<PAGE> 1
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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, 2000
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: 0-22788
AXYS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 22-2969941
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 829-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
The number of outstanding shares of the registrant's Common Stock, $0.001
par value, was 37,014,346 as of July 31, 2000.
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<PAGE> 2
AXYS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)*
Consolidated Balance Sheets -- June 30, 2000 and December
31, 1999.................................................. 1
Consolidated Statements of Operations -- Three and six
months ended June 30, 2000 and 1999....................... 2
Consolidated Statements of Cash Flows -- Six months ended
June 30, 2000 and 1999.................................... 3
Notes to Consolidated Financial Statements -- June 30,
2000...................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................ 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults Upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures........................................................... 16
</TABLE>
---------------
* The financial information contained herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
filed with the Securities and Exchange Commission on March 8, 2000.
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999(1)
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 30,932 $ 23,577
Marketable investments...................................... 8,578 3,080
Accounts receivable......................................... 630 5,340
Due from affiliates......................................... 2,316 31
Inventory................................................... -- 2,258
Prepaid expenses and other current assets................... 1,463 939
--------- ---------
Total current assets.............................. 43,919 35,225
Property and equipment, net................................. 14,456 18,873
Other long-term investment.................................. 38,630 --
Note receivable from officer................................ 485 671
Other assets................................................ 954 965
--------- ---------
Total Assets...................................... $ 98,444 $ 55,734
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,683 $ 4,563
Accrued compensation........................................ 2,327 2,980
Other accrued liabilities................................... 2,791 5,284
Deferred revenue............................................ 229 2,083
Current portion of capital lease and debt obligations....... 23,780 23,646
--------- ---------
Total current liabilities......................... 31,810 38,556
Capital lease and debt obligations, net of current
portion................................................... 8 57
Minority interest in joint venture.......................... 2,286 3,074
Stockholders' equity:
Preferred stock............................................. -- --
Common stock................................................ 326,532 291,328
Accumulated other comprehensive income (loss)............... 2,116 (70)
Accumulated deficit......................................... (264,308) (277,211)
--------- ---------
Total stockholders' equity........................ 64,340 14,047
--------- ---------
Total Liabilities and Stockholders' Equity........ $ 98,444 $ 55,734
========= =========
</TABLE>
---------------
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statement at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
1
<PAGE> 4
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues
Collaboration and license revenues.................. $ 1,488 $ 4,734 $ 2,886 $ 13,063
Service revenues.................................... 366 162 619 342
-------- -------- -------- --------
Total revenue............................... 1,854 4,896 3,505 13,405
Operating expenses
Research and development............................ 10,437 15,392 20,256 30,164
General and administrative.......................... 2,757 4,287 6,028 7,261
Restructuring charge................................ (79) -- (625) --
-------- -------- -------- --------
Total operating expenses.................... 13,115 19,679 25,659 37,425
-------- -------- -------- --------
Operating loss........................................ (11,261) (14,783) (22,154) (24,020)
Interest income....................................... 592 799 752 1,706
Interest expense...................................... (247) (504) (531) (1,011)
Other................................................. 380 358 788 81
-------- -------- -------- --------
Loss from continuing operations....................... (10,536) (14,130) (21,145) (23,244)
Discontinued operations
Income (loss) from operations of discontinued
segment.......................................... (1,056) 916 1,061 2,283
Gain on disposal of segment......................... 32,987 -- 32,987 --
-------- -------- -------- --------
Net income (loss)..................................... $ 21,395 $(13,214) $ 12,903 $(20,961)
======== ======== ======== ========
Basic and diluted net loss per share from continuing
operations.......................................... $ (0.30) $ (0.47) $ (0.63) $ (0.77)
======== ======== ======== ========
Basic and diluted net income (loss) per share from
discontinued operations............................. $ 0.90 $ 0.03 $ 1.01 $ 0.08
======== ======== ======== ========
Basic and diluted net income (loss) per share......... $ 0.61 $ (0.44) $ 0.38 $ (0.69)
======== ======== ======== ========
Shares used in computing basic and diluted net income
(loss) per share.................................... 35,289 30,359 33,678 30,340
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
AXYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 12,903 $(20,961)
Adjustments to reconcile net income (loss) to net cash and
cash equivalents used in operating activities:
Non-cash restructuring charge............................. (79) --
Gain on disposal of segment............................... (32,987) --
Depreciation and amortization............................. 3,709 5,131
Equity interest in loss of joint venture.................. -- 830
Forgiveness of note receivable from officer............... 186 183
Changes in assets and liabilities:
Other current assets................................... 6,994 (1,104)
Due from affiliates.................................... (2,285) (103)
Other long-term assets................................. (539) (2,164)
Other liabilities...................................... (6,801) (6,512)
-------- --------
Net cash and cash equivalents used in operating
activities................................................ (18,899) (24,700)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases................................................. (8,578) (22,470)
Maturities................................................ 3,080 29,332
Minority interest........................................... (788) 12,771
Purchase of property and equipment.......................... (2,749) (5,254)
-------- --------
Net cash and cash equivalents provided by (used in)
investing activities...................................... (9,035) 14,379
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 35,204 653
Proceeds from notes payable and lease financing............. 37,525 --
Principal payments on notes payable and capital leases...... (37,440) (3,568)
-------- --------
Net cash and cash equivalents provided by (used in)
financing activities...................................... 35,289 (2,915)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 7,355 (13,236)
Cash and cash equivalents, beginning of period.............. 23,577 36,261
-------- --------
Cash and cash equivalents, end of period.................... $ 30,932 $ 23,025
======== ========
Supplemental cash flow information:
Common stock received in connection with the merger of
AAT into DPI.......................................... $ 59,400 $ --
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by Axys Pharmaceuticals, Inc. ("Axys" or the "Company") according to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in complete financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to state fairly the
financial position and results of operations as of and for the periods
indicated. The results of operations for the six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for subsequent quarters
or the full fiscal year.
On April 28, 2000, the Company completed the sale of its combinatorial
chemistry business, Axys Advanced Technologies, Inc. ("AAT"), to Discovery
Partners International, Inc. ("DPI"). The Company reclassified operating results
previously reported for the three and six months ended June 30, 1999 to reflect
the results of the combinatorial chemistry business as a discontinued operation,
in accordance with Accounting Principles Board Opinion No. 30 (APB 30).
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
Reclassifications
Certain 1999 amounts have been reclassified to conform to the June 30, 2000
presentations.
2. DISCONTINUED OPERATIONS
On April 28, 2000, Axys completed the sale of AAT, its combinatorial
chemistry business, to DPI. Under the terms of the agreement, AAT was merged
with a subsidiary of DPI and the Company received as consideration 7,425,000
shares of common stock in DPI (which represents a minority ownership position),
$50,000 in cash, $550,000 in a form of note receivable and a warrant to purchase
200,000 additional shares of DPI at $8 per share. The revenues of the
combinatorial chemistry business were $5.1 million for the four months ended
April 30, 2000, and $6.7 million for the six months ended June 30, 1999. The net
income of the combinatorial chemistry business was $1.1 million for the four
months ended April 30, 2000, and $2.3 million for the six months ended June 30,
1999.
3. DUE FROM AFFILIATES
At June 30, 2000, due from affiliates consists of $2.0 million from DPI and
$0.3 million from Akkadix, a minority-owned subsidiary. Amounts represent note
receivable, advances and allocated expenses paid by Axys on behalf of affiliated
companies.
4. OTHER LONG-TERM INVESTMENT
Other long-term investment consists of the investment in DPI as part of the
consideration of the merger agreement between DPI and the Company for the sale
of AAT in April 2000. The investment represents an approximately 43% minority
ownership interest in DPI at June 30, 2000. The Company accounts for its
investment in DPI under the equity method of accounting.
4
<PAGE> 7
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
5. RESTRUCTURING CHARGE
In December 1999, the Company completed the closing of its San Diego, CA
operations and had finished the relocation of its oncology genomics activities
to its South San Francisco headquarters. As a result of this action, a one-time
charge of $7.0 million was recorded during the third quarter of 1999, of which
$2.2 million related to severance and other employee-related costs, $1.7 million
related to facilities costs, $1.8 million related to the disposal of assets, and
$1.3 million in other costs associated with the restructuring. During the second
quarter of 2000, the restructuring reserve was reduced by actual cash payments
and favorable resolution of lease commitments.
The following table summarizes the Company's 2000 restructuring charge
activity for the six months ended June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE BALANCE
DESCRIPTION AT 12/31/99 OTHER PAYMENTS AT 6/30/00
----------- ----------- ----- -------- ----------
<S> <C> <C> <C> <C>
Severance and benefits............................. $(1,095) $ 79 $ 821 $(195)
Facilities......................................... (748) 546 202 --
Contractual research commitments................... (81) -- 81 --
------- ---- ------ -----
Total.................................... $(1,924) $625 $1,104 $(195)
======= ==== ====== =====
</TABLE>
The Company anticipates that the remaining accruals will be utilized by
December 31, 2000.
6. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was $23,582,000 and $15,089,000 for the
three and six months ended June 30, 2000, respectively, and $(13,353,000) and
$(21,186,000) for the three and six months ended June 30, 1999, respectively.
7. SEGMENT INFORMATION
Prior to April 28, 2000, the Company operated in three business segments:
drug discovery, combinatorial chemistry and other affiliated businesses. The
drug discovery segment focused its own resources on discovering and developing
therapeutics for the treatment of various types of cancer and collaborates with
large pharmaceutical companies in discovering therapeutics for chronic diseases.
The combinatorial chemistry segment was AAT, a wholly owned subsidiary that
marketed combinatorial chemistry compounds, enabling technology and services.
The other affiliated businesses segment consisted of PPGx, Inc. ("PPGx"), a 82%
owned subsidiary that engaged in the business of providing pharmacogenomic (the
science of how genetic variations among individuals affects drug safety and
efficacy) products and services to the pharmaceutical and biotechnology
industries, and Akkadix Corporation ("Akkadix"), an approximately 26% owned
subsidiary in the agricultural biotechnology business. The segments were
strategic business units managed separately, based on the differences in the
technologies of their respective product lines. On April 28, 2000, the Company
completed the sale of its combinatorial chemistry business, AAT to DPI. All
financial results related to the combinatorial chemistry business are accounted
for as discontinued operations in accordance with APB 30.
The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. The Company does
not currently have a measure of interest income or interest expense by business
segment.
5
<PAGE> 8
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
The table below details the segment information prior to the sale of the
combinatorial chemistry business, with a reconciling column to reflect totals
related to continuing operations.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
-----------------------------------------------------------------
OTHER CONTINUING
DRUG AFFILIATED OPERATIONS
DISCOVERY AAT BUSINESSES RECONCILIATION TOTAL
--------- ------ ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000
Revenue............................. $ 2,923 $5,071 $ 582 $(5,071) $ 3,505
Income (loss)....................... (16,767) 1,061 (4,378) (1,061) (21,145)
Identifiable assets................. 94,381 7,758 4,063 (7,758) 98,444
SIX MONTHS ENDED JUNE 30, 1999
Revenue............................. $ 13,063 $6,726 $ 342 $(6,726) $ 13,405
Income (loss)....................... (19,628) 2,283 (3,616) (2,283) (23,244)
Identifiable assets................. 69,349 7,148 12,924 -- 89,421
</TABLE>
Other affiliated businesses represent the results of Akkadix's and PPGx's
principal activities, which commenced in 1998 and 1999, respectively. The
Company's ownership of Akkadix was reduced to a level below 50% in August 1999.
Therefore, Akkadix's activities are excluded above for the six months ended June
30, 2000. Both Akkadix and PPGx have been funded by third parties.
8. REVOLVING LINE OF CREDIT
The Company has a $30.0 million revolving line of credit with Foothill
Capital Corporation. The balance outstanding at June 30, 2000 was $14.5 million.
The line is subject to the terms of a security agreement, and is fully secured
by the Company's cash and cash equivalents, and marketable investments. Interest
is due on the line monthly and is computed at the reference rate for Wells Fargo
Bank, which approximated 9.5% at June 30, 2000. The line is available through
July 2002.
PPGx, Inc. increased its revolving line of credit from $8.0 million to $9.0
million during the second quarter of 2000. This line is guaranteed by PPD, Inc.
("PPD"), a minority owner of PPGx. Interest is accrued monthly and is computed
at the LIBOR rate, which approximated 6.78% at June 30, 2000. The amount
outstanding on this line as of June 30, 2000 was $9.0 million. The balance of
any unpaid principal and interest is due November 2000.
9. SUBSEQUENT EVENTS
Equity Financing
On July 21, 2000, the Company completed an offering of $10 million of its
common stock, par value $.001 per share, under its effective shelf registration
statement relating to the offer and sale by the Company of its common stock
pursuant to a common stock purchase agreement, dated as of July 21, 2000 between
the Company and Acqua Wellington North American Equities Fund, Ltd. ("Acqua
Wellington"). The shares of common stock were sold at a price of $6.10 per
share, based on a negotiated discount from the daily volume weighted average
price of the Company's common stock on July 20, 2000. Pursuant to the common
stock purchase agreement, the Company may, from time to time, and at its own
discretion, issue and sell to Acqua Wellington up to an additional $40 million
of common stock, subject to customary conditions, at a price per share based on
the daily volume weighted average price of the Company's common stock over a
certain period of time less a discount ranging from 4.5% to 6.0% over the
fifteen month period beginning July 21, 2000. In
6
<PAGE> 9
AXYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
addition, the Company may also grant to Acqua Wellington a call option at the
same discount for the applicable period to purchase additional shares of the
Company's common stock up to the applicable amount being sold by the Company in
such period, subject to the overall limit of $40 million described above.
Discovery Partners International, Inc. Initial Public Offering
On July 27, 2000, DPI effected an initial public offering ("IPO") of its
common stock and commenced trading on the Nasdaq under the symbol "DPII". Prior
to the IPO, Axys owned 7,425,000 shares of DPI common stock, which represented
approximately 43% of the outstanding shares. DPI sold 5 million shares of its
common stock in its IPO at a price of $18 per share, raising gross proceeds of
approximately $90 million. This reduced the Company's ownership in DPI to
approximately 33% after the IPO. As of August 9, 2000, Axys' investment in DPI
has a value of approximately $142 million.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains both historical information and
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include projections and other statements about events that may occur
at some point in the future. The Company's actual results could differ
significantly from those described in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in this section as well as under "Item 1. Business,"
including, "What Factors Could Cause Our Results To Differ Significantly From
Those You Might Expect" and "What Matters Should Stockholders Consider with
Respect to the Company?", in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 filed with the Securities and Exchange Commission.
OVERVIEW
The Company is an early-stage biopharmaceutical company focused on the
discovery, development and commercialization of small molecules. The Company
invests its own resources in discovering and developing therapeutics for the
treatment of various types of cancer and collaborates with large pharmaceutical
companies in discovering therapeutics for chronic diseases for which there are
large markets.
The Company formed three affiliated companies to provide capital to Axys
for its drug discovery operations:
- Axys Advanced Technologies, Inc. ("AAT"), which began operations in 1996
and was set up as a wholly owned subsidiary in 1999, marketed
combinatorial chemistry compounds, enabling technology and services. On
April 28, 2000, Axys completed the sale of this business as discussed
further in "Discontinued Operations". As a result of the sale of AAT, at
June 30, 2000, the Company owns approximately 43% of the outstanding
common stocks of Discovery Partners International, Inc. ("DPI"), a
chemistry services business.
- Akkadix Corporation ("Akkadix"), an agricultural biotechnology company
founded in 1998, was approximately 26% owned by Axys at June 30, 2000.
Akkadix has incurred losses since inception and is separately managed and
has been funded by third parties.
- PPGx, Inc. ("PPGx"), a pharmacogenomics subsidiary founded in 1999, is
82% owned by Axys and 18% owned by PPD, Inc. ("PPD"). Financial results
of PPGx are consolidated into Axys' financial results. It has incurred
losses since inception, is separately managed and has been funded by
third parties.
On July 21, 2000, the Company completed an offering of $10 million of its
common stock, par value $.001 per share, under its effective shelf registration
statement relating to the offer and sale by the Company of its common stock
pursuant to a common stock purchase agreement, dated as of July 21, 2000 between
the Company and Acqua Wellington North American Equities Fund, Ltd. ("Acqua
Wellington"). The shares of common stock were sold at a price of $6.10 per
share, based on a negotiated discount from the daily volume weighted average
price of the Company's common stock on July 20, 2000. Pursuant to the common
stock purchase agreement, the Company may, from time to time, and at its own
discretion, issue and sell to Acqua Wellington up to an additional $40 million
of common stock, subject to customary conditions, at a price per share based on
the daily volume weighted average price of the Company's common stock over a
certain period of time less a discount ranging from 4.5% to 6.0% over the
fifteen month period beginning July 21, 2000. In addition, the Company may also
grant to Acqua Wellington a call option at the same discount for the applicable
period to purchase additional shares of the Company's common stock up to the
applicable amount being sold by the Company in such period, subject to the
overall limit of $40 million described above.
In May 2000, Bayer AG ("Bayer"), a collaboration partner of the Company,
decided to discontinue development of the compound known as BAY 44-3428. Bayer
had previously selected BAY 44-3428 for development as an oral treatment for
asthma based on the demonstrated in vivo efficacy of the compound in primate
models of asthma. Bayer's decision to discontinue development of BAY 44-3428 was
based on its view that the toxicological properties of this specific compound
precluded advancement into clinical development. However, Bayer's decision did
not affect Axys' Phase II clinical trial of APC 2059, a tryptase inhibitor
8
<PAGE> 11
currently being developed for the treatment of inflammatory bowel disease. After
completing a planned interim data analysis of its Phase II clinical study of APC
2059 for the treatment of ulcerative colitis, the Company decided to continue
the Phase II study to its defined clinical endpoints later this year. APC 2059,
which is a second generation tryptase inhibitor developed in the collaboration
with Bayer, is from a chemically distinct class of compounds from the third
generation compound BAY 44-3428, and does not demonstrate the toxicological
properties that were found with BAY 44-3428. The Company previously demonstrated
proof of principle for tryptase as a target in inflammation in two Phase II
trials of a first generation compound, APC 366. Those trials, completed in the
United Kingdom, demonstrated that APC 366 could alleviate symptoms associated
with allergen-induced asthma, with statistically significant results in the
reduction of the late airway response as measured against both baseline and
placebo.
To date, the Company has not generated any product revenue in its drug
discovery programs and does not expect to generate such revenues for at least
several years. The Company expects its sources of revenue, if any, for the next
several years to consist of payments under corporate partnerships and interest
income. The process of developing the Company's products will require
significant additional research and development, preclinical testing and
clinical trials, as well as regulatory approval. These activities, together with
general and administrative expenses, are expected to result in significant
operating losses for the foreseeable future. The Company expects that losses
will fluctuate from quarter to quarter, that such fluctuations may be
substantial, and that results from prior quarters may not be indicative of
future operating results. Axys will not receive product revenue or royalties in
its drug discovery programs unless the Company or its collaborative partners
complete clinical trials and successfully commercialize one or more of the
Company's products. In addition, there can be no assurance that DPI, Akkadix or
PPGx will ever generate funding for the Company's drug discovery operations. As
of June 30, 2000, the Company had an accumulated deficit of $264 million.
Included in the Company's accumulated deficit at June 30, 2000 was approximately
$147 million of acquired in-process research and development from the
acquisition of Khepri Pharmaceuticals, Inc. in 1995 and the acquisition of
Sequana Therapeutics, Inc. in January 1998.
The Company is subject to risks common to early-stage drug discovery and
development companies, including risks inherent in its research and development
efforts and clinical trials, reliance on collaborative partners, the need for
future capital, enforcement of patent and proprietary rights, potential
competition and uncertainty of regulatory approval. In order for a product to be
commercialized, it will be necessary for the Company, and in some programs, its
collaborators, to conduct preclinical tests and clinical trials to demonstrate
efficacy and safety of product candidates, obtain regulatory clearances and
enter into manufacturing, distribution and marketing arrangements, as well as
obtain market acceptance. There can be no assurance that the Company will
generate revenues or achieve and sustain profitability in the future.
RESULTS OF OPERATIONS
Collaboration and Licensing Revenues
The Company's collaboration and licensing revenues were $1.5 million and
$2.9 million for the three and six months ended June 30, 2000, respectively,
compared to $4.7 million and $13.1 million for the comparable periods in 1999.
The decrease was primarily due to wind-up of several collaborations in gene
identification in 1999. The collaboration and licensing revenues for the three
and six months ended June 30, 2000 consisted of research support and license
fees from two collaborative partners, compared to the research support and
license fees from eight collaborative partners for the comparable periods in
1999.
Service Revenues
The Company's service revenues were $366,000 and $619,000 for the three and
six months ended June 30, 2000, respectively, compared to $162,000 and $342,000
for the comparable periods in 1999. The increase was primarily due to the
increase in PPGx's service revenue.
9
<PAGE> 12
Research and Development
The Company's research and development expenses were $10.4 million and
$20.3 million for the three and six months ended June 30, 2000, respectively,
compared to $15.4 million and $30.2 million for the comparable periods in 1999.
The overall decrease in 2000 was primarily due to the shutdown of the Company's
San Diego operations and the conclusion of several collaborations in gene
identification in 1999.
General and Administrative
The Company's general and administrative expenses were $2.8 million and
$6.0 million for the three and six months ended June 30, 2000, respectively,
compared to $4.3 million and $7.3 million for the comparable periods in 1999.
The overall decrease in 2000 was primarily due to the shutdown of the Company's
San Diego operations in 1999.
Interest Income and Interest Expense
Interest income was $592,000 and $752,000 for the three and six months
ended June 30, 2000, respectively, compared to $799,000 and $1.7 million for the
comparable periods in 1999. The decrease was primarily due to the decrease in
average cash and investment balances for the respective periods. Interest
expense was $247,000 and $531,000 for the three and six months ended June 30,
2000, respectively, compared to $504,000 and $1.0 million for the comparable
periods in 1999. The decrease was primarily due to the lower debt balances on
the Company's revolving line of credit and capital lease arrangements.
Income from Operations of Discontinued Segment
Income from operations of discontinued segment was $1.1 million for the six
months ended June 30, 2000, compared to $2.3 million for the comparable period
in 1999. The decrease was primarily due to reporting four months of operations
of AAT in 2000 because of the merger of AAT into DPI on April 28, 2000, compared
to six months of operations in 1999.
Discontinued Operations
On April 28, 2000, the Company completed the sale of its combinatorial
chemistry business, AAT to DPI. Total revenues on the discontinued operations
were $5.1 million for the six months ended June 30, 2000, compared to $6.7
million for the comparable period in 1999. The net income on the discontinued
operations was $1.1 million for the six months ended June 30, 2000, compared to
$2.3 million for the comparable period in 1999. The Company also recorded a gain
of $33.0 million on the merger of AAT into DPI. Additional gain totaling $21.6
million from the sale of AAT to DPI will be recognized by Axys as its ownership
interest in DPI diminishes as a result of (1) the sale of Axys' shares in DPI,
or (2) the dilution of Axys' ownership interest in DPI. Financial results of AAT
were consolidated with Axys' financial results through April 2000 when a merger
involving AAT was consummated and AAT became a subsidiary of DPI. In conjunction
with the merger, Axys received as consideration 7,425,000 shares of common stock
in DPI (which represents a minority ownership position), $50,000 in cash,
$550,000 note receivable and a warrant to purchase 200,000 additional shares of
DPI at $8 per share. In July 2000, DPI effected an initial public offering of
its common stock and began trading on Nasdaq under the symbol "DPII". The
Company's former combinatorial chemistry business has been accounted for as a
discontinued operation and prior period results have been reclassified to report
only continuing operations. DPI has been accounted for under the equity method
starting in May 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private and public offerings of capital stock, corporate collaborative research
agreements, and sales of combinatorial chemistry compounds. From inception
through June 30, 2000, the Company realized approximately $217.4 million in net
proceeds from offerings of its capital stock. In addition, over the same period,
the Company realized approximately $207.6 million from its collaborative
research agreements and the sale of compound libraries by AAT.
10
<PAGE> 13
The Company's principal sources of liquidity are its cash and investments,
which totaled $39.5 million as of June 30, 2000. The Company has a $30.0 million
line of credit under which $14.5 million was outstanding as of June 30, 2000.
The line is available subject to customary conditions through July 2002. PPGx
has a $9.0 million line of credit that is guaranteed by PPD, its minority
shareholder, under which $9.0 million was outstanding as of June 30, 2000. The
Company's cash and investments at June 30, 2000 include the balances from PPGx,
its majority owned subsidiary, some of which is subject to certain restrictions
on use. The Company's cash and cash equivalents serve as security for its
borrowings under its line of credit.
The Company's marketable investments at June 30, 2000 include approximately
70,912 shares of Maxim Pharmaceuticals, Inc. stock (a publicly traded company).
These shares are subject to a lock-up arrangement that restricts Axys' ability
to sell them, which expires over a twelve month period, beginning March 2000, at
a rate of 25% per quarter.
Net cash used in operating activities during the six months ended June 30,
2000 was $18.9 million, compared to $24.7 million for the comparable period in
1999. The change was primarily attributable to lower operating expenses in 2000
due to the shutdown of the Company's San Diego operations in 1999. Cash used in
operating activities is expected to fluctuate from quarter to quarter depending
in part upon the timing and amounts, if any, of cash received from existing and
any new collaboration agreements.
The Company also spent approximately $2.7 million for the purchase of
property, plant and equipment during the six months ended June 30, 2000. The
Company expects to acquire or lease additional equipment in connection with
future research and development activities. There were no material commitments
for capital expenditures outstanding at June 30, 2000. However, the Company
expects to enter into agreements pertaining to the construction of a 43,000
square foot medicinal chemistry building on leased property adjacent to its
corporate headquarters commencing the third quarter of 2000.
The Company's material commitments at June 30, 2000 included its
obligations to perform research under its collaboration agreements with Merck
and Aventis (for which the Company is fully funded by its partners) and its
obligations under its line of credit. The Company believes that its existing
cash and investments (including the proceeds of the $10.0 million stock issuance
described below and the investment in DPI also described below) are sufficient
for the Company to fulfill its commitments to the lender under its line of
credit, which had a $14.5 million balance outstanding at June 30, 2000.
On July 21, 2000, the Company completed an offering of $10 million of its
common stock, par value $.001 per share, under its effective shelf registration
statement relating to the offer and sale by the Company of its common stock
pursuant to a common stock purchase agreement, dated as of July 21, 2000 between
the Company and Acqua Wellington. The shares of common stock were sold at a
price of $6.10 per share, based on a negotiated discount from the daily volume
weighted average price of the Company's common stock on July 20, 2000. Pursuant
to the common stock purchase agreement, the Company may, from time to time, and
at its own discretion, issue and sell to Acqua Wellington up to an additional
$40 million of common stock, subject to customary conditions, at a price per
share based on the daily volume weighted average price of the Company's common
stock over a certain period of time less a discount ranging from 4.5% to 6.0%
over the fifteen month period beginning July 21, 2000. In addition, the Company
may also grant to Acqua Wellington a call option at the same discount for the
applicable period to purchase additional shares of the Company's common stock up
to the applicable amount being sold by the Company in such period, subject to
the overall limit of $40 million described above.
Axys acquired its interest in DPI in connection with the April 2000 merger
of AAT, the Company's combinatorial chemistry business, into DPI. In July 2000,
DPI effected an initial public offering ("IPO") of its common stock and
commenced trading on the Nasdaq under the symbol "DPII". Prior to the IPO, Axys
owned 7,425,000 shares of DPI common stock, which represented approximately 43%
of the outstanding shares. DPI sold 5 million shares of its common stock in its
IPO at a price of $18 per share, raising gross proceeds of approximately $90
million. This reduced the Company's ownership in DPI to approximately 33% after
the IPO. As of August 9, 2000, Axys' investment in DPI has a value of
approximately $142 million.
11
<PAGE> 14
The Company expects that existing cash and investments will enable the
Company to maintain current and planned operations for the foreseeable future.
The Company continues to actively pursue a variety of financing alternatives.
The drug development process is expensive and the Company is at an early
stage of development. Therefore, the Company expects that it will continue to
need to raise money in the future until the Company achieves substantial product
or royalty revenues, if ever. The Company expects that it will continue to seek
additional funding from time to time through one or more of the following: new
collaborations, the extension of existing collaborations, the sale of its
interests in its affiliated businesses, or through public or private equity or
debt financings. Furthermore, the Company may obtain funds through arrangements
with collaborative partners or others that require the Company to give up rights
to technologies or products that it would otherwise seek to develop or
commercialize itself. The Company cannot be certain that additional funding will
be available or that, if available, the terms will be acceptable. Existing
stockholders will experience dilution of their investment if additional funds
are raised through private or public stock sales. If adequate funds are not
available, the Company may delay, reduce or eliminate any of its research or
development programs.
CERTAIN BUSINESS RISKS
The Company is at an early stage of development and will need a substantial
amount of additional funding to continue to prosecute its research and
development programs. The Company's technologies are, in many cases, new and all
are still under development. All of its proposed products are in research or
development and will require significant additional research and development
efforts prior to any commercial use, including extensive and costly pre-clinical
and clinical testing, as well as lengthy regulatory approval involving many
complexities. The Company's research and development efforts may not be
successful, its proposed products may not prove to be safe and efficacious in
clinical trials, and no commercially successful products may ultimately be
developed by the Company. In addition, many of the Company's currently proposed
products are subject to development and licensing arrangements with its
collaborators. Therefore, the Company is dependent in many cases on the research
and development efforts of these collaborators. Moreover, the Company is
entitled only to a portion of the revenues, if any, realized from the commercial
sale of any of the proposed products covered by the collaborations. The Company
has experienced significant operating losses since inception and expects to
incur significant operating losses over at least the next several years. The
development of the Company's technology and proposed products will require a
commitment of substantial funds to conduct these costly and time-consuming
activities, which funds may not be available.
Should the Company or its collaborators fail to perform in accordance with
the terms of the applicable agreements, any consequent loss of revenue under the
collaboration agreements could have a material adverse effect on the Company's
business, financial condition and results of operations. The proposed products
under development by the Company have never been manufactured on a commercial
scale and it is possible that proposed products may not be able to be
manufactured at a cost or in quantities necessary to make them commercially
viable. The Company has no sales, marketing or distribution capability for its
proposed products. If any of the products subject to the Company's collaborative
agreements are successfully developed, the Company must rely on its
collaborators to market the products. The Company cannot ensure that any
collaborator's marketing efforts would be successful.
If the Company develops any products which are not subject to its
collaborative agreements, we must either rely on other pharmaceutical companies
to market the products or the Company must develop a marketing and sales force
with technical expertise and supporting distribution capability in order to
market the products directly. The Company cannot guarantee that these marketing
efforts would be successful.
The foregoing risks reflect the Company's early stage of development and
the nature of its industry and products. Also inherent in the Company's stage of
development are a number of additional risks, including competition, the
substantially greater financial resources of a number of its competitors,
uncertainties regarding protection of patents and proprietary rights, government
regulation, uncertainties related to clinical trials and health care reform and
the potential volatility of its stock price. These risks and uncertainties are
discussed further in "Items 1. Business -- What Factors Could Cause Our Results
to Differ Significantly
12
<PAGE> 15
From Those You Might Expect?" and "-- What Other Matters Should Stockholders
Consider with Respect to the Company?" in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, filed by the Company with the
Securities and Exchange Commission on March 8, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold derivative financial investments, derivative
commodity investments or other financial investments or engage in foreign
currency hedging or other transactions that exposes it to market risk. In
addition, due to the short-term nature of the Company's financial instruments,
market risk is not material.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In July 2000, the Company issued and sold under its effective shelf
registration statement 1.639 million shares of common stock at $6.10 per share
for an aggregate of $10 million in proceeds. The Company intends to use the
proceeds from this transaction for operating costs, including the Company's
ongoing oncology research programs and other general corporate purposes. The
shares were purchased by Acqua Wellington pursuant to a registration statement
on Form S-3 filed with the Securities and Exchange Commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 Annual Meeting of Stockholders was held on Wednesday,
May 24, 2000. Stockholders were asked (i) to elect directors to serve for the
ensuing year and until their successors are elected; (ii) to ratify the
selection of Ernst & Young LLP as independent auditors of the Company for its
fiscal year ending December 31, 2000; and (iii) to approve an additional
1,500,000 shares of common stock under the Company's 1997 Equity Incentive Plan.
All of the matters were approved by the stockholders of the Company. The
number of shares voted for, against and withheld for each matter were:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
---------- --------
<S> <C> <C>
Election of Directors:
John P. Walker...................................... 26,418,140 307,750
Ann M. Arvin, M.D. ................................. 26,458,944 266,946
Vaughn M. Kailian................................... 26,448,476 277,414
Donald Kennedy, Ph.D. .............................. 26,432,902 292,988
Irvin Lerner........................................ 26,419,893 305,997
Alan Mendelson, J.D. ............................... 26,449,173 276,717
J. Leighton Read, M.D. ............................. 26,460,977 264,913
</TABLE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
---------- --------- ------- ----------------
<S> <C> <C> <C> <C>
Selection of Ernst & Young LLP............. 26,571,726 105,607 48,557 6,386,613
Additional 1,500,000 shares of common stock
under the Company's 1997 Equity Incentive
Plan..................................... 21,879,278 4,749,942 96,670 6,386,613
</TABLE>
ITEM 5. OTHER INFORMATION
None
14
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
10.126 Agreement and Plan of Merger by and among Discovery Partners
International, Inc., DPII Newco, LLC, Axys Advanced
Technologies, Inc. and Axys Pharmaceuticals, Inc., dated
April 11, 2000. (1)
10.127* Amendment No. 1 to the Collaborative Research and License
Agreement between the Registrant and Rhone-Poulenc Rorer
Pharmaceuticals, Inc., dated June 2, 2000.
27 Financial Data Schedule.
</TABLE>
---------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated herein by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 15, 2000.
(b) REPORTS ON FORM 8-K
On May 15, 2000, the Company filed with the Commission a Current Report on
Form 8-K relating the sale of Axys Advanced Technologies, Inc., the Company's
wholly-owned subsidiary, to Discovery Partners International, Inc. on April 28,
2000.
15
<PAGE> 18
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.
AXYS PHARMACEUTICALS, INC.
<TABLE>
<S> <C>
Date: August 14, 2000 By: /s/ JOHN P. WALKER
----------------------------------------------------
John P. Walker
Chief Executive Officer, Chairman of the Board, Director
(Principal Executive Officer and Principal Financial
Officer)
Date: August 14, 2000 By: /s/ MARK B. LUCKY
----------------------------------------------------
Mark B. Lucky
Controller, Director of Financial Planning & Analysis
(Chief Accounting Officer)
</TABLE>
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
------- DESCRIPTION
<S> <C>
10.126 Agreement and Plan of Merger by and among Discovery Partners
International, Inc., DPII Newco, LLC, Axys Advanced
Technologies, Inc. and Axys Pharmaceuticals, Inc., dated
April 11, 2000. (1)
10.127* Amendment No. 1 to the Collaborative Research and License
Agreement between the Registrant and Rhone-Poulenc Rorer
Pharmaceuticals, Inc., dated June 2, 2000.
27 Financial Data Schedule.
</TABLE>
---------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated herein by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 15, 2000.
