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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 June 30, 1999.
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:
0-24814
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SUGEN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3629196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 East Grand Avenue, South San Francisco, California 94080
(address of principal executive offices)
(650) 553-8300
(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 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. Common Stock $.01 par value;
16,989,452 shares outstanding at July 31, 1999.
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<PAGE>
<TABLE>
SUGEN, Inc.
INDEX
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations - for the three and
six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - for the six
months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
</TABLE>
2
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS AND NOTES
SUGEN, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS (unaudited) (1)
Current assets:
Cash and cash equivalents $ 18,710 $ 23,901
Short-term investments 28,897 23,396
Accounts receivable 650 373
Prepaid expenses and other current assets 1,275 1,022
--------- ---------
Total current assets 49,532 48,692
Property and equipment, net 8,306 7,863
Other assets 2,137 2,778
========= =========
$ 59,975 $ 59,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 3,363 $ 4,883
Accrued liabilities 19,998 13,910
Deferred contract revenue 625 1,625
Capital lease obligations - current portion 4,689 2,779
--------- ---------
Total current liabilities 28,675 23,197
Long-term liabilities:
Capital lease obligations - non-current portion 4,922 5,724
Senior convertible notes 44,903 5,694
--------- ---------
Total long-term liabilities 49,825 11,418
Stockholders' equity:
Common stock 162,436 157,171
Deferred compensation (789) (971)
Note receivable from stockholder (883) (883)
Accumulated deficit (179,289) (130,599)
--------- ---------
Total stockholders' equity (net capital deficiency) (18,525) 24,718
--------- ---------
$ 59,975 $ 59,333
========= =========
<FN>
(1) Derived from audited financial statements at this date.
See accompanying notes.
</FN>
</TABLE>
3
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<TABLE>
SUGEN, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenue (includes amounts from related party
of $824 and $1,649 for the three and six months ended June 30,
1999 and $801 and $1,602 for the same periods in prior year) $ 2,485 $ 2,351 $ 6,747 $ 3,996
Costs and expenses:
Research and development 16,577 11,711 33,105 21,143
General and administrative 4,534 1,999 7,207 3,844
-------- -------- -------- --------
Total costs and expenses 21,111 13,710 40,312 24,987
-------- -------- -------- --------
Operating loss (18,626) (11,359) (33,565) (20,991)
Other income and expenses:
Interest income 668 883 1,189 1,862
Interest and other expense (15,013) (399) (15,500) (867)
-------- -------- -------- --------
Other income/(loss), net (14,345) 484 (14,311) 995
-------- -------- -------- --------
Net loss $(32,971) $(10,875) $(47,876) $(19,996)
======== ======== ======== ========
Basic and diluted net loss per share $ (1.95) $ (0.69) $ (2.85) $ (1.28)
======== ======== ======== ========
Shares used in computing basic and diluted net loss
per share 16,916 15,721 16,799 15,533
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
4
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<TABLE>
SUGEN, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
(unaudited)
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $(47,876) $(19,996)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation, amortization and issuance of stock for non-cash benefits 2,586 1,919
Loss on extinguishment of 1997 Notes 2,094 --
Derivative mark-to-market valuation 12,050 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (530) 9
Other assets 478 (47)
Accounts payable (1,520) 587
Accrued liabilities 5,423 2,482
Deferred revenue (1,000) --
-------- --------
Net cash used in operating activities (28,295) (15,046)
-------- --------
Cash flows from investing activities
Sales/maturities (purchases) of short-term investments, net (5,644) 4,757
Purchases of property and equipment, net (1,620) (1,730)
-------- --------
Net cash provided by (used in) investing activities (7,264) 3,027
-------- --------
Cash flows from financing activities
Proceeds from issuance of common stock, net 3,152 3,092
Proceeds from issuance of senior convertible notes, net 26,108 --
Proceeds from lease financing of property and equipment 2,513 2,102
Payments under capital lease obligations (1,405) (1,199)
-------- --------
Net cash provided by financing activities 30,368 3,995
-------- --------
Net decrease in cash and cash equivalents (5,191) (8,024)
Cash and cash equivalents at beginning of period 23,901 23,816
-------- --------
Cash and cash equivalents at end of period $ 18,710 $ 15,792
======== ========
Supplemental schedule of noncash investing and
financing activities:
Issuance of common stock upon conversion of Senior Custom
Convertible Notes, due 2000, net $ 631 $ 7,136
======== ========
Issuance of warrants for non-cash services $ 550 $ 69
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
SUGEN, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Organization and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of SUGEN, Inc. ("SUGEN" or the "Company") and its
wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. The condensed
consolidated financial statements as of June 30, 1999, the condensed
consolidated statements of operations for the three and six months
ended June 30, 1999 and 1998, and the condensed consolidated statements
of cash flows for the six months ended June 30, 1999 and 1998, have
been prepared by the Company and are unaudited. In the opinion of
management, all necessary adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for the
fair presentation of the financial position at such date and the
operating results and cash flows for those periods are included. The
accompanying condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto for the
year ended December 31, 1998 included in the Company's Form 10-K, as
amended, filed with the U.S. Securities and Exchange Commission. The
results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for a
full fiscal year.
Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires companies to report in their annual
financial statements an additional measure of income. Comprehensive
income (loss) includes foreign currency translation gains and losses
and unrealized gains and losses on equity securities that have been
previously excluded from net income and reflected instead in equity.
Total comprehensive loss amounted to $33.7 million and $48.7 million
for the three and six month periods ended June 30, 1999, respectively.
For the same periods last year, total comprehensive loss approximated
net loss.
Derivative Financial Instruments
Warrants issued to purchase convertible debt ("Warrant Notes") are
valued when issued using the fair value method and are marked-to-market
through interest expense until such time as the warrant is exercised.
Upon exercise of the warrants, the difference between the then current
fair market value of the warrant and the beneficial conversion feature,
if any, will be recorded as a premium or discount and amortized to
interest expense over the term of the Warrant Notes. Mark-to-market
charges totaled $12.1 million in the three and six month periods ended
June 30, 1999 (none in 1998) but had no impact on the Company's cash
flows.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. It requires that changes in the
derivative's fair value be recognized currently in earnings
6
<PAGE>
SUGEN, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
1. Summary of Organization and Significant Accounting Policies (continued)
unless specific hedge accounting criteria are met and that a company
must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No.133 is effective
for fiscal years beginning after June 15, 1999. The adoption of SFAS
133 could have a material impact on the Company's results of
operations, as significant mark-to-market adjustments of the Company's
derivative financial instruments may result due to fluctuations in
interest rates and the price of the Company's common stock, which
historically has been volatile.
2. Agreement and Plan of Merger
On June 15, 1999, SUGEN entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Pharmacia & Upjohn, Inc., a Delaware
corporation ("Parent"), and University Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger
Subsidiary"). Subject to the terms and conditions of the Merger
Agreement, Merger Subsidiary will be merged with and into the Company
(the "Merger") at the effective time of the Merger, and the Company
will become a wholly owned subsidiary of Parent.
At the effective time of the Merger, the outstanding shares of common
stock, $.01 par value per share, of the Company ("Company Common
Stock"), other than shares of Company Common Stock to be canceled in
accordance with the Merger Agreement, will be converted into the right
to receive that number of shares (the "Exchange Ratio") of common
stock, par value $.01 per share, of Parent ("Parent Common Stock"),
based on the average (rounded to the 1/10,000, or if there shall not be
a nearest 1/10,000, to the next highest 1/10,000) of the volume
weighted averages (rounded to the 1/10,000, or if there shall not be a
nearest 1/10,000, to the next highest 1/10,000) of the trading prices
of Parent Common Stock on the New York Stock Exchange, Inc. ("NYSE"),
as reported by Bloomberg Financial Markets for each of the 20 NYSE
trading days ending on and including the third trading day immediately
preceding the meeting of stockholders of the Company called to vote on
the Merger (the "Average Price"), determined as follows: (i) if the
Average Price is greater than $49.21875 and less than $60.15626, then
the Exchange Ratio shall equal $31.00 divided by the Average Price;
(ii) if the Average Price is equal to or less than $49.21875, then the
Exchange Ratio shall equal 0.62984; or (iii) if the Average Price is
equal to or greater than $60.15625, then the Exchange Ratio shall equal
0.51533. In addition, Parent will assume outstanding options
exercisable for Company Common Stock.
The Merger is intended to be a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and is intended to be
accounted for as a pooling-of-interests. The Merger is subject to
approval by the stockholders of the Company, regulatory approvals and
other customary closing conditions. A proxy statement has been mailed
to all of the Company's stockholders regarding a vote to approve the
Merger Agreement at a special meeting of stockholders to be held on
August 31, 1999. Certain affiliates of the Company entered into voting
agreements on June 15, 1999, pursuant to which such affiliates agreed
to vote shares owned by them in favor of the Merger. Also on June 15,
1999, the Company entered into a Stock Option Agreement with Parent
(the "Stock Option Agreement") pursuant to which the Company granted an
option to Parent to purchase up to 3,372,255 shares of Company Common
Stock at a price of $31.00 per share upon the occurrence of certain
events related to termination of the Merger Agreement.
7
<PAGE>
SUGEN, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Accrued Liabilities
The components of accrued liabilities consist of the following:
June 30, December 31,
1999 1998
------- -------
(In thousands)
Accrued research & development services $10,909 $ 6,859
Accrued compensation 1,879 1,937
Accrued professional fees 1,398 1,118
Other 5,812 3,996
------- -------
$19,998 $13,910
======= =======
4. Research and Development Collaboration Agreements
Laboratorios Del Dr. Esteve S.A.
In March 1999, the Company, through its affiliate, SUGEN Europe AG,
entered into an agreement with Laboratorios Del Dr. Esteve S.A.
("Esteve") to distribute, market and sell SUGEN's proprietary cancer
products in Spain, Portugal and Andorra. In connection with this
agreement, the Company recognized $1.4 million in net up-front fees and
Esteve, through its affiliate Laboratorios P.E.N., S.A., purchased $1.0
million of SUGEN Common Stock at $31.50 per share, of which the premium
above fair market value was recorded as equity.
ASTA Medica Aktiengesellschaft
In March 1999, the Company received the second of two $750,000
installments in consideration to extend the period of time for the
screening and selection of active compounds under the Pan-Her program.
$375,000 was recognized as contract revenue for 1999 services, and the
remaining $375,000 was in the form of the purchase of 10,964 shares of
SUGEN Common Stock at $34.20 per share, of which the premium above fair
market value was recorded as equity.
The Company has no future performance obligations associated with the
purchase of common stock at a premium by ASTA Medica or Esteve, nor did
either party receive rights or privileges other than customary
registration rights and the rights and privileges of the Company's
other common stockholders.
5. Senior Convertible Notes
5% Senior Custom Convertible Notes due 2000
Through June 30, 1999, $12.6 million of principal and accrued and
unpaid interest relating to the Company's outstanding 5% Senior Custom
Convertible Notes due 2000 (the "1997 Notes") were converted into
1,051,530 shares of Common Stock at a weighted average price of $12.11
per share. Upon conversion, the principal and the related accrued and
unpaid interest were recorded as equity, net of the proportionate
unamortized deferred offering costs.
8
<PAGE>
SUGEN, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Senior Convertible Notes (continued)
In April and May 1999, $5.0 million of the 1997 Notes were exchanged
into 12% Senior Convertible Notes due 2002 (the "Exchange Notes"), at a
premium of 125% - 132% of their principal amount, for approximately (i)
$6.5 million principal amount of the Exchange Notes and (ii) $4.9
million Warrants to acquire Warrant Notes. The premium paid on the
exchange was deemed a substantial modification to the 1997 Notes and
was accounted for as a loss on extinguishment of debt together with the
unamortized debt issue costs and debt discount. A loss of approximately
$2.1 million was recorded in the second quarter when the debt was
extinguished. At June 30, 1999, the 1997 Notes were fully converted or
exchanged.
12% Senior Convertible Notes due 2002
In March 1999, the Company completed the private placement of $28.0
million principal amount of 12% Senior Convertible Notes due 2002 (the
"Notes"). The Notes are convertible into SUGEN Common Stock at $20.50
per share. Interest on the Notes may be paid in SUGEN Common Stock or
cash, at the Company's option. As part of the Note placement,
purchasers were issued warrants (the "Warrants") to acquire up to an
additional $21.0 million principal amount of 12% Senior Convertible
Notes which will mature on the third anniversary date of issuance (the
"Warrant Notes"). The Warrant Notes will have principally the same
terms and conditions as the original Notes. The Warrants to purchase
the Warrant Notes are exercisable until March 2001. The Company has the
right, at its option, to require the exercise of the Warrants by the
holders in the event that the closing price of the Company's Common
Stock exceeds certain levels during the term of the Warrants, subject
to certain limitations.
The estimated fair value of the Warrants as of June 30, 1999 was $14.1
million and is subject to quarterly adjustments for changes in the fair
value during the period the Warrants are outstanding and unexercised.
The fair value of the Warrants was based on the June 30, 1999 closing
market price of $29.50 resulting in approximately $12.1 million in
additional non-cash interest expense. The costs and expenses related to
the issuance of the Notes and Warrants of approximately $3.8 million
were recorded as debt discount and issuance costs and are amortized to
interest expense over the respective term of the Notes and Warrants. If
upon exercise of the Warrants the fair value of the Company's Common
Stock is more than $20.50 per share (the conversion price of the
Warrant Notes), the Company may record an additional non-cash expense
for such beneficial conversion feature (if such benefit exceeds the
previously recorded fair value of the Warrants).
6. Subsequent Events
In July and August 1999, Warrants to acquire approximately $17.7
million in Warrant Notes were exercised. The Warrant Notes mature in
2002 and principally have the same terms and conditions as the original
Notes issued March 1999.
9
<PAGE>
SUGEN, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information contained herein, the following
discussion contains words such as "intends," "believes," "anticipates," "plans,"
"expects" and similar expressions which are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are subject to the "safe harbor" created by those sections. The Company's
actual results could differ materially from the results discussed in these
forward-looking statements. Factors that could cause or contribute to such
differences include the factors discussed below as well as the factors discussed
in the Company's Form 10-K, as amended, for the year ended December 31, 1998.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
Overview
SUGEN was founded in July 1991 to discover and develop new classes of
small molecule drugs which target specific cellular signal transduction
pathways. These signalling pathways are involved in a variety of chronic and
acute pathological diseases, including cancer and diabetes as well as in
dermatologic, ophthalmic, neurologic and immune disorders. One of the Company's
drug candidates is SU101, a PDGF TK signalling antagonist. The Company initiated
a Phase III clinical trial for use of SU101 as a treatment for refractory
glioblastoma during the first quarter of 1998. Additionally, SUGEN currently has
underway multiple Phase II studies including SU101 in combination with BCNU in
front-line glioma, mono-therapy in ovarian and non-small cell lung cancers and
mono-therapy and in combination with mitozantrone in hormone refractory prostate
cancer. A Phase II study of SU101 as single agent therapy for refractory
anaplastic astrocytoma, another type of malignant brain tumor, is also being
conducted in parallel with the Phase III trial, and at the same centers. To
date, approximately 515 patients have been treated with SU101 in 14
Company-sponsored clinical trials. The Company's second cancer product
candidate, SU5416, is a Flk-1/KDR TK antagonist which inhibits angiogenesis (the
process by which blood vessels are formed). Currently, the Company is conducting
multiple Phase I clinical trials for SU5416 in solid tumors in Europe and the
U.S. and a Phase I/II study of SU5416 in Kaposi's sarcoma in the U.S. The
Company announced plans to accelerate the development of SU5416 with the
initiation of Phase III clinical trials in non-small cell lung and colorectal
cancers, and for Phase II/III studies in Kaposi's sarcoma. Meanwhile, the
Company will be working with certain investigators on National Cancer Institute
sponsored Phase II and Phase I/II studies in other cancer indications. In
December 1998, the Company filed an Investigational New Drug application with
the U.S. Food and Drug Administration for its third cancer product, SU6668, a
novel broad spectrum inhibitor of angiogenesis and tumor growth, and has
initiated Phase I clinical trials in Europe and the U.S. using intravenous and
oral formulations, respectively. Through June 30, 1999, substantially all of the
Company's revenue apart from interest income has been earned pursuant to
collaborations with Zeneca Limited ("Zeneca"), Taiho Pharmaceutical Ltd.
("Taiho"), Vision Pharmaceuticals L.P., an affiliate of Allergan, Inc.,
Allergan, Inc. (collectively "Allergan") and ASTA Medica Aktiengesellschaft
("ASTA Medica").
In June 1998, the Company established SUGEN International AG ("SUGEN
International"), as a wholly owned subsidiary. SUGEN Europe AG ("SUGEN Europe")
was established in August 1998, as a wholly owned subsidiary of SUGEN
International.
10
<PAGE>
Both entities are incorporated in the Canton of Schaffhausen, Switzerland. SUGEN
International and SUGEN Europe will hold certain rights to the Company's
technology portfolio outside of North America. The entities were formed to
facilitate commercialization of the Company's products outside the United
States.
On June 15, 1999, SUGEN entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Pharmacia & Upjohn, Inc., a Delaware corporation
("Parent"), and University Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Parent ("Merger Subsidiary"). Subject to the terms and
conditions of the Merger Agreement, Merger Subsidiary will be merged with and
into the Company (the "Merger") at the effective time of the Merger, and the
Company will become a wholly owned subsidiary of Parent.
At the effective time of the Merger, the outstanding shares of common
stock, $.01 par value per share, of the Company ("Company Common Stock"), other
than shares of Company Common Stock to be canceled in accordance with the Merger
Agreement, will be converted into the right to receive that number of shares
(the "Exchange Ratio") of common stock, par value $.01 per share, of Parent
("Parent Common Stock"), based on the average (rounded to the 1/10,000, or if
there shall not be a nearest 1/10,000, to the next highest 1/10,000) of the
volume weighted averages (rounded to the 1/10,000, or if there shall not be a
nearest 1/10,000, to the next highest 1/10,000) of the trading prices of Parent
Common Stock on the New York Stock Exchange, Inc. ("NYSE"), as reported by
Bloomberg Financial Markets for each of the 20 NYSE trading days ending on and
including the third trading day immediately preceding the meeting of
stockholders of the Company called to vote on the Merger (the "Average Price"),
determined as follows: (i) if the Average Price is greater than $49.21875 and
less than $60.15626, then the Exchange Ratio shall equal $31.00 divided by the
Average Price; (ii) if the Average Price is equal to or less than $49.21875,
then the Exchange Ratio shall equal 0.62984; or (iii) if the Average Price is
equal to or greater than $60.15625, then the Exchange Ratio shall equal 0.51533.
In addition, Parent will assume outstanding options exercisable for Company
Common Stock.
The Merger is intended to be a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and is intended to be accounted for
as a pooling-of-interests. The Merger is subject to approval by the stockholders
of the Company, regulatory approvals and other customary closing conditions. A
proxy statement has been mailed to all of the Company's stockholders regarding a
vote to approve the Merger Agreement at a special meeting of stockholders to be
held on August 31, 1999. Certain affiliates of the Company entered into voting
agreements on June 15, 1999, pursuant to which such affiliates agreed to vote
shares owned by them in favor of the Merger, currently expected to be completed
during the third quarter. Also on June 15, 1999, the Company entered into a
Stock Option Agreement with Parent (the "Stock Option Agreement") pursuant to
which the Company granted an option to Parent to purchase up to 3,372,255 shares
of Company Common Stock at a price of $31.00 per share upon the occurrence of
certain events related to termination of the Merger Agreement.
The Company has not been profitable since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
acceleration of its three cancer products in clinical development along with the
manufacturing scale-up and preparation for potential New Drug Application
filings for SU101 and SU5416 in 2000. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
As of June 30, 1999, the Company's accumulated deficit was $179.3 million.
Results of Operations
The Company's consolidated revenues for the three and six months ended
June 30, 1999 were $2.5 million and $6.7 million, respectively. Revenues for the
three and six months ended June 30, 1999 included contract revenue from the
Taiho, Zeneca, Allergan and ASTA Medica collaborations. In addition, $1.4
million in net non-recurring up front fees was recognized in connection with
SUGEN Europe establishing a marketing and distribution agreement with
Laboratorios Del Dr. Esteve S.A., Spain's second largest pharmaceutical company.
11
<PAGE>
These up front fees combined with Taiho related contract funding resulted in
increased revenue for the first half of 1999 of approximately 69% over the same
period last year. Research funding under certain of the Company's collaborations
are scheduled to expire in accordance with their original terms in the fourth
quarter of 1999 and the first quarter of 2000 which will reduce the Company's
annual revenues by approximately $5.8 million.
Research and development expenses increased to $16.6 million and $33.1
million, respectively, for the three and six months ended June 30, 1999 from
$11.7 million and $21.1 million for the same periods last year. The increase in
spending over the same period last year was primarily due to advancements made
in the Company's clinical programs, including additional Phase II studies and
the progression of the Phase III registrational study of SU101 and expanded
Phase I and Phase I/II studies of SU5416. Also contributing to higher expenses
in 1999 was moving the Company's third cancer product, SU6668, into clinical
trials along with higher personnel related costs accompanying the growth in the
Company's research and development programs. The Company expects that its
research and development expenses will continue to grow in future years due to
the clinical advancement of SU101, SU5416 and SU6668 in the United States and
Europe, including the related manufacturing and process development efforts, the
hiring of personnel, additional preclinical studies, the initiation of new
clinical trials on additional drug candidates and pursuant to requirements under
the Company's anticipated future collaborations.
General and administrative expenses for the three and six months ended
June 30, 1999 were $4.5 million and $7.2 million, respectively. These results
compare to expenses of $2.0 million and $3.8 million for the same periods last
year. Included in general and administrative expenses for the quarter was $1.7
million in expenses associated with the Company's planned merger with Pharmacia
& Upjohn, Inc. which primarily represent legal and accounting fees. The Company
expects to record approximately $11.0 million in additional merger related
expenses in 1999. Excluding the merger related costs, the increase in general
and administrative expenses was primarily due to higher headcount related
expenses and costs associated with the Company's international operations. The
Company expects that its general and administrative expenses will continue to
increase in order to support the Company's expanding research and development
efforts.
Interest income for the three and six months ended June 30, 1999 was
$668,000 and $1.2 million, respectively, compared to $883,000 and $1.9 million
earned for the same periods last year. The decrease in 1999 was due to lower
investment balances resulting from the timing of cash flows generated from
financing activities. Interest and other expense for the three and six months
ended June 30, 1999 was $15.0 million and $15.5 million, respectively, compared
to $399,000 and $867,000 for the same periods last year. The $14.6 million
increase over the prior year was principally due to a non-cash $12.1 million
mark-to-market adjustment to record the change in fair value of the outstanding
and unexercised warrants issued in connection with the March 1999 convertible
note financing. The significant mark-to market adjustment was driven by the
increase in the Company's stock price resulting from the announced planned
merger with Pharmacia & Upjohn, Inc. In addition, interest and other expense
included a $2.1 million loss on extinguishment of the 5% Senior Custom
Convertible Notes due 2000. Monthly interest expense is expected to increase in
future periods as a result of the third quarter exercise of note warrants and
the continued use of capital lease financing for equipment and facility
improvements.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash, cash equivalents and
short-term investments of approximately $47.6 million compared with
approximately $47.3 million at December 31, 1998. The net proceeds resulting
from the issuance of the 12% Senior Convertible Notes in March 1999 were offset
by the net operating losses for the first half.
12
<PAGE>
Through June 1999, the Company's principal sources of financing have
been its initial and follow-on public offerings of Common Stock, private
placements of the Company's Preferred and Common Stock and senior convertible
notes and funds received under the Company's corporate collaborations. The
Company's current principal sources of liquidity are its research and
development collaborations with Taiho, Zeneca, Allergan and ASTA Medica, its
cash, cash equivalents and short-term investments and capital lease financing.
Also, in accordance with the terms of the Merger Agreement, Pharmacia & Upjohn,
Inc. will provide up to $35 million in financing during the remainder of 1999
under certain circumstances. The research funding terms under the Allergan and
Zeneca collaborations are scheduled to expire in October 1999 and March 2000,
respectively. If the funding arrangements are not renewed by these collaborative
partners, the Company will scale back its resources dedicated to these programs
and reassign these resources to other research and development areas. At June
30, 1999, the Company had capital lease lines of $2.5 million available for the
purchase of equipment and facility improvements.
The Company has entered into license and research agreements whereby
the Company funds research projects performed by others or in-licenses compounds
from third parties. Some of the agreements may require the Company to make
milestone and royalty payments. Under these programs, commitments for external
research funding are approximately $1.6 million, $1.5 million and $1.2 million
in 1999, 2000 and 2001, respectively. Most of these commitments are cancelable
within a three-to-six month period and limit the amounts payable by the Company
for sponsored research under the programs after notice of cancellation. The
Company anticipates renewing certain contracts that expired in 1997 which will
increase future commitments beyond the levels indicated above for 1999 through
2001.
Net additions of equipment and leasehold improvements for the six
months ended June 30, 1999 was $1.6 million compared to $1.7 million spent
during the same period last year. The Company expects that its capital additions
for 1999 will be lower than that of the prior year as 1998 included costs
associated with the completion of the Company's new build-to-suit facility. In
April 1999, the Company entered into a third amendment to its facility lease
agreement thereby exercising the first of two available expansion options. The
Company's obligations and related interest expense will increase in future
periods due to the exercise of this expansion option, however this is not
expected to have a notable financial impact until early 2000, the targeted
completion date of the expansion.
In the event the merger with Pharmacia & Upjohn is not consummated, the
Company estimates that its existing capital resources together with facility and
equipment financing that Pharmacia & Upjohn agreed to provide pursuant to the
merger agreement expected revenues from current collaborations and net income
from investment activities, will be sufficient to fund its planned operations
into 2000. However, there can be no assurance that the underlying assumed levels
of revenue and expense will prove accurate. Whether or not these assumptions
prove to be accurate, in the event the merger with Pharmacia & Upjohn is not
consummated, the Company will need to raise substantial additional capital to
fund its operations. If necessary, the Company intends to seek such additional
funding through collaborative arrangements, public or private equity or debt
financings and capital lease transactions; however, there can be no assurance
that additional financing will be available on acceptable terms, or at all. If
additional funds are raised by issuing equity securities, further dilution to
stockholders may result. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners, such arrangements may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself. 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.
Year 2000
The Year 2000 Issue is the result of information technologies, computer
systems and scientific and manufacturing equipment being written using two
digits rather than four digits to define the applicable year. As a result,
time-sensitive functions of those software programs and equipment may
misinterpret dates after January 1, 2000, to refer to the twentieth century
rather than the twenty-first
13
<PAGE>
century. This could cause system or equipment shutdowns, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including, among other things, inaccurate processing of financial
information and/or temporary inability to process transactions, manufacture
products, or engage in similar normal business activities.
The Company has a Year 2000 Project ("Y2K Project") in place to address
the potential exposures related to the impact on its computer systems and
scientific and manufacturing equipment containing computer related components
for the Year 2000 ("Y2K") and beyond. Approximately half of the Company's Y2K
scheduled work is complete. The remaining work is scheduled to be completed by
the end of the fourth quarter of 1999. The Y2K Project phases include: (1)
inventorying and prioritizing business critical systems; (2) Y2K compliance
analysis; (3) remediation activities including repairing or replacing identified
systems; (4) testing; and (5) developing contingency plans.
An inventory of business critical financial, informational and
operational systems has been completed. This inventory has been prioritized to
reflect key items of significance. Compliance analysis is approximately 90%
complete for these systems. Remediation activities vary by department; however,
on average, remediation activities are approximately 90% complete. Testing of
the Company's information technology infrastructure is 100% complete. Testing of
business critical application programs began in the second quarter of 1999 and
is scheduled to be complete by the fourth quarter of 1999. Contingency planning
has begun in the second quarter of 1999. The Company believes that with the
completed modifications, the Y2K issue will not pose significant operational
problems for its key computer systems and equipment. However, if such
modifications and conversions are not made, or are not completed in a timely
fashion, the Y2K issue could have a material impact on the operations of the
Company, the precise degree of which cannot be known at this time.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information, goods
and services to the Company. These include financial institutions, suppliers,
vendors and research and development associates. If significant numbers of these
third parties experience failures in their computer systems or equipment due to
Y2K noncompliance, it could affect the Company's ability to process
transactions, manufacture products or engage in similar normal business
activities. While some of these risks are outside the control of the Company,
the Company has instituted programs, including internal records review and use
of external questionnaires, to identify key third parties, assess their level of
Y2K compliance, update contracts and address any noncompliance issues. The total
cost of the Y2K systems assessments and conversions is funded through operating
cash flows and is not expected to exceed $200,000 of which approximately
$100,000 has been spent to date. The actual financial impact could, however,
exceed this estimate.
To the extent that the assessment is finalized without identifying any
material noncompliant information technology systems operated by the Company or
by third parties, the most reasonably likely worst case Y2K scenario is a
systematic failure beyond the Company's control, such as prolonged
telecommunications or electrical failure. Such a failure could prevent the
Company from operating our business. The Company believes that the primary
business risks in the event of such failure, would include:
o Interruption in manufacturing process (clinical supplies, validation and
registration runs);
o Inability to access clinical data to compile timely New Drug
Applications;
o Inability to conduct research and development experiments; and
o Claims of mismanagement, misinterpretation or breach of contract.
Any of these risks would have a material adverse effect on the
Company's business, results of operations and financial condition.
14
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes to interest
rates, foreign currency exchange rates and the volatility of its stock price. A
discussion of the Company's accounting policies for financial instruments and
further disclosures relating to financial instruments is included in the Summary
of Organization and Significant Accounting Policies in the Notes to Condensed
Consolidated Financial Statements.
The Company monitors the risks associated with interest rates and
foreign currency exchange rate risks and has established policies and business
practices to protect against these and other exposures. The Company places its
investments in instruments that meet high credit quality standards, as specified
in the Company's investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue, issuer or type of instrument and does not
permit derivative financial instruments in its investment portfolio. As the
result, the Company does not expect any material loss with respect to its
investment portfolio.
<TABLE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted-average
interest rates by expected maturity dates.
<CAPTION>
Fair
There Value At
(in millions) 1999 2000 2001 2002 2003 -after Total 6/30/99
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 18.7 - - - - - $ 18.7 $ 18.7
Weighted average interest rate 4.71%
Short-term investments $ 13.8 $ 11.5 $ 3.3 - - - $ 28.6 $ 28.9
Weighted average interest rate 4.74% 4.22% 5.09%
Liabilities
12% Senior convertible notes - - - $ 34.5 - - $ 34.5 $ 63.3
Weighted average interest rate 12%
</TABLE>
The Company has no cash flow exposure to interest rate changes on its
12% Senior Convertible Notes. The Company's earnings however are affected by the
volatility of its stock price and interest rates as a result of its issuance of
warrants to acquire additional 12% Senior Convertible Notes. Due to the high
stock price resulting from the pending Pharmacia & Upjohn, Inc. merger, the
non-cash mark-to-market adjustment was $12.1 million reflecting the change in
fair value of the warrants from March 31, 1999. Although changes in the
valuation of this derivative impacted earnings, the Company's cash flow was not
affected as reflected in the Company's second quarter financial results. As
exercises of these warrants occur, the Company may record an additional non-cash
expense for the beneficial conversion feature.
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1999, the Company held its 1999 Annual Meeting of
Stockholders. The following actions were taken at the meeting:
(a) The following two directors were each elected for a three-year term
expiring at the 2002 Annual Meeting of Stockholders:
1. 14,710,638 shares voted in favor of Jeremy Curnock Cook and
46,515 shares withheld their vote;
2. 14,709,443 shares voted in favor of Gerald Moller, Ph.D. and
47,710 shares withheld their vote;
The following individuals' terms of office as directors continued after
the meeting:
Stephen Evans-Freke
Samuel A. Hamad
Donald E. Nickelson
Richard D. Sprizzirri
Axel Ullrich
(b)
1. A proposal to approve an amendment to the Company's 1992 Stock
Option Plan, as amended, to increase the aggregate number of
shares of Common Stock available for issuance by 750,000 shares:
7,549,044 shares were voted in favor of the proposal, 833,869
shares were voted against the proposal, 32,253 shares abstained
and 6,341,987 shares were broker non-votes.
2. A proposal to approve an amendment to the Company's 1994
Non-Employee Directors' Stock Option Plan, as amended, to provide
for automatic and non-discretionary option grants to certain
directors who serve on certain committees of the Board of
Directors: 14,374,606 shares were voted in favor of the proposal,
339,523 shares were voted against the proposal, 43,024 shares
abstained and zero shares were broker non-votes.
3. A proposal to approve an amendment to the Company's Employee Stock
Purchase Plan, as amended, to increase the aggregate number of
shares of Common Stock available for issuance by 200,000 shares:
8,190,405 shares were voted in favor of the proposal, 193,396
shares were voted against the proposal, 31,365 shares abstained
and 6,341,987 were broker non-votes.
4. The ratification of the selection of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ended December
31, 1999: 14,709,526 shares were voted in favor of the proposal,
26,900 shares were voted against the proposal, 20,727 shares
abstained and zero shares were broker non-votes.
16
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Dr. Heinrich Kuhn resigned from the Company's Board of Directors
effective April 22, 1999, coinciding with his retirement from the
Max-Planck Society.
Effective April 19, 1999, the Company's Board of Directors
appointed Gerald H. Moller, Ph.D. and Samuel A. Hamad to its Board
of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation (2)
3.2(ii) Bylaws of the Registrant (1)
3.3 Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant (3)
10.85 Agreement and Plan of Merger, dated June 15, 1999, by
and among the Registrant, Pharmacia & Upjohn, Inc., a
Delaware corporation, and University Acquisition
Corp., a Delaware corporation. (4)
10.86 Stock Option Agreement, dated June 15, 1999, by and
between Parent and the Registrant. (4)
--------------
(1) Incorporated by reference to identically numbered
exhibits filed in response to Item 16 "Exhibits" of
the Company's Registration Statement on Form S-1, as
amended (File Number 33-77074), which became
effective October 4, 1994.
(2) Incorporated by reference to identically numbered
exhibits filed in response to Item 14 "Exhibits" of
the Company's Annual Report of Form 10-K for the year
ended December 31, 1994.
(3) Filed as an exhibit to the Form 8-K Current Report
dated July 26, 1995 and incorporated herein by
reference.
(4) Filed as an exhibit to the Form 8-K Current Report
dated June 15, 1999 and incorporated herein by
reference.
(b) Reports on Form 8-K
SUGEN, Inc. filed a Current Report on Form 8-K, dated June 15,
1999, with respect to its announcement that it had entered into an
Agreement and Plan of Merger on June 15, 1999 with Pharmacia &
Upjohn, Inc., a Delaware corporation and University Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of
Pharmacia & Upjohn, Inc.
The Company filed a Current Report on Form 8-K, dated July 28,
1999, with respect to its announcement of its financial results
for the quarter ended June 30, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1999 SUGEN, Inc.
---------------------------------
By: /s/ Stephen Evans-Freke By: /s/ James L. Knighton
--------------------------------- -----------------------------
Stephen Evans-Freke James L. Knighton
Chairman of the Board and Senior Vice President and
Principal Executive Officer Principal Financial Officer
18
<PAGE>
SUGEN, Inc.
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation (2)
3.2(ii) Bylaws of the Registrant (1)
3.3 Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant (3)
10.85 Agreement and Plan of Merger, dated June 15, 1999, by
and among the Registrant, Pharmacia & Upjohn, Inc., a
Delaware corporation, and University Acquisition Corp.,
a Delaware corporation.(4)
10.86 Stock Option Agreement, dated June 15, 1999, by and
between Parent and the Registrant. (4)
--------------
(1) Incorporated by reference to identically numbered
exhibits filed in response to Item 16 "Exhibits" of the
Company's Registration Statement on Form S-1, as
amended (File Number 33-77074), which became effective
October 4, 1994.
(2) Incorporated by reference to identically numbered
exhibits filed in response to Item 14 "Exhibits" of the
Company's Annual Report of Form 10-K for the year ended
December 31, 1994.
(3) Filed as an exhibit to the Form 8-K Current Report
dated July 26, 1995 and incorporated herein by
reference.
(4) Filed as an exhibit to the Form 8-K Current Report
dated June 15, 1999 and incorporated herein by
reference.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,710
<SECURITIES> 28,897
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,532
<PP&E> 15,447
<DEPRECIATION> 7,141
<TOTAL-ASSETS> 59,975
<CURRENT-LIABILITIES> 28,675
<BONDS> 0
0
0
<COMMON> 162,436
<OTHER-SE> (181,961)
<TOTAL-LIABILITY-AND-EQUITY> 59,975
<SALES> 0
<TOTAL-REVENUES> 6,747
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,500
<INCOME-PRETAX> (47,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,876)
<EPS-BASIC> (2.85)
<EPS-DILUTED> (2.85)
</TABLE>
