<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1996
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 0-21478
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THERAPEUTIC DISCOVERY CORPORATION
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173191
- -------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1375 California Avenue, P.O. Box 10051, Palo Alto, CA 94303-0806
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 496-8200
-------------
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
--- ---
Number of shares outstanding of each of the registrant's classes of common stock
as of November 12, 1996
Class A Common Stock, $.01 par value - 7,734,424 shares
Class B Common Stock, $.01 par value - 100 shares
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<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Statement of Operations (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Period
From Inception
Three Months Ended Nine Months Ended (November 1992)
September 30, September 30, to September 30,
1996 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net interest and investment income $ 1,705 $ 2,474 $ 6,370 $ 9,281 $ 32,491
EXPENSES:
Research and development 22,278 17,854 72,164 44,515 177,590
General and administrative 1,067 600 2,321 1,766 8,765
---------- ---------- ---------- ---------- ----------
Total expenses 23,345 18,454 74,485 46,281 186,355
---------- ---------- ---------- ---------- ----------
Loss before tax (21,640) (15,980) (68,115) (37,000) (153,864)
---------- ---------- ---------- ---------- ----------
Income tax - - - - 301
---------- ---------- ---------- ---------- ----------
Net loss $ (21,640) $ (15,980) $ (68,115) $ (37,000) $ (153,563)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net loss per common share $ (2.80) $ (2.07) $ (8.81) $ (4.78)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares 7,734,524 7,734,524 7,734,524 7,734,524
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Balance Sheet (unaudited)
(in thousands, except number of shares and per share data)
ASSETS September 30, December 31,
1996 1995
----------- ----------
Current assets:
Cash and cash equivalents $ 11,663 $ 13,314
Short-term investments 96,816 163,294
Interest receivable 1,198 1,427
Prepaid expenses and other
current assets 369 278
----------- ----------
Total current assets 110,046 178,313
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other
long-term assets - 1,094
Organization costs, (net of
accumulated amortization) 1,194 1,730
----------- ----------
Total assets $ 111,540 $ 181,437
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 15,928 $ 16,817
Accounts payable - 1
Other current liabilities 79 147
----------- ----------
Total current liabilities 16,007 16,965
Long-Term Liabilities:
Deferred compensation 17 -
----------- ----------
Total liabilities 16,024 16,965
Stockholders' equity:
Class A Common Stock, $.01 par
value, 12,000,000
shares authorized, 7,734,424
issued and outstanding 77 77
Class B Common Stock, $.01 par
value, 100 shares authorized,
issued and outstanding - -
Additional paid-in capital 251,642 251,650
Net unrealized losses on
available-for-sale securities (1,307) (262)
Deficit accumulated during the
development stage (153,563) (85,448)
Deferred compensation (1,333) (1,545)
----------- ----------
Total stockholders' equity 95,516 164,472
----------- ----------
Total liabilities and stockholders' equity $ 111,540 $ 181,437
----------- ----------
----------- ----------
See accompanying notes.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Condensed Consolidated Statement of Cash Flows (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Period From
Inception
Nine Months Ended (November 1992) to
September 30, September 30,
1996 1995 1996
---------- ---------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (68,115) $ (37,000) $ (153,563)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization of organization costs 536 537 2,386
Amortization of deferred compensation 204 112 606
(Increase) decrease in assets:
Interest receivable 229 447 (1,198)
Other receivable - 252 (252)
Organization costs - - (3,581)
Prepaid and other expenses 1,003 (181) (117)
Increase (decrease) in liabilities:
Payable to ALZA Corporation (889) 5,588 15,928
Accounts payable (1) (3) -
Other current liabilities (68) (35) 79
Long-term liabilities 17 - 17
---------- ---------- ----------
Total adjustments 1,031 6,717 13,868
---------- ---------- ----------
Net cash used in operating
activities (67,084) (30,283) (139,695)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale
securities (25,667) (42,863) (1,363,067)
Sale of available-for-sale securities 76,274 75,020 761,970
Maturities of available-for-sale
securities 14,826 3,041 502,977
Employee loans, long-term - - (300)
---------- ---------- ----------
Net cash provided by
(used in) investing activities 65,433 35,198 (98,420)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock - - 2
Issuance of Class A Common Stock, net of - -
issuance costs - - 249,776
---------- ---------- ----------
Net cash provided by financing
activities - - 249,778
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,651) 4,915 11,663
Cash and cash equivalents at
beginning of period 13,314 20,050 -
---------- ---------- ----------
Cash and cash equivalents at
end of period $ 11,663 $ 24,965 $ 11,663
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware on
November 12, 1992 and commenced operations on June 11, 1993. Since it commenced
operations, TDC has been engaged in selecting and developing new human
pharmaceutical products (the "TDC Products") combining the proprietary drug
delivery technologies of ALZA Corporation ("ALZA") with various drug compounds.
TDC's principal activities consist of research and development activities under
its agreements with ALZA.
Under generally accepted accounting principles, TDC is considered a
development stage company and, accordingly, must present financial information
for the three and nine months ended September 30, 1996 and 1995 and for the
period from inception (November 1992) to September 30, 1996.
The information at September 30, 1996, for the three and nine months ended
September 30, 1996 and 1995, and for the period from inception (November 1992)
to September 30, 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) which the management of TDC believes
necessary for fair presentation of the results for such periods. Interim
results are not necessarily indicative of results for a full year. The
financial statements should be read in conjunction with the audited financial
statements of TDC for the year ended December 31, 1995 included in TDC's 1995
Annual Report on Form 10-K.
2. SHORT-TERM INVESTMENTS
TDC has classified its entire investment portfolio as available-for-sale.
TDC's investment portfolio is available for current operations and, therefore,
has been classified as a current asset.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
The following is a summary of available-for-sale securities at September 30,
1996:
AVAILABLE-FOR-SALE SECURITIES
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ----- -------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 48,941 $ 8 $ (779) $ 48,170
Collateralized mortgage
obligations and asset
backed securities 25,744 4 (348) 25,400
Corporate securities 34,472 11 (203) 34,280
--------- ----- -------- ---------
$ 109,157 $ 23 $ (1,330) $ 107,850
--------- ----- -------- ---------
--------- ----- -------- ---------
The amortized cost and estimated fair value of debt and marketable
securities at September 30, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
Estimated
Fair
(in thousands) Cost Value
--------- ---------
Due in one year or less $ 49,385 $ 49,263
Due after one year through
four years 48,999 48,153
Due after four years through
eight years 10,773 10,434
--------- ---------
$ 109,157 $ 107,850
--------- ---------
--------- ---------
The difference between the total estimated fair value as given in the above
tables and the total of cash and cash equivalents and short-term investments on
the balance sheet is due to the inclusion of TDC's cash in bank of approximately
$ 0.6 million in cash and cash equivalents on the balance sheet.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
3. ARRANGEMENTS WITH ALZA CORPORATION
TDC was formed by ALZA for the purpose of selecting and developing new
human pharmaceutical products combining ALZA's proprietary drug delivery
technologies with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. In connection with the distribution to
ALZA stockholders of a special dividend of units (each unit included one share
of TDC Class A Common Stock and one warrant to purchase one-eighth of one share
of ALZA Common Stock at an exercise price of $65 per share), ALZA made a $250
million cash contribution to TDC's capital. The cash is being used primarily to
fund activities under a development agreement (the "Development Contract")
between ALZA and TDC pursuant to which ALZA conducts research and development
activities on behalf of TDC. In accordance with TDC's Restated Certificate of
Incorporation, on June 11, 1996, the units separated into their component
securities--TDC Class A Common Stock and ALZA warrants. As a result of the
separation, both securities are listed and trade separately on the Nasdaq Stock
Market. The trading symbol for the TDC Class A Common Stock is "TDCA".
The arrangements between ALZA and TDC are complex and are incorporated in
various agreements between the parties and in TDC's Restated Certificate of
Incorporation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTICE CONCERNING FORWARD-LOOKING STATEMENTS - Some of the statements made
in this quarterly report on Form 10-Q are forward-looking in nature, including
but not limited to statements that are not historical facts and statements
including forms of the words "intend", "believe", "will", "may", "expect",
"anticipate" and similar terms. The occurrence of the events described, and the
achievement of the intended results, are subject to the future occurrence of
many events which are unpredictable or outside TDC's control and various risk
factors that could cause TDC's actual results to be materially different from
those anticipated in any forward-looking statements. Many of the significant
risks are described in TDC's 1995 Annual Report on Form 10-K and include,
without limitation, risks associated with product development, risks relating to
clinical development, changes in the health care marketplace, regulatory risks
and risks related to patent and intellectual property matters, market acceptance
of products (including third-party reimbursement) and competition.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
LIQUIDITY AND CAPITAL RESOURCES
TDC was formed in November 1992 by ALZA and was fully capitalized and
commenced operations in June 1993 with approximately $250 million in cash
contributed by ALZA. At September 30, 1996, TDC had cash and cash equivalents,
and short-term investments of approximately $108 million, as compared with
approximately $177 million at December 31, 1995.
TDC's cash expenditures for operating activities were approximately $67.1
million for the nine months ended September 30, 1996, as compared with $30.3
million for the nine months ended September 30, 1995. Cash expenditures for
operating activities were approximately $139.7 million for the period from
inception (November 1992) to September 30, 1996 and differ from TDC's net
losses of approximately $153.6 million for the same period due primarily to
the amount payable to ALZA for research and development and amortization of
organization expenses. TDC's remaining cash, plus interest earned thereon,
less administrative expenses, is being used primarily to fund the development
of TDC Products under the Development Contract. The rate at which cash is
used to fund these activities is anticipated to continue at approximately
current levels during the remainder of 1996. However, several factors could
impact the level and timing of TDC funding, including the discontinuation of
the development of any TDC Products, any commercial arrangements between
ALZA and other companies which would cause ALZA to exercise its license
option with respect to any TDC Product, any change in the number of projects
advancing to or continuing in later stages of development or any adjustments
in the rates of spending on products currently in development. Funds not
immediately required for development activities and administrative expenses
have been invested in low risk securities. As TDC's funds are utilized under
the Development Contract, lower cash balances will be available for
investment.
If expenditures on products by TDC were to continue at approximately
current levels, it can be expected that the amount of cash available for product
development will be exhausted during the second half of 1997. Under TDC's
Restated Certificate of Incorporation, ALZA has the right, but not the
obligation, to purchase all (but not less than all) of the TDC Class A Common
Stock (the "Purchase Option"). A complete discussion of the Purchase Option is
contained in TDC's 1995 Annual Report on Form 10-K. The Purchase Option will
terminate at the earlier of (a) December 31, 1999 (subject to certain
adjustments extending such date) or (b) the 60th day after the later of the
filing or the due date of a Form 10-K or Form 10-Q of TDC containing a balance
sheet showing less than $5 million of cash, cash equivalents and short-term and
long-term investments.
At September 30, 1996, the cost of short-term investments exceeded their
fair value by approximately $1.3 million.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
RESULTS OF OPERATIONS
Revenues, consisting of net interest and investment income earned on
invested funds, were approximately $1.7 million and $6.4 million for the three
and nine months ended September 30, 1996, as compared with approximately $2.5
million and $9.3 million for the three and nine months ended September 30, 1995.
Revenues totaled approximately $32.5 million for the period from inception
(November 1992) to September 30, 1996. For the nine months ended September 30,
1996, interest and investment income is lower than in the nine months ended
September 30, 1995 as a result of lower cash balances available for investment.
As TDC's funds are utilized under the Development Contract, lower cash balances
will be available for investment, and therefore net interest income is expected
to decrease. While products are under development and applications for
regulatory approval are submitted and reviewed, TDC does not anticipate
significant revenues.
TDC spent approximately $22.3 million and $72.2 million on research and
development activities in the three and nine months ended September 30, 1996, as
compared with approximately $17.9 million and $44.5 million in the three and
nine months ended September 30, 1995. Research and development expenses have
totaled approximately $177.6 million for the period from inception (November
1992) to September 30, 1996. Research and development expenditures increased in
1996 over 1995, as expected, as activities increased and as products reached and
continued in later stages of development. TDC's research and development
expenses are expected to continue at approximately current levels during the
remainder of 1996 subject, as discussed above, to the occurrence of various
events which could impact the level and timing of TDC's expenditures on research
and development.
TDC incurred general and administrative expenses of approximately $1.1
million and $2.3 million for the three and nine months ended September 30, 1996,
as compared with approximately $0.6 million and $1.8 million for the three and
nine months ended September 30, 1995. General and administrative expenses
totaled approximately $8.8 million for the period from inception (November 1992)
to September 30, 1996. Expenses incurred by TDC under an administrative
services agreement with ALZA were approximately $39,000 and $109,000 for the
three and nine months ended September 30, 1996, as compared with approximately
$55,000 and $132,000 for the three and nine months ended September 30, 1995. The
expenses incurred under such agreement for the period from inception (November
1992) to September 30, 1996 were approximately $571,000.
TDC reported a net loss of approximately $21.6 million or $2.80 per common
share and $68.1 million or $8.81 per common share for the three and nine months
ended September 30, 1996, as compared with a net loss of approximately $16.0
million or $2.07 per common share and $37.0 million or $4.78 per common share
for the three and nine months ended September 30, 1995. TDC has had a net loss
of approximately $153.6
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
million for the period from inception (November 1992) to September 30, 1996.
The increasing net loss resulted primarily from the substantial increase in
product development activities during the relevant periods. It is anticipated
that TDC will continue to record significant net losses as products enter or
continue in later stages of development, if additional products are accepted by
TDC for development, and as investment income decreases as funds available for
investment are reduced.
For the quarter ended September 30, 1996 and the period from inception
(November 1992) to September 30, 1996, the provision for income taxes was not
material.
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Therapeutic Discovery Corporation
Date: November 12, 1996 By: /s/ Gary L. Neil
---------------------------
Gary L. Neil
President and
Chief Executive Officer
Date: November 12, 1996 By: /s/ David R. Hoffmann
---------------------------
David R. Hoffmann
Vice President, Finance
(Principal Financial and
Accounting Officer)
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THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
September 30,1996
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF FORM 10-Q DATED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12
<SECURITIES> 97
<RECEIVABLES> 2
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 110
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 112
<CURRENT-LIABILITIES> 16
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 98
<TOTAL-LIABILITY-AND-EQUITY> 112
<SALES> 0
<TOTAL-REVENUES> 6
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 74
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (68)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68)
<EPS-PRIMARY> (8.81)
<EPS-DILUTED> (8.81)
</TABLE>
