<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 JUNE 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 August 9, 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
Three Months Ended Six Months Ended Inception
June 30, June 30, (November 1992)
1996 1995 1996 1995 to June 30, 1996
---------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net interest and investment
income $ 1,993 $ 3,900 $ 4,665 $ 6,806 $ 30,786
EXPENSES:
Research and development 28,312 14,464 49,886 26,660 155,311
General and administrative 705 557 1,254 1,166 7,699
---------- ---------- ---------- ----------- ---------
Total expenses 29,017 15,021 51,140 27,826 163,010
---------- ---------- ---------- ----------- ---------
Loss before tax (27,024) (11,121) (46,475) (21,020) (132,224)
---------- ---------- ---------- ----------- ---------
Income tax - - - - 301
---------- ---------- ---------- ----------- ---------
Net loss $ (27,024) $ (11,121) $ (46,475) $ (21,020) $(131,923)
---------- ---------- ---------- ----------- ---------
---------- ---------- ---------- ----------- ---------
Net loss per common share $ (3.49) $ (1.44) $ (6.01) $ (2.72)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average common shares 7,734,524 7,734,524 7,734,524 7,734,524
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Balance Sheet (unaudited)
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,040 $ 13,314
Short-term investments 120,979 163,294
Interest receivable 1,508 1,427
Prepaid expenses and other
current assets 1,320 278
-------- --------
Total current assets 135,847 178,313
Long-term assets:
Employee loans, long-term 300 300
Prepaid expenses and other
long-term assets - 1,094
Organization costs, (net of
accumulated amortization) 1,373 1,730
-------- --------
Total assets $137,520 $181,437
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to ALZA Corporation $ 20,741 $ 16,817
Accounts payable - 1
Other current liabilities 96 147
-------- --------
Total current liabilities 20,837 16,965
Long-Term Liabilities:
Deferred compensation 12 -
-------- --------
Total liabilities 20,849 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 251,643 251,650
Net unrealized losses on
available-for-sale securities (1,670) (262)
Deficit accumulated during the
development stage (131,923) (85,448)
Deferred compensation (1,456) (1,545)
-------- --------
Total stockholders' equity 116,671 164,472
-------- --------
Total liabilities and stockholders' equity $137,520 $181,437
-------- --------
-------- --------
</TABLE>
See accompanying notes.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
Condensed Consolidated Statement of Cash Flows (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Period From
Six Months Ended Inception
June 30, (November 1992) to
1996 1995 June 30, 1996
---- ---- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (46,475) $ (21,020) $ (131,923)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Amortization of organization costs 358 358 2,208
Amortization of deferred compensation 82 70 484
(Increase) decrease in assets:
Interest receivable (81) 577 (1,508)
Other receivable - 252 (252)
Organization costs - - (3,581)
Prepaid expenses 52 (229) (1,068)
Increase (decrease) in liabilities:
Payable to ALZA Corporation 3,924 2,161 20,741
Accounts payable (1) (3) -
Other current liabilities (51) (31) 96
Long term liabilities 12 - 12
-------- -------- -----------
Total adjustments 4,295 3,155 17,132
-------- -------- -----------
Net cash used in operating
activities (42,180) (17,865) (114,791)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in available-for-sale
securities (25,667) (32,690) (1,363,067)
Sale of available-for-sale securities 58,503 54,711 744,199
Maturities of available-for-sale
securities 8,070 3,041 496,221
Employee loans, long-term - - (300)
-------- -------- -----------
Net cash provided by
(used in) investing activities 40,906 25,062 (122,947)
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 (1,274) 7,197 12,040
Cash and cash equivalents at beginning of period 13,314 20,050 -
-------- -------- -----------
Cash and cash equivalents at end of period $ 12,040 $ 27,247 $ 12,040
-------- -------- -----------
-------- -------- -----------
</TABLE>
See accompanying notes.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 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 six months ended June 30, 1996 and 1995 and for the period
from inception (November 1992) to June 30, 1996.
The information at June 30, 1996, for the three and six months ended June
30, 1996 and 1995, and for the period from inception (November 1992) to June 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.
Although TDC does not intend to dispose of all of the securities in its
investment portfolio within one year, TDC's investment portfolio is available
for current operations and, therefore, has been classified as a current asset.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1996
The following is a summary of available-for-sale securities at June 30, 1996:
<TABLE>
Available-for-Sale Securities
-----------------------------
Estimated
Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies $ 70,814 $ 9 $ (958) $ 69,865
Collateralized mortgage
obligations and asset
backed securities 28,317 5 (478) 27,844
Corporate securities 33,846 14 (262) 33,598
--------- ------ ---------- ---------
$ 132,977 $ 28 $ (1,698) $ 131,307
--------- ------ ---------- ---------
--------- ------ ---------- ---------
</TABLE>
The amortized cost and estimated fair value of debt and marketable
securities at June 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 $ 55,540 $ 55,438
Due after one year through
four years 66,627 65,425
Due after four years through
eight years 10,810 10,444
--------- ---------
$ 132,977 $ 131,307
--------- ---------
--------- ---------
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
$ 1.7 million in cash and cash equivalents on the balance sheet.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 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 split into their component
securities--TDC Class A Common Stock and ALZA warrants. As a result of the
split, both securities are listed and trade separately on NASDAQ. 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 product development plans and other 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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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 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 June 30, 1996, TDC had cash and cash equivalents, and
short-term investments of approximately $133 million, as compared with
approximately $177 million at December 31, 1995.
TDC's cash expenditures for operating activities were approximately $42.2
million for the six months ended June 30, 1996, as compared with $17.9 million
for the six months ended June 30, 1995. Cash expenditures for operating
activities were approximately $114.8 million for the period from inception
(November 1992) to June 30, 1996 and differ from TDC's net losses of
approximately $131.9 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 may impact the level and
timing of TDC funding, including any commercial arrangements between ALZA
and other companies which would cause ALZA to exercise its license option with
respect to any TDC Product, any reduction 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 would be exhausted within the next 12 to 18 months.
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 June 30, 1996, the cost of short-term investments exceeded their fair
value by approximately $1.7 million.
RESULTS OF OPERATIONS
Revenues, consisting of net interest and investment income earned on
invested funds, were approximately $2.0 million and $4.7 million for the three
and six months ended June 30, 1996, as compared with approximately $3.9 million
and $6.8 million for the three and six months ended June 30, 1995. Revenues
totaled approximately $30.8 million for the period from inception (November
1992) to June 30, 1996. For the six months ended June 30, 1996, interest and
investment income is lower than in the six months ended June 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. TDC does not
-8-
<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1996
anticipate significant revenues, other than from interest and investment
income, in the future while products are under development and applications
for regulatory approval are submitted and reviewed.
TDC spent approximately $28.3 million and $49.9 million on research and
development activities in the three and six months ended June 30, 1996, as
compared with approximately $14.5 million and $26.7 million in the three and six
months ended June 30, 1995. Research and development expenses have totaled
approximately $155.3 million for the period from inception (November 1992) to
June 30, 1996. Research and development expenditures have been increasing, as
expected, as activities increase and as products reach and continue 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
to, as discussed above, the occurrence of various events which may impact the
level and timing of TDC's expenditures on research and development.
TDC incurred general and administrative expenses of approximately $0.7
million and $1.3 million for the three and six months ended June 30, 1996, as
compared to $0.6 million and $1.2 million for the three and six months ended
June 30, 1995. General and administrative expenses totaled approximately $7.7
million for the period from inception (November 1992) to June 30, 1996.
Expenses incurred by TDC under an administrative services agreement with ALZA
were approximately $21,000 and $70,000 for the three and six months ended June
30, 1996, as compared with approximately $36,000 and $78,000 for the three and
six months ended June 30, 1995. The expenses incurred under such agreement for
the period from inception (November 1992) to June 30, 1996 were approximately
$532,000.
TDC reported a net loss of approximately $27.0 million or $3.49 per common
share and $46.5 million or $6.01 per common share for the three and six months
ended June 30, 1996, as compared with a net loss of approximately $11.1 million
or $1.44 per common share and $21.0 million or $2.72 per common share for the
three and six months ended June 30, 1995. TDC has had a net loss of
approximately $131.9 million for the period from inception (November 1992) to
June 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 June 30, 1996 and the period from inception (November
1992) to June 30, 1996, the provision for income taxes was not material.
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 30, 1996
Part II OTHER INFORMATION
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of TDC was held on May 23, 1996.
(b) At the annual meeting, stockholders approved the following proposal:
Election of Class III Directors:
Votes Votes
For Against
--------- --------
Allen M. Phipps 6,817,809 11,634
William P. Sommers, PhD 6,817,753 11,690
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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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 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: August 12, 1996 By: /s/ Gary L. Neil
------------------------------
Gary L. Neil
President and
Chief Executive Officer
Date: August 12, 1996 By: /s/ David R. Hoffmann
------------------------------
David R. Hoffmann
Vice President, Finance
(Principal Financial and
Accounting Officer)
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<PAGE>
THERAPEUTIC DISCOVERY CORPORATION
(a development stage company)
June 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 JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 12
<SECURITIES> 121
<RECEIVABLES> 2
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 136
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 138
<CURRENT-LIABILITIES> 21
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 120
<TOTAL-LIABILITY-AND-EQUITY> 138
<SALES> 0
<TOTAL-REVENUES> 5
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 50
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (46)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-PRIMARY> (6.01)
<EPS-DILUTED> (6.01)
</TABLE>
