<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 December 31, 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 0-22987
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VALENTIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3156660
- --------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
863A Mitten Rd., Burlingame, CA 94010
- --------------------------------------------- ---------------------------------
(Address of principal offices) (Zip Code)
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 26,745,618 as of January 31, 2000.
Page 1 of 18
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VALENTIS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
Page
----
<S> <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>
DECEMBER 31, JUNE 30,
1999 1999
---- ----
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,472 $ 4,785
Short-term investments 19,703 19,522
Note receivable from PolyMASC Pharmaceuticals - 1,000
Other receivables 577 1,800
Prepaid expenses and other 927 1,392
------ ------
Total current assets 29,679 28,499
Property and equipment, net 11,066 11,897
Long-term investments - 14,830
Goodwill and other intangible assets 12,938 9,012
Other assets 189 189
------ ------
$ 53,872 $ 64,427
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,551 $ 3,691
Other accrued liabilities 957 1,309
Deferred revenue 5,893 4,914
Current portion of long-term debt 3,206 3,124
------ ------
Total current liabilities 12,607 13,038
Long-term debt 4,227 5,459
Commitments
Stockholders' equity:
Common stock 26 22
Additional paid-in capital 139,546 119,746
Deferred compensation, net of amortization (318) (463)
Accumulated other comprehensive loss (48) (109)
Accumulated deficit (102,168) (73,266)
------ ------
Total stockholders' equity 37,038 45,930
------ ------
$ 53,872 $ 64,427
====== ======
</TABLE>
See accompanying notes
Page 3 of 18
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Collaborative research and development revenue $ 2,150 $ 613 $ 3,238 $ 1,386
Research and development grant revenue 167 -- 264 --
----- ----- ----- -----
Total revenue 2,317 613 3,502 1,386
Operating expenses:
Research and development 7,087 3,357 12,574 6,786
General and administrative 1,822 1,018 3,641 2,094
Acquired in-process research and development -- -- 14,347 --
Amortization of goodwill and other acquired intangibles 1,499 -- 2,334 --
------ ----- ------ -----
Total operating expenses 10,408 4,375 32,896 8,880
------ ----- ------ -----
Loss from operations (8,091) (3,762) (29,394) (7,494)
Interest income 426 622 944 1,301
Interest expense and other (207) (198) (452) (344)
---- ---- ---- ----
Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.30) $ (0.26) $ (1.16) $ (0.51)
======== ======== ======== ========
Shares used in computing basic and diluted net loss per share 26,363 12,798 24,987 12,767
======== ======== ======== ========
</TABLE>
See accompanying notes
Page 4 of 18
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(28,902) $ (6,537)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 1,957 1,217
Amortization 2,334 --
Amortization of deferred compensation 113 295
Purchase of in-process research and development with common stock 14,347 --
Changes in operating assets and liabilities:
Other receivables 1,231 (334)
Prepaid expenses and other 525 (205)
Deferred revenue 979 109
Accounts payable (2,252) (593)
Accrued liabilities (352) 447
------ -----
Net cash used in operating activities (10,020) (5,601)
Cash flows from investing activities
Net cash acquired in acquisition 422 --
Purchase of property and equipment (621) (4,564)
Deposits and other assets -- (15)
Purchase of available-for-sale investments -- (3,035)
Maturities of available-for-sale investments 14,649 5,070
------ -----
Net cash provided by (used in) investing activities 14,450 (2,544)
Cash flows from financing activities
Proceeds from issuance of long-term debt 367 4,590
Payments on long-term debt (1,517) (622)
Proceeds from issuance of common stock, net of repurchases 407 91
--- --
Net cash provided by financing activities (743) 4,059
---- -----
Net increase (decrease) in cash and cash equivalents 3,687 (4,086)
Cash and cash equivalents, beginning of period 4,785 15,172
-------- --------
Cash and cash equivalents, end of period $ 8,472 $ 11,086
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 410 $ 327
Schedule of non-cash transactions:
Construction in progress included in accrued liabilities (126) $ (547)
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 December 31, 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 and six months ended December 31, 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 December 31, 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 results 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: 28,660 common shares
which are outstanding but are subject to the Company's right of repurchase which
expires ratably over 4 years; options to purchase 2,811,545 shares of common
stock at a weighted average price of $6.63 per share and warrants to purchase
62,378 shares of common stock at a weighted average exercise price of $3.88 per
share. Options and warrants will be included in the calculation of diluted
earnings per share at such time as the effect is no longer antidilutive, as
calculated using the treasury stock method. The repurchasable shares will be
included in the calculations as the repurchase rights lapse.
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537)
====== ====== ======= ======
BASIC AND DILUTED
Weighted average shares of common stock outstanding 26,398 12,899 25,029 12,908
Common shares subject to repurchase (35) (101) (42) (141)
------ ------ ------- ------
Weighted average shares of common stock used in computing
net loss per share 26,363 12,798 24,987 12,767
====== ====== ======= ======
Basic and diluted net loss per share $ (0.30) $ (0.26) $ (1.16) $ (0.51)
===== ===== ===== ====
</TABLE>
4. ACQUISITION OF POLYMASC PHARMACEUTICALS PLC ("POLYMASC")
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC").
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 is serving as Managing Director,
PolyMASC. The Company is managing 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
$6.3 million and will be amortized over their estimated useful lives of three
years. The acquired in-process research and development was included in the
Valentis Statement of Operations for the quarter ended September 30, 1999.
The unaudited pro forma information for the Company for the six months ended
December 31, 1999 and 1998, had the acquisition occurred at the beginning of
each fiscal year is as follows (in thousands except per share amounts):
Six months ended
December 31,
1999 1998
---- ----
Net revenue $ 3,505 $ 2,138
Net loss $(15,072) $(7,708)
Net loss per share $ (0.57) $ (0.46)
====== =====
Page 8 of 18
<PAGE>
The unaudited pro forma combined results for the six months ended December 31,
1999 and 1998 exclude the effect of the write-off of acquired in-process
research and development 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.
5. COMPREHENSIVE INCOME (LOSS)
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended December
December 31, 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (7,872) $ (3,338) $(28,902) $ (6,537)
Net unrealized gain (loss) on available-for-sale securities 4 (43) 17 100
Net unrealized foreign exchange translation adjustment 12 -- 44 --
------ ------ ------- ------
Comprehensive loss $ (7,856) $ (3,381) $(28,841) $ (6,437)
====== ====== ======= ======
</TABLE>
The components of accumulated other comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
Unrealized gain (loss) on available for sale investments $ (92) $(109)
Foreign currency translation adjustments 44 --
--- ----
Accumulated other comprehensive loss $ (48) $(109)
=== ====
</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 improve 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,
- Boehringer Ingelheim ("BI") to develop treatments for
rheumatoid arthritis,
- Heska Corporation ("Heska") for the development of gene
medicines for animal health,
- 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
December 31, 1999, the Company's accumulated deficit was approximately $102.2
million.
BUSINESS ACQUISITIONS
Page 10 of 18
<PAGE>
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC").
Under the terms of the acquisition agreement, each outstanding ordinary share of
PolyMASC 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 is serving as Managing Director of PolyMASC. The
Company is managing 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
$6.3 million and will be amortized over their estimated useful lives of three
years. The acquired in-process research and development was included in the
Valentis Condensed Consolidated Statements of Operations for 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 0.571 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 are being 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
December 31, 1999 totaled approximately $2.3 million compared to $613,000 for
the corresponding period of 1998. Research and development revenue for the six
months ended December 31, 1999 totaled approximately $3.5 million compared to
$1.4 million for the corresponding period of 1998. The 1999 revenue for the
quarter was attributable to amounts earned for milestone achievements and for
collaborative research and development performed under the Company's corporate
collaborations with Roche, Lilly and Boehringer Ingelheim of approximately $1.7
million, $20,000 and $213,000, respectively, and $384,000 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 $7.1 million and $12.6 million
for the quarter and six months ended December 31, 1999, respectively, from $3.4
million and $6.8 million in the corresponding periods 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 and six months ended
December 31, 1999 increased to $1.8 million and $3.6 million, respectively, from
$1.0 million and $2.1 million in the corresponding periods of 1998. The
increases in 1999 compared to 1998 were 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 $219,000 for the quarter ended December 31,
1999 compared to $424,000 for the corresponding quarter of the prior year. For
the six months ended December 31, 1999, interest income (expense), net was
$492,000 compared to $957,000 for the corresponding period of the prior year.
The decrease in interest income (expense), net resulted primarily from increased
interest expenses on 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 December 31, 1999, the Company had $28.2 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 six months ended December 31, 1999 was $10.0
million compared to $5.6 million in the corresponding period 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 $621,000
for the six months ended December 31, 1999 compared to $4.6 million used in the
corresponding quarter of 1998.
In May 1996, the Company entered into an equipment financing agreement for up to
$2,700,000 with a financing company. The Company financed the entire $2,700,000
in equipment purchases under this agreement structured as loans. The equipment
loans are being repaid over 48 months at interest rates ranging from 15.2% to
16.2% and are secured by the related equipment. As of December 31, 1999, the
outstanding balance under this financing agreement was $1.4 million.
In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank, which was subsequently fully utilized. 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
Page 12 of 18
<PAGE>
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. As of December 31, 1999, the outstanding balance under this financing
agreement was $5.7 million.
In October 1998, the Company entered into an equipment financing agreement for
up to $2,500,000 with a financing company. The Company financed $366,000 in
equipment purchases under this agreement structured as loans. The equipment
loans are being repaid over 43 months at interest rates 10.10% and are secured
by the related equipment. As of December 31, 1999, the outstanding balance under
this financing agreement was $351,000.
The Company anticipates that its cash and cash equivalents, committed funding
from existing corporate collaborations and projected interest income, will
enable the Company to maintain its current and planned operations at least
through June 2001. 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. Prior to the merger of GeneMedicine with
Megabios in 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 $65 million over the next five
to seven years.
In determining its research and development priorities, the Company has decided
to delay additional work on three of the programs acquired in the merger with
GeneMedicine. Work on any of the growth factor gene medicines (IGF-1), pulmonary
gene medicines (AAT GM) and the nucleic acid programs (APC) will not be pursued
unless or until a corporate partner is found to provide funding for further
development.
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 some of
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
An issue faced by all industries was the Year 2000 ("Y2K") computer issue. As of
January 31, 2000, no Y2K issues arose that negatively impacted the Company's
operations.
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 were expensed as incurred. However, costs
incurred 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 has not experienced 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 still experience unanticipated material negative consequences
and/or material costs caused by undetected errors or defects in such systems.
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
Page 14 of 18
<PAGE>
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>
2000 Total
--------------- -----------------
<S> <C> <C>
Cash equivalents
Fixed rate .......................... $ 7,918 $ 7,918
Average rate ........................ 5.58% 5.58%
Short-term investments
Fixed rate .......................... $ 19,703 $ 19,703
Average rate ........................ 5.28% 5.28%
Total investment securities ............ $ 27,621 $ 27,621
Average rate ........................... 5.36% 5.36%
</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
---------------------------------------------------
On December 7, 1999, in connection with the Company's Annual
Meeting of Stockholders, the following proposals were voted on
as follows:
PROPOSAL 1: Election of Directors.
PROPOSAL 2: Ratification of Ernst & Young LLP as the Company's
independent auditors.
The voting of stockholders with respect to each of the foregoing proposals was
as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
--- ------- ---------
<S> <C> <C> <C>
Election as Director:
Stanley T. Crooke, MD. Ph.D. 17,508,414 33,348 0
Patrick G. Enright 17,507,371 34,391 0
Gillian E. Francis, M.B., D.Sc.(Med), FRC(Path) 17,507,471 34,291 0
Proposal 2 17,520,275 6,825 14,662
</TABLE>
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 November 9, 1999, the Registrant filed a current report on
Form 8-K to report (i) that it had restructured the Company to
improve the efficiency of product development and enhance the
Company's capability for clinical development, and (ii) that
Rodney Pearlman Ph.D. resigned from his position as the
Company's Senior Vice President, Research and Development
effective on January 3, 2000.
On November 9, 1999, the Registrant filed an amendment to a
current report on Form 8-K to report unaudited condensed
combined financial statements and unaudited pro forma
financial information relating to its acquisition of PolyMASC
Pharmaceuticals plc.
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: February 11, 2000 /s/ Benjamin F. McGraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: February 11, 2000 /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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,472
<SECURITIES> 19,703
<RECEIVABLES> 577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,679
<PP&E> 21,044
<DEPRECIATION> 9,978
<TOTAL-ASSETS> 53,872
<CURRENT-LIABILITIES> 12,756
<BONDS> 0
0
0
<COMMON> 139,572
<OTHER-SE> (102,534)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 3,502
<TOTAL-REVENUES> 3,502
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386
<INCOME-PRETAX> 0
<INCOME-TAX> 67
<INCOME-CONTINUING> (28,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,902)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
