<PAGE>
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, 1999
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.
CLASS OUTSTANDING AT MARCH 31, 1999
- ------------------------------ -----------------------------
Common Stock, $0.001 par value 18,026,471
<PAGE>
TREGA BIOSCIENCES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998............................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998................................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 13
PART II. OTHER INFORMATION
Item 6. Exhibits ....................................................... 14
SIGNATURE............................................................... 15
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,
1999 1998
----------- ----------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,535 $ 9,755
Short-term investments 4,141 6,507
Accounts receivable and other current assets 1,338 778
-------- --------
Total current assets 13,014 17,040
Property and equipment, net 3,756 4,123
Other assets 8,138 8,372
-------- --------
$ 24,908 $ 29,535
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 794 $ 1,539
Accrued compensation and other accrued liabilities 2,637 2,399
Current portion of debt obligations 1,160 1,251
Deferred revenue 2,454 3,794
-------- --------
Total current liabilities 7,045 8,983
Long-term debt obligations, net of current portion 2,387 2,689
Deferred rent 306 223
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000 at March 31, 1999 Issued
and outstanding shares - 18,026,471 and 17,481,097 at
March 31, 1999 and December 31, 1998, respectively 18 18
Additional paid-in capital 86,690 86,645
Common stock issuable 16 16
Deferred compensation (444) (609)
Accumulated deficit (71,110) (68,430)
-------- --------
Total stockholders' equity 15,170 17,640
-------- --------
$ 24,908 $ 29,535
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1998 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,
---------------------------
1999 1998
------------ --------------
(Unaudited)
<S> <C> <C>
Revenues:
Contract research and license fees $ 1,205 $ 1,168
Related party contract research 825 --
Net sales 105 --
-------- --------
2,135 1,168
Costs and expenses:
Cost of sales 59 --
Research and development 4,587 3,575
Selling, general and administrative 1,796 1,169
-------- --------
6,442 4,744
-------- --------
Loss from operations (4,307) (3,576)
Other income (expense):
Interest income, net 114 155
Gain on sale of ChromaXome 1,513 --
-------- --------
Net loss $ (2,680) $ (3,421)
-------- --------
-------- --------
Basic and diluted net loss per share $ (.15) $ (.25)
-------- --------
-------- --------
Shares used in computing basic and diluted
net loss per share 17,853 13,910
-------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
---------- ---------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,680) $(3,421)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 459 346
Amortization of note receivable discount (13) (13)
Amortization of deferred compensation 165 165
Accrued interest on notes payable -- 43
Gain on disposal of assets -- (73)
Gain on sale of CXC (1,513) --
Changes in operating assets and liabilities, net of effects
from the transfer of assets from sale of CXC in 1999:
Accounts receivable (659) 2
Other current assets 99 (392)
Accounts payable (745) 548
Other accrued liabilities 238 (725)
Deferred rent 83 --
Deferred revenue (1,340) (662)
---------- ---------
Net cash used in operating activities (5,906) (4,182)
INVESTING ACTIVITIES
Purchase of short-term investments -- (139)
Maturities of short-term investments 2,366 8,376
Additions to property and equipment (170) (528)
Proceeds from disposition of equipment -- 115
Net proceeds from sale of CXC 1,705 --
Other assets 133 (99)
---------- ---------
Net cash provided by investing activities 4,034 7,725
FINANCING ACTIVITIES
Principal payments under debt obligations (393) (189)
Proceeds from equipment notes and notes payable -- 302
Issuance of common and preferred stock 45 138
---------- ---------
Net cash provided by financing activities (348) 251
---------- ---------
Net (decrease) increase in cash and cash equivalents (2,220) 3,794
Cash and cash equivalents at beginning of period 9,755 5,457
---------- ---------
Cash and cash equivalents at end of period $ 7,535 $ 9,251
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 90 $ 50
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
March 31, 1999
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, 1999, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998, 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 those
outstanding options, warrants and convertible securities and contingently
issuable shares. SFAS No. 128 is effective for periods ending after December
15, 1997. All common shares, outstanding options, warrants and convertible
securities and contingently issuable shares have been excluded from the
calculation of diluted earnings per share, as their inclusion would be
anti-dilutive.
New Accounting Standards
During 1998, the Company adopted Statement of Financial Accounting
Standard No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131"), "Segment
Information." 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, are required to be reported, net of their
related tax effect, to arrive at comprehensive income. For the quarters ended
March 31, 1999 and 1998, comprehensive loss is the same as net 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 only, and therefore
the adoption of this standard did not have a material impact on the Company's
financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
presentation for the three months ended March 31, 1999.
6
<PAGE>
3. LEASES
LONG-TERM DEBT
In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it drew down approximately $1.1 million by December 31, 1998.
The loan, which is secured by the equipment, bears interest at 11.3% and is to
be repaid monthly over a four-year term.
In September 1998, the Company obtained an equipment financing line under
an existing master agreement established in 1997. This equipment financing
line of $750,000 was completely drawn down in September 1998. Approximately
$2.3 million is owed under the previous equipment financing line. No
additional amounts are available under the line. The loans are secured by the
equipment. The terms of the Company's loan agreement call for amounts drawn
down under the loans to be repaid monthly over a four-year term, including
interest payments based on an interest rate of approximately 8.85%.
In September 1997, the Company entered into a 10-year lease for its facility
in San Diego, California. The Company has occupied such premises since May 1998.
Annual rent is $1.7 million and is subject to annual increases of 3.5%. The
Company has the option to extend the lease for an additional term of 5 years
subject to terms and conditions specified in the lease.
4. SALE OF CHROMAXOME CORPORATION
In March 1999, the Company's wholly owned subsidiary, ChromaXome Corp.
("CXC"), sold substantially all of its assets (valued on its books at
approximately $110,000) to TerraGen Discovery Inc. ("Discovery"), a privately
held company. As consideration for the sale, CXC received $2 million in cash,
two interest bearing notes in the amounts of $2 million and $1 million plus
600,000 shares of preferred stock in the parent of Discovery, which is also a
privately held company. The two notes are due no later than December 31, 1999
and June 30, 2000, respectively, and may be accelerated in certain events.
The Company has recorded a gain on the sale of these assets of approximately
$1.5 million which relates to the $2 million in cash received at the time of
the closing of the sale. Any gains resulting from future payments and the
preferred stock received have been deferred until such time as the payments
are received or value is realized from the preferred stock received.
5. COLLABORATIVE ARRANGEMENTS
In March 1999 and February 1999, the Company entered into Software
License Agreements, through its wholly owned subsidiary, NaviCyte, Inc.
("NaviCyte"), with the R.W. Johnson Pharmaceutical Research Institute ("PRI")
and Schering-Plough Research Institute ("Schering-Plough") to collaborate on
the use and development of NaviCyte's proprietary Pk-Informatics tools to
identify new candidates for drug development. Under the terms of these
agreements, both companies will provide data and make initial and milestone
payments over the course of the further development of NaviCyte's proprietary
In Vitro Determination for Evaluation of Absorption (IDEA (TM)) simulation
software system and database. NaviCyte will license its software and
computational models for use with both companies' compound libraries. The
Company has recorded a portion of the upfront payments as well as two
milestones as revenue while the remaining portion of the upfront payments
have been recorded as deferred revenue.
In March 1999, the Company entered into a Library Sales Agreement with
Isis Pharmaceuticals, Inc. ("ISIS") by which ISIS acquires combinatorial
libraries as part of the Company's Chem.Folio(TM) program. Under the terms of
the agreement, the Company will give Isis non-exclusive access to its
small-molecule combinatorial libraries in exchange for an up-front payment on
each compound delivered. ISIS also has the option to license synthetic
protocols for libraries from which active compounds are identified. The
Company will recognize revenue as libraries are shipped.
In connection with the Company's research agreement with Dura
Pharmaceuticals ("Dura"), the Company is committed to fund $6 million 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,
1999, $4.9 million had been funded since the inception of the 1996 Dura
agreement.
6. COMMON STOCK
During the first quarter of 1999, the Company issued 545,374 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, 1999.
7
<PAGE>
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, 1998) 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 focused on accelerating the process of drug discovery by using small
molecule combinatorial chemistry and other drug discovery technologies to create
novel drugs having greater chances of clinical success. In combination with its
wholly owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers products and
services to the pharmaceutical and biopharmaceutical industries. Trega also uses
its drug discovery technologies in its internal development programs, which are
focused on discovering small molecules acting on melanocortin receptors, which
may be important in the treatment of inflammatory and metabolic diseases.
In November 1998, the Company acquired NaviCyte, a privately-held company
engaged in (i) the sale of devices and licensing of a cell line used in
connection with predictive testing of drug candidates for absorption
characteristics and (ii) the development of a range of drug candidate selection
tools intended to be used to predict the pharmacokinetic characteristics of drug
candidates.
In March 1999, ChromaXome Corp. ("ChromaXome"), a wholly-owned subsidiary
of the Company, sold substantially all of its assets. ChromaXome focused on
the development and use of combinatorial biology techniques to create drug
candidates and other molecules of commercial interest from naturally occurring
microbial sources.
While at the time of these transactions the respective sizes of the
workforces of NaviCyte and ChromaXome were comparable, the Company anticipates
an increase in costs at NaviCyte over those at ChromaXome as development costs
related to NaviCyte's products and services under development are incurred. It
can be anticipated, in addition, that the development of NaviCyte's products and
services will necessitate the hiring of additional employees, although their
number has not yet been ascertained. It is further anticipated that revenues
from the sale of products and services by NaviCyte will offset, in part, these
increased costs.
The Company enters into pharmaceutical alliances, providing partners
access to the Company's technologies in exchange for licensing fees and
potential milestone payments and royalties. 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, 1999, the Company's accumulated
deficit was approximately $71,110,000.
RESULTS OF OPERATIONS
The Company recorded revenues of approximately $2,135,000 and $1,168,000 for
the three months ended March 31, 1999 and 1998, respectively. First quarter
revenues for 1999 were derived from shipments of combinatorial libraries or
individual compounds, research conducted under collaborative research agreements
and contract screening (accounting for approximately $1,808,000), NaviCyte's
simulation software system and database contracts (accounting for $200,000) as
well as approximately $22,000 derived from grant and other revenue. In addition,
the Company recorded, through its subsidiary, NaviCyte, device and cell sales of
8
<PAGE>
approximately $105,000. By comparison, 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.
As of March 31, 1999, the Company's financial statements reflect a liability
for deferred revenue in the amount of approximately $2,454,000. This represents
the excess of payments received from research collaborators over the revenue
from libraries shipped or work performed, and will be recognized when the
correlative services are performed or the period for performance expires.
Cost of sales in the first quarter of 1999 is related to device sales from
the Company's subsidiary, Navicyte, acquired in November 1998. There were no
sales in the comparable quarter of 1998.
The Company incurred research and development expenses totaling
approximately $4,587,000 and $3,575,000 for the three months ended March 31,
1999 and 1998, respectively. Increased spending in research and development
during the first quarter of 1999 compared to the same period in 1998 resulted
primarily from increased funding for (i) the Company's combinatorial chemistry
program, (ii) the Company's partnered drug discovery and melanocortin programs.
The Company expects to continue to incur significant expenses in research and
development relating to combinatorial chemistry, melanocortin biology and the
development of other drug discovery technologies.
The Company's selling, general and administrative expenses total
approximately $1,796,000 and $1,169,000 for the three months ended March 31,
1999 and 1998, respectively. These expenses include administrative salaries and
legal, finance, investor relations and business development activities. The
increase in selling, general and administrative expenses are primarily
attributable to the addition of NaviCyte and its expanding business base.
Selling, general and administrative expenses are expected to increase as the
Company's research activities increase.
The Company's interest income decreased to approximately $181,000 for the
quarter ended March 31, 1999, compared to $250,000 for the same quarter in
1998. The decrease is a result of lower cash balances.
Interest expense for the three months ended March 31, 1999 and 1998 was
approximately $67,000 and $95,000, respectively. The decrease in interest
expense for the quarter is a result of the buy-out of equipment from under a
capital lease and the discontinued accrual of interest for patent technology
which was paid in the second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through March 31, 1999, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries (through its former subsidiary, Multiple Peptide
Systems, Inc.), sales of devices and CACO-2 cells (through NaviCyte), other drug
discovery technologies (through NaviCyte) and interest income. At March 31,
1999, the Company had cash, cash equivalents and marketable securities
aggregating $11.7 million compared to $16.3 million on December 31, 1998. The
Company's working capital at March 31, 1999 was $6 million compared to $8.1
million at December 31, 1998. The Company has invested a significant portion of
its excess funds in cash equivalents and short-term investments primarily of
highly-rated debt instruments of financial institutions and corporations.
See Item 3, Qualitative and Quantitative Disclosure About Market Risk.
The decrease in cash, cash equivalents and marketable securities at March
31, 1999, resulted primarily from $5.9 million used to fund operating
activities, $170,000 invested in property and equipment, and $393,000 repaid
on debt from property and equipment financing agreements. The decrease was
offset, in part, by cash received through the sale of its former subsidiary,
ChromaXome Corp., as well as sales derived from shipments of combinatorial
libraries, individual compounds, devices and cells.
In March 1999 and February 1999, the Company entered into Software
License Agreements, through its subsidiary NaviCyte, with the R.W. Johnson
Pharmaceutical Research Institute ("PRI") and Schering-Plough Research
Institute ("Schering-Plough") to collaborate on the use and development of
NaviCyte's proprietary Pk-Informatics tools to identify new candidates for
drug development. Under the terms of the agreements, both companies will
provide data and make initial and milestone payments over the course of the
further development of NaviCyte's proprietary In Vitro Determination for
Evaluation of Absorption (IDEA (TM)) simulation software system and database.
NaviCyte will license its software and computational models for use with both
companies' compound libraries. The Company has recorded a portion of upfront
payments as well as two milestones as revenue while the remaining portion of
the upfront payments have been recorded as deferred revenue.
9
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In March 1999, the Company entered into a Library Sales Agreement with Isis
Pharmaceuticals, Inc. ("ISIS") by which ISIS acquires combinatorial libraries as
part of the Company's Chem.Folio(TM) program. Under the terms of the agreement,
the Company will give Isis non-exclusive access to its small-molecule
combinatorial libraries in exchange for an up-front payment on each compound
delivered. ISIS also has the option to license synthetic protocols for libraries
from which active compounds are identified. The Company will recognize revenue
as libraries are shipped.
As of March 31, 1999, the Company had approximately $1.1 million available
under property and equipment financing agreements and may need to secure
additional property and equipment financing before the end of 1999 to fund
planned purchases. Certain of the existing property and equipment financing
arrangements require the Company to provide a security deposit if cash, cash
equivalents and marketable securities fall below certain levels as defined in
the agreements.
During 1998, the Company moved into a combined research and development
facility and corporate headquarters in San Diego, California. The ten-year lease
covering the facility calls for annual rent of approximately $1.7 million and is
subject to a 3.5% annual escalation clause. (See Note 6 to the Company's
Consolidated Financial Statements.)
In connection with the Company's research agreement with Dura
Pharmaceuticals ("Dura"), the Company is committed to fund $6 million 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,
1999, $4.9 million had been funded since the inception of the 1996 Dura
agreement.
The Company intends to use its financial resources primarily to fund
research and development, the expansion of its combinatorial library inventories
and to fund NaviCyte's operations. The amounts actually expended for each
purpose may vary significantly depending on many factors. These factors include
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.
The Company anticipates that its existing capital resources and funding
under existing research and development collaborations and product sales
agreements (which could provide up to $7.1 million to be received in each of
1999 and 2000), together with currently available property and equipment
financing, will be sufficient to fund its current and planned operations at
least through the end of 1999. There can be no assurances, 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.
The Company will need to raise substantial capital to fund its operations in
future periods. The Company expects that its primary potential revenue sources
for the foreseeable future will be additional collaborative agreements, sales of
combinatorial libraries or compounds and revenues generated by the Company's
wholly owned subsidiary, NaviCyte. 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 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 and development programs or take other
measures to cut costs, which could have a material adverse effect on the
Company.
OTHER MATTERS
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
In 1998, Trega Biosciences Inc. developed a three-phase program for Y2K
information systems compliance. Phase 1 is to identify and solve Y2K issues in
the Company's significant information systems infrastructure and enterprise
business applications, including telecommunications and networking systems, as
well as accounting software. Phase 2 is to identify and plan for Y2K issues that
are specific to the Company's business units, including local software, product
matters, facilities related systems and vendor concerns.
10
<PAGE>
Phase 3 is the final testing of each major area of exposure to ensure
compliance, and the development of contingency plans for unsolved Y2K
deficiencies
In Phase 1 of the program, the Company has inventoried and is in the process
of assessing company-wide systems, many of which have been identified as being
Y2K compliant. Some systems software, hardware and firmware are in need of
upgrades. These upgrades are available from third party suppliers, and are in
the process of being evaluated. Systems which are not Y2K compliant are
currently being upgraded. A plan for in-house testing has been developed and is
scheduled for completion by the end of the second quarter.
Under Phase 2, the Company is currently identifying and evaluating
exposure to Y2K risk from third-party vendors. The Company has developed a
list of critical vendors that are either sole-source suppliers or preferred
suppliers. The Company is currently contacting significant third parties
regarding their Y2K readiness. Preliminary findings indicate that only one
such company's product may have Y2K issues, and upgrades to this product are
being addressed. There is another class of third party vendors, however, from
which the Company cannot obtain assurances with regard to the Y2K compliance
of their systems. For example, the Company is dependent on electric, natural
gas, water and telephone utilities. Similarly, the Company is dependent upon
its banks, payroll processor and insurers. Disruption in one or more of the
foregoing services could have a material adverse impact on the Company.
The testing and contingency plan development under Phase 3 began in early
1999 with completion expected in mid-1999.
The anticipated costs relating to resolving Company Y2K issues are not
currently believed to be significant (i.e., less than $100,000). However, as
additional Y2K remediation activities are developed and planned, there can be no
guarantee that actual costs will not differ materially from those in the current
estimate. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the completion of the Company's Y2K investigations (including matters
relating to the Company's customers and vendors), the ability to locate and
correct all relevant computer codes and similar uncertainties. In addition,
there can be no assurance that Y2K compliance problems will not be revealed in
the future which could have a material adverse affect on the Company's business,
financial condition and results of operation. Many of the Company's customers
and vendors may be affected by Y2K issues which may result in those customers
having reduced funds to purchase the Company's products, or those suppliers
experiencing difficulties in producing or shipping key components to the Company
on a timely basis or at all. Such third party issues could have a material
adverse affect on the Company's business, financial condition and results of
operations.
THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT.
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, 1998), 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. Moreover, the Company's
technology development programs, including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds 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, the
nature of the compounds the Company is able to synthesize and the relative value
of any other drug development technologies which the Company may be able to
provide will, in large part, determine the demand for the Company's drug
discovery capabilities. An inability to offer competitive libraries or other
drug development technologies, or an inability to synthesize compounds that have
actual or potential
11
<PAGE>
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 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 believed to be 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.
Certain of the Company's technology development programs, including the
Company's selection, screening and predictive technology programs (conducted
through NaviCyte), may not result in products or services that can be utilized,
other than for certain limited development consortium purposes, within the
foreseeable future, if ever. There can be no assurances that these programs will
be successfully completed or result in products or services that are
efficacious, perceived as valuable by pharmaceutical partners or customers,
useful in the Company's internal development programs or otherwise an
enhancement to the Company's ability to engage effectively in drug discovery.
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 maintain the
competitiveness of its combinatorial chemistry technologies, to continue its
technology development programs (including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds through automation) and to conduct the
costly and time consuming research and preclinical and clinical testing
necessary to advance potential drug candidates (such as HP 228). 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
12
<PAGE>
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 and other drug discovery capabilities, (v) the costs involved in
developing additional drug discovery technologies (including the Company's
selection, screening and predictive technology programs (conducted through
NaviCyte) and the Company's efforts to synthesize 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 and funding under existing research and development collaborations
and product sales agreements, together with currently available property and
equipment financing, will be sufficient to fund its current and planned
operations through the end of 1999, there can be no assurance that changes
will not occur that would consume available capital resources before such
time or that sufficient funds will be available thereafter.
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, 1998, 1997 and 1996, the Company had net
losses of approximately $12,801,000, $9,372,000 and $11,688,000, respectively.
For the three months ended March 31, 1999, the Company recorded a net loss of
$2,680,000 and had an accumulated deficit at March 31, 1999 of approximately
$71,110,000.
The Company expects that its ability to achieve profitability will be partly
dependent upon the ability of the 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
significant additional 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.
As a result of factors affecting the Company's business (including the
importance to the Company of collaborative arrangements and the Company's
inability to control the actions, timing, funding or success of its current and
potential collaborative partners), the revenues of the Company may vary
substantially from period to period. Thus, the Company's results for any one
period may not be indicative of the results which can be expected for any other
period.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
held-to-maturity securities. The Company invests its excess cash in highly
liquid short-term investments that are typically held for the duration of the
term of the respective instrument. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions to manage exposure to interest
rate changes. Accordingly, the Company believes that, while the securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
13
<PAGE>
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
On March 30, 1999, the Company filed a report on Form 8-K relating to the
disposition of assets of its subsidiary, ChromaXome Corp. In addition, on
February 4, 1999, the Company filed a report on Form 8-K/A relating to the
acquisition of NaviCyte, Inc.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Trega Biosciences, Inc.
Date: May 14, 1999 /s/ Michael G. Grey
-------------------------------------
Michael G. Grey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard A. Wills
-------------------------------------
Gerard A. Wills
Vice President, Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
15
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT MARCH 31, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999.
</LEGEND>
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