<PAGE> 1
UNITED STATES
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 March 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 0-27972
TREGA BIOSCIENCES, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its charter)
DELAWARE 51-0336233
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9880 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121
(619) 410-6500
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone, including area code, of
registrant's principal executive offices)
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, 1998
- ------------------------------ -----------------------------
<S> <C>
Common Stock, $0.001 par value 13,952,620
</TABLE>
<PAGE> 2
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, 1998 and December 31, 1997................. 3
Consolidated Statements of Operations for the three months ended March 31, 1998
and 1997............................................................................ 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and
1997................................................................................ 5
Notes to Consolidated Financial Statements.......................................... 6
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 6. Exhibits............................................................................ 15
SIGNATURE..................................................................................... 16
</TABLE>
2
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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>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,251 $ 5,457
Short-term investments 5,733 13,970
Accounts receivable and other current assets 1,066 676
-------- --------
Total current assets 16,050 20,103
Property and equipment, net 2,936 2,741
Other assets 2,332 2,275
-------- --------
$ 21,318 $ 25,119
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 759 $ 211
Accrued compensation 566 497
Other accrued liabilities 685 1,479
Current portion of debt obligations 2,213 2,123
Deferred revenue 2,340 3,002
-------- --------
Total current liabilities 6,563 7,312
Obligations under capital leases 238 298
Long-term equipment notes payable 1,306 1,159
Long-term notes payable 111 132
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000 at March 31, 1998
Issued and outstanding shares - 13,937,620 and
13,863,562 at March 31, 1998 and
December 31, 1997, respectively 14 14
Additional paid-in capital 73,225 73,087
Common stock issuable 16 16
Deferred compensation (1,105) (1,270)
Accumulated deficit (59,050) (55,629)
-------- --------
Total stockholders' equity 13,100 16,218
-------- --------
$ 21,318 $ 25,119
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 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 net loss per share)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Revenues:
Contract research and license fees $ 1,168 $ 946
Net sales -- 430
-------- --------
1,168 1,376
Costs and expenses:
Cost of sales -- 319
Research and development 3,575 2,849
Selling, general and administrative 1,169 1,224
-------- --------
4,744 4,392
-------- --------
Loss from operations (3,576) (3,016)
Other income (expense):
Interest income 250 339
Interest expense (95) (25)
Gain on sale of MPS -- 1,259
-------- --------
Net loss $ (3,421) $ (1,443)
======== ========
Basic and diluted net loss per share $ (.25) $ (.11)
======== ========
Shares used in computing basic and diluted
net loss per share 13,910 13,412
======== ========
</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,
---------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,421) $ (1,443)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 346 (70)
Amortization of note receivable discount (13) (4)
Amortization of deferred compensation 165 165
Accrued interest on notes payable 43 --
Gain on disposal of assets (73) --
Realized loss on sale of investment -- 88
Gain on sale of MPS -- (1,259)
Changes in operating assets and liabilities, net of
effects from the transfer of assets from sale of MPS in
1997:
Accounts receivable 2 (762)
Other current assets (392) 112
Accounts payable 548 294
Other accrued liabilities (725) (1,395)
Deferred revenue (662) 2,532
-------- --------
Net cash provided by (used in) operating activities (4,182) (1,742)
INVESTING ACTIVITIES
Purchase of short-term investments (139) (11,975)
Maturities of short-term investments 8,376 5,340
Additions to property and equipment (528) (85)
Proceeds from disposition of equipment 115 --
Net proceeds from sale of MPS -- 1,592
Notes receivable -- (1,537)
Other assets (99) (11)
-------- --------
Net cash used in investing activities 7,725 (6,676)
FINANCING ACTIVITIES
Principal payments under debt obligations (189) (115)
Proceeds from equipment notes and notes payable 302 --
Issuance of common and preferred stock 138 235
-------- --------
Net cash provided by financing activities 251 120
-------- --------
Net increase (decrease) in cash and cash equivalents 3,794 (8,298)
Cash and cash equivalents at beginning of period 5,457 13,615
-------- --------
Cash and cash equivalents at end of period $ 9,251 $ 5,317
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 50 $ 25
======== ========
</TABLE>
See accompanying notes.
5
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Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Trega
Biosciences, Inc. (the "Company"), 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 month period ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. 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, 1997, included in the
Company's 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.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 requires the presentation of basic and diluted earnings per
share amounts. Basic earnings per share is calculated based upon the weighted
average number of common shares outstanding during the period while diluted
earnings per share also gives effect to all potential diluted common shares
outstanding during the period such as options, warrants, convertible securities
and contingently issuable shares. SFAS No. 128 is effective for periods ending
after December 15, 1997. All potential dilutive common shares have been excluded
from the calculation of diluted earnings per share as their inclusion would be
anti-dilutive.
Accounting Policies
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting and
Comprehensive Income" and Statement of Financial Accounting Standard No. 131
("SFAS No. 131"), "Segment Information." Both of these standards are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that
all components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company believes that
comprehensive income or loss will not be materially different from net income or
loss. SFAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in SFAS No. 131, are components of an enterprise
for which separate financial information is available and is evaluated regularly
by the Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the basis
that is used internally for evaluating the segment performance. The Company
operates in one business and operating segment therefore the adoption of this
standard did not have a material impact on the Company's financial statements.
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<PAGE> 7
3. LEASES
LONG-TERM DEBT
The Company obtained a $3,000,000 equipment financing line in 1997, of
which approximately $1,884,000 had been utilized at March 31, 1998. The Company
intends to use this financing source through mid-1998 to fund the majority of
its equipment needs. The loan is secured by the equipment. The terms of the
Company's loan agreement call for amounts drawn down under the loan to be repaid
monthly over a four-year term, including interest payments based on the average
of the Federal Reserve three- and five-year treasuries.
In September 1997, the Company entered into a 10-year lease for its new
research, development and corporate headquarters that it began occupying in May
1998. Annual rent is initially $1,685,000, but is subject to annual increases of
3.5%. The Company has the option to extend the lease for an additional term of
five years subject to terms and conditions specified in the lease.
4. TPIMS AGREEMENT
Since 1992, the Company has been party to a Research and Option Agreement,
as amended, with 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
provide a source of combinatorial libraries and other discoveries. As of April
15, 1997, the Company entered into a Restated and Third Amended Research and
Option Agreement with TPIMS (the "TPIMS Agreement"). In connection with the
TPIMS Agreement, the Company acquired certain patents and purchased technology,
previously invented by TPIMS, in exchange for $1,300,000 (the "Purchase Price").
In addition, the TPIMS Agreement eliminated potential related royalties
otherwise payable on such patents and purchased technology. The TPIMS Agreement
also extended, through July 14, 1998, the existing funded research relationship
between the parties, and provided for a possible further extension through April
14, 2000, upon agreement on a work plan. Included in other assets on the
Company's consolidated balance sheets is $1,300,000 representing the Purchase
Price. In January 1998, the Company announced that the TPIMS Agreement would not
be extended beyond July 14, 1998. The Company remains obligated to fund research
under the TPIMS Agreement through July 14, 1998. The Company paid the Purchase
Price, plus applicable interest (10% per annum), to TPIMS on April 14, 1998. The
Purchase Price ($1,300,000), along with approximately $115,000 of accrued
interest, is reflected in current notes payable in the accompanying consolidated
balance sheets.
5. COLLABORATIVE ARRANGEMENTS
In May 1998, the Company and Ono Pharmaceutical Co., Ltd. ("Ono") reached
definitive agreement on terms relating to a non-binding letter of intent signed
in February 1998 that expanded their existing relationship. Under the terms of
the new agreement, the Company will create custom combinatorial libraries,
optimize lead compounds discovered by Ono and undertake screening of those
compounds in a target of interest to Ono in exchange for research funding of
$1,875,000 in the aggregate (including $500,000 advanced pursuant to the letter
of intent) and potential milestone payments and royalties.
In February 1998, the Company announced that it met a milestone in
connection with a May 1997 agreement with Warner-Lambert Company
("Warner-Lambert"). Based upon certain screening of the Company's combinatorial
libraries against certain Warner-Lambert biological assays utilizing
Warner-Lambert screening technology, Warner-Lambert has identified a series of
lead compounds which are active in a biological target of interest to
Warner-Lambert. Following achievement of this milestone, Warner-Lambert will
purchase $1,500,000 of the Company's common stock (at fair market value), the
timing of which investment may be determined by the Company prior to February
11, 2000.
In June 1997, the Company entered into a Research and Development Agreement
with Ono whereby the Company received $2,000,000 as a license fee in connection
with the screening by the Company of certain of its combinatorial libraries
against certain of its biological screens. The Company also received $2,000,000
in July 1997 for work to be done during the first 12 months under the agreement
and, subject to Ono's right of early termination, will receive an additional
$2,000,000 in July 1998 for further research during an additional 12-month
period. The non-refundable license fee was recognized as revenue in 1997. The
research related payments are treated as deferred revenue and recognized as
revenue as related work is performed under the contract. The Company will also
receive milestone and royalty payments on products it discovers which are
subsequently developed and marketed by Ono, if any.
7
<PAGE> 8
6. COMMON STOCK
During the first quarter of 1998, the Company issued 74,058 shares of
common stock upon the exercise of options and through participation in the
Company's employee stock purchase plan, which are included in common stock
outstanding at March 31, 1998.
8
<PAGE> 9
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, IN THE SECTION OF THIS ITEM 2 OF
THIS QUARTERLY REPORT ON FORM 10-Q UNDER THE CAPTION "RISK FACTORS" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) 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 STATEMENTS 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" or "Trega") is a drug discovery
company pursuing the identification and early-stage development of novel,
small-molecule drug therapies through combinatorial chemistry and other drug
discovery technologies. The synthetic chemistry technologies used by Trega in
its combinatorial chemistry program enable the Company to provide a wide range
of small-molecule libraries constructed in single-based compound arrays--a
format that permits the rapid identification of active compounds after testing
in a biological assay. Trega believes its technologies position the Company to
become a leading developer and resource of drug discovery technologies and a
leading provider of novel chemical drug leads to the pharmaceutical industry.
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, providing partners access to 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 and may not be indicative of future operating results. 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 the Company is unable to predict
when, if ever, it will become profitable. As of March 31, 1998, the Company's
accumulated deficit was approximately $59,050,000.
RESULTS OF OPERATIONS
The Company recorded revenues of approximately $1,168,000 and $1,376,000
for the three months ended March 31, 1998 and 1997, respectively. First quarter
revenues for 1998 were derived from shipments of combinatorial libraries or
individual compounds and research conducted under collaborative research
agreements (accounting for approximately $1,156,000) as well as $11,850 derived
from grant revenue. By comparison, the first quarter revenues for 1997 were
derived from shipments of combinatorial libraries or individual compounds and
research conducted under collaborative research agreements (accounting for
approximately $858,000), sales of custom peptides and combinatorial peptide
libraries by the Company's former subsidiary, Multiple Peptide Systems, Inc.
("MPS") (accounting for approximately $430,000), and approximately $88,000 from
grant revenues. Sales from MPS are confined to the first two months of 1997,
after which time MPS was sold.
As of March 31, 1998, the Company's financial statements reflect a
liability for deferred revenue in the amount of approximately $2,340,000. This
represents the excess of payments received from research collaborators over the
revenue from libraries shipped or work performed. (See Note 5 of Notes to the
Company's Consolidated Financial Statements included elsewhere herein.)
9
<PAGE> 10
Cost of sales in the three months ended March 31, 1998 were $0 compared to
approximately $319,000 for the same period in 1997. The elimination of cost of
sales in 1998 is attributable to the absence of revenues previously recorded
through MPS, due to the sale of MPS in 1997.
The Company incurred research and development expenses totaling
approximately $3,575,000 and $2,849,000 for the three months ended March 31,
1998 and 1997, respectively. Increased spending in research and development
during the first quarter of 1998 compared to the same period in 1997 resulted
primarily from increased funding for (i) the Company's combinatorial chemistry,
automation and robotics synthesis programs, largely reflecting a shift in the
Company's combinatorial chemistry from mixture-based libraries to libraries
formatted in single-based compound arrays, and (ii) the Company's internal drug
discovery program. The increased spending for the combinatorial chemistry
program was partially offset by reduced spending under arrangements with Torrey
Pines Institute for Molecular Studies ("TPIMS"). Funding to TPIMS was $386,000
and $578,000 for the first quarters of 1998 and 1997, respectively. Research and
development expenses for the first quarters of 1998 and 1997 include $250,000
and $500,000, respectively, for the Company's collaboration with Dura
Pharmaceuticals, Inc. ("Dura") to evaluate delivery of the Company's lead
compound, HP 228, in Dura's dry powder inhalation system. This collaboration was
initiated in February 1996 and is a related party transaction. The Company
expects to incur continued and substantial increases in research and development
expenses relating to combinatorial chemistry, melanocortin biology, product
development and clinical trials, as well as for the development of combinatorial
biology technologies (through its subsidiary, ChromaXome Corp.) and the
development of other drug discovery technologies.
The Company's selling, general and administrative expenses total
approximately $1,169,000 and $1,224,000 for the three months ended March 31,
1998 and 1997, respectively. These expenses include administrative salaries and
legal, finance, investor relations and business development activities. The
decrease in selling, general and administrative expenses are primarily
attributable to the reclassification of legal expenses associated with patents
from selling, general and administrative to research and development expenses
(this amount totaled approximately $129,000 for the first quarter of 1998). This
reclassification began in the fourth quarter of 1997 and will continue going
forward. Most of the reduction was offset by an increase in administrative
expenses used to support research and development activities. Selling, general
and administrative expenses are expected to increase as the Company's research
activities increase.
The Company's interest income decreased to approximately $250,000 for the
quarter ended March 31, 1998 compared to $339,000 for the same quarter in 1997.
The decrease is a result of lower cash balances due to continuing net losses
from operations.
Interest expense for the three months ended March 31, 1998 and 1997 were
approximately $95,000 and $25,000, respectively. The increase in interest
expense is a result of utilization of a capital lease and notes payable to fund
the acquisition of laboratory equipment and other capital assets.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments totaling approximately $14,984,000 compared with $19,427,000 at
December 31, 1997.
In May 1998, the Company and Ono Pharmaceutical Co., Ltd. ("Ono") reached
definitive agreement on terms relating to a non-binding letter of intent signed
in February 1998 that expanded their existing relationship. Under the terms of
the new agreement, the Company will create custom combinatorial libraries,
optimize lead compounds discovered by Ono and undertake screening of those
compounds in a target of interest to Ono in exchange for research funding of
$1,875,000 in the aggregate (including $500,000 advanced pursuant to the letter
of intent) and potential milestone payments and royalties.
In February 1998, the Company announced that it met a milestone in
connection with a May 1997 agreement with Warner-Lambert Company
("Warner-Lambert"). Based upon certain screening of the Company's combinatorial
libraries against certain Warner-Lambert biological assays utilizing
Warner-Lambert screening technology, Warner-Lambert has identified a series of
lead compounds which are active in a biological target of interest to
Warner-Lambert. Following achievement of this milestone, Warner-Lambert will
purchase $1,500,000 of the Company's common stock (at fair market value), the
timing of which investment may be determined by the Company prior to February
11, 2000.
In September 1997, the Company entered into a 10-year lease covering a
facility located in San Diego, California, to serve as its research, development
and corporate headquarters. The Company's headquarters and all operations
relocated to this new facility effective May 4, 1998. The annual rent is
$1,685,000 and is subject to a 3.5% annual escalation clause. The landlord has
agreed to
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fund up to a specified amount of tenant improvements for construction, project
management, space planning, architect and engineering fees and other related
costs on behalf of the Company. The Company expects to incur approximately
$700,000 to furnish and equip the new facility. (See Note 3 of Notes to the
Company's Consolidated Financial Statements.)
In July 1997, the Company was notified of approval for a $3,000,000
equipment financing line for the financing of the majority of its near-term
equipment needs. The Company intends to use this financing source through
mid-1998. The Company has granted all rights, title and security interest in the
equipment acquired through this financing source, as set forth on periodic
equipment schedules, to the lender (and secured party). The terms of the
Company's loan agreement, which became effective in September 1997, call for
amounts drawn down under the loan to be repaid monthly over a four-year term. As
of March 31, 1998, the Company had drawn down approximately $1,884,000 against
this equipment financing line. (See Note 3 of Notes to the Company's
Consolidated Financial Statements.)
In June 1997, the Company entered into a Research and Development Agreement
with Ono whereby the Company received $2,000,000 as a license fee in connection
with the screening by the Company of certain of its combinatorial libraries
against certain of its biological screens. The Company also received $2,000,000
in July 1997 for work to be done during the first 12 months under the agreement
and, subject to Ono's right of early termination, will receive an additional
$2,000,000 in July 1998 for further research during an additional 12-month
period. The non-refundable license fee was recognized as revenue in 1997. The
research related payments are treated as deferred revenue and recognized as
revenue as related work is performed under the contract. The Company will also
receive milestone and royalty payments on products it discovers which are
subsequently developed and marketed by Ono, if any. (See Note 5 of Notes to the
Company's Consolidated Financial Statements.)
In June 1997, the Company entered into an arrangement with Northwest
Neurologic, Inc. ("NNL") whereby the Company received a non-exclusive license to
patents covering certain melanocortin receptors. In return, NNL received
non-exclusive access to a limited number of the Company's combinatorial
libraries and a $300,000 license fee, of which $175,000 was paid in June 1997
with the remaining $125,000 due to NNL in May 1998.
Since 1992, the Company has been party to a Research and Option Agreement,
as amended, with 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 provide a source of combinatorial libraries and
other discoveries. As of April 15, 1997, the Company entered into a Restated and
Third Amended Research and Option Agreement with TPIMS (the "TPIMS Agreement").
In connection with the TPIMS Agreement, the Company acquired certain patents and
purchased technology, previously invented by TPIMS, in exchange for $1,300,000
(the "Purchase Price"). In addition, the TPIMS Agreement eliminated potential
related royalties otherwise payable on such patents and purchased technology.
The TPIMS Agreement also extended, through July 14, 1998, the existing funded
research relationship between the parties, and provided for a possible further
extension through April 14, 2000, upon agreement on a work plan. Included in
other assets on the Company's consolidated balance sheets is $1,300,000
representing the Purchase Price. In January 1998, the Company announced that the
TPIMS Agreement would not be extended beyond July 14, 1998. The Company remains
obligated to fund research under the TPIMS Agreement through July 14, 1998. The
Company paid the Purchase Price, plus applicable interest (10% per annum), to
TPIMS on April 14, 1998. The Purchase Price ($1,300,000), along with
approximately $115,000 of accrued interest, is reflected in current notes
payable in the accompanying consolidated balance sheets.
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
Company compounds (such as HP 228). As of March 31, 1998, $4,200,000 had been
funded under the Dura agreement.
During the first quarter of 1998, the Company used approximately $4,182,000
of cash to fund operations. The Company's future cash requirements will depend
on many factors, including the continuation of its research and development
programs, the acquisition or initiation of new research and development
programs, the costs involved in filing, prosecuting and enforcing patents,
competing technological and market developments, and the scope and results of
clinical trials. It is probable, however, that for at least the foreseeable
future, the Company's cash requirements will exceed its revenues. The Company
expects that its primary potential revenue source for the foreseeable future
will be additional collaborative agreements. The Company intends to seek
additional funding through additional research and development agreements with
suitable corporate collaborators, extensions of existing corporate
collaborations, and through public or private financings if available and
consistent with the Company's business objectives. There can be no assurances,
however, that such collaboration arrangements, or any public or private
financings, will be available on acceptable terms, if at all. If funds are
raised through equity arrangements, further dilution to stockholders may result.
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 or take other measures to cut costs, which could have a material
adverse effect on the Company. The Company estimates that its existing
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capital resources, together with currently available facility and equipment
financing, will be sufficient to fund its current and planned operations for at
least the next 12 months. There can be no assurance, however, that changes in
the Company's research and development plans or other changes 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.
OTHER MATTERS
Impact of Year 2000
The Year 2000 will impact computer programs written using two digits rather
than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation (including a temporary inability to process
transactions, send invoices or engage in other ordinary activities). This
problem largely affects software programs written years ago, before the issue
came to prominence.
The Company is presently reviewing all of its software for exposure to the
Year 2000 issue, including network and workstation software, and does not
believe that it has significant associated risk. The Company primarily uses
third-party software programs written and updated by outside firms. Currently a
plan is being put into place to request certification from each company that its
software is Year 2000 compliant. To assure that all software programs can
successfully work in conjunction with each other after 1999, the Company plans
to test all of its software during 1998 using a combination of past and future
dates. Although no problems are expected to result from these tests, the Company
expects that any problems would be corrected before the end of 1998. The cost of
modifying or replacing software to bring the Company into compliance, if
necessary, is not expected to be material.
RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS (INCLUDING THOSE NOTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997), IN SOME CASES HAVE AFFECTED, AND IN THE
FUTURE COULD AFFECT, THE COMPANY'S ACTUAL CONSOLIDATED 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 technology
development programs (including the Company's combinatorial biology technology
program (conducted through its subsidiary, ChromaXome) and the Company's efforts
to synthesize compounds in combinatorial library formats through automation) are
at early stages of development, and there can be no assurance that such
technology programs will be developed or employed successfully, work efficiently
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 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 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
12
<PAGE> 13
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 conflicts or terminations 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 developed and
marketed as a result of such collaborations or (iii) the Company will be able to
negotiate additional collaborative arrangements in the future 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
The Company's research and product development programs (including the
Company's program with respect to potential drug candidates for the treatment of
diseases mediated by the melanocortin receptor pathway) are at early stages. Any
compounds resulting from the Company's research and development programs are not
expected to be commercially available for a number of years, if ever, even if
any such compounds are successfully developed and proven to be safe and
effective. There can be no assurances that any of the Company's product
development efforts will be successfully completed, that development
arrangements with pharmaceutical partners will be established on acceptable
terms, if at all, 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.
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
further developing and sustaining 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 and (viii) changes in the Company's existing research
relationships. Although the Company estimates that its existing capital
resources will be sufficient to fund its current and planned operations for the
next 12 months, there can be no assurance that changes will not occur that would
consume available capital resources before such time.
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.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has experienced significant operating losses since inception.
For the years ended December 31, 1997, 1996 and 1995, the Company had net losses
of approximately $9,372,000, $11,688,000 and $9,490,000, respectively. For the
three months ended March 31, 1998, the Company recorded a net loss of $3,421,000
and had an accumulated deficit at March 31, 1998 of approximately $59,050,000.
The Company expects that its ability to achieve profitability will be dependent
upon the ability of the
13
<PAGE> 14
Company to enter into and achieve success under additional collaborative
arrangements or to expand and achieve success under existing relationships.
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. If the Company is unable to receive significantly increased
revenues under collaboration arrangements, the Company expects to incur
additional operating losses in the future and expects cumulative losses to
increase as the Company's research and development efforts and preclinical and
clinical testing are expanded. 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
No information is presented for this Item (the Company is not presently
required to prepare or provide this information pursuant to the Instructions to
Item 305 of Regulation S-K).
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1998.
15
<PAGE> 16
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.
Trega Biosciences, Inc.
Date: May 14, 1998 /s/ ROBERT S. WHITEHEAD
-------------------------------------
Robert S. Whitehead
President, Chief Executive Officer,
Chairman of the Board of Directors
and Acting Chief Financial Officer
(Principal Executive, Financial and
Accounting Officer)
16
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This schedule contains financial information extracted from Consolidated Balance
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months ended March 31, 1998, and is qualified by reference to
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<FISCAL-YEAR-END> DEC-31-1998
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