<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27972
TREGA BIOSCIENCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0336233
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3550 GENERAL ATOMICS COURT, SAN DIEGO, CA 92121
(619) 455-3814
-------------------------------------------------------
(Address, including zip code, and telephone, including
area code, of registrant's principal executive offices)
HOUGHTEN PHARMACEUTICALS, INC.
----------------------------------------------------
(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
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1997
----- -----------------------------
<S> <C>
Common stock, $0.001 par value 13,427,352
</TABLE>
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TREGA BIOSCIENCES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at March 31, 1997 and December 31, 1996....................... 3
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 ................................................................ 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996........... ..................................................... 5
Notes to Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 17
Item 6. Exhibits and Reports on Form 8-K.......................................................... 17
SIGNATURE ......................................................................................... 18
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TREGA BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
- ------ 1997 1996
--------------- --------------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 5,317 $ 13,615
Short-term investments 20,375 13,828
Accounts receivables 703 481
Notes receivable 1,000 -
Other current assets 58 282
----------------- ----------------
Total current assets 27,453 28,206
Property and equipment, net 1,702 1,745
Notes receivable-long-term 541 -
Other assets 555 562
----------------- ----------------
$ 30,251 $ 30,513
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 886 $ 810
Accrued compensation 446 769
Other accrued liabilities 656 1,951
Current portion of obligations under capital lease 367 433
Deferred revenue 4,290 1,761
----------------- ----------------
Total current liabilities 6,645 5,724
Obligations under capital leases 492 633
Stockholders' equity Common stock, $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 13,427,352 and 13,368,772 at
March 31, 1997 and December 31, 1996, respectively. 13 13
Additional paid-in capital 71,285 71,050
Common stock issuable 1,281 1,281
Deferred compensation, net (1,766) (1,931)
Accumulated deficit (47,699) (46,257)
----------------- ----------------
Total stockholders' equity 23,114 24,156
----------------- ----------------
$ 30,251 $ 30,513
================= ================
</TABLE>
Note: The balance sheet at December 31, 1996, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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TREGA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------------
1997 1996
---------------- ----------------
(unaudited)
<S> <C> <C>
Revenues:
Net sales $ 430 $ 561
Contract research and licenses fees 946 1,004
---------------- ----------------
1,376 1,565
Costs and expenses:
Cost of sales 319 467
Research and development 2,845 2,166
Acquired in-process research and development 4 -
Selling, general and administrative 1,291 795
---------------- ----------------
4,459 3,428
---------------- ----------------
Loss from operations (3,083) (1,863)
Other income (expense):
Other income 67 -
Interest income 339 78
Interest expense (25) (26)
Gain on sale of MPS 1,259 -
================ ================
Net loss $ (1,443) $ (1,811)
================ ================
Net loss per share $ (0.11) $ (0.19)
================ ================
Shares used in computing
net loss per share 13,412,000 9,698,000
================ ================
</TABLE>
See accompanying notes.
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TREGA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1997 1996
--------------- --------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,443) $ (1,811)
Adjustments to reconcile net loss to net cash flows
used for operating activities:
Depreciation and amortization (70) 119
Realized loss on sale of investment 88 -
Amortization of deferred compensation 165 74
Gain on sale of MPS (1,259) -
Changes in operating assets and liabilities
Accounts receivable (762) (69)
Other current assets 112 (31)
Accounts payable 294 328
Other accrued liabilities (1,395) 212
Deferred revenue 2,532 1,046
--------------- --------------
Net cash flows used for operating activities (1,738) (132)
INVESTING ACTIVITIES
Short term investments (6,635) -
Additions to property and equipment, net (85) (20)
Net proceeds from sale of MPS 1,592 -
Notes receivable (1,541) -
Other assets (11) (786)
--------------- --------------
Net cash flows used for investing activities (6,680) (806)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (115) (116)
Issuance of common and preferred stock 235 10,111
--------------- --------------
Net cash flows provided by financing activities 120 9,995
--------------- --------------
Net increase (decrease) in cash and cash equivalents (8,298) 9,057
Cash and cash equivalents at beginning of period 13,615 1,161
--------------- --------------
Cash and cash equivalents at end of period $ 5,317 $ 10,218
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 25 $ 23
=============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Property and equipment acquired under capital lease obligations $ - $ 26
=============== ==============
Deferred compensation related to stock options $ - $ 1,773
=============== ==============
</TABLE>
See accompanying notes.
5
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TREGA BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Trega
Biosciences, Inc. (the "Company"), formerly Houghten Pharmaceuticals, Inc., have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1997, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For more complete information, these financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1996, included
in the Company's 1996 Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
Accounting Standard on Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. The new
requirement for calculating primary earnings per share exclude the dilutive
effect of stock options. The adoption of this statement is not expected to have
a material impact as the Company is currently in a net loss position and
therefore stock options and warrants are not included in the computation of
earnings per share since their effect is anti-dilutive.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the periods as adjusted for the effects of certain
rules of the Securities and Exchange Commission for the period prior to the
Company's initial public offering which closed April 3, 1996. The calculation of
the shares used in computing net loss per share also includes the shares of
preferred stock which converted into shares of common stock upon the closing of
the initial public offering, effective April 3, 1996, as if they were converted
into common stock as of the original dates of issuance.
4. COLLABORATIVE ARRANGEMENTS
In February 1996, the Company entered into a collaborative arrangement with
Novo Nordisk A/S whereby the Company received $2,000,000 for library access
charges and received an additional $2,000,000 in February 1997. Payments have
been treated as deferred revenue and are recognized as revenue as libraries are
shipped. The Company will also receive milestone and royalty payments on
products discovered and subsequently developed and marketed by Novo Nordisk A/S,
if any.
Effective December 31, 1996, the Company entered into a drug discovery
collaboration and license agreement with Chugai Biopharmaceuticals, Inc.
("Chugai"). Under the terms of the agreement, the Company received, as an
advance towards future library access charges, an upfront payment in January
1997 of $1,250,000 and the Company will receive an additional payment of
$1,000,000 in December 1997. In addition, the Company and Chugai will jointly
collaborate on the discovery of compounds for certain therapeutic targets,
which would be jointly owned, and the Company will own any compounds that may
be discovered using Chugai's screens for certain other therapeutic targets.
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TREGA BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(unaudited)
5. SALE OF MULTIPLE PEPTIDE SYSTEMS, INC.
On February 28, 1997, the Company sold all of the issued and outstanding
shares of the capital stock of Multiple Peptide Systems Inc. ("MPS") to RAH
Acquisition Corp. ("Newco"), an entity formed by Richard A. Houghten, Ph.D.
("Dr. Houghten"). Dr. Houghten is the sole stockholder of Newco, and Dr.
Houghten is also a founder and a Director of the Company. Prior to the sale
of the MPS shares, Dr. Houghten was also the Chief Technical Officer of the
Company. In connection with such sale, however, Dr. Houghten resigned as an
officer of the Company. In addition to his affiliation with the Company, Dr.
Houghten is the founder of MPS and has been an executive officer and Director of
that entity, and Dr. Houghten is the founder, an executive officer and a
Director of the Torrey Pines Institute for Molecular Studies ("TPIMS").
In exchange for the MPS shares, the Company received $500,000 in cash in
March 1997, short-term promissory notes (payable in 1997) for an additional
$1,000,000 and additional payments, on the third, fourth and fifth anniversaries
of the sale, amounting to a minimum of $750,000 in the aggregate. As part of the
arrangements made in connection with the sale, the Company has agreed, for a
period of seven years, not to (i) engage in certain activities which would be
competitive with the business of MPS or (ii) license certain technologies (which
are presently licensed from the Company to MPS) to entities which are engaged
primarily in a business similar to the business of MPS.
Prior to the Company's sale of the MPS shares, the business of MPS was
comprised of manufacturing and marketing certain peptides and other compounds,
and the customers of MPS included government entities, universities, research
institutions and private companies. The Company had been exploring strategic
options regarding MPS.
6. EVENTS SUBSEQUENT TO MARCH 31, 1997
Effective April 15, 1997, the Company entered into a Restated and Third
Amended Research and Option Agreement (the "Restated Agreement") with the Torrey
Pines Institute for Molecular Studies ("TPIMS"). The Restated Agreement
provides, among other things, for (i) the assignment of patent rights to the
Company for certain technology previously invented at TPIMS, and the elimination
of royalties related thereto; (ii) an extension through July 14, 1998, of the
existing funded research relationship between the parties, with a further
extension through April 14, 2000, at the Company's option, upon agreement of a
work plan pertaining to such extension period, and (iii) scientific support from
TPIMS for the benefit of the Company in connection with the Company's
collaborations with biotechnology and pharmaceutical companies.
The Company is committed to provide research funding to TPIMS of $1,631,000
for the twelve-month period commencing April 15, 1997. The Company has the
option to extend the research relationship with TPIMS for an additional three
years for total funding of $2,850,000. In the event the Company elects not to
exercise this option, the Company is committed to spend an additional $463,000
for research at TPIMS for the period from April 15, 1998 through July 14, 1998.
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TREGA BIOSCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(unaudited)
6. EVENTS SUBSEQUENT TO MARCH 31, 1997 (CONTINUED)
In addition, under the terms of the Restated Agreement, the Company will pay
$1,300,000 to TPIMS, plus accrued interest, in connection with the assignment
of patent rights to certain technology to the Company and the elimination of
the related royalties discussed above. The payment date will be no later than
April 14, 2000, but should the Company elect not to exercise the option to
extend the agreement described above, then the payment date will be April 14,
1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed
in this quarterly report on Form 10-Q are forward-looking statements that
involve risks and uncertainties (such forward-looking statements include,
without limitation, statements using words such as "may," "potential,"
"expects," "believes," "estimates," "plans," "intends," "anticipates" and
similar expressions). These forward-looking statements are subject to risks and
uncertainties, including those set forth below and under the caption "Risk
Factors", that could cause actual results to vary materially from those
projected. These forward-looking statements speak only as of the date hereof.
The Company expressly disclaims any obligation or undertaking to release
publicly 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.
OVERVIEW
Trega Biosciences, Inc. (the "Company"), formerly Houghten Pharmaceuticals,
Inc., is a drug discovery company utilizing combinatorial chemistry and other
technologies to pursue the discovery of novel, small molecule drug therapies.
The Company has devoted substantially all of its resources since its founding to
developing methods to synthesize and screen large libraries of chemicals for new
drug discovery and optimization, to developing a select number of chemical
compounds as potential pharmaceutical products, and to acquiring or developing
technologies with the potential to expand the methods available to generate drug
candidates.
The Company leverages its technology platform by entering into pharmaceutical
alliances, enabling partners to access the Company's technologies in exchange
for licensing fees and potential milestone payments and royalties, or by
establishing joint-discovery alliances with biotechnology companies. The timing
and amounts of revenues from such alliances, if any, are subject to significant
fluctuations and therefore the Company's results of operations for any period
may not be comparable to the results of operations for any other period. The
Company will be required to conduct significant research, development and
production activities during the next several years to fulfill its obligations
to corporate partners and for the development of its own compounds. The Company
has been unprofitable since its inception and does not anticipate having net
income in the next several years. As of March 31, 1997, the Company's
accumulated deficit was approximately $47,699,000.
Effective February 28, 1997, the Company sold all of the issued and
outstanding shares of the capital stock of its former subsidiary, Multiple
Peptide Systems, Inc. ("MPS"), to a company formed by Richard A. Houghten, Ph.D.
Dr. Houghten is the scientific founder of the Company and a member of the
Company's Board of Directors. In exchange for the shares of MPS, the Company
received $500,000 in cash in March 1997, short-term promissory notes (payable in
1997) for an additional $1,000,000 and the right to receive payments of at least
$250,000 on each of February 28, 2000, 2001 and 2002. (See Note 5 of Notes to
the Company's Consolidated Financial Statements.)
The Company and its predecessors have been parties to a Research and Option
Agreement, as amended, since July 1, 1992, with the Torrey Pines Institute for
Molecular Studies ("TPIMS"). A primary purpose of the Company's relationship
with TPIMS has been to give the Company access to support services provided by
TPIMS scientific personnel and to give the Company a source of combinatorial
libraries and other discoveries to license and exploit in the conduct of its
business. As of April 15, 1997, the Company entered into a Restated and Third
Amended Research and Option Agreement with TPIMS (the "Restated Agreement"). The
Restated Agreement provides, among other things, for (i) the acquisition by the
Company of certain technology previously invented at TPIMS, and the elimination
of royalties related thereto; (ii) an extension through July 14, 1998, of the
existing funded research relationship between the parties, with a further
extension through April 14, 2000, at the Company's option, upon agreement of a
work plan pertaining to such extension period, and (iii) scientific support from
TPIMS for the benefit of the
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Company in connection with the Company's collaborations with biotechnology and
pharmaceutical companies. (See Note 6 of Notes to the Company's Consolidated
Financial Statements included elsewhere herein.).
RESULTS OF OPERATIONS
The Company recorded revenues of approximately $1,376,000 and $1,565,000 for
the quarters ended March 31, 1997 and 1996, respectively. The first quarter
revenues for 1997 and 1996 were derived principally from revenues from
collaborative research agreements (accounting for approximately $758,000 and
$1,004,000 for the first quarters of 1997 and 1996, respectively) along with the
sale of custom peptides and combinatorial peptide libraries by the Company's
former subsidiary, MPS (accounting for approximately $430,000 and $561,000 for
the first quarters of 1997 and 1996, respectively).
As of March 31,1997, the Company's financial statements reflect a liability
for deferred revenue in the amount of approximately $4,290,000. This represents
the excess of payments received from research collaborators over the revenue
recognized from libraries shipped. These payments are generally not refundable.
Cost of sales were approximately $319,000 and $467,000 for the quarterS ended
March 31, 1997 and 1996, respectively, and relate primarily to sales made by
MPS. The decrease in cost of sales from 1996 to 1997 is primarily due to an
adjustment to estimated royalties payable to TPIMS and the sale of MPS on
February 28, 1997.
The Company incurred research and development expenses totaling approximately
$2,845,000 and $2,166,000 for the three months ended March 31, 1997 and 1996,
respectively. Increased spending in research and development during the first
quarter of 1997 compared to the same period in 1996 results primarily from
increased funding for (i) the Company's combinatorial chemistry program,
largely reflecting the commencement of an internal combinatorial chemistry
program (initiated in February 1996), and (ii) the Company's combinatorial
biology technology program (conducted through its subsidiary, ChromaXome Corp.
("ChromaXome"), acquired in August 1996). Funding to TPIMS, the Company's
external research partner for combinatorial chemistry technology, was $578,000
and $744,000 for the first quarter of 1997 and 1996, respectively. The
President of TPIMS is a member of the Company's Board of Directors. Research
and development expenses for the first quarter of 1997 and 1996 include
$500,000 and $178,000, respectively, for the Company's collaboration with Dura
Pharmaceuticals, Inc. ("Dura) to evaluate delivery of the Company's lead
compound HP228, which is in Phase II clinical trials, in Dura's dry powder
inhalation system (this collaboration was initiated in February 1996). The
Chairman of the Board of Directors of the Company is a member of the Board of
Directors of Dura, and Dura's Chairman and Chief Executive Officer is a member
of the Company's Board of Directors. The Company's President and Chief
Executive Officer, who is also a Director of the Company, is a member of the
Board of Directors of a private research and development company for which Dura
performs certain work concerning applications of Dura's drug delivery
technology. The Company expects to incur continued and substantial increases in
research and development expenses relating to its combinatorial chemistry,
product development and clinical trials, as well as for the development of the
combinatorial biology technologies acquired through the acquisition of
ChromaXome and the development of other drug discovery technologies.
The Company's selling, general and administrative expenses total
approximately $1,291,000 and $795,000 for the three months ended March 31, 1997
and 1996, respectively. These expenses include administrative salaries and
legal, finance and corporate development expenses. Selling, general and
administrative expenses for the first quarter of 1997 increased compared to the
same period in 1996 primarily due to higher legal costs incurred for litigation,
patents and corporate development activities and costs associated with being a
public company. Selling, general and administrative expenses are expected to
increase as the Company's research activities increase.
As the result of higher cash balances (resulting from sales of the Company's
stock, including the Company's initial public offering), the Company's interest
income increased to approximately $339,000 for the quarter ended March 31, 1997
compared to $78,000 for the same period in 1996.
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In the first quarter of 1997, the Company recorded a gain of $1,259,000 in
connection with the sale of MPS on February 28, 1997. (See Note 5 of Notes to
the Company's Consolidated Financial Statements)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash, cash equivalents and short-term
investments totaling approximately $25,692,000 compared with $27,443,000 at
December 31, 1996.
The Company's research and development commitments include a research
agreement with TPIMS, restated to reflect amendments effective April 15, 1997.
Pursuant to the restated agreement, the Company is committed to spend an
additional $1,631,000, due in quarterly installments, for the twelve-month
period commencing April 15, 1997. The Company has also agreed to pay TPIMS the
amount of $1,300,000 under the terms of the restated agreement, plus accrued
interest, in connection with the acquisition of certain technology and the
elimination of related royalties. The payment date will be no later than April
14, 2000; however, if the Company does not elect to exercise its option to
extend the agreement, then the payment date for such $1,300,000 will be on
April 14, 1998. (See Note 6 of Notes to the Company's Consolidated Financial
Statements)
In connection with the Company's research agreement with Dura, the Company is
committed to fund $6,000,000 over four years in a drug discovery and development
collaboration using Dura's proprietary drug delivery technology and the
Company's Cytokine Regulating Agents. As of March 31, 1997, $2,178,000 had been
funded under the Dura agreement.
Pursuant to a drug discovery collaboration with Novo Nordisk A/S, the Company
received $2,000,000 in February 1996 as an advance payment of library access
fees and received an additional $2,000,000 in February 1997. Payments have been
treated as deferred revenue and are recognized as revenue as libraries are
shipped.
Effective December 31, 1996, the Company entered into a drug discovery
collaboration and license agreement with Chugai Biopharmaceuticals, Inc.
("Chugai") Under the terms of the agreement, the Company received, as an advance
towards future library access charges, an upfront payment in January 1997 of
$1,250,000 and will receive an additional payment of $1,000,000 in December
1997.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
acquisition or initiation of new research and development programs, the scope
and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments and the cost of product
commercialization. It is probable, however, that for the foreseeable future, the
Company's cash requirements will exceed its revenues. The Company intends to
seek additional funding through research and development agreements with
suitable corporate collaborators and through public or private financings. The
Company also intends to seek equipment lease financing to fund future capital
expenditures. The Company expects that its primary potential revenue source for
the foreseeable future will be additional collaborative agreements. There can be
no assurances, however, that such collaboration arrangements, or any public,
private or equipment lease financings, will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research or
development programs.
The Company estimates that its existing capital resources, together with
facility and equipment financing, will be sufficient to fund its current and
planned operations through 1998. There can be no assurance, however, that
changes in the Company's research and development plans or other changes
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affecting the Company's operating expenses will not result in the expenditure of
such resources before such time. In any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
RISK FACTORS
The Company wishes to caution readers that the following important factors,
among others detailed from time to time in the Company's filings with the
Securities and Exchange Commission (such as the Company's Annual Report on Form
10-K for 1996), in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual consolidated
results for future periods to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS
Drug discovery methods based upon combinatorial chemistry technology are
relatively new compared to traditional methods of drug discovery and there can
be no assurance that these methods will lead to the discovery or development of
commercial pharmaceutical products or that the Company will be able to employ
these or other methods of drug discovery successfully. The Company's
combinatorial biology technology program (conducted through its recently
acquired subsidiary, ChromaXome) is at an early stage of development, and there
can be no assurance that such technology will be developed or employed
successfully. Moreover, the Company's efforts to synthesize compounds through
automation are at an early state of development, and there can be no assurance
that such automation will work efficiently, be employed successfully or
otherwise enhance the Company's ability to engage effectively in drug discovery.
The types of combinatorial libraries the Company is capable of offering and
the nature of the compounds the Company is able to synthesize or have
synthesized will, in large part, determine the demand for the Company's drug
discovery capabilities. An inability to offer competitive libraries or an
inability to synthesize or have synthesized compounds that have actual or
potential utility would have a material adverse effect on the Company. Failures
in the field of drug discovery, including combinatorial chemistry, could have a
material adverse effect on the Company.
DEPENDENCE ON COLLABORATORS
The Company's strategy for the utilization of its drug discovery technologies
and for the development, clinical testing, manufacturing and commercialization
of any compounds depends upon the formation of collaborations and arrangements
with corporate collaborators, licensors, licensees and others. There may only be
a limited number of pharmaceutical and biotechnology companies that would
potentially collaborate with the Company. Historically, pharmaceutical and
biotechnology companies have conducted lead compound identification and
optimization within their own research departments, due to the highly
proprietary nature of the activities being conducted, the central importance of
these activities to their drug discovery and development efforts, and the desire
to obtain maximum patent and other proprietary protection on the results of
their internal programs. Pharmaceutical and biotechnology companies must be
convinced that the Company's drug discovery technologies and expertise justify
outsourcing these programs to the Company. The amount and timing of resources
that current and future collaborators, if any, devote to collaborations with the
Company are not within the control of the Company. There can be no assurance
that such collaborators will perform their obligations as expected or that the
Company will derive any additional revenue from such arrangements. Because the
Company's arrangements with its collaborators may entail the provision of
identical or similar libraries or compounds to multiple parties, there can be no
assurance that conflicts will not arise between collaborators as to proprietary
rights to particular libraries or as to particular compounds in the Company's
libraries. Moreover, the Company's collaborations may be terminated under
certain circumstances by its collaborators, which terminations could result in
the Company relinquishing rights to products developed jointly with its
collaborators. Any such termination could have a material and adverse effect on
the Company.
There can be no assurance that (i) the Company's present or any future
collaborators will not pursue their existing or alternative technologies in
preference to those of the Company, (ii) any product will be
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developed and marketed as a result of such collaborations or (iii) the Company
will be able to negotiate additional collaborative arrangements in the future
(or expand or extend existing arrangements) on acceptable terms, if at all, or
that such current or future collaborative arrangements will be successful. To
the extent that the Company chooses not to or is unable to establish such
arrangements, it will require substantially greater capital to undertake the
research, development and marketing of products at its own expense. In addition,
the Company may encounter significant delays in developing compounds or find
that the development, manufacture or sale of its proposed products is materially
and adversely affected by the absence of such collaborative agreements.
EARLY STAGE OF PRODUCT DEVELOPMENT
To date, the Company has itself developed only one drug candidate (HP 228)
that has entered the early stages of human clinical testing. Even though HP 228
has demonstrated indications of efficacy in preclinical models and the results
of a preliminary dose tolerance study of HP 228 show no significant safety
concerns in the 17 patients who received HP 228, there can be no assurance that
it will be demonstrated to be effective in treating human diseases or that it
will be demonstrated to be safe in further studies. Enrollment in the Company's
Phase II clinical trial of HP 228 in supportive cancer therapy has been slow.
Lack of progress or adverse results from the Phase II clinical trials of HP 228
in supportive cancer therapy or with respect to Type II diabetes and obesity
could have a material adverse effect on the Company. HP 228 or other compounds,
if any, resulting from the Company's research and development programs are not
expected to be commercially available for a number of years even if they are
successfully developed and proven to be safe and effective. There can be no
assurance that any of the Company's product development efforts will be
successfully completed, that a development arrangement with a pharmaceutical
partner will be established, that regulatory approvals will be obtained or will
be as broad as sought, that any candidate products will be capable of being
produced in commercial quantities at reasonable cost or that any products, if
introduced, will achieve market acceptance or profitability.
RELIANCE ON OUTSIDE CONTRACTOR FOR COMBINATORIAL CHEMISTRY
The Company presently relies upon an independent contractor, TPIMS, for basic
research and laboratory facilities and scientific personnel necessary for the
Company to conduct a significant portion of its combinatorial chemistry
technology program and synthesis of iterations and individual compounds. TPIMS
licenses technology from a third party that is important to the Company's
business. TPIMS is an independent entity and the Company believes TPIMS is not
within the control of the Company. The contract between the Company and TPIMS
permits TPIMS complete freedom to select the methods to be used in pursuing its
research. A discontinuation of work by TPIMS for the Company could have a
material adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The continued development of the Company's technologies and compounds will
require the commitment of substantial additional funds to continue to maintain
the competitiveness of its drug discovery technologies and to conduct the costly
and time consuming research and preclinical and clinical testing necessary to
bring products to market. The Company's future capital requirements will depend
on many factors, including, among others, (i) continued scientific progress in
its research and development programs, (ii) the ability of the Company to
establish and maintain collaborative arrangements with respect to the Company's
drug discovery technologies and the clinical testing of candidate products,
(iii) progress with preclinical and clinical trials, (iv) the costs involved in
developing internal combinatorial chemistry capabilities, (v) the costs involved
in developing additional drug discovery technologies, including combinatorial
biology and the synthesis of compounds through automation, (vi) the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, (vii) competing technological and market developments, (viii) changes in
its existing research relationships, (ix) the exercise of the Company's option
to extend the term of the Company's present agreement with TPIMS and (x)
effective commercialization activities and arrangements. Although the Company
estimates that its existing capital resources will be sufficient to fund its
current and planned operations through 1998, there can be no assurance that
changes will not occur that would consume available capital resources before
such time.
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<PAGE> 14
The Company anticipates that it will be required to raise additional capital
over a period of several years in order to conduct its operations. Such capital
may be raised through additional public or private financings, as well as
collaborative arrangements, borrowings and other available sources. There can be
no assurance that additional financing will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs, which could have a material adverse effect on the Company.
COMPETITION
The Company is engaged in a highly competitive and rapidly changing industry.
The Company competes not only with other combinatorial chemistry companies, but
also with companies utilizing other technologies (such as combinatorial biology)
for the same objectives. Competition from fully integrated pharmaceutical
companies and biotechnology companies and other drug discovery companies is
intense and is expected to increase. Many pharmaceutical and biotechnology
companies, which represent the largest potential market for the Company's
combinatorial chemistry and other drug discovery technologies, have developed or
are developing internal combinatorial chemistry and other drug discovery
technology programs or have entered into collaborations with companies
conducting such programs. Many of these pharmaceutical companies, as compared
with the Company, have significantly greater financial resources and expertise
in research and development, manufacturing, preclinical and clinical testing,
obtaining regulatory approvals and marketing. Smaller companies may also prove
to be significant competitors, particularly through collaborative arrangements
with large pharmaceutical and established biotechnology companies. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and marketing
which may be competitive with the Company's efforts. These companies and
institutions compete with the Company in recruiting and retaining highly
qualified scientific and management personnel. There is also competition for
access to novel pharmacophores and desirable assays to use for screening of
libraries, and any inability of the Company to develop novel pharmacophores or
maintain access to a sufficiently broad range of assays for screening potential
drugs would have a material adverse effect on the Company. There can be no
assurance that the Company's competitors will not develop more effective or more
affordable technologies or products, or achieve earlier product development and
commercialization than the Company, thus rendering the Company's technologies
and/or products obsolete, uncompetitive or uneconomical. In combinatorial
chemistry and other drug discovery technologies, the Company faces competition
based on a number of factors, including size and diversity of libraries, ease of
use of libraries, speed and costs of identifying and optimizing potential lead
compounds and patent position.
In addition, products and therapies that will compete directly with any
compounds that the Company seeks to develop (such as HP 228) currently exist or
are being developed. In product development and marketing, the Company will face
competition based on product efficacy and safety, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent position.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in large part on its ability to obtain
patents for its methodologies and the compounds and other products, if any,
resulting from the application of such methodologies, defend patents once
obtained, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the U.S. and in foreign countries. The
patent positions of pharmaceutical and biotechnology companies, and companies
utilizing drug discovery technologies such as combinatorial chemistry and
combinatorial biology, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. There can be no assurance that the Company or TPIMS will develop or
obtain the rights to products or processes that are patentable, that patents
will issue from any of the pending applications or that claims allowed will be
sufficient to protect the Company's technologies or products. Pending patent
applications for which rights are uncertain include applications being
prosecuted by TPIMS for certain aspects of library generation technology
(libraries-from-libraries) and the Company with respect to its combinatorial
chemistry libraries and certain uses for HP 228, as well as patent applications
filed by the Company (through ChromaXome) with respect
14
<PAGE> 15
to certain aspects of the combinatorial biology technologies being developed by
the Company (through ChromaXome). There can be no assurance that the patents of,
or with respect to which rights have been licensed to, the Company or TPIMS will
not be challenged, invalidated or circumvented, or that the rights granted or
licensed to the Company or TPIMS will provide proprietary protection or
competitive advantages to the Company. Such patents include a U.S. patent for
the Tea Bag technology, which is licensed to the Company, the Company's U.S.
patent for the composition of matter of HP 228 and certain uses of HP 228, a
U.S. patent of TPIMS for certain aspects of the positional scanning technology
and a further U.S. patent with respect to which rights have been licensed to
TPIMS (on a non-exclusive basis) for other aspects of the positional scanning
technology. The U.S. patent on the Tea Bag technology, that the Company believes
is important to the Company's business, expires in 2003. Competitors (some of
which have, or are affiliated with companies having, substantially greater
resources than the Company) may have filed applications, may have been issued
patents or may obtain additional patents and proprietary rights to or for the
use of certain methodologies relating to products or processes competitive with
those of the Company or which could block the Company's efforts to obtain
patents or conduct its business.
A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
the fields of combinatorial chemistry, combinatorial biology and other drug
discovery technologies and with respect to products and therapies that may have
potential uses which are similar to the Company's current research and
development areas. The commercial success of the Company will depend in part on
the Company's not infringing patents or rights of third parties, and not
breaching the patent and know-how licenses upon which any of the Company's
technologies or compounds are based or having such licenses breached or
terminated by others. Certain patent applications or patents may conflict with
the Company's patent applications and patents, or rights under patent
applications and patents of third parties which are licensed to the Company
(such as from TPIMS), either by claiming the same methods or compounds or by
claiming methods or compounds which would dominate those of or licensed to the
Company. A U.S. patent application is maintained under conditions of
confidentiality while the application is pending in the U.S. Patent and
Trademark Office ("PTO") so that the Company cannot determine the inventions
being claimed in pending patent applications filed by its competitors in the
PTO. Any such conflicts could result in a significant reduction of the coverage
of the Company's issued or licensed patents, or rights under patent applications
and patents of third parties which are licensed to the Company (such as from
TPIMS), and the Company's ability to benefit from the issuance of significant
patent protection from the Company's applications or the applications of third
parties (such as TPIMS) licensing rights to the Company. In addition, if patents
are issued to other companies which contain competitive or conflicting claims,
the Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any license is required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable terms, if at all. If such licenses are not obtained, the
Company could be prevented from pursuing the development or commercialization of
its technologies or potential products. The Company's breach of an existing
license or failure to obtain a license to any technology that it may require to
commercialize its technologies or its potential products may have a material
adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights. There can be
no assurance that the Company's issued or licensed patents would be held valid
by a court of competent jurisdiction or that an alleged infringer would be found
to be infringing. Further, with respect to certain technology in-licensed by the
Company, the Company does not have the right to control any litigation with
respect to such technology. An adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology, any of
which could have a material adverse effect on the Company. Moreover, merely the
uncertainties resulting from institution and continuation of any
technology-related litigation could have a material adverse effect on the
Company's ability to compete in the marketplace pending resolution of the
disputed matters. If competitors of the Company prepare and file patent
applications in the U.S. that claim technology also claimed by the Company, the
Company may have to participate in interference proceedings declared by the PTO
to determine the priority of the invention, which could result in substantial
cost to the Company, even if the outcome is favorable to the Company.
15
<PAGE> 16
An adverse outcome could subject the Company to significant liabilities to third
parties and require the Company to license disputed rights from third parties or
discontinue using the technology.
The Company also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. The
Company attempts to protect its proprietary technology and processes in part
through confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance, however, that these agreements will not
be breached or terminated, that the Company would have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. The Company, as well as its
consultants and research collaborators in their work for the Company, use
intellectual property owned by others. Disputes may arise as to the rights in
technology resulting from these collaborations and in the related know-how and
inventions. The Company relies on certain technologies to which it does not have
exclusive rights or which may not be patentable or proprietary and thus may be
available to competitors.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has experienced significant operating losses since inception. For
the years ended December 31, 1996, 1995 and 1994, the Company had net losses of
approximately $11,688,000, $9,490,000 and $9,052,000, respectively. For the
quarter ended March 31, 1997, the Company recorded a net loss of $1,443,000 and
had an accumulated deficit at March 31, 1997 of approximately $47,699,000. The
Company expects to incur additional operating losses over the next several years
and expects cumulative losses to increase substantially as the Company's
research and development efforts and preclinical and clinical testing are
expanded. The Company expects that its ability to achieve profitability will be
dependent upon the ability of the Company to enter into and achieve success
under additional collaborative arrangements. There can be no assurance that the
Company will be successful in entering into additional collaboration
arrangements that will result in revenues or that the Company will receive
additional revenues under existing collaboration arrangements. Any revenues from
the achievement of milestones, royalties or license fees from the discovery,
development or sale of a commercial drug by a collaborator are not expected to
be material to the Company's financial position for several years, if at all.
The Company is unable to predict when, if ever, it will become profitable.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of life sciences companies have been highly
volatile and the market has experienced significant price and volume
fluctuations, some of which are unrelated to the operating performance of
particular companies. Announcements of technological innovations or new
commercial products or failures of potential products by the Company or its
competitors, developments in the Company's relationships with current or future
collaborative partners, developments concerning proprietary rights, including
patents and litigation matters, publicity regarding actual or potential results
with respect to compounds under development by the Company (such as HP 228),
regulatory developments in both the U.S. and foreign countries, public concern
as to the efficacy of combinatorial chemistry or other new drug discovery
technologies, changes in reimbursement policies, general market conditions, as
well as quarterly fluctuations in the Company's revenues and financial results
and other factors, may have a significant impact on the market price of the
Company's Common Stock. In particular, the realization of any of the risks
described in these "Risk Factors" may have a material adverse impact on such
market price.
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<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 7, 1996, a complaint was filed in San Diego Superior Court naming
the Company, ChromaXome, and the officers and directors of the Company as
defendants. The complaint, filed by Michael Dickman and Katie Thompson, the
founders of ChromaXome, alleges various contract and tort claims against the
defendants, including that the defendants acted wrongfully in connection with
the Company's acquisition of ChromaXome to deny Mr. Dickman and Ms. Thompson
access to and employment with ChromaXome and to prevent them from obtaining
certain consideration in connection with the ChromaXome acquisition. The
complaint seeks compensatory and punitive damages from the defendants as well as
certain declaratory relief, including an avoidance of certain non-competition
provisions applicable to Mr. Dickman and Ms. Thompson as part of the
acquisition-related arrangements. The Company believes that the claims of Mr.
Dickman and Ms. Thompson are without merit. Moreover, the Company believes it
has valid claims, which it has raised, against Mr. Dickman and Ms. Thompson
regarding their conduct in connection with the business of ChromaXome. Although
there can be no assurances in this regard, the Company believes that the claims
of Mr. Dickman and Ms. Thompson, and any related litigation, will have no
material adverse effect on the Company. The Company intends to vigorously defend
against the claims of Mr. Dickman and Ms. Thompson in any litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) The Company filed a Form 8-K, dated February 28, 1997, announcing
that the Company had sold Multiple Peptides Systems, Inc. ("MPS"), a
wholly-owned subsidiary of the Company, effective February 28, 1997.
Financial statements were filed as part of this report which
included an unaudited pro forma condensed combined balance sheet as
of December 31, 1996 and an unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1996, giving
effect of the sale of MPS by the Company as of December 31, 1996 for
the pro forma condensed combined balance sheet and as of January 1,
1996 for the pro forma condensed combined statement of operations.
(c) The Company filed a Form 8-K, dated May 1, 1997, announcing that the
Company changed its name from Houghten Pharmaceuticals, Inc. to
Trega Biosciences, Inc., effective May 1, 1997.
17
<PAGE> 18
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.
Trega Biosciences, Inc.
Date: 5/13/97 /s/ ROBERT S. WHITEHEAD
------- --------------------------------------------
Robert S. Whitehead
President and Chief Executive Officer
(Principal Executive Officer)
Date: 5/13/97 /s/ TERENCE E. McMORROW
------- --------------------------------------------
Terence E. McMorrow
Vice President, Finance and Corporate
Development (Principal Financial
and Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE
SHEET AT MARCH 31, 1997 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,317
<SECURITIES> 20,375
<RECEIVABLES> 703
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,453
<PP&E> 3,497
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<TOTAL-ASSETS> 30,251
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0
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<TOTAL-LIABILITY-AND-EQUITY> 30,251
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<TOTAL-REVENUES> 1,376
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