SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 quarter ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2859704
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
215 College Road
Paramus, NJ 07652
(Address of principal executive offices) (Zip Code)
(201) 261-1331
(Registrant's telephone number, including area code)
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
As of August 1, 1999, there were 10,743,161 shares of the registrant's Common
Stock outstanding.
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SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
PART I. FINANCIAL INFORMATION
Page
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Item 1. Financial Statements 1
Balance Sheets at June 30, 1999 and December 31, 1998 1
Statements of Operations and Comprehensive Income (Loss) for
the three months ended June 30, 1999 and 1998, and for the
six months ended June 30, 1999 and 1998 2
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 3
Note to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
(i)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share information)
ASSETS
June 30, December 31,
1999 1998
---------- -----------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 9,307 $16,590
Restricted cash -- 600
Marketable securities--current maturities 6,884 7,133
Other current assets 1,076 1,064
------- -------
Total current assets 17,267 25,387
Property and equipment, net 5,758 5,733
Marketable securities 32,887 32,655
Patent and patent application costs,
net of accumulated amortization 752 921
------- -------
$56,664 $64,696
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 698 $ 966
Accrued liabilities 379 645
Accrued compensation 210 326
Unearned revenue under research agreement 279 83
------- -------
Total current liabilities 1,566 2,020
Deferred rent obligation 82 --
Stockholders' equity:
Preferred Stock, $.01 par value; authorized--
1,000,000 shares; issued--none -- --
Common Stock, $.01 par value; authorized--
25,000,000 shares; issued and outstanding--
10,743,161 shares in 1999 and 10,711,374 shares
in 1998; 107 107
Additional paid-in capital 98,689 98,516
Accumulated other comprehensive income--
net unrealized losses on securities (562) (77)
Deferred compensation (30) (61)
Accumulated deficit (43,188) (35,809)
------- -------
Total stockholders' equity 55,016 62,676
------- -------
$56,664 $64,696
======= =======
See note to financial statements.
1
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SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Contract revenue $ 843 $ 2,148 $ 1,487 $ 4,313
License revenue -- -- -- 2,000
Grant revenue -- 60 -- 150
------- ------- ------- -------
Total revenues 843 2,208 1,487 6,463
Expenses:
Research and development 3,814 3,851 7,800 7,512
General and administrative 1,292 1,085 2,498 2,168
------- ------- ------- -------
Total expenses 5,106 4,936 10,298 9,680
------- ------- ------- -------
Loss from operations (4,263) (2,728) (8,811) (3,217)
Other income, net:
Interest income 695 953 1,430 1,871
Gain on sale of securities -- -- 2 --
------- ------- ------- -------
Other income, net 695 953 1,432 1,871
------- ------- ------- -------
Net loss $(3,568) $(1,775) $(7,379) $(1,346)
======= ======= ======= =======
Comprehensive loss:
Net loss $(3,568) $(1,775) $(7,379) $(1,346)
Unrealized losses (gains)
arising during period (355) 121 (473) 24
Less: Reclassification
adjustment for gains
included in net income -- -- (12) --
------- ------- ------- -------
Comprehensive loss $(3,923) $(1,654) $(7,864) $(1,322)
======= ======= ======= =======
Basic and diluted net loss
per share $(0.33) $(0.17) $(0.69) $(0.13)
====== ====== ====== ======
Shares used in
computation of basic
and diluted net loss
per share 10,742,618 10,691,744 10,735,167 10,668,641
========== ========= ========== =========
See note to financial statements.
2
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SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the six months
ended June 30,
1999 1998
------- -------
Operating activities:
Net loss $(7,379) $(1,346)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred rent obligation 82 --
Depreciation and amortization 798 702
Amortization of premiums/(discounts) on securities 227 74
Amortization of deferred compensation 31 41
Gain on sale of securities (2) --
Changes in operating assets and liabilities:
Decrease (increase) in other current assets 588 (484)
Decrease in accounts payable, accrued liabilities
and accrued compensation (650) (291)
Increase in collaborative agreement
revenue receivable -- (120)
Increase in deferred revenue 196 313
------- -------
Net cash used in operating activities (6,109) (1,111)
Investing activities:
Sale or maturity of investments 15,656 30,000
Purchase of investments (16,349) (39,120)
Purchases of property and equipment (654) (808)
------- -------
Net cash used in investing activities (1,347) (9,928)
Financing activities:
Issuance of common stock, net of repurchases 173 1,374
------- -------
Net cash provided by financing activities 173 1,374
------- -------
Net decrease in cash and cash equivalents (7,283) (9,665)
Cash and cash equivalents at beginning of period 16,590 23,113
------- -------
Cash and cash equivalents at end of period $ 9,307 $13,448
======= =======
See note to financial statements.
3
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SYNAPTIC PHARMACEUTICAL CORPORATION
NOTE TO FINANCIAL STATEMENTS
June 30, 1999
Note 1 -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and may not include all
information and footnotes required for a presentation in accordance with
generally accepted accounting principles. In the opinion of the management of
Synaptic Pharmaceutical Corporation (the "Company"), these financial statements
include all normal and recurring adjustments necessary for a fair presentation
of the financial position and the results of operations and cash flows of the
Company for the interim periods presented. For more complete financial
information, these financial statements should be read in conjunction with the
audited financial statements for the fiscal year ended December 31, 1998, and
notes thereto included in the Company's 1998 Annual Report on Form 10-K. The
results of operations for the fiscal quarter ended June 30, 1999, are not
necessarily indicative of the results of operations to be expected for the full
year.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Synaptic Pharmaceutical Corporation is a biotechnology company engaged
in the development of a broad platform of enabling technology which it calls
"human receptor-targeted drug design technology." The Company is utilizing this
technology to discover and clone the genes that code for human receptor subtypes
that may be associated with specific disorders. The Company and its
collaborative partner and other licensees are in turn utilizing the cloned
receptor genes to design compounds that can potentially be developed as drugs
for treating these disorders.
The Company is currently collaborating with Grunenthal GmbH
("Grunenthal"). Concurrently with the establishment of this collaborative
arrangement, the Company granted a license to certain of its technology and
patent rights to Grunenthal.
In addition to its ongoing collaborative arrangement, four other
pharmaceutical companies, Eli Lilly and Company ("Lilly"), Merck & Co., Inc.
("Merck"), Novartis Pharma AG ("Novartis"), and Glaxo Group Limited ("Glaxo"),
have licenses to certain of the Company's technology and patent rights. The
Lilly, Merck and Novartis licenses were granted concurrently with the
establishment of collaborative arrangements with such companies. While the Lilly
collaboration, the Merck collaboration and the Novartis collaboration ended in
July 1999, February 1999 and August 1998, respectively, the associated licenses
continue for the respective periods provided in these agreements. For
convenience of reference, the agreements pursuant to which the licenses referred
to in this paragraph and the preceding paragraph were granted are collectively
referred to as the "License Agreements."
Since inception, the Company has financed its operations primarily
through the sale of its stock, through contract and license revenue under
certain of its License Agreements, and through interest income and capital gains
resulting from its investments. The Company also has received revenues from
government grants under the Small Business Innovative Research ("SBIR") program
of the National Institutes of Health.
To date, the Company's expenditures have been for research and
development related expenses, general and administrative related expenses, fixed
asset purchases and various patent related expenditures incurred in protecting
the Company's technologies. The Company has been historically unprofitable and
had an accumulated deficit of $43,188,000 at June 30, 1999. The Company expects
to continue to incur operating losses for a number of years and may not become
profitable, if at all, unless and until it receives royalty revenue or revenue
from sales of drugs that may be developed with the use of its technology or its
patent rights.
Results of Operations
Comparison of the Three Months Ended June 30, 1999 and 1998
Revenues. The Company recognized revenue of $843,000 and $2,208,000 for
the three months ended June 30, 1999 and 1998, respectively. The decrease of
$1,365,000 was attributable primarily to a net decrease in contract revenue of
$1,305,000 resulting from the contractual termination of two of the Company's
collaborative arrangements and the reduction in full-time equivalent scientists
being funded under another of the Company's collaborative arrangements.
Research and Development Expenses. The Company incurred research and
development expenses of $3,814,000, and $3,851,000 for the three months ended
June 30, 1999 and 1998, respectively. The decrease of $37,000, or 1%, in
research and development expenses was attributable primarily to: reductions in
recruiting fees and expenses as well as reductions in salary costs due to a net
decrease in
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headcount, both of which were offset by: increased rent expense for facilities
resulting from previously contracted increases in square footage; and increased
supply costs.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $1,292,000 and $1,085,000 for the three months ended
June 30, 1999 and 1998, respectively. The increase of $207,000, or 19%, was
attributable primarily to an increase in rent expense resulting from previously
contracted increases in square footage.
Other Income, Net. The Company recorded other income of $695,000 and
$953,000 for the three months ended June 30, 1999 and 1998, respectively. The
decrease of $258,000 was primarily due to lower average cash, cash equivalent
and marketable securities balances during the second quarter of 1999 as compared
with the same period in the prior year.
Net Loss and Basic and Diluted Net Loss Per Share. The net loss
incurred by the Company was $3,568,000 ($0.33 per share), and $1,775,000 ($0.17
per share) for the three months ended June 30, 1999 and 1998, respectively. The
increase in net loss per share of $0.16 resulted primarily from lower revenues
and other income and higher expenses during the second quarter of 1999 as
described above.
Comparison of the Six Months Ended June 30, 1999 and 1998
Revenues. The Company recognized revenue of $1,487,000 and $6,463,000
for the six months ended June 30, 1999 and 1998, respectively. The decrease of
$4,976,000 was attributable primarily to the following: the receipt in 1998 of
$2,000,000 of non-recurring license revenue; and a decrease in contract revenue
of $2,826,000 resulting from the contractual termination of two of the Company's
collaborative arrangements and the reduction in full-time equivalent scientists
being funded under another of the Company's collaborative arrangements.
Research and Development Expenses. The Company incurred research and
development expenses of $7,800,000, and $7,512,000 for the six months ended June
30, 1999 and 1998, respectively. The increase of $288,000, or 4%, in research
and development expenses was attributable primarily to: an increase in rent
expense resulting from previously contracted increases in square footage, an
increase in facility related costs and increased supply costs, all of which were
offset by decreases in travel related expenditures and reductions in recruiting
fees and expenses.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $2,498,000 and $2,168,000 for the six months ended
June 30, 1999 and 1998, respectively. The increase of $330,000, or 15%, was
attributable primarily to increases in: rent expense resulting from previously
contracted increases in square footage; and compensation expenses.
Other Income, Net. The Company recorded other income of $1,432,000 and
$1,871,000 for the six months ended June 30, 1999 and 1998, respectively. The
decrease of $439,000 was primarily due to lower cash, cash equivalent and
marketable securities balances during 1999 as a result of the utilization of
these resources to fund the Company's operations.
Net Loss and Basic and Diluted Net Loss Per Share. The net loss
incurred by the Company was $7,379,000 ($0.69 per share), and $1,346,000 ($0.13
per share) for the six months ended June 30, 1999 and 1998, respectively. The
increase in net loss per share of $0.56 resulted primarily from lower revenues
and other income and higher expenses during the first half of 1999 as described
above.
Operating Trends
Revenues may vary from period to period depending on numerous factors
including the timing of revenue earned under the License Agreements and revenue
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that may be earned under future collaborative and/or license agreements. During
the three months ended June 30, 1999, the Company recognized an aggregate of
$843,000 in revenue. The Company currently expects revenue to approximate
$1,800,000 in 1999. Furthermore, under the terms of one or more of the License
Agreements, additional revenues may be recognized if certain milestones are
achieved. Management continues to assess the opportunity for obtaining
additional funding under new collaborative and/or license agreements as well as
obtaining financing through equity transactions. The Company continues to
monitor its spending level in order to insure that it has enough cash to last
through the year 2001.
Other income, net is expected to decline in 1999 and 2000 as existing
funds are utilized to support the Company's operations.
Property and equipment spending in 1999 is expected to decrease from
that of 1998 as the Company completes the conversion of a portion of its
underutilized space into laboratory space.
At June 30, 1999, the Company held marketable securities with an
estimated fair value of $39,771,000. The Company's primary interest rate
exposure results from changes in short-term interest rates. The Company does not
purchase financial instruments for trading or speculative purposes. All of the
marketable securities held by the Company are classified as available-for-sale
securities. The following table provides information about marketable securities
held by the Company at June 30, 1999:
Estimated
Principal Amount and Weighted Average Stated Rate Fair
by Expected Maturity Value
- ------------------------------------------------------------- ---------
(000's) 1999 2000 2001 2002 2003 Total (000's)
- ------------------------------------------------------------- ---------
Principal $3,383 $6,487 $20,440 $2,500 $6,500 $39,310 $39,771
Weighted
Average
Stated
Rates 5.56% 6.39% 7.91% 6.50% 5.77% 7.01% --
- ------------------------------------------------------------- ---------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities which the Company currently holds
since the Company has purchased some of its marketable securities at other than
face value. Additionally, some of the securities represented in the above table
may be called or redeemed, at the option of the issuer, prior to their expected
due dates. If such early redemptions occur, the Company may reinvest the
proceeds realized on such calls or redemptions in marketable securities with
stated rates of interest or yields that are lower than those of current holdings
affecting both future cash interest streams and future earnings.
In addition to investments in marketable securities, the Company places
some of its cash in money market funds in order to keep cash available to fund
operations and to hold cash pending investments in marketable securities.
Fluctuations in short term interest rates will affect the yield on monies
invested in such money market funds. Such fluctuations can have an impact on
future cash interest streams and future earnings of the Company, but such
impacts are not expected to be material.
Management believes that it has remedied all of its significant
information technology and non-information technology systems that may be
affected by the year 2000 issue. Management has made inquiries of its
significant vendors as to their readiness for the year 2000 issue. The Company's
significant vendors have represented to the Company that there is a high
probability that the year 2000 issue will not cause a significant disruption to
the delivery of goods and services
7
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after 1999. However, the Company gives no assurance as to whether or not this
will be the case. To date the Company has spent less than $50,000 to remedy
systems that may have been affected by the year 2000 issue and does not expect
future expenses, if any, to be material. If it turns out that some of the
Company's systems or its vendors' systems are not year 2000 compliant,
management believes the most likely worst case scenario would be temporary
reduction in the current level of productivity. The Company's contingency plan
includes, but may not be limited to, manual workarounds and a temporary increase
in the current staffing level.
The Company does not believe that inflation has had a material impact
on its results of operations.
Liquidity and Capital Resources
At June 30, 1999 and December 31, 1998, cash, cash equivalents and
marketable securities aggregated $49,078,000 and $56,378,000, respectively. This
decrease was a result of the utilization of these resources to fund the
Company's operations.
To date, the Company has met its cash requirements through the sale of
its stock, through contract and license revenue, through SBIR grants and through
interest income and gains resulting from its investments. If the current
biotechnology financing environment remains unfavorable, raising additional
capital may be difficult.
At June 30, 1999, the Company had invested an aggregate of $11,273,000
in property and equipment.
The Company leases laboratory and office facilities under an agreement
expiring on December 31, 2015. The minimum annual payment under the lease is
currently $1,530,000. The lease provides for fixed escalations in rent payments
in the years 2005 and 2010.
At June 30, 1999, the Company had $49,078,000 in cash, cash equivalents
and marketable securities. The Company currently intends to utilize these funds
primarily to conduct certain of its research programs, for patent related
expenditures, for general corporate purposes, to make leasehold improvements to
its facilities and to purchase property and equipment. The Company expects to
continue to incur operating losses for a number of years. The Company believes
that its cash on hand and cash that it expects to receive through interest
payments on its investments, will be sufficient to fund its operations, as well
as the Company's share of certain development costs under the Grunenthal
Agreement, through the year 2001.
This Report on Form 10-Q contains "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Such statements include, but are not limited
to, those relating to future cash and spending plans, amounts of future research
funding, and any other statements regarding future growth, future cash needs,
future operations, business plans and financial results, and any other
statements which are not historical facts. When used in this document, the words
"expects," "may," "believes," and similar expressions are intended to be among
the words that identify forward-looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those risks and
uncertainties detailed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (the "1998 Form 10-K"), including in Item 1
of the 1998 Form 10-K under the captions "Patents, Proprietary Technology and
Trade Secrets," "Competition" and "Government Regulation" as well as in the
section entitled "Disclosure Regarding Forward-Looking Statements" under the
captions "Early Stage of Product Development; Technological Uncertainty,"
"Dependence on Collaborative Partners and Licensees for Development, Regulatory
Approvals, Manufacturing, Marketing and Other Resources" and "Uncertainties
Related to Clinical Trials" or detailed from time to time in filings the Company
makes with the SEC. Should one
8
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or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. Although the Company believes that the expectations reflected in the
forward-looking statements contained herein are reasonable, it can give no
assurance that such expectations will prove to be correct. The Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
9
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e.,
interest rate risk) are included in Item 2 of this Report.
10
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 1999, the Company held its annual meeting of stockholders for
the following purposes: (i) to elect three Class III directors to the Board of
Directors (Proposal No. 1); and (ii) to ratify the appointment by the Board of
Directors of Ernst & Young LLP as the independent auditors of the Company for
the fiscal year ending December 31, 1999 (Proposal No. 2).
The stockholders elected the persons named below, the Company's
nominees for director, as Class III directors of the Company, casting votes for
such nominees or withholding votes as indicated:
VOTES FOR VOTES WITHHELD
Zola P. Horovitz 8,429,329 28,676
Patrick J. McDonald 8,429,629 28,376
Kathleen P. Mullinix 8,428,504 29,501
The stockholders approved Proposal No. 2 as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES
8,456,880 525 600 0
11
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 16, 1999, the Company filed a Current Report on Form 8-K stating that
it had issued a press release announcing the appointment of a new member to the
Company's board of directors.
On May 17, 1999, the Company filed a Current Report on Form 8-K stating that it
had issued a press release announcing the termination of its collaboration with
Warner-Lambert Company in the field of galanin.
On May 23, 1999, the Company filed a Current Report on Form 8-K announcing the
expiration of a nonexclusive license under certain of its patents, as well as an
option to obtain a license under certain of its patents, that it had granted to
Glaxo Group Limited.
12
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SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SYNAPTIC PHARMACEUTICAL CORPORATION
(Registrant)
Date: August 6, 1999 By:/s/ Kathleen P. Mullinix
-----------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President &
Chief Executive Officer
By:/s/ Robert L. Spence
-----------------------------
Name: Robert L. Spence
Title: Senior Vice President,
Chief Financial Officer & Treasurer
13
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