our ownership interest in the collaboration and record it as
equity in gains (losses) of affiliates. Losses relating to our collaborations
are recognized only to the extent we have made or are committed to make capital
contributions to the collaboration. Operating results of our collaborations
include expenses related to research and development efforts that we recognize
as revenue. Due to the nature of our collaborative agreements, cost
reimbursement revenue, which is
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included in collaborative research and development from related parties, largely
depends on the continued progression of clinical trial and development
activities.
Cost reimbursement revenue includes revenue recognized pursuant to our
product development agreement with ICOS Clinical Partners L.P., a limited
partnership composed of private investors to fund development of certain of our
product candidates. Proceeds received under this agreement are apportioned
between collaborative research and development revenue from related parties and
additional paid-in capital for the purchase of warrants. The amount recognized
as revenue under this agreement is based on a relationship between costs
incurred and available funding. As of September 30, 2000, there remained
approximately $4.3 million available to be recognized as revenue under this
agreement through March 31, 2001.
We have incurred significant operating losses since we began operations in
September 1990. As of September 30, 2000, we had an accumulated deficit of
$175.3 million. We expect that our operating expenses will continue to increase
during 2000 and subsequent years as we attempt to complete development of our
product candidates, obtain necessary regulatory approvals and manufacture and
market these product candidates. In particular, we expect to incur substantial
marketing and other costs related to commercializing Cialis if we are able to
complete clinical trials and obtain regulatory approval for this product
candidate. We may also incur costs and make capital contributions under our
collaborative agreements with Eli Lilly, Suntory and Texas Biotechnology related
to the development of Cialis, Pafase and sitaxsentan, respectively. The clinical
and development activities of our affiliates are not entirely within our
control. On October 11, 2000, we filed a Registration Statement on Form S-3 with
the SEC in connection with a proposed offering of 5.0 million shares of common
stock. We expect that the net proceeds from this offering, if consummated, will
allow us to pursue our internal research and development activities more
aggressively and may provide us increased flexibility in establishing future
collaborations. As a result of these factors, we expect to incur losses for at
least the next three years.
Our results of operations may vary significantly from period to period and
will depend on, among other factors, the timing of expenses, payments received
from collaborations, and the progress of our research and development efforts.
We may experience significant fluctuations in both cost reimbursement revenue
and revenue from the license of technology to related parties from one period to
the next. Revenue from the license of technology to related parties may be tied
to the achievement of research and development objectives or milestones and may
also depend on the success of our clinical trial and development efforts. In
addition, significant changes in joint venture activities could cause
fluctuations in the amount of affiliate losses from period to period.
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Results of Operations
---------------------
Revenue
Revenue for the third quarter of 2000 decreased 35% to $11.5 million
compared to $17.6 million during the third quarter of 1999. Revenue for the
third quarter of 2000 consisted primarily of $4.5 million in cost reimbursement
revenue from Suncos, $1.3 million from ICOS Clinical Partners, $4.8 million from
Lilly ICOS and $0.9 million from ICOS-Texas Biotechnology. Revenue for the third
quarter of 1999 consisted of $10.7 million in cost reimbursement revenue from
Suncos, $4.3 million from ICOS Clinical Partners and $2.6 million from Lilly
ICOS.
Revenue for the first nine months of 2000 decreased 36% to $31.7 million
compared to $49.8 million for the first nine months of 1999. Revenue for the
first nine months of 2000 consisted primarily of $10.6 million in cost
reimbursement revenue from Suncos, $6.8 million from ICOS Clinical Partners,
$13.3 million from Lilly ICOS and $1.0 million from ICOS-Texas Biotechnology.
Revenue for the first nine months of 1999 consisted of $21.8 million in cost
reimbursement revenue from Suncos, $13.4 million from ICOS Clinical Partners,
$14.1 million from Lilly ICOS and $0.5 million received under a research and
development agreement with Abbott Laboratories.
The decrease in revenue, both on a quarterly and year-to-date basis,
reflects a reduction in reimbursable clinical trial and development expenses
primarily associated with Pafase as well as a reduction in available funding
from ICOS Clinical Partners during 2000 compared to the same periods of the
prior year.
Operating Expenses
Research and development. Research and development expense consists
primarily of costs associated with conducting basic research, clinical trials
for our product candidates and other costs incurred in direct support of those
activities. Research and development expense for the third quarter of 2000
decreased 31% to $19.7 million compared to $28.4 million for the third quarter
of 1999. Research and development expense for the first nine months of 2000
decreased 18% to $63.6 million compared to $77.3 million for the first nine
months of 1999. The decrease in research and development expense, on both a
quarterly and year-to-date basis, was primarily due to the discontinuation of
clinical activity associated with product candidate LEUKARREST(TM) in 2000 as
well as completion in 2000 of multiple Pafase clinical studies that were ongoing
during 1999. This decrease was partially offset by increased research and
development expenses associated with sitaxsentan and our small molecule product
candidates IC485 and IC747.
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General and administrative. General and administrative expense consists
primarily of costs associated with corporate support functions, general
management and other activities not directly related to research and development
efforts. General and administrative expense for the third quarter of 2000
decreased 27% to $1.1 million compared to $1.6 million in the third quarter of
1999. The decrease reflects reduced expenses in a number of administrative areas
in the third quarter of 2000 compared to the third quarter of 1999. General and
administrative expense for the first nine months of 2000 increased 20% to $4.3
million compared to $3.6 million for the first nine months of 1999. The increase
was primarily due to certain management transition costs incurred during the
first nine months of 2000.
Equity in losses of affiliates
Equity in losses of affiliates represents our share of the operating losses
of our collaborations. During the third quarter of 2000, equity in losses of
affiliates increased 149% to $13.4 million compared to $5.4 million during the
third quarter of 1999. During the first nine months of 2000, equity in losses of
affiliates increased 86% to $18.9 million compared to $10.2 million during the
first nine months of 1999. The increase, on both a quarterly and year-to-date
basis, was primarily due to continued progression of our clinical trial activity
for Cialis as well as our share of losses related to the start-up activities of
ICOS-Texas Biotechnology, partially offset by lower costs associated with
clinical trial activity for Pafase. In addition, in the third quarter of 2000,
we began to recognize our share of Lilly ICOS' losses because we will now
provide our proportionate share of the funding of Lilly ICOS' operations
pursuant to our collaboration agreement with Eli Lilly. Prior to the third
quarter of 2000, Eli Lilly funded all of Lilly ICOS' operations. Our equity in
the losses of Lilly ICOS for both the third quarter and the first nine months of
2000 was $9.4 million.
Investment income
Investment income for the third quarter of 2000 decreased 12% to $0.9
million compared to $1.0 million for the third quarter of 1999. This decrease
was primarily due to lower average cash balances available for investment during
the third quarter of 2000. Investment income for the first nine months of 2000
increased 3% to $3.2 million compared to $3.1 million for the first nine months
of 1999. This increase was primarily due to higher yields on investment balances
during the first nine months of 2000.
Net loss
As a result of the above, we reported a net loss of $21.7 million, or $0.47
per share, for the third quarter of 2000, compared to a net loss of $16.4
million, or $0.37 per share, for the third quarter of 1999. For the first nine
months of 2000, we reported a net loss of $51.0 million, or $1.11 per share,
compared to a net loss of $37.5 million, or $0.87 per share, for the first nine
months of 1999.
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Liquidity & Capital Resources
-----------------------------
As of September 30, 2000, we had cash, cash equivalents, investment
securities available for sale, and interest receivable of $53.3 million compared
to $69.3 million as of December 31, 1999.
We used $42.7 million in cash for operating activities during the first
nine months of 2000 compared to $30.9 million during the first nine months of
1999. The primary operating uses of cash during the first nine months of 2000
relate to our clinical trial activities associated with Cialis and Pafase as
well as the expansion of other product development efforts. Current year cash
outflows also reflect costs related to the acquisition of technology rights and
LFA-1 compounds from Abbott Laboratories. The primary operating uses of cash
during the first nine months of 1999 relate to our clinical trial activities
associated with Cialis, Pafase and LeukArrest as well as the expansion of other
product development efforts.
We generated $24.8 million in cash from investing activities during the
first nine months of 2000 compared to using $53.1 million in cash during the
first nine months of 1999. Significant cash inflows from investing activities
during the first nine months of 2000 included a $22.1 million net decrease in
our short-term investment portfolio and $7.3 million received upon the repayment
of a loan to ICOS Clinical Partners. Significant cash outflows during the first
nine months of 2000 included a $2.0 million capital contribution upon the
formation of ICOS-Texas Biotechnology and $2.5 million invested in capital
equipment and leasehold improvements to support our research and development
activities. The primary investing uses of cash during the first nine months of
1999 included a $38.7 million net increase in our short-term investment
portfolio, $10.2 million in equity investments in affiliates and $4.2 million
invested in property, plant and equipment.
We generated $24.1 million in cash from financing activities during the
first nine months of 2000 compared to $26.6 million during the first nine months
of 1999. The primary cash inflows in both periods relate to proceeds received
from the exercise of stock options and warrants.
Our future cash requirements will depend on various factors, many of which
are beyond our control, including:
. continued scientific progress in our research and development programs;
. the results of clinical trials and preclinical studies;
. acquisitions of products or technologies, if any;
. relationships with corporate collaborators;
. capital contributions to our joint ventures, including Lilly ICOS;
. royalty payments to ICOS Clinical Partners upon commercialization of
Pafase;
. competing technological and market developments;
. the time and costs involved in filing and prosecuting patents and enforcing
patent claims;
. the regulatory process; and
. the time and costs of manufacturing, scale-up and commercialization
activities.
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We have engaged in collaborations and joint development agreements with
other parties where the work and strategies of the other parties complement
ours. In some instances, these relationships may involve commitments by us to
fund some or all of certain development programs. Although corporate
collaborations, partnerships and joint ventures have provided cost reimbursement
revenue to us in the past, we cannot assure you that this type of revenue will
be available to us in the future.
We intend to expand our operations and hire the additional personnel
necessary to continue development of our current portfolio of product candidates
in clinical trials, as well as to continue discovery and preclinical research to
identify additional product candidates. We also intend to pursue pre-marketing
activities necessary to bring our product candidates to market and to establish
marketing capabilities if and when a product candidate is ready for
commercialization. We anticipate that expansion of these activities will
increase operating expenses in the future. Furthermore, we will need to make
incremental expenditures for additional laboratory, production and office
facilities to accommodate the activities and personnel associated with this
increased development effort.
We anticipate that our existing cash, interest income from investments,
anticipated payments from Suncos, Lilly ICOS and ICOS Clinical Partners, and
cash flow from other operating activities, will be adequate to satisfy our cash
requirements through the first quarter of 2001. We anticipate that these
resources, together with the net proceeds from our proposed offering of 5.0
million shares of our common stock, if consummated, will be adequate to satisfy
our cash requirements for at least the next 18 months. However, we cannot assure
you that any offering of our common stock will be consummated. Even if such an
offering is completed, we may need additional financing, depending on our
product development efforts. Additional financing may not be available when we
need it or may be unavailable on acceptable terms. If we are unable to raise
additional funds when we need them, we may be required to delay, scale back or
eliminate expenditures for some of our development programs or grant rights to
third parties to develop and market products that we would prefer to develop and
market internally.
Recent Accounting Pronouncements
--------------------------------
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B, or SAB
101B. SAB 101B delays the effective date of Staff Accounting Bulletin No. 101,
or SAB 101, "Revenue Recognition in Financial Statements," to no later than the
fourth quarter of fiscal years beginning after December 15, 1999. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues. The
interpretation of SAB 101 is currently uncertain as it relates to biotechnology
companies and, consequently, the impact on our financial statements is unknown.
We are currently evaluating the impact of SAB 101 on the accounting for license
fees received under collaboration agreements. Should we determine that a change
in the method of accounting for these fees is necessary, such changes will be
made in the fourth quarter of 2000.
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In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation; an Interpretation of Accounting Principles Board Opinion No. 25."
Interpretation No. 44 clarifies the application of Interpretation of Accounting
Principles Board Opinion No. 25, or APB 25, and became effective on July 1,
2000. Interpretation No. 44 clarifies the definition of "employee" for purposes
of applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. Our adoption of
Interpretation No. 44 on July 1, 2000 did not have a material impact on our
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. We do not expect the adoption of SFAS 133 will have a material
impact on our consolidated financial statements as we do not currently hold any
derivative instruments.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Our financial instruments consist of cash and cash equivalents, short-term
investments, accounts payable and an equity interest in an affiliate. We do not
use derivative financial instruments in our investment portfolio. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
investments, thus, fluctuations in interest rates would not have a material
impact on the fair value of these financial instruments.
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PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the three
months ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICOS CORPORATION
Date: October 18, 2000 By: /s/ PAUL N. CLARK
---------------- -----------------
Paul N. Clark
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: October 18, 2000 By: /s/ SANFORD S. HASKINS
---------------- ----------------------
Sanford S. Haskins
Acting Chief Financial Officer
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