<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934. For the quarterly period ended September 30, 1999.
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
--------------
VALENTIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3156660
- -------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
863A Mitten Rd., Burlingame, CA 94010
- -------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
650-697-1900
---------------------------------------------------
(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, $.001 par
value, was 26,386,236 as of October 31, 1999.
Page 1 of 18
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VALENTIS, INC.
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONs 10
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 16
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5: OTHER INFORMATION 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
Page 2 of 18
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
VALENTIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
---- ----
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,088 $ 4,785
Short-term investments 23,627 19,522
Note receivable from PolyMASC Pharmaceuticals plc -- 1,000
Other receivables 945 1,800
Other current assets 774 1,392
-------- -------
Total current assets 28,434 28,499
Property and equipment, net 11,850 11,897
Long-term investments 7,123 14,830
Goodwill and other intangible assets 14,453 9,012
Deposits and other assets 189 189
---------- -----------
$ 62,049 $ 64,427
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,404 $ 3,691
Other accrued liabilities 1,114 1,309
Deferred revenue 5,076 4,914
Current portion of long-term debt 3,162 3,124
------- -------
Total current liabilities 12,756 13,038
Long-term debt 4,680 5,459
Commitments
Stockholders' equity:
Common stock 26 22
Additional paid-in capital 139,322 119,746
Deferred compensation (373) (463)
Accumulated other comprehensive loss (66) (109)
Accumulated deficit (94,296) (73,266)
--------- ---------
Total stockholders' equity 44,613 45,930
--------- ---------
$ 62,049 $ 64,427
======== ========
</TABLE>
See accompanying notes
Page 3 of 18
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Collaborative research and development revenue $ 1,185 $ 773
Operating expenses:
Research and development 5,487 3,429
General and administrative 1,819 1,076
Acquired in-process research and development 14,347 --
Amortization of goodwill and other acquired intangibles 835 --
-------- --------
Total operating expenses 22,488 4,505
-------- --------
Loss from operations (21,303) (3,732)
Interest income 518 679
Interest expense and other (245) (146)
-------- --------
Net loss $(21,030) $ (3,199)
======== ========
Basic and diluted net loss per share $ (0.89) $ (0.25)
======== ========
Shares used in computing basic and diluted net loss per share 23,610 12,736
====== ======
</TABLE>
See accompanying notes
Page 4 of 18
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (21,030) $ (3,199)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 1,008 584
Amortization 819 --
Amortization of deferred compensation 56 78
Purchase of in-process research and development with common stock 14,347 --
Changes in operating assets and liabilities:
Other receivables 862 (388)
Prepaid expenses and other 662 (215)
Deferred revenue 162 --
Accounts payable (1,399) (334)
Accrued liabilities (195) 108
--------- ---------
Net cash used in operating activities (4,708) (3,366)
--------- ---------
Cash flows from investing activities
Net cash acquired in acquisition 422 --
Purchase of property and equipment (456) (2,544)
Deposits and other assets -- --
Purchase of available-for-sale investments -- (2,010)
Maturities of available-for-sale investments 3,602 1,070
--------- ---------
Net cash provided by (used in) investing activities 3,568 (3,484)
--------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt -- 2,502
Payments on long-term debt (741) (370)
Proceeds from issuance of common stock, net of repurchases 184 203
--------- ---------
Net cash provided by financing activities (557) 2,335
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,697) (4,515)
Cash and cash equivalents, beginning of period 4,785 15,172
--------- ---------
Cash and cash equivalents, end of period $ 3,088 $ 10,657
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 203 $ 143
========= =========
Schedule of non-cash transactions:
Construction in progress included in accrued liabilities $ -- $ 177
========= =========
Tangible and intangible assets acquired for shares of common stock, net of cash
acquired and liabilities assumed $ 5,334 $ --
========= =========
</TABLE>
See accompanying notes
Page 5 of 18
<PAGE>
VALENTIS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Valentis, Inc. ("Valentis" or the "Company") in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in the Company's
annual financial statements as required by generally accepted accounting
principles have been condensed or omitted. The interim financial statements,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results for the
interim periods ended September 30, 1999 and 1998. The balance sheet at June
30, 1999 is derived from the audited financial statements at that date but
does not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The results of operations for the three months ended September 30, 1999 are not
necessarily indicative of the results of operations to be expected for the
fiscal year, although the Company expects to incur a substantial loss for the
year ended June 30, 2000. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended June 30,
1999, which are contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
On March 18, 1999, the Company completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On August 27, 1999, the Company acquired all the outstanding
shares of PolyMASC Pharmaceuticals plc ("PolyMASC").
Both transactions were accounted for under the purchase method of accounting.
The accompanying condensed consolidated financial statements reflect the
revenues and expenses of PolyMASC and GeneMedicine from their acquisition dates
and include the accounts of the Company and its wholly owned subsidiary,
PolyMASC. All significant intercompany balances and transactions have been
eliminated.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. For some
contracts, the Company is reimbursed based on the costs associated with the
number of full time equivalent employees working on each specific contract over
the term of the agreement. Research and development expenses under the
collaborative research agreements approximate or exceed the revenue recognized
under such agreements over the term of the respective agreements.
Deferred revenue results when the Company does not incur the required level of
effort during a specific period in comparison to funds received under the
respective contracts or if additional work may be required to satisfy a contract
obligation. In addition, as a result of the GeneMedicine merger, deferred
revenue at September 30, 1999 includes an obligation related to a research
agreement with Roche Holdings Ltd. ("Roche"). Pursuant to the terms of the Roche
agreement, the Company may be obligated to conduct research and development at
its own expense in an amount not to exceed $5 million at the end of the
agreement. The Company has, therefore, deferred a portion of research funding
received from Roche under this agreement to provide for this obligation.
Milestone payments, if any, will be recognized pursuant to collaborative
agreements upon the achievement of specified milestones, such as the filing of
Investigational New Drug Applications, commencement of clinical trials or
receipt of regulatory approvals.
Page 6 of 18
<PAGE>
3. NET LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" ("SFAS 128"), which requires the presentation of
basic earnings (loss) per share and diluted earnings (loss) per share, if
dilutive. Basic earnings per share is computed by dividing income or loss
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period net of certain common shares outstanding which
are subject to continued vesting and the Company's right of repurchase. Basic
earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted net loss per share has not been presented
separately as, given the Company's net loss position, the result would be
anti-dilutive.
The following have been excluded from the calculation of net loss per share
because the effect of inclusion would be antidilutive: 41,976 common shares
which are outstanding but are subject to the Company's right of repurchase which
expires ratably over 4 years; options to purchase 2,850,067 shares of common
stock at a weighted average price of $6.67 per share and warrants to purchase
62,378 shares of common stock at a weighted average exercise price of $3.88 per
share. The repurchasable shares, options and warrants will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
A reconciliation of shares used in the calculation of basic and diluted net loss
per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Net loss $ (21,030) $ (3,199)
========= ========
BASIC AND DILUTED
Weighted average shares of common stock outstanding 23,652 12,872
Common shares subject to repurchase (42) (136)
--------- --------
Weighted average shares of common stock used in
computing net loss per share 23,610 12,736
========= ========
Basic and diluted net loss per share $ (0.89) $ (0.25)
========= ========
</TABLE>
4. ACQUISITION OF POLYMASC PHARMACEUTICALS PLC ("POLYMASC")
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC").
In conjunction with the acquisition, prior to closing, Valentis loaned PolyMASC
$1,000,000 which was secured by certain intellectual property. Under the terms
of the acquisition agreement, each outstanding share of PolyMASC common stock
was exchanged, at a fixed exchange ratio of 0.209, for newly issued shares of
common stock of Valentis. This resulted in the issuance of approximately 4.2
million Valentis shares, valued at about $19.3 million based on an average
Valentis stock price of $4.56 at the date the transaction was announced. Dr.
Gillian E. Francis, Chief Executive Officer of PolyMASC, has joined the Board of
Directors of Valentis and will serve as Managing Director of PolyMASC. The
Company intends to manage PolyMASC as a wholly owned subsidiary of Valentis. The
acquisition was accounted for as a purchase.
Page 7 of 18
<PAGE>
The total cost of the merger was approximately $20.1 million, determined as
follows (in thousands):
<TABLE>
<S> <C>
Fair value of Valentis Common Stock (based on the per share fair value at the
date the agreement was announced) $19,266
Valentis transaction costs 837
-------
$20,103
=======
</TABLE>
Based on a valuation of tangible and intangible assets and liabilities assumed,
Valentis has allocated the total cost of the acquisition to the net assets of
PolyMASC as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired $ 1,600
In-process research and development 14,347
Intangible assets - assembled workforce and goodwill 6,261
Liabilities assumed (including PolyMASC transaction costs) (2,105)
-------
$20,103
=======
</TABLE>
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing or
has been approved for marketing. PolyMASC's strategy has been to develop and
commercialize its products through alliances with pharmaceutical and
biotechnology companies.
A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $14.3 million of the purchase
price being charged to in-process research and development. The intangible
assets, consisting of assembled workforce and goodwill, were assigned a value of
$6.2 million and will be amortized over their estimated useful lives of three
years. The acquired in-process research and development is included in the
Valentis Statement of Operations in the quarter ended September 30, 1999.
The unaudited pro forma information for the Company for the quarter ended
September 30, 1999, had the acquisition occurred as of July 1, 1999, is as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999
----
<S> <C>
Net revenue $ 1,188
Net loss $(7,200)
Net loss per share $ (0.27)
</TABLE>
The unaudited pro forma combined results for the quarter ended September 30,
1999 exclude the effect of the write-off of acquired in-process research and
development cost of $14.3 million, as such amount is non-recurring. The
unaudited pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results that would have occurred
had the transaction been completed at the beginning of the period indicated, nor
is it necessarily indicative of future operating results.
Page 8 of 18
<PAGE>
5. COMPREHENSIVE INCOME (LOSS)
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss $(21,030) $(3,199)
Net unrealized gain (loss) on available-for-sale securities (74) 143
Net unrealized foreign exchange translation adjustment 31 --
-------- -------
Comprehensive income (loss) $(21,073) $(3,056)
======== =======
</TABLE>
Page 9 of 18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
OVERVIEW
The Company develops proprietary technologies and applies its preclinical and
early clinical development expertise to create novel therapeutics. The Company's
core technologies include multiple gene delivery and gene expression systems and
PEGylation technologies designed to improved the safety, efficacy and dosing
characteristics of genes, proteins, peptides, peptidomimetics (peptide-like
small molecules), antibodies and replicating and non-replicating viruses. These
technologies are covered by a broad patent portfolio that includes issued U.S.
and European claims. This expanded portfolio of delivery technologies allows
Valentis to maintain its focus on creating improved versions of currently
marketed products as well as solving safety, efficacy and compliance issues with
biologics in development. Valentis' commercial strategy is to enter into
corporate collaborations for full-scale clinical development and marketing and
sales of products. Valentis itself, or through its PolyMASC subsidiary,
currently has corporate collaborations with:
- Roche Holdings Ltd. ("Roche") for cancer immunotherapeutics,
- Eli Lilly & Co. ("Lilly") to develop treatments for breast and ovarian
cancer using the BRCA1 gene,
- Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment for
cystic fibrosis using the CFTR gene,
- Transkaryotic Therapies Inc. for PEGylation of certain proteins,
- Onyx Pharmaceuticals Inc. for a PEGylated virus-based cancer
therapeutic,
- Bayer Corporation for a PEGylated Factor VIII, and
- DSM Biologics and Qiagen N.V. for plasmid manufacturing.
To date, substantially all revenue has been generated by collaborative research
and development agreements from corporate partners, and no revenue has been
generated from product sales. Under the terms of its corporate collaborations,
the Company generally receives research and development funding on a quarterly
basis in advance of associated research and development costs. The Company
expects that future revenue will be derived in the short-term from research and
development agreements and milestone payments and in the long-term from
royalties on product sales.
The Company is conducting operations in California, Texas and London. The
Company has incurred significant losses since inception and expects to incur
substantial losses for the foreseeable future, primarily due to the expansion of
its research and development programs and because the Company does not expect to
generate revenue from the sale of products in the foreseeable future, if at all.
The Company expects that operating results will fluctuate from quarter to
quarter and that such fluctuations may be substantial. The Company expects to
increase both research and administrative expenditures in future periods. As of
September 30, 1999, the Company's accumulated deficit was approximately $94.3
million.
BUSINESS ACQUISITIONS
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc
("PolyMASC"). In conjunction with the acquisition, prior to closing, Valentis
loaned PolyMASC $1,000,000 which was secured by certain intellectual
property. Under the terms of the acquisition agreement, each outstanding
ordinary share of PolyMASC
Page 10 of 18
<PAGE>
was exchanged, at a fixed exchange ratio of 0.209, for newly issued shares of
common stock of Valentis. This resulted in the issuance of approximately 4.2
million Valentis shares valued at about $19.3 million based on an average
Valentis stock price of $4.56 at the date the transaction was announced. The
purchase price also included approximately $837,000 of transaction costs, for an
aggregate purchase price of $20.1 million. Dr. Gillian E. Francis, Chief
Executive Officer of PolyMASC, has joined the Board of Directors of Valentis and
will serve as Managing Director of PolyMASC. The Company intends to manage
PolyMASC as a wholly owned subsidiary of Valentis. The acquisition was accounted
for as a purchase.
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing or
has been approved for marketing. PolyMASC's strategy has been to develop and
commercialize its products through alliances with pharmaceutical and
biotechnology companies.
A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $14.3 million of the purchase
price being charged to in-process research and development. The intangible
assets, consisting of assembled workforce and goodwill, were assigned a value of
$6.2 million and will be amortized over their estimated useful lives of three
years. The acquired in-process research and development is included in the
Valentis Condensed Consolidated Statement of Operations in the quarter ended
September 30, 1999.
With the acquisition of London-based PolyMASC, Valentis expanded its delivery
technologies and has a more diversified portfolio of products in clinical and
preclinical development. The acquisition broadened Valentis' intellectual
property portfolio in biologics delivery, creating what it believes is the first
company offering a broad array of technologies and intellectual property in
biologics delivery. PolyMASC will continue to focus primarily on research and
preclinical development of PEGylation technologies and products. PEGylation is
an established technology that involves the attachment of the polymer
polyethyleneglycol ("PEG") to therapeutics to alter their pharmacokinetics
(distribution in the body, metabolism and excretion). The alteration of the
pharmacokinetics of biologics due to PEGylation may lead to improved dosing
intervals and may also have beneficial effects on safety and efficacy.
On March 18, 1999, Megabios Corp. completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On April 29, 1999, the combined company was renamed Valentis,
Inc. ("the Company"). Each outstanding share of GeneMedicine common stock was
converted into 0.5710 of a share of the common stock of the Company. The merger
resulted in the issuance of approximately 9.1 million shares of the Company's
common stock, valued at $38.7 million. The purchase price also included
approximately $850,000 related to outstanding GeneMedicine stock options and
outstanding warrants assumed by the Company and $1.7 million of transaction
costs, for an aggregate purchase price of $41.3 million.
The merger transaction was accounted for as a purchase. A write-off of $25.9
million for in-process research and development acquired from GeneMedicine was
included in the Company's Condensed Consolidated Statement of Operations (see
detailed discussion under "Acquisition of GeneMedicine Research and Development
Programs" below). The intangible assets acquired will be amortized over their
estimated useful lives of 3 years.
Page 11 of 18
<PAGE>
RESULTS OF OPERATIONS
The Company's research and development revenue for the three months ended
September 30, 1999 totaled approximately $1.2 million compared to $773,000 for
the corresponding period of 1998. The 1999 revenue was attributable to amounts
earned for collaborative research and development performed under the Company's
corporate collaborations with Roche and Lilly of approximately $1.0 million and
$87,000, respectively, and $98,000 earned under other agreements. The 1998
revenue was attributable primarily to amounts earned for research and
development performed under the Company's corporate collaboration with Lilly. No
revenue from royalties from product sales has been earned under any corporate
collaboration to date.
Research and development expenses increased to $5.5 million for the quarter
ended September 30, 1999 from $3.4 million in the same period of 1998. The
increases in 1999 were primarily attributable to the addition of staff,
facilities and projects resulting from the acquisition of PolyMASC in August
1999 and the merger with GeneMedicine in March 1999. The Company expects
research and development expenses to increase as the Company continues to expand
its independent and collaborative research and development programs.
General and administrative expenses for the quarter ended September 30, 1999
increased to $1.8 million from $1.1 million in the corresponding period of 1998.
The increase in 1999 compared to 1998 was primarily due to the addition of
staff, facilities and projects resulting from the acquisition of PolyMASC in
August 1999 and the merger with GeneMedicine in March 1999. The Company expects
general and administrative expenses to increase due to business development
activities and to support expanded research and development activities.
Interest income (expense), net was $273,000 for the quarter ended September 30,
1999 compared to $533,000 for the corresponding quarter of the prior year. The
decrease in interest income (expense), net resulted primarily from increased
interest expenses on higher outstanding balances on the Company's equipment
financing lines of credit and a decrease in interest income resulting from lower
average cash, cash equivalent and short term investment balances.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $33.8 million in cash, cash
equivalents and investments compared to $39.1 million at June 30, 1999. Net cash
used in the Company's operations for the quarter ended September 30, 1999 was
$4.7 million compared to $3.4 million used in the corresponding quarter of 1998.
Cash was used primarily to fund increasing levels of research and development
and general and administrative activities. The Company's capital expenditures
were $456,000 for the quarter ended September 30, 1999 compared to $2.5 million
used in the corresponding quarter of 1998.
In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank, which was subsequently fully utilized. At September 30, 1999,
the outstanding balance was $6.3 million under the line of credit. In accordance
with the terms of the agreement, the entire balance was converted into term
loans at interest rates ranging from 8.25% to 9.0% due in equal monthly
installments. The loans are secured by tangible personal property, other than
the assets securing the equipment financing, accounts receivable and funds on
deposit. As a condition of the credit line, the Company must maintain a minimum
cash and short-term investments balance of not less than the greater of the
prior two quarters net cash usage or 90% of the total principal drawn under the
line of credit.
In May 1996, the Company entered into an equipment financing agreement for up to
$2,700,000 with a financing company. The Company has financed $2,700,000 in
equipment purchases under this agreement structured as loans. The equipment
loans are to be repaid over 48 months at interest rates ranging from 15.2% to
16.2% and are secured by the related equipment. As of September 30, 1999, the
outstanding balance under this financing agreement was $1.6 million.
Page 12 of 18
<PAGE>
The Company anticipates that its cash and cash equivalents, committed funding
from existing corporate collaborations, lines of credit and projected interest
income, will enable the Company to maintain its current and planned operations
at least through December 2000. However, the Company may require additional
funding prior to such time. The Company's future capital requirements will
depend on many factors, including scientific progress in its research and
development programs, the size and complexity of such programs, the scope and
results of preclinical studies and clinical trials, the ability of the Company
to establish and maintain corporate collaborations, the time and costs involved
in obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing preclinical and clinical materials and
other factors not within the Company's control. The Company is seeking
additional collaborative agreements with corporate partners and may seek
additional funding through public or private equity or debt financing. The
Company may not be able to enter into any such agreements, however, or if
entered into, any such agreements may not reduce the Company's funding
requirements. The Company expects that additional equity or debt financing may
be required to fund its operations. Additional financing to meet the Company's
funding requirements may not be available on acceptable terms or at all.
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain, which could materially adversely affect the Company's
business, financial condition and results of operations.
ACQUISITION OF GENEMEDICINE RESEARCH AND DEVELOPMENT PROGRAMS
There are seven primary GeneMedicine research and development programs that the
Company acquired in March 1999. The Company's management is primarily
responsible for estimating the fair value of the purchased in-process research
and development. Each of the programs was valued at the date of acquisition
based on a discounted probable future cash flow analysis using a discount rate
of 40%, which management believes adequately reflects the substantial risk of
gene therapy research and development. In the valuation model, it is assumed
that for each program preclinical studies and clinical trials are successfully
completed, regulatory approval to market the product is obtained, a marketing
partner is secured and the Company is able to manufacture the product in
commercial quantities. Each of these activities is subject to significant risks
and uncertainties.
The seven primary research and development programs that the Company acquired
were valued as follows (in thousands):
<TABLE>
<S> <C>
Cancer gene medicines (IL-2, IFN-(alpha), IL-12) $ 8,100
Hemophilia gene medicines (Factor VIII and IX) 1,240
Growth Factor gene medicines (IGF-I) 5,180
Pulmonary gene medicines (AAT GM) 1,730
Vascular Growth Factor gene medicines (VEGF) 4,620
Drug-controlled GeneSwitch(TM)technology 3,930
Nucleic Acid Programs/(APC) 1,070
-------
$25,870
=======
</TABLE>
Prior to March 1999, over the previous five years, GeneMedicine, Inc. incurred
approximately $50 million of research and development expenses in the
development of its current research and development programs. Costs to complete
these projects could aggregate to approximately $70 million over the next five
to seven years. The Company presently anticipates that gene medicines (which
utilize its proprietary developmental-stage technologies) will obtain FDA
approval beginning at various times beginning in 2005 through 2008. If such gene
medicines are successfully completed, the Company will receive a royalty on the
product sales.
Page 13 of 18
<PAGE>
The nature of the efforts required for developing the acquired in-process
research and development into technologically feasible and commercially viable
products principally relate to the successful performance of additional
preclinical studies and clinical trials. Though the Company expects that the
acquired in-process technology will be successfully developed, there can be no
assurance that commercial or technical viability of these products will be
achieved. While the expectations and promise of gene therapy are great, clinical
efficacy has not yet been demonstrated. Many approaches to gene therapy are
being pursued by pharmaceutical and biotechnology companies, but there are
currently no marketed gene therapy products and none are expected for the next
several years.
ACQUISITION OF POLYMASC RESEARCH AND DEVELOPMENT PROGRAM
PEGylation is the primary PolyMASC research and development program that the
Company acquired in August 1999. The Company's management is primarily
responsible for estimating the fair value of the purchased in-process research
and development. The program has been valued based on a discounted probable
future cash flow analysis using a discount rate of 40%, which management
believes adequately reflects the substantial risk of biologics delivery research
and development. In the valuation model, it is assumed that for product
candidates based on PolyMASC's technology, preclinical studies and clinical
trials are successfully completed, regulatory approval to market the product
candidates is obtained, a marketing partner is secured and the Company is able
to manufacture the product in commercial quantities. Each of these activities is
subject to significant risks and uncertainties. The PEGylation technology that
the Company acquired was valued at $14.3 million. The Company currently has
corporate collaborations with Onyx Pharmaceuticals, Transkaryotic Technologies
and Bayer Pharmaceuticals under which it is developing product candidates using
its PEGylation technology.
Before a product can be successfully marketed, the Company's corporate partners
must fund the completion of preclinical studies, clinical studies and, if
successfully completed, the market introduction of the new PEGylated therapies.
Product efficacy and dose responsiveness must be proven in Phase II and Phase
III human clinical trials and FDA approval is required before market
introduction. The Company currently estimates that clinical development
activities could be completed and revenues could begin to accrue to the Company
with the projected introduction of a product in 2002. Management estimates that
the remaining research and development efforts will total more than $8 million
over the next six years.
IMPACT OF THE YEAR 2000
A major issue currently faced by all industries is the Year 2000 ("Y2K")
computer issue. The problem arises from the use in computer hardware and
software of the last two digits rather than four digits to define the year. As a
result, computer programs are unable to distinguish between a year which begins
with "20" or "19". This, can then cause failures in computer systems and
applications, or create erroneous results unless steps are taken to prevent such
failures and errors. The Y2K problem is also compounded by the fact that many
computer and telecommunication systems are interdependent, both within the
United States and throughout the world. Thus, due to interdependence, the
failure of one system may lead other systems to fail, even if these systems are
themselves Y2K compliant.
In order to address this issue, the Company has put a Y2K plan in place to
identify, evaluate and modify its current systems or replace and implement new
systems. Identification includes reviewing and assessing the potential systems
within the Company and at key third party vendors that would be affected by
theY2K issue. A Y2K Committee, comprised of members of all the Company's
departments and senior management, has been established to evaluate, assess and
prioritize the Company's internal systems and key vendors' systems.
In its evaluation stage, the Company determined that it would be required to
upgrade or replace a portion of its accounting software to a Y2K compliant
version. The accounting software upgrade was completed in February 1999. In
addition to the accounting system upgrade, the Company has reviewed its key
informational,
Page 14 of 18
<PAGE>
operational and manufacturing systems and has determined the Y2K issue will
not pose significant operational problems for its business activities. The
Company has also completed communications with its significant suppliers to
determine the extent to which the Company's operations are vulnerable to
those third parties' failure to solve their own Y2K issues. The Company has
determined that no significant issues exist that would cause it to believe
that it cannot continue to use the services of these third parties. However,
if such suppliers or other third parties with which the Company transacts
business experience failures in their computer systems or equipment due to
Y2K non-compliance, it could affect the Company's ability to process
transactions or engage in ordinary business activities. The Company has not
used an independent source to verify and validate its Year 2000 readiness or
that of its partners. Additionally, the Company has no contingency plans to
deal with Year 2000 failures.
The financial impact of the required upgrades and conversion of computer
software relating to the Y2K issue was funded through operating cash flows and
was less than $20,000. All costs to date have been expensed as incurred.
However, costs incurred to date, do not take into account the costs, if any,
that might be incurred as a result of Y2K-related failures that occur despite
the Company's implementation of its Y2K plan. Although the Company is not aware
of any material operational issues associated with preparing its internal
systems for the Year 2000, or material issues with respect to the adequacy of
third party systems, the Company could experience unanticipated material
negative consequences and/or material costs caused by undetected errors or
defects in such systems or by the Company's failure to adequately prepare for
the results of such errors or defects, including the costs of related
litigation, if any. The impact of such consequences could have a material
adverse effect on the Company's business, financial condition or results of
operations
FINANCIAL MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company maintains a strict investment policy that ensures the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company's investments consist primarily of commercial
paper, medium term notes, U.S. Treasury notes and obligations of U.S. Government
agencies and corporate bonds. The table below presents notional amounts and
related weighted-average interest rates by year of maturity for the Company's
investment portfolio and long-term debt obligations (in thousands, except
percentages).
<TABLE>
<CAPTION>
1999 2000 Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash equivalents
Fixed rate.................. $ 2,259 -- $ 2,259
Average rate................ 5.28% -- 5.28%
Short-term investments
Fixed rate.................. $23,627 -- $23,627
Average rate................ 5.70% -- 5.70%
Long-term investments
Fixed rate.................. -- $7,123 $ 7,123
Average rate................ -- 4.90% 4.90%
----------------- ----------------- -----------------
Total investment securities.... $25,886 $7,123 $33,009
Average rate................... 5.66% 4.90% 5.50%
</TABLE>
Page 15 of 18
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on July 30, 1999 to
approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 30,000,000 to
45,000,000.
The voting of stockholders with respect to the proposal was as
follows:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
12,961,451 745,671 273,471
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and Exchange
Commission).
b. Reports on Form 8-K
On September 13, 1999, the Registrant filed a current report on
Form 8-K to report that it had acquired PolyMASC Pharmaceuticals
plc, a biotechnology company organized under English law, pursuant
to an Ordinary and Deferred Share Offer on August 27, 1999.
Page 16 of 18
<PAGE>
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.
Valentis, Inc.
--------------
(registrant)
Date: November 12, 1999 /s/ Benjamin F. McGraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer,
and Chairman of the Board of
Directors
Date: November 12, 1999 /s/ Bennet Weintraub
--------------------
Bennet Weintraub
Chief Financial Officer and Vice
President Finance
(Principal Financial and Accounting
Officer)
Page 17 of 18
<PAGE>
VALENTIS, INC.
EXHIBIT INDEX
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form
10-Q submitted to the Securities and Exchange Commission).
Page 18 of 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,088
<SECURITIES> 23,627
<RECEIVABLES> 945
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,434
<PP&E> 20,879
<DEPRECIATION> 9,029
<TOTAL-ASSETS> 62,049
<CURRENT-LIABILITIES> 12,756
<BONDS> 0
0
0
<COMMON> 139,348
<OTHER-SE> (94,735)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,185
<TOTAL-REVENUES> 1,185
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 0
<INCOME-TAX> 32
<INCOME-CONTINUING> (21,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,030)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
