<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 June 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
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 91-1463450
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22021 - 20th Avenue S.E., Bothell, WA 98021
________________________________________________________________________________
(Address of principal executive offices) (Zip code)
(425) 485-1900
________________________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________________________
(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 July 31, 2000
----- ----------------------------
Common Stock, $0.01 par value 46,304,846
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ICOS CORPORATION
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE NO.
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PART I. Financial Information
ITEM 1. Financial Statements
<S> <C>
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows for the six months ended June 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 9
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk 14
PART II. Other Information
ITEM 4: Submission of Matters to a Vote of Security Holders 15
ITEM 5: Other Information 16
ITEM 6: Exhibits and Reports on Form 8-K 16
SIGNATURE 17
EXHIBITS 18
</TABLE>
<PAGE>
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 Six months ended
June 30, June 30,
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------- --------------- -------------- --------------
Revenue:
Collaborative research and development from related $ 10,461 $ 16,020 $ 20,238 $ 31,665
parties
Other - - - 500
--------------- --------------- -------------- -------------
Total revenue 10,461 16,020 20,238 32,165
Operating expenses:
Research and development 23,632 26,626 43,909 48,889
General and administrative 1,628 1,204 3,120 2,005
--------------- --------------- -------------- -------------
Total operating expenses 25,260 27,830 47,029 50,894
--------------- --------------- -------------- -------------
Operating loss (14,799) (11,810) (26,791) (18,729)
--------------- --------------- -------------- -------------
Other income (expense):
Equity in losses of affiliates (4,003) (3,274) (5,486) (4,775)
Investment income 1,125 908 2,266 2,049
Other, net 235 216 697 310
--------------- --------------- -------------- -------------
(2,643) (2,150) (2,523) (2,416)
--------------- --------------- -------------- -------------
Net loss $(17,442) $(13,960) $(29,314) $(21,145)
=============== =============== ============== =============
Net loss per common share - basic and diluted $ (0.38) $ (0.32) $ (0.64) $ (0.50)
=============== =============== ============== =============
Weighted average common shares outstanding - basic 45,880 43,274 45,524 42,709
and diluted
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Form 10-Q Page 1
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ICOS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
--------------------- --------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,025 $ 12,885
Investment securities, at market value 35,399 55,349
Interest receivable 542 1,020
Receivables from related parties under collaborative arrangements 12,489 9,780
Loan receivable from related party - 7,341
Other current assets 2,400 2,049
--------------------- --------------------
Total current assets 73,855 88,424
Net property and equipment, at cost 20,270 21,042
Investments in affiliates, at equity 180 3,241
Other assets 81 81
--------------------- --------------------
$ 94,386 $ 112,788
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,186 $ 4,854
Accrued clinical expenses 2,773 3,409
Other accrued expenses 3,956 5,126
--------------------- --------------------
Total current liabilities 8,915 13,389
Stockholders' equity:
Common stock 461 448
Additional paid-in capital 238,774 223,477
Accumulated other comprehensive loss (140) (216)
Accumulated deficit (153,624) (124,310)
--------------------- --------------------
Total stockholders' equity 85,471 99,399
--------------------- --------------------
$ 94,386 $ 112,788
===================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Form 10-Q Page 2
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ICOS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (29,314) $ (21,145)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,317 2,134
Loss on sale of investment securities - 13
Equity in losses of affiliates 5,486 4,775
Stock compensation costs 555 -
Change in operating assets and liabilities:
Interest receivable 478 (236)
Receivables from related parties under collaborative arrangements (3,110) (1,409)
Other current assets (277) (279)
Accounts payable (2,515) (288)
Accrued clinical expenses (636) (2,446)
Other accrued expenses (1,418) (710)
-------------------- -------------------
Net cash used in operating activities (28,434) (19,591)
Cash flows from investing activities:
Purchases of investment securities (11,793) (45,357)
Maturities of investment securities 27,964 8,908
Sales of investment securities 3,999 1,981
Acquisitions of property and equipment (1,842) (3,209)
Proceeds upon repayment of related party loan 7,341 -
Equity investments in affiliates (2,178) (10,219)
Other - (8)
-------------------- -------------------
Net cash provided by (used in) investing activities 23,491 (47,904)
-------------------- -------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 13,379 21,017
Proceeds from issuance of warrants 1,704 2,017
-------------------- -------------------
Net cash provided by financing activities 15,083 23,034
Net increase (decrease) in cash and cash equivalents 10,140 (44,461)
Cash and cash equivalents at beginning of period 12,885 69,584
-------------------- -------------------
Cash and cash equivalents at end of period $ 23,025 $ 25,123
==================== ===================
Supplemental disclosure concerning cash flow information:
Cash paid during the period for income taxes $ - $ 648
==================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Form 10-Q Page 3
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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 the
Company and its wholly owned subsidiaries. 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 entered into a collaborative agreement with
Abbott Laboratories ("Abbott"). The collaboration focused on the development of
small molecules that modulate, by intracellular interaction, the activity of
certain cell adhesion molecules and also provided the Company with a library of
chemical compounds for use in its own discovery programs. Under the
collaboration, the Company had rights to market cancer products in the U.S. and
would receive a royalty on all non-cancer products in the U.S. and all products
outside the U.S. In June 2000, the Company renegotiated the agreement with
Abbott and acquired the remaining rights from Abbott for all technology and
compounds in the field of LFA-1 antagonism. Under the terms of the revised
agreement, Abbott will receive milestone payments upon the occurrence of certain
events and royalties on any marketed products.
Form 10-Q Page 4
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Suncos
The Company owns a 50% interest in Suncos Corporation ("Suncos"), a
corporation formed for the development and commercialization of Pafase(TM).
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 six
months ended June 30, 2000, the Company recognized cost reimbursement revenue
under this arrangement of $3.4 million and $6.1 million, respectively. For the
quarter and six months ended June 30, 1999, the Company recognized cost
reimbursement revenue under this arrangement of $6.3 million and $11.1 million,
respectively.
For the quarter and six months ended June 30, 2000, the Company recognized
$1.7 million and $3.2 million of expense, respectively, representing its
proportionate share of Suncos' net losses. For the quarter and six months ended
June 30, 1999, the Company recognized $3.2 million and $4.7 million of expense,
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 product candidates based on three compounds--
LeukArrest(TM), Pafase(TM) and ICM3--pursuant to the terms of a Product
Development Agreement. In April 2000, the Company elected to forgo further study
of LeukArrest(TM) as the results of an interim efficacy analysis failed to meet
the Company's predefined criteria for success. For the quarter and six months
ended June 30, 2000, the Company recognized cost reimbursement revenue from the
Partnership of $2.0 million and $5.5 million, respectively. For the quarter and
six months ended June 30, 1999, the Company recognized cost reimbursement
revenue from the Partnership of $3.9 million and $9.1 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 price of $52.49 per
share. The Series B warrants issued are exercisable through June 30, 2004.
During the six months ended June 30, 2000, warrants to purchase 594,900 shares
were exercised at a weighted-average exercise price of $9.46 per share resulting
in total proceeds to the Company of $5.6 million. At June 30, 2000, warrants to
purchase approximately 10.8 million shares remain outstanding at an average
exercise price of $39.57 per share.
Form 10-Q Page 5
<PAGE>
Lilly ICOS, LLC
The Company owns a 50% interest in Lilly ICOS LLC ("Lilly ICOS"), a limited
liability company. Lilly ICOS was formed by the Company and Eli Lilly and
Company ("Lilly") to jointly develop and globally commercialize
phosphodiesterase type 5 inhibitors (PDE5) as oral therapeutic agents for the
treatment of both male erectile dysfunction and female sexual dysfunction. For
the quarter and six months ended June 30, 2000, the Company recognized cost
reimbursement revenue under this arrangement of $5.0 million and $8.6 million,
respectively. For the quarter and six months ended June 30, 1999, the Company
recognized cost reimbursement revenue under this arrangement of $5.8 million
and $11.5 million, respectively.
The joint venture has been capitalized by cash contributions from Lilly and
the Company's contribution of intellectual property associated with IC351. The
intellectual property contributed to Lilly ICOS by the Company had no basis for
financial reporting purposes and, accordingly, the Company has recorded its
investment in Lilly ICOS at zero. The Company will not report its proportionate
share of Lilly ICOS' results of operations until such time, if ever, that the
Company makes capital contributions to Lilly ICOS.
ICOS - Texas Biotechnology L. P.
On June 6, 2000, the Company and Texas Biotechnology Corporation ("Texas
Biotech") formed the joint venture ICOS-Texas Biotechnology L.P. ("ICOS-TBC"),
for the purpose of developing and commercializing endothelin-A receptor
antagonists. The initial focus of the joint venture will be to initiate a Phase
2b/3 pulmonary hypertension trial for sitaxsentan (a selective endothelin-A
receptor antagonist) and explore applications for second generation endothelin
antagonists.
Under the terms of the limited partnership joint venture agreement, ICOS and
Texas Biotech agreed to equally fund the development of sitaxsentan and other
endothelin receptor antagonists and share equally in the profits of the joint
venture. In June 2000, the Company made an initial $2.0 million capital
contribution to the joint venture and may make future milestone payments of up
to $53.5 million to ICOS-TBC for the development and commercialization of
products resulting from the collaboration. In accordance with the joint venture
agreement, the Company's initial capital contribution and future milestone
payments will be distributed by the joint venture to Texas Biotech.
For both the quarter and six months ended June 30, 2000, the Company
recognized $0.1 million in revenue under a related research and development
agreement. During the same periods, the Company also recognized $2.3 million of
expense representing its proportionate share of ICOS-TBC net loss since
inception.
Form 10-Q Page 6
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3. Comprehensive Loss
------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands) June 30, June 30,
-------------------------- ------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------------------------- ------------------------
Net loss $(17,442) $(13,960) $(29,314) $(21,145)
Other comprehensive income (loss):
Unrealized holding gains (losses) 29 (210) 76 (214)
arising during the period
Less reclassification adjustment for - 13 - 13
losses included in net loss
------------------------- ------------------------
Total other comprehensive income (loss) 29 (197) 76 (201)
------------------------- ------------------------
Comprehensive loss $(17,413) $(14,157) $(29,238) $(21,346)
========================= ========================
</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 period. For the quarter and six months ended June
30, 2000, options to acquire 8.1 million shares of common stock and warrants to
acquire 10.8 million shares of common stock have been excluded from the
computation of net loss per common share because their impact would be
antidilutive. For quarter and six months ended June 30, 1999, options to acquire
8.6 million shares of common stock and warrants to acquire 11.7 million shares
of common stock have been excluded from the computation of net loss per common
share because their impact would be antidilutive.
5. Financing
---------
The Company anticipates that its existing cash, along with interest
income from cash investments, anticipated payments from affiliates, and cash
flow from other operating activities, will be sufficient to fund its cash
requirements through the first quarter of 2001. 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. The
Company's existing capital resources and collaborative arrangements will not be
sufficient to fund the Company's operations through commercialization of its
first product. Accordingly, the Company will need to raise substantial
additional funds for its programs. The Company is currently evaluating
financing alternatives, some that may involve the sale of additional equity,
commencement of additional corporate partnerships and other methods of raising
capital from public, private, and corporate sources. The Company anticipates
completion of one or more of these financing events before the end of the first
quarter of 2001.
Form 10-Q Page 7
<PAGE>
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. New Accounting Pronouncements
-------------------------------
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B ("SAB
101B"). SAB 101B delays the effective date of Staff Accounting Bulletin No. 101
("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 No. 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 in the process of determining the
potential impact of the new pronouncement.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation." Interpretation No. 44 clarifies the application of Accounting
Principles Board Opinion No. 25 ("APB 25") and is effective 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
does not expect the adoption of Interpretation No. 44 will have a material
impact on its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 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 No. 133
will have a material impact on its consolidated financial statements because the
Company does not currently hold any derivative instruments.
Form 10-Q Page 8
<PAGE>
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 the
Company's 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 the Company's plans, objectives, expectations and
intentions. The words "believes," "intends," "anticipates," "plans to,"
"expects" and similar expressions are intended to identify forward-looking
statements. 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 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 the
Company's annual report on Form 10K for the year ended December 31, 1999.
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 serious medical conditions.
The Company's fundamental strategy is to identify and develop a significant
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 chronic and acute
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.
Results of Operations
---------------------
Revenue for the second quarter of 2000 was $10.5 million compared to $16.0
million during the second quarter of 1999. Current period revenue included cost
reimbursement of $3.4 million from Suncos Corporation ("Suncos"), $2.0 million
from ICOS Clinical Partners L.P. (the "Partnership"), $5.0 million from Lilly
ICOS LLC ("Lilly ICOS") and $0.1 million from ICOS-Texas Biotechnology L.P.
("ICOS-TBC"). Revenue for the second quarter of 1999 consisted of cost
reimbursement of $6.3 million from Suncos, $3.9 million from the Partnership and
$5.8 million from Lilly ICOS.
Form 10-Q Page 9
<PAGE>
Revenue for the first six months of 2000 was $20.2 million and consisted
primarily of cost reimbursement of $6.1 million from Suncos, $5.5 million from
the Partnership, $8.6 million from Lilly ICOS and $0.1 million from ICOS-TBC.
Revenue for the first six months of 1999 was $32.2 million and consisted of cost
reimbursement of $11.1 million from Suncos, $9.1 million from the Partnership,
$11.5 million from Lilly ICOS and $0.5 million received under the Company's
research and development agreement with Abbott Laboratories ("Abbott").
The decline in revenue, both on a quarter and year-to-date basis, reflects a
reduction in reimbursable clinical trial and development activities during 2000
as compared to the same periods of the prior year.
Total operating expenses were $25.3 million during the second quarter of
2000 compared to $27.8 million in the same period of 1999. Total operating
expenses were $47.0 million for the first six months of 2000 compared to $50.9
million in the comparable 1999 period.
Research and development expenses totaled $23.7 million during the second
quarter of 2000 compared to $26.6 million in the second quarter of 1999.
Research and development expenses for the first six months of 2000 were $43.9
million compared to $48.9 million for the first six months of 1999. The decline
in research and development expenses, on both a quarter and year-to-date basis,
was due primarily to the discontinuation of further clinical activity associated
with LeukArrest(TM) as well as the completion of a Pafase(TM) ERCP study that
was ongoing during the first half of 1999. Current quarter and year-to-date
expenses also reflect costs related to the acquisition of additional technology
rights and LFA-1 compounds from Abbott.
General and administrative expenses for the second quarter of 2000 were $1.6
million compared to $1.2 million in the same period of 1999. General and
administrative expenses for the first six months of 2000 were $3.1 million
compared to $2.0 million in the same period of 1999. The increase in general and
administrative expenses reflects certain management transition costs incurred
during the first six months of the current year.
During the second quarter of 2000, the Company recognized $4.0 million in
losses related to its equity affiliates as compared to $3.3 million in losses
during the second quarter of 1999. On a year-to-date basis, losses related to
equity affiliates totaled $5.5 million during the first six months of 2000 as
compared to $4.8 million during the same period of the prior year. Equity
interests in affiliate net losses primarily relate to the continued progression
of the Company's clinical trial activity associated with Pafase(TM). Current
year results also reflect the Company's share of losses related to the start-up
activities of ICOS-TBC.
Investment income for the second quarter of 2000 totaled $1.1 million
compared to $0.9 million for the second quarter of 1999. Investment income for
the first six months of 2000 totaled $2.3 million compared to $2.0 million for
the same period of the prior year. The increase in investment income on both a
quarter and year-to-date basis reflects higher returns on investments in the
current year as a result of higher yields on invested securities.
Form 10-Q Page 10
<PAGE>
As a result of the above, the Company reported a net loss of $17.4 million,
or $0.38 per share, for the second quarter ended June 30, 2000, compared to a
net loss of $14.0 million, or $0.32 per share, for the same period in 1999. For
the six months ended June 30, 2000, the Company reported a net loss of $29.3
million, or $0.64 per share, compared to a net loss of $21.1 million, or $0.50
per share for the comparable period in 1999.
The Company's results of operations may vary significantly from period to
period and will depend, among other factors, on the timing of certain expenses,
payments received on certain research collaborations, and the progress of the
Company's research and development efforts. The Company may experience
significant fluctuations in cost reimbursement revenue from one period to the
next. Due to the nature of the Company's collaborative agreements, cost
reimbursement revenue is largely dependent upon the continued progression of
clinical trial and development activities.
The Company's operating expenses may increase during 2000 and subsequent
years 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 expenses 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, Lilly and Texas Biotechnology related to the
development of Pafase(TM), IC351 and sitaxsentan, respectively. Some of these
expenses are to be reimbursed by affiliates and are recognized as revenue from
collaborative research and development from related parties in the Company's
condensed consolidated statements of operations. In addition, the clinical and
development activities of the Company's affiliates are not entirely within the
Company's control. Significant changes in affiliate activities could be cause
for fluctuations in the Company's share of affiliate losses from period to
period.
Liquidity & Capital Resources
-----------------------------
At June 30, 2000, the Company had cash, cash equivalents, investment
securities, and interest receivable of $59.0 million compared to $69.3 million
at December 31, 1999.
The Company used $28.4 million in cash for operating activities during the
first half of 2000 compared to $19.6 million in the same period of 1999. The
primary operating uses of cash in both periods relate to the Company's clinical
trial activities associated with IC351, Pafase(TM) and LeukArrest(TM) as well as
the expansion of other product development efforts. In April 2000, the Company
elected to forgo further study of LeukArrest(TM) as the results of an interim
efficacy analysis failed to meet the Company's predefined criteria for success.
Current year cash outflows also reflect costs related to the acquisition of
technology rights and LFA-1 compounds from Abbott.
Form 10-Q Page 11
<PAGE>
For the six months ended June 30, 2000, the Company generated $23.5 million
in cash from investing activities compared to using $47.9 million in cash during
the same period of the prior year. Significant cash inflows from investing
activities during the first half of 2000 included a $20.2 million net decrease
in the Company's short-term investment portfolio and $7.3 million received upon
the repayment of a loan to the Partnership. Significant cash outflows during
the current year included a capital contribution of $2.0 million upon the
formation of ICOS-TBC and $1.8 million invested in capital equipment and
leasehold improvements to support the Company's research and development
activity. The primary investing uses of cash during the first six months of
1999 included a $34.5 million net increase in the Company's short-term
investment portfolio, $10.2 million in equity investments in affiliates and
$3.2 million invested in property, plant and equipment.
The Company generated $15.1 million in cash from financing activities
during the first half of 2000 compared to $23.0 million in the same period of
1999. The primary cash inflows in both periods relate to proceeds received from
the exercise of stock options and warrants.
The Company's future cash requirements depend on many factors including
continued scientific progress in its research and development programs, the
results of clinical trials and preclinical studies, 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 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 regulatory process, and other factors, many of which are
beyond the Company's control.
The Company has successfully negotiated 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.
Form 10-Q Page 12
<PAGE>
The Company anticipates that its existing cash, along with interest income
from cash investments, anticipated payments from affiliates, and cash flow from
other operating activities, will be sufficient to fund its cash requirements
through the first quarter of 2001. The Company intends to expand its operations
and hire the additional personnel necessary to continue development of its
current portfolio of product candidates in clinical trials, as well as continue
discovery and preclinical research to identify additional potential drug
candidates. The Company anticipates that expansion of these activities will
increase operating expenses in future years. Further, incremental expenditures
will be required for additional laboratory, production, and office facilities to
accommodate activities and the personnel associated with this increased
development effort. The Company will need to raise additional funds in order to
continue to conduct the research and development activities, preclinical
studies, clinical trials and pre-marketing activities necessary to bring its
product candidates to market and to establish marketing capabilities if and when
a product candidate is ready for commercialization. The Company is currently
evaluating financing alternatives, some of which may involve the sale of
additional equity, commencement of additional corporate partnerships and other
methods of raising capital from public, private, and corporate sources. The
Company anticipates completion of one or more of these financing events before
the end of the first quarter of 2001.
New Accounting Pronouncements
-----------------------------
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B ("SAB
101B"). SAB 101B delays the effective date of Staff Accounting Bulletin No. 101
("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 No. 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 in the process of determining the
potential impact of the new pronouncement.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation." Interpretation No. 44 clarifies the application of Accounting
Principles Board Opinion No. 25 ("APB 25") and is effective 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
does not expect the adoption of Interpretation No. 44 will have a material
impact on its consolidated financial statements.
Form 10-Q Page 13
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 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 No. 133
will have a material impact on its consolidated financial statements because the
Company does not currently hold any derivative instruments.
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 an equity interest in an affiliate.
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.
Form 10-Q Page 14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 4, 2000. The
proposals voted upon and the results of the voting are as follows:
1. The following nominees for election as Directors, each to hold
office for a term as defined in the Proxy Statement and until
their successors are duly elected and qualified, received not
less than 35,370,160 votes, which represents 99.62% of the shares
of Common Stock voted. Each Director received the number of
votes set opposite their respective name:
Nominee For Withheld
------- --- ---------
Frank T. Cary 35,370,160 135,136
James L. Ferguson 35,373,547 131,749
David V. Milligan 35,391,242 114,054
The aforesaid nominees have been elected as Directors for the
term set forth in the Proxy Statement.
The following Directors are currently serving terms that expire
at the 2001 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified:
Paul N. Clark
William H. Gates III
Robert W. Pangia
The following Directors are currently serving terms that expire
at the 2002 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified:
Alexander B. Trowbridge
Gary L. Wilcox
Walter B. Wriston
Form 10-Q Page 15
<PAGE>
2. The proposal to approve the appointment of KPMG LLP as the
Company's independent public accountants for fiscal year 2000
received the following votes:
<TABLE>
<CAPTION>
Votes
-----
<S> <C>
For 35,370,160
Against 39,172
Abstain 46,497
The foregoing proposal was approved.
</TABLE>
ITEM 5: Other Information
Pursuant to Rule 14a-4 under the Securities Exchange Act of 1934, as
amended, the Company intends to retain discretionary authority to vote
proxies with respect to stockholder proposals for which the proponent
does not seek inclusion of the proposed matter in the Company's proxy
statement for the Company's 2001 Annual Meeting of Stockholders,
except in circumstances where (i) the Company receives notice of the
proposed matter no later than February 14, 2001, and (ii) the
proponent complies with the other requirements set forth in Rule 14a-
4.
ITEM 6: Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b There were no reports on Form 8-K filed during the three
months ended June 30, 2000.
Form 10-Q Page 16
<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: August 11, 2000 By: /S/ PAUL N. CLARK
--------------- ------------------
Paul N. Clark
Chairman of the Board of Directors,
Chief Executive Officer and President
Date: August 11, 2000 By: /S/ THOMAS N. SWALLOW
--------------- ----------------------
Thomas N. Swallow
Corporate Controller
Form 10-Q Page 17
<PAGE>
Index to Exhibits
-----------------
<TABLE>
Page
----
<S> <C>
10.1 Agreement of Limited Partnership of ICOS -Texas Biotechnology L.P.
(the "ICOS-TBC Agreement") dated June 6, 2000, among ICOS-ET-LP LLC,
Texas Biotechnology Corporation, ICOS-ET-GP LLC and TBC-ET, Inc.,
including Exhibit D thereto.+ #
10.2 Endothelin License Agreement dated June 6, 2000, between Texas
Biotechnology Corporation and ICOS-Texas Biotechnology L.P. (Exhibit
A to the ICOS-TBC Agreement).+ #
10.3 Research and Development Service Agreement dated June 6, 2000, among ICOS
Corporation, Texas Biotechnology Corporation and ICOS-Texas Biotechnology
L.P. (Exhibit B to the ICOS-TBC Agreement).+ #
10.4 Formation and Peformance Agreement, dated June 6, 2000, by and between
Corporation and Texas Biotechnology Corporation.+ #
10.5 Restated R & D Collaboration / License Agreement dated May 31, 2000,
between ICOS Corporation and Abbott Laboratories .+ #
27.1 Financial Data Schedule #
</TABLE>
__________________________
# Filed with this document
+ Confidential treatment has been requested with respect to portions of
this exhibit.
Form 10-Q Page 18
