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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-20954
COCENSYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0538836
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
201 TECHNOLOGY DRIVE, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(714) 753-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.001 PAR VALUE 22,792,364
(CLASS OF COMMON STOCK) (OUTSTANDING AT OCTOBER 29, 1997)
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COCENSYS, INC.
(A development stage company)
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Statements of Operations for the
three-month and nine-month periods ended
September 30, 1997 and 1996 and the period
from inception (February 15, 1989) through
September 30, 1997 4
Condensed Statements of Cash Flows for the
nine-month periods ended September 30, 1997
and 1996 and the period from inception
(February 15, 1989) through September 30, 1997 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES 16
2
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,513 $ 1,050
Short-term investments 7,861 16,949
Receivables from corporate partners 70 659
Other current assets 399 556
--------- ---------
TOTAL CURRENT ASSETS 10,843 19,214
Property and equipment, net 2,754 2,685
Notes receivable from officers 254 126
Other assets, net 57 26
--------- ---------
$ 13,908 $ 22,051
--------- ---------
--------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 975 $ 1,437
Other accrued liabilities 1,814 2,556
Advances from corporate partners - 446
Capital lease obligation - current portion 287 341
--------- ---------
TOTAL CURRENT LIABILITIES 3,076 4,780
Capital lease obligation, less current portion 174 284
Other liabilities 36 40
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value,
5,000,000 shares authorized; 100,000
shares of Series B convertible issued and
outstanding at September 30, 1997 and
December 31, 1996; 100,000 shares of
Series C convertible issued and outstanding
at September 30, 1997 12,000 7,000
Common stock - $.001 par value, 75,000,000
shares authorized; 22,792,051 shares
issued and outstanding at September 30,
1997 and 22,083,346 at December 31, 1996 96,165 93,986
Deficit accumulated during the development
stage (97,078) (83,162)
Deferred compensation (497) (905)
Unrealized gain on investments 32 28
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,622 16,947
--------- ---------
$ 13,908 $ 22,051
--------- ---------
--------- ---------
See accompanying notes.
3
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS ENDED NINE MONTHS ENDED (FEBRUARY 15,
SEPTEMBER 30, SEPTEMBER 30, 1989) TO
------------------ -------------------- SEPTEMBER 30,
1997 1996 1997 1996 1997
-------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Co-promotion revenues from corporate partners $ 861 $ 845 $ 3,169 $ 4,856 $ 30,070
Co-development revenues from corporate partners 951 450 7,900 4,999 15,943
-------- -------- --------- --------- ----------
Total revenues 1,812 1,295 11,069 9,855 46,013
-------- -------- --------- --------- ----------
OPERATING EXPENSES
Research and development 5,781 4,264 17,198 14,048 85,370
Marketing, general and administrative 2,855 3,158 8,358 8,747 45,988
Acquired research and development - - - - 14,879
-------- -------- --------- --------- ----------
Total operating expenses 8,636 7,422 25,556 22,795 146,237
-------- -------- --------- --------- ----------
OPERATING LOSS (6,824) (6,127) (14,487) (12,940) (100,224)
Interest income 230 375 638 1,004 4,193
Interest expense (16) (55) (67) (113) (1,047)
-------- -------- --------- --------- ----------
NET LOSS $ (6,610) $ (5,807) $ (13,916) $ (12,049) $ (97,078)
-------- -------- --------- --------- ----------
-------- -------- --------- --------- ----------
Net loss per share $ (0.29) $ (0.26) $ (0.62) $ (0.55)
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in computing net loss per share 22,707 22,003 22,497 21,714
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying notes.
4
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COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED (FEBRUARY 15,
SEPTEMBER 30, 1989) TO
------------------------ SEPTEMBER 30,
1997 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (13,916) $ (12,049) $ (97,078)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 776 1,517 6,665
Amortization of deferred compensation 203 547 3,541
Issuance of stock and warrants for services 55 - 1,972
Loss on sale of fixed assets 65 - 91
Acquired research and development - - 12,279
Increase in other assets 157 (175) (471)
Decrease (increase) in receivable from corporate partner 589 - (70)
Increase (decrease) in advances from corporate partners (446) 1,198 0
Increase (decrease) in accounts payable and other accrued liabilities (1,204) (689) 2,553
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (13,721) (9,651) (70,518)
--------- --------- ---------
INVESTING ACTIVITIES
Decrease (increase) in short-term investments 9,092 (10,306) (7,830)
Purchase of property and equipment (931) (636) (6,556)
Increase in other assets and notes receivable from officers (159) (73) (467)
Cash received on sale of fixed assets 1 - 20
Increase in deferred sales organization costs - - (1,571)
Increase in deferred patent costs - - (904)
Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 8,003 (11,015) (17,370)
--------- --------- ---------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 2,329 15,0366 1,114
Net cash proceeds from issuance of preferred stock 5,000 7,000 28,381
Proceeds from sale/leaseback of fixed assets and notes payable 529 621 4,762
Payments on capital lease obligations and notes payable (677) (947) (3,856)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,181 21,710 90,401
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,463 1,044 2,513
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,050 6,895 -
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,513 $ 7,939 $ 2,513
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 55 $ 113 $ 809
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial information for the three and nine-month periods
ended September 30, 1997 and 1996 is unaudited but includes all
adjustments (consisting only of normal recurring entries) which the
Company's management believes to be necessary for the fair presentation
of the financial position, results of operations and cash flows for the
periods presented. The accompanying interim financial statements should
be read in conjunction with the financial statements and related notes
included in the Company's 1996 Annual Report on Form 10-K for the year
ended December 31, 1996. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to Securities and Exchange Commission rules and regulations.
Interim results of operations for the three-month and nine-month periods
ended September 30, 1997, are not necessarily indicative of operating
results to be expected for the full year.
REVENUE AND EXPENSE RECOGNITION
See Notes 2 through 6 for revenue recognition policies related to
co-promotion and co-development revenues from corporate partners. The
initial costs incurred in establishing the Company's sales and marketing
organization were deferred until initiation of the Company's sales
efforts on August 1, 1994. Such costs were amortized over the contract
term (through December 31, 1996) of the Company's Promotion Agreement
with Novartis (formerly Ciba-Geigy Corporation). On October 8, 1997, the
Company sold its Pharmaceutical Sales and Marketing Division (the "Sales
Division") to Watson Laboratories, Inc. ("Watson"). See Note 7.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the periods. Common stock
equivalents from stock options and warrants are excluded from the
calculation as their effect would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
6
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
2. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY
In October 1995, the Company entered into a collaboration with
Warner-Lambert Company and its Parke-Davis division to develop and market
therapeutic drugs for the treatment of certain central nervous system
disorders. This arrangement consists of the Research, Development and
Marketing Collaboration Agreement (the "1995 Warner Collaboration
Agreement"), for the worldwide development and commercialization of a new
class of neurological and psychiatric drugs, termed subtype selective
NMDA receptor antagonists ("SSNRAs"), and the Parke-Davis Promotion
Agreement, pursuant to which the Company co-promoted Parke-Davis' CNS
drug, Cognex-Registered Trademark-, to United States neurologists for the
treatment of Alzheimer's disease. As discussed more fully in Note 7, the
1995 Warner Collaboration Agreement was expanded in October 1997 to
include modulators of the AMPA receptor and extended until October 1999.
Under the 1995 Warner Collaboration Agreement, both companies shared
technology and resources to develop SSNRA candidates. The parties were
obligated to make specified contributions to development costs with
respect to any development candidates. Promotion costs of, and profits
from any products developed under the agreement will be shared equally in
the United States and Japan. Warner-Lambert will have the exclusive
right to develop and market any product, at its own cost, for markets
outside the United States and Japan, subject to a specified royalty
payment to the Company. Warner-Lambert is obligated to pay its specified
portion of the development costs and to make certain milestone payments,
upon achievement of certain clinical development and regulatory
milestones, for each development compound. Payments received under the
1995 Warner Collaboration Agreement are recognized as co-development
revenues by the Company.
Pursuant to the Warner Collaboration Agreement, Warner-Lambert purchased
$2.0 million of CoCensys common stock in October 1995 and an additional
$2.0 million of CoCensys common stock in March 1997.
The original Parke-Davis Promotion Agreement, entered into in October
1995, was terminated on December 31, 1996, when a revised promotion
agreement relating to Cognex took effect. Under the original Parke-Davis
Promotion Agreement for Cognex, the Company realized co-promotion
revenues from its share of sales of Cognex above certain baseline levels
specified in the contract. Under the revised Parke-Davis Promotion
Agreement for Cognex, the Company realized co-promotion revenues based
upon the number of prescriptions for Cognex written by certain targeted
neurologists and other doctors during each quarter, with a specified
minimum payment. The revised Cognex agreement was terminated in June
1997.
In July 1997, the Company entered into a new Parke-Davis Promotion
Agreement, pursuant to which the Company, through its Sales Division,
co-promoted Zarontin-Registered Trademark-, Parke-Davis' drug for
pediatric epilepsy. Under the terms of the new agreement, the Company
realized co-promotion revenue on the basis of the number of prescriptions
for Zarontin written each quarter over a specified baseline. As
discussed more fully in Note 7, in October 1997 the Company sold the
Sales Division, and all related co-promotion agreements, to Watson.
7
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COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
3. PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS, INC.
In January 1996, the Company and Somerset Pharmaceuticals, Inc.
("Somerset") entered into the Somerset Promotion Agreement, pursuant to
which the Company, through its Sales Division, promoted Somerset's drug
Eldepryl-Registered Trademark- to neurologists in the United States for
the treatment of Parkinson's disease. Effective January 1, 1997, the
initial agreement was superseded by the 1997 Somerset Promotion
Agreement. Under the 1997 Somerset Promotion Agreement, CoCensys had the
exclusive right to detail Eldepryl to certain neurologists and other
physicians in the United States and was compensated based upon the number
of details undertaken and gross sales of Eldepryl. As discussed more
fully in Note 7, in October 1997 the Company sold its Sales Division, and
all related co-promotion agreements, to Watson.
4. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH G.D. SEARLE & CO.
In May 1996, the Company entered into an agreement with G.D. Searle & Co.
("Searle") to co-develop and co-promote CCD 3693, the Company's lead
compound for the treatment of insomnia along with its back-up compounds.
Pursuant to the agreement, Searle paid a $3.0 million license fee and
purchased 100,000 shares of the Company's Series B Convertible Preferred
Stock for $7.0 million. The license fee was recognized as co-development
revenue in 1996. The preferred stock is convertible to common stock on
May 17, 1998, or earlier at the Company's option. The number of shares
issuable upon conversion shall be equal to $7.0 million divided by the
then current common stock price (subject to certain minimum and maximum
limits).
Under the agreement, both companies are obligated to pay a portion of the
development costs of the compound and its back-up compounds. In
addition, the Company will receive nonrefundable milestone payments upon
the occurrence of certain events in the development of the compound. The
parties will co-promote any products derived from the collaboration in
the United States, while Searle will have the right to develop, register
and market the products in the rest of the world, subject to specified
royalty payments.
5. MARKETING AND DEVELOPMENT COLLABORATION WITH NOVARTIS PHARMA, A.G.
In May 1994, the Company entered into a marketing and development
collaboration with Novartis Pharma, A.G. (formerly Ciba-Geigy Limited)
for the co-promotion by the Company of certain Novartis products and the
development and commercialization of ACEA 1021, a compound being
developed by the Company. This collaboration consisted of the Novartis
Promotion Agreement and the Novartis Research and Development Agreement.
8
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Pursuant to the Novartis Promotion Agreement, CoCensys established a
sales force to co-promote and market certain Novartis products in the
United States initially to psychiatrists. The agreement provided for the
advance of funds to the Company to cover a portion of the expenses
incurred by the CoCensys sales force in promoting the Novartis products.
CoCensys realized co-promotion revenues from its share of sales of
Novartis products above certain baseline levels specified in the
contract. The Novartis Promotion Agreement terminated at the end of
1996.
In connection with the Novartis Research and Development Agreement,
Novartis purchased $7.0 million of CoCensys common stock and agreed to
make certain nonrefundable milestone payments in connection with
specified events in the course of the development of ACEA 1021. In April
1997, Novartis advised the Company that it would not continue the
development of ACEA 1021, and the agreement terminated in October 1997.
The Company is seeking a new partner to develop ACEA 1021. There can be
no assurance that the Company will be able to secure another partner to
continue the development of this compound.
6. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH WYETH-AYERST
LABORATORIES
In May 1997, the Company entered into a development and commercialization
agreement for Co 2-6749, its lead anxiolytic compound, with Wyeth-Ayerst
Laboratories, the pharmaceutical division of American Home Products
Corporation ("AHP"). Under the terms of the agreement, Wyeth-Ayerst made
upfront payments to CoCensys of $5.0 million in licensing fees and AHP
paid $5.0 million to purchase the Company's Series C Convertible
Preferred Stock. Additionally, CoCensys will receive specified milestone
payments dependent upon the achievement of key development events and
$3.0 million per year for up to three years to identify back-up
compounds. Beginning in May 1997, payments due to CoCensys for work
performed identifying back-up compounds are due quarterly. Wyeth-Ayerst
will be responsible for the development of Co 2-6749. The Company and
Wyeth-Ayerst will co-promote any resulting product in certain market
segments in the United States, while Wyeth-Ayerst will have rights to
develop, register and market any drugs derived from the collaboration in
the rest of the world, subject to royalty obligations to CoCensys. The
preferred stock is convertible into common stock after May 12, 1999, into
a number of shares of common stock equal to $5.0 million divided by the
conversion price, which will be determined pursuant to a formula based
partially on the market price of the common stock at the time of
conversion (subject to a minimum price of $4.37 and a maximum price of
$7.76).
7. SUBSEQUENT EVENTS
DISPOSITION OF PHARMACEUTICAL SALES AND MARKETING DIVISION
On October 8, 1997, the Company entered into an Asset Purchase Agreement
(the "Watson Agreement") to sell its Sales Division to Watson. Under the
terms of the Watson Agreement, Watson assumed the Sales Division's
co-promotion agreements, acquired certain of its operating assets and has
the right to hire approximately 70 former employees of the Sales
Division. As consideration
9
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
for these assets, Watson paid $8.0 million, with up to $1.0 million more
due to the Company if Watson is able to hire and retain, as of specified
dates, certain percentages of the employees from the Sales Division.
In order to satisfy certain provisions of the Watson Agreement, the
Company entered into, and transferred to Watson, agreements with two
pharmaceutical companies for marketing rights and New Drug Approvals
("NDAs") for two drugs at an aggregate cost of $2.0 million, of which the
Company paid $1.0 million during October 1997. An additional $1.0
million is payable by the Company in future installments. Pursuant to
the Watson Agreement, $1.0 million of the $8.0 million in proceeds from
the sale of the Sales Division was deposited into an escrow account to
satisfy the Company's future obligations related to the acquisition of
these marketing rights and NDAs.
EXPANDED WARNER-LAMBERT COLLABORATION AGREEMENT
In October 1997 the Company and Warner-Lambert Company entered into an
agreement (the "1997 Warner Collaboration Agreement") to extend and
expand the 1995 Warner Collaboration Agreement to include the discovery
and commercialization of therapeutic glutamate receptor antagonists. As
discussed in Note 2 above, the original two-year collaboration focused on
the discovery of SSNRAs, compounds that block the activity of one
specific class of glutamate receptor. The expanded collaboration also
covers modulators of the AMPA receptor, a second class of glutamate
receptor. Pursuant to the terms of the expanded agreement, Warner-Lambert
purchased $1.0 million of CoCensys Series D preferred stock, and will
purchase an additional $6.0 million in January 1988, pay up to $16.5
million in milestone payments if all key targets are met and pay
royalties on sales of resulting compounds. The Company will provide drug
discovery expertise under the two-year term of the collaboration's
research component and will retain an option to participate in the US
development, commercialization and profit sharing for any resulting
compounds.
RESULTS OF GANAXOLONE PHASE II CLINICAL TRIALS
The Company's lead Epalon compound, CCD 1042 (ganaxolone), an
anticonvulsant and anti-migraine compound, completed separate Phase II
clinical trials for adult epilepsy and migraine in the third quarter of
fiscal 1997. In November 1997, the Company announced that in these
trials CCD 1042 demonstrated clinical activity in both indications and
the Company intends to pursue further clinical development and partnering
discussions.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE COMPANY'S 1996 ANNUAL REPORT
ON FORM 10-K.
OVERVIEW
CoCensys, Inc. is a biopharmaceutical company dedicated to the discovery,
development, marketing and sales of small molecule drugs to treat
neurological and psychiatric disorders. The Company's product discovery and
development programs are focused on the exploration of novel receptors and
enzymes and their ligands and inhibitors through three technology platforms:
GABA receptor enhancers, or Epalons; glutamate antagonists; and ICE-like
protease inhibitors.
The Company's lead Epalon compound, CCD 1042 (ganaxolone), an anticonvulsant
and anti-migraine compound, completed separate Phase II clinical trials for
adult epilepsy and migraine in the third quarter of fiscal 1997. In November
1997, the Company announced that in these trials CCD 1042 demonstrated
clinical activity in both indications and the Company intends to pursue
further clinical development and partnering discussions. The Company's lead
compound for the treatment of insomnia, CCD 3693, began preliminary testing
in humans during the third quarter of fiscal 1997. Also, during the third
quarter of 1997, the Company presented new preclinical data for ACEA 1021
(licostinel), its lead drug candidate for stroke. The ACEA 1021 data suggest
that the minimum dose required for efficacy in an animal model of stroke may
be three to four times lower than the doses that were well tolerated in Phase
I clinical (human) infusion studies and are considerably below the doses that
had previously indicated the potential for kidney toxicity. The company
currently does not intend to initiate Phase II trials of ACEA 1021 until the
compound is repartnered.
Since its inception in February 1989, the Company has devoted substantially
all of its resources to the discovery and development of neuropharmaceutical
products for the treatment of disorders affecting the central nervous system.
The Company has incurred losses since inception and expects losses to
continue for the foreseeable future, primarily due to the expansion of
programs for research and development. Operating results are expected to
fluctuate as a result of uncertainty in the timing and amount of revenues to
be earned from co-development activities and from achievement of research and
development milestones, and uncertainty in the timing and amount of expenses
for product development, including clinical trials. As of September 30, 1997,
the Company's accumulated deficit was approximately $97.1 million.
RESULTS OF OPERATIONS
The Company recognized $0.9 and $3.2 million in co-promotion revenues for the
three and nine-month periods ended September 30, 1997, respectively, compared
to $0.8 and $4.9 million during the same periods in 1996. The decrease for
the nine-month period compared to the same period a
11
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year earlier is due primarily to a nonrecurring adjustment of $2.3 million,
relating to settlement of co-promotion activities with Novartis Pharma A.G.
("Novartis"), that was recorded in the second quarter of fiscal 1996.
The Company recognized $1.0 and $7.9 million in co-development revenues for
the three and nine-month periods ended September 30, 1997, respectively,
compared to $0.5 and $5.0 million for the comparable periods of 1996. The
increases in both the three and nine-month periods of the current year are
primarily due to co-development revenue under the Wyeth-Ayerst development
and commercialization agreement that was signed in May of 1997. The Company
recognized $0.8 million of co-development revenue in the third quarter and
$5.8 million in the nine months ended September 30, 1997 related to the
Wyeth-Ayerst agreement. For the same periods in fiscal 1996, co-development
revenue was generated by the CCD 3693 program with Searle and the terminated
ACEA 1021 program with Novartis.
Research and development expenses increased to $5.8 and $17.2 million for the
three and nine-month periods ended September 30, 1997, respectively, from
$4.3 and $14.0 million in the comparable periods of the prior year. These
increases resulted primarily from higher product development costs incurred
to support Phase II clinical trials of CCD 1042 in both migraine and epilepsy
and pre-clinical development of CCD 3693, partially offset by lower product
development costs associated with the ACEA 1021 program. Clinical
development of ACEA 1021 was suspended in April 1997 following the decision
of Novartis, the Company's development partner, not to continue participation
in the development of ACEA 1021. The Company does not intend to resume
clinical development of ACEA 1021 until it secures another partner. There
can be no assurance that the Company will be able to secure another partner
to continue the clinical development of ACEA 1021.
Marketing, general and administrative expense decreased to $2.9 and $8.4
million for the three and nine-month periods ended September 30, 1997,
respectively, from $3.2 and $8.7 million in the same periods of the prior
year. The decreases in the three and nine-month periods of the current year
in comparison to the same periods in the prior year are primarily
attributable to reductions in certain promotional and marketing expenses,
partially offset by increases in salaries and other general corporate
expenses.
Net interest income decreased to $0.2 and $0.6 million for the three and
nine-month periods ended September 30, 1997, respectively, from $0.3 and $1.0
million in the same periods of the prior year. The decrease was due to lower
average levels of cash and short-term investment balances in the current year.
LIQUIDITY AND CAPITAL RESOURCES
From its inception in February 1989 through September 30, 1997, the Company
has financed its operations by raising approximately $89.5 million
through private and public offerings of its equity securities, $30.1 million
through co-promotion revenue and $15.9 million through co-development
revenue. As of September 30,
12
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1997, the Company's balance of cash, cash equivalents and short-term
investments totaled $10.4 million, compared to $18.0 million at December 31,
1996.
As of September 30, 1997, the Company had invested $6.6 million in leasehold
improvements, laboratory and computer equipment and office furnishings and
equipment since inception. The Company has financed $3.7 million of these
capital additions through capital lease lines. In addition, the Company
leases its laboratory and office facilities under operating leases.
Additional equipment will be needed as the Company increases its research and
development activities. The Company has no material commitments for the
acquisition of property and equipment.
Pursuant to the Watson Agreement, in October 1997 the Company sold its Sales
Division, related co-promotion agreements and certain other assets to Watson
for $9.0 million in cash, of which $8.0 million was paid by Watson in October
1997 and $1.0 million is payable in installments over the next twelve months
subject to the occurrence of specified events. Of the $8.0 million received
to date, the Company expects to net approximately $5.4 million in cash after
expenditures necessary to fulfill its obligations related to the Watson
Agreement. These obligations include the acquisition of specified NDAs, the
purchase of leased assets, a portion of which were transferred to Watson, and
payment of certain transaction and severance costs.
As a result of selling the Sales Division to Watson, the Company will no
longer realize co-promotion revenues or related expenses after the fourth
quarter of 1997. The Company estimates that, based on annualized 1997
results, the Sales Division was consuming approximately $3.0 million annually.
Pursuant to the 1995 and 1997 Warner Collaboration Agreements, Warner-Lambert
is obligated to make certain milestone payments for each compound selected
for development, as well as pay for its share of development costs. Under
the terms of the 1995 agreement, Warner-Lambert purchased $2.0 million of
CoCensys common stock in October 1995 and an additional $2.0 million of
CoCensys common stock in March 1997. Under the terms of the 1997 agreement,
Warner-Lambert purchased $1.0 million of CoCensys preferred stock in October
1997 and is obligated to purchase an additional $6.0 million of CoCensys
preferred stock in January 1998.
Pursuant to the 1997 Wyeth-Ayerst Development and Commercialization
Agreement, Wyeth-Ayerst is obligated pay all development costs related to Co
2-6749, as well as make milestone payments upon the occurrence of certain
agreed upon events. Furthermore, Wyeth-Ayerst is required to pay the Company
$3.0 million per year for up to three years to identify back-up compounds.
CoCensys' operations to date have consumed substantial amounts of cash. The
negative cash flow from operations is expected to continue and will likely
increase over the foreseeable future. The Company anticipates that its
existing capital resources, including funding expected to be available
through current partner collaborations (including milestone payments), will
be adequate to satisfy its capital needs for at least the next 12 months.
There can be no assurance that milestone-based payments or co-development
revenues will be sufficient to meet the Company's capital requirements. The
Company will need to obtain substantial additional funds to continue to
conduct the costly and time-consuming research, preclinical development and
clinical trials necessary to bring its products to market. The Company
intends to seek additional funding through additional research, development
and commercialization
13
<PAGE>
collaborations with suitable corporate partners and/or through public or
private financing. There can be no assurance that additional financings or
suitable collaborations will be available on favorable terms, if at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself.
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development programs,
the scope and results of preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the rate of
technological advances, determinations as to the commercial potential of the
Company's products under development, the status of competitive products, the
expansion of sales and marketing agreements, the establishment of third-party
manufacturing arrangements and the establishment of additional collaborative
relationships.
ADDITIONAL RISKS
In addition to those discussed above, the Company is subject to the following
risks:
The Company's products are in an early stage of development and face a high
degree of technological, regulatory and competitive risks. Drug discovery
and development are capital intensive activities, and there can be no
assurance the Company will be able to raise the additional capital necessary
to develop and commercialize products. The Company's strategy for the
development, clinical testing and commercialization of its products includes
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be
able to negotiate further collaborative arrangements on acceptable terms, if
at all, or that the current collaborative efforts will be successful. Human
clinical trials require considerable time and funding, and results from any
stage of testing may not predict results of later stages. In addition, if
results of any clinical trial fail to meet the Company's requirements, the
study plan for such compound may be adjusted or another compound may be
substituted, either of which may result in delays in future clinical studies.
Unfavorable clinical trials could result in cancellation of future clinical
studies. Inherent in the fact that CoCensys is an early stage
biopharmaceutical company are a range of additional risks, including those
associated with obtaining and enforcing patents and protecting proprietary
technology and the risk of regulatory change, among others.
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. The market prices of the common stock of many publicly
traded biopharmaceutical companies have in the past been, and can in the
future be expected to be, especially volatile due to various external
factors, including but not limited to, announcements of technological
innovations or new products by the Company or its competitors, developments
or disputes concerning patents or proprietary rights, publicity regarding
actual or potential results relating to products under development,
regulatory developments in both the United States and foreign countries and
public concern as to the safety of biotechnology products.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1(1) Asset Purchase Agreement, dated October 8, 1997, between the
Company and Watson.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Form 8-K/A on July 3, 1997, reporting under Item 5
that the Company entered into a license agreement with Massachusetts
General Hospital ("MGH") pursuant to which the Company licensed from MGH
certain patent rights relating to the treatment of migraine.
__________________________
(1) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 8, 1997 and incorporated herein by reference.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CoCensys, Inc.
Date: November 14, 1997 By: /s/ Peter E. Jansen
----------------- -------------------------------
Peter E. Jansen
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
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