<PAGE> 1
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
MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________ TO _______
Commission File Number: 0-24274
LA JOLLA PHARMACEUTICAL COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0361285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6455 NANCY RIDGE DRIVE 92121
SAN DIEGO, CA (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (619) 452-6600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at March 31, 1997 was 17,279,895.
<PAGE> 2
LA JOLLA PHARMACEUTICAL COMPANY
FORM 10-Q
QUARTERLY REPORT
INDEX
<TABLE>
<S> <C>
COVER PAGE ..................................................................................................... 1
INDEX ......................................................................................................... 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 1997 and December 31, 1996 ............................................... 3
Statements of Operations for the three months ended March 31, 1997 and 1996 ............................. 4
Statements of Cash Flows for the three months ended March 31, 1997 and 1996 ............................. 5
Notes to Financial Statements ........................................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................................... 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... *
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .............................................................................. *
ITEM 2. Changes in Securities .......................................................................... *
ITEM 3. Defaults upon Senior Securities ................................................................ *
ITEM 4. Submission of Matters to a Vote of Security Holders ............................................ *
ITEM 5. Other information .............................................................................. 10
ITEM 6. Exhibits and Reports on Form 8-K ............................................................... 10
SIGNATURE ...................................................................................................... 11
</TABLE>
* No information provided due to inapplicability of item.
2
<PAGE> 3
LA JOLLA PHARMACEUTICAL COMPANY
BALANCE SHEETS
(in thousands)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,323 $ 6,613
Short-term investments 17,984 17,621
Receivable -- 4,000
Other current assets 1,191 1,233
-------- --------
Total current assets 28,498 29,467
Property and equipment, net 1,536 1,361
Patent costs and other assets, net 918 859
-------- --------
Total Assets $ 30,952 $ 31,687
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 552 $ 1,539
Accrued expenses 543 1,106
Accrued payroll and related expenses 293 294
Deferred revenue 2,290 --
Current portion of obligations under capital leases 461 642
-------- --------
Total current liabilities 4,139 3,581
Noncurrent portion of obligations under capital leases 94 168
Commitments
Stockholders' equity:
Common stock 173 173
Additional paid-in capital 76,260 76,307
Deferred compensation (118) (169)
Accumulated deficit (49,596) (48,373)
-------- --------
Total stockholders' equity 26,719 27,938
-------- --------
Total Liabilities and Stockholders' Equity $ 30,952 $ 31,687
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue from collaborative agreement $ 2,364 $ --
Expenses:
Research and development 3,137 2,560
General and administrative 780 588
-------- --------
Total expenses 3,917 3,148
-------- --------
Loss from operations (1,553) (3,148)
Interest expense (24) (57)
Interest income 355 286
-------- --------
Net loss $ (1,222) $ (2,919)
======== ========
Net loss per share $ (.07) $ (.21)
======== ========
Shares used in computing net loss per share 17,279 14,060
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,222) $ (2,919)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 166 193
Deferred compensation amortization 35 110
Change in operating assets and liabilities:
Receivables 4,000 --
Other current assets 42 (159)
Accounts payable and accrued expenses (1,550) (68)
Accrued payroll and related expenses (1) (192)
Deferred revenue 2,290 --
------- --------
Net cash provided by (used for) operating activities 3,760 (3,035)
INVESTING ACTIVITIES
Increase in short-term investments (363) (9,251)
Additions to property and equipment (337) (12)
Increase in patent costs and other assets (63) (20)
------- --------
Net cash used for investing activities (763) (9,283)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock (32) (20)
Payments on obligations under capital leases (255) (204)
------- --------
Net cash used for financing activities (287) (224)
Net increase (decrease) in cash and cash equivalents 2,710 (12,542)
Cash and cash equivalents at beginning of period 6,613 19,804
------- --------
Cash and cash equivalents at end of period $ 9,323 $ 7,262
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 24 $ 57
======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Adjustment to deferred compensation for terminations $ 15 $ --
======= ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
LA JOLLA PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of La Jolla Pharmaceutical
Company (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1997 are not necessarily indicative of the results
that may be expected for other quarters or the year ended December 31, 1997. For
more complete financial information, these financial statements, and the notes
thereto, should be read in conjunction with the audited financial statements for
the year ended December 31, 1996 included in the Company's Form 10-K filed with
the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from collaborative agreements is recorded when earned as defined under
the terms of the agreements. Payments received in advance under these agreements
are recorded as deferred revenue until earned.
ACCOUNTING STANDARD ON EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. The new
requirements for calculating primary earnings per share exclude the dilutive
effect of stock options. The adoption of this statement is not expected to have
a material impact as the Company is currently in a net loss position and
therefore stock options and warrants are not included in the computation of
earnings per share since their effect is anti-dilutive.
3. LICENSE AGREEMENT
The Company has decided not to dedicate additional resources to its inflammation
program and consequently, in May 1997, the Company canceled its exclusive
license agreement with The Regents of the University of California for certain
PLA2 inhibitor technology. (See Item 5.)
6
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LA JOLLA PHARMACEUTICAL COMPANY
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion below includes forward-looking statements, including
without limitation those dealing with the Company's drug development plans and
clinical trials, its relationship with Abbott Laboratories ("Abbott"), and other
matters described in terms of the Company's plans and expectations. The
forward-looking statements below involve risks and uncertainties and a number of
factors, both foreseen and unforeseen, could cause actual results to differ from
the Company's current expectations. The Company's ongoing Phase II/III clinical
trial of LJP 394, the Company's drug candidate for the treatment of lupus, could
result in a finding that LJP 394 is not effective in producing a sustained
reduction of dsDNA antibodies in large patient populations or does not provide a
meaningful clinical benefit. The Company's other potential drug candidates are
at earlier stages of development and involve comparable risks. Payments by
Abbott to the Company are contingent upon progress of clinical trials and the
Company's achievement of certain other milestones that might not be met. The
relationship with Abbott could be terminated by either party for various
reasons. Clinical trials could be delayed and could have negative or
inconclusive results. Additional risk factors include the uncertainty of future
revenue from product sales or other sources such as collaborative relationships,
the uncertainty of future profitability, the Company's dependence on patents and
other proprietary rights, the Company's limited manufacturing capabilities and
the Company's lack of marketing experience. Readers are cautioned not to place
undue reliance upon forward-looking statements, which speak only as of the date
hereof, and the Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date hereof.
Interested parties are urged to review the risks described and in other reports
and registration statements of the Company filed with the SEC from time to time.
OVERVIEW
Since its inception in May 1989, the Company has devoted substantially
all of its resources to the research and development of technology and potential
drugs to treat antibody-mediated diseases. The Company has never generated any
revenue from product sales and has relied upon private and public investors,
revenues from collaborative agreements, equipment lease financings and interest
income on invested cash balances for its working capital. The Company has been
unprofitable since inception and expects to incur substantial additional
operating losses for at least the next several years as it increases
expenditures on research and development and allocates significant and
increasing resources to its manufacturing, clinical trials, and marketing
activities. The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future, and the Company's historical
operations and the financial information reported below are not indicative of
its future operating results or financial condition.
The Company expects that losses will fluctuate from quarter to quarter
as a result of differences in the timing of expenses incurred and potential
revenues from collaborative arrangements. Some of these fluctuations may be
significant. The Company's research and development expenses are expected to
increase significantly in the future as the Company increases its development
efforts. As of March 31, 1997, the Company's accumulated deficit was
approximately $49.6 million.
The Company's business is subject to significant risks including, but
not limited to, the risks inherent in its research and development efforts,
including clinical trials, uncertainties associated with both obtaining and
enforcing its patents and with the patent rights of others, the lengthy,
expensive and uncertain process of seeking regulatory approvals, uncertainties
regarding government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties and dependence
on its collaborative relationship with Abbott. Even if the Company's product
7
<PAGE> 8
LA JOLLA PHARMACEUTICAL COMPANY
candidates appear promising at an early stage of development, they may not reach
the market for numerous reasons. Such reasons include the possibilities that the
products will be ineffective or unsafe during clinical trials, will fail to
receive necessary regulatory approvals, will be difficult to manufacture on a
large scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. All of the Company's
product development efforts are based upon technologies and therapeutic
approaches that are unproven. There can be no assurance that LJP 394 will
reliably induce or sustain suppression of disease-causing antibodies, or that
LJP 394 will prove to be safe or effective. Furthermore, clinical trials of LJP
394 may be viewed as a test of the Company's entire Tolerance Technology
approach. If these clinical trials are unsuccessful, the applicability of the
Company's Tolerance Technology to other antibody-mediated diseases will be
highly uncertain.
RESULTS OF OPERATIONS
The Company earned $2.4 million in revenue from its collaborative
agreement with Abbott in the first quarter of 1997 and earned no revenues for
the same period in 1996. Revenue from collaborative agreements is recorded when
earned as defined under the terms of the agreements. Payments received in
advance under these agreements are recorded as deferred revenue until earned.
Total payments of approximately $4.6 were received in advance under the
collaborative agreement with Abbott in the first quarter of 1997. The receipt of
payments and the recognition of revenue from the collaborative agreement with
Abbott may vary significantly from quarter to quarter and from year to year
depending on the level of research effort expended and the timing of milestone
payments. There can be no assurance that the Company will realize any further
revenue from the Abbott arrangement or any other collaborative arrangement.
For the three months ended March 31, 1997, research and development
expenses increased to $3.1 million from $2.6 million for the same period in
1996. The increase was due primarily to the conduct of the Company's toxicology
and clinical programs including the Phase II/III clinical trial of LJP 394,
manufacturing scale-up activities, the expansion of the Company's research and
development programs and increased facilities expenditures. The Company's
research and development expenses are expected to increase significantly in the
future as the organization grows, efforts to develop additional drug candidates
are intensified and potential products progress into and through clinical
trials.
General and administrative expenses increased to $780,000 for the three
months ended March 31, 1997, from $588,000 for the same period in 1996. Several
factors contributed to this increase, including increased personnel to support
increased research and development and clinical activities, increased facilities
expenditures and expanded business development activities. The Company expects
general and administrative expenses to increase at a greater rate in the future
because, among other reasons, the Company has leased additional space to house
expanded research and development and manufacturing activities. In the future,
general and administrative expenses may increase due to payment obligations to a
financial consultant arising in connection with certain payments expected from
Abbott under the collaborative agreement.
Interest income increased to $355,000 for the three months ended March
31, 1997 from $286,000 for the same period in 1996. The increase was due to
higher investment balances following receipt of the net proceeds of the
Company's follow-on public offering in July and August 1996, its sale of stock
to Abbott in December 1996, the initial license payment from Abbott received in
January 1997 and the receipt of revenue payments under the collaborative
agreement with Abbott during the first quarter of 1997. For the three months
ended March 31, 1997, interest expense decreased to $24,000 from $57,000 for the
same period in 1996. The decrease was the result of decreases in the Company's
capital lease obligations as compared to the same period in 1996.
8
<PAGE> 9
LA JOLLA PHARMACEUTICAL COMPANY
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had incurred a cumulative net loss
since inception of approximately $49.6 million, and had financed its operations
through private and public offerings of its securities, payments under
collaborative agreements, capital and operating lease transactions, and interest
income on its invested cash balances. As of March 31, 1997, the Company had
raised $75.6 million in net proceeds since inception from sales of equity
securities.
At March 31, 1997, the Company had $27.3 million in cash, cash
equivalents and short-term investments, as compared to $24.2 million at December
31, 1996. The Company's working capital at March 31, 1997 was $24.4 million, as
compared to $25.9 million at December 31, 1996. The increases in cash, cash
equivalents and short-term investments resulted from the receipt of the initial
license fee and revenue payments under the Company's collaborative agreement
with Abbott and the financing of property and equipment under operating leases,
partially offset by the continued use of the Company's cash toward expenses of
ongoing clinical and research and development programs and related general and
administrative expenses. The decrease in working capital resulted from the
deferral of unearned advance revenue payments under the collaborative agreement
with Abbott. The Company invests its cash in corporate and U.S. Government
backed debt instruments.
As of March 31, 1997, the Company had acquired an aggregate of $4.9
million in property and equipment, of which approximately $3.2 million had been
acquired through capital lease obligations. In addition, the Company leases its
office and laboratory facilities and certain property and equipment under
operating leases. The Company has no material commitments for the acquisition of
property and equipment but anticipates increasing investment in property and
equipment in connection with the enhancement of its manufacturing and research
capabilities.
The Company intends to use its financial resources to fund research and
development, manufacturing scale-up and for working capital and other general
corporate purposes. Anticipated near-term expenses include the expansion of
manufacturing and research activities, including development of other drug
candidates in addition to LJP 394. The amounts actually expended for each
purpose may vary significantly depending upon numerous factors, including the
results of clinical studies, the timing of regulatory applications and
approvals, and technological advances. Expenditures will also depend upon the
establishment and progress of collaborative arrangements, contract research and
the availability of other financing. There can be no assurance that these funds
will be available on acceptable terms, if at all.
The Company anticipates that its existing capital and interest earned
thereon will be sufficient to fund the Company's operations as currently planned
through 1998. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and development
programs, the size and complexity of these programs, the scope and results of
clinical trials, the time and costs involved in applying for regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, competing technological and market developments, the
ability of the Company to maintain its collaborative arrangement with Abbott and
to establish and maintain additional collaborative relationships and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. The Company expects to incur significant losses each year for at
least the next several years as it expands its current research and development
programs and invests increasing amounts of capital in manufacturing scale-up and
administration of a more complex organization. It is possible that the Company's
cash requirements will exceed current projections and that the Company will
therefore need additional financing sooner than currently expected.
The Company has no current means of generating cash flow from
operations, and its lead drug candidate, LJP 394, will not generate revenues, if
at all, until it has been proven safe and effective, has received regulatory
approval, and has been successfully commercialized, a process that is expected
to
9
<PAGE> 10
LA JOLLA PHARMACEUTICAL COMPANY
take at least the next several years. The Company's other drug candidates are
much less developed than LJP 394. There can be no assurance that the Company's
product development efforts with respect to LJP 394 or any other drug candidate
will be successfully completed, that required regulatory approvals will be
obtained, or that any product, if introduced, will be successfully marketed or
achieve commercial acceptance. Accordingly, the Company must continue to rely
upon outside sources of financing to meet its capital needs for the foreseeable
future.
Abbott's funding of the development costs for LJP 394 and milestone
payments are expected to enhance the Company's short-term liquidity by
minimizing the expenditure of the Company's own funds on further development of
LJP 394. However, the Company anticipates increasing expenditures on
manufacturing activities and the development of other drug candidates, and in
the long run, the Company's consumption of cash will necessitate additional
sources of financing. Furthermore, the Company has no internal sources of
liquidity, and termination of the Abbott arrangement would have a serious
adverse effect on the Company's ability to generate sufficient cash to meet its
needs.
The Company will continue to seek capital through any appropriate
means, including issuance of its securities and establishment of additional
collaborative arrangements. However, there can be no assurance that additional
financing will be available on acceptable terms, and the Company's negotiating
position in its capital-raising efforts may worsen as it continues to use its
existing resources. Financing through collaborative arrangements is uncertain
because payments under the Company's collaborative agreement with Abbott are
subject to certain termination rights, including related to progress in clinical
trials for LJP 394, and there is no assurance that the Company will be able to
enter into further collaborative relationships.
ITEM 5. OTHER INFORMATION
In light of the Company's relationship with Abbott and its anticipated
emphasis on use of its Tolerance Technology to develop additional drug
candidates for antibody mediated diseases such as myasthenia gravis, the Company
has decided not to dedicate additional resources to its inflammation program and
has canceled its exclusive license agreement with The Regents of the University
of California for certain PLA2 inhibitor technology. The Company has not
determined if or when it will reinitiate research and development activity in
the area of inflammation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
27 Financial Data Schedule 13
(b) REPORTS ON FORM 8-K
None
</TABLE>
10
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LA JOLLA PHARMACEUTICAL COMPANY
SIGNATURE
MARCH 31, 1997
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.
La Jolla Pharmaceutical Company
Date: May 12, 1997 By: /s/ Wood C. Erwin
---------------------------
Wood C. Erwin
Vice President Finance
Chief Financial Officer
Signed both on behalf of the Registrant and
as Principal Accounting Officer.
11
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LA JOLLA PHARMACEUTICAL COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
27 Financial Data Schedule 13
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,323
<SECURITIES> 17,984
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,191
<PP&E> 4,884
<DEPRECIATION> 3,348
<TOTAL-ASSETS> 30,952
<CURRENT-LIABILITIES> 4,139
<BONDS> 94
0
0
<COMMON> 173
<OTHER-SE> 26,546
<TOTAL-LIABILITY-AND-EQUITY> 30,952
<SALES> 0
<TOTAL-REVENUES> 2,364
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (1,222)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
