<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26244
SEQUANA THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
California 33-0550509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11099 N. Torrey Pines Road, Suite 160, La Jolla, CA 92037
(Address of principal executive offices) (Zip code)
(619) 452-6550
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class April 30, 1996
----- --------------
<S> <C>
Common Stock, $.001 par value 9,863,517
</TABLE>
Page 1 of 10
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SEQUANA THERAPEUTICS, INC.
FORM 10Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE................................................................................. 1
TABLE OF CONTENTS.......................................................................... 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets-- March 31, 1996 and December 31, 1995............................. 3
Statements of Operations--Three months ended March 31, 1996
and 1995.......................................................................... 4
Statements of Cash Flows--Three months ended March 31, 1996
and 1995.......................................................................... 5
Notes to Financial Statements..................................................... 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8K.......................................... 9
SIGNATURE.................................................................................. 10
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SEQUANA THERAPEUTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,978,800 $ 13,512,688
Investment securities, available-for-sale, net 43,873,731 27,825,023
Other current assets 1,730,969 1,582,053
------------ ------------
Total current assets 70,583,500 42,919,764
Furniture and equipment, net 6,193,906 4,438,611
Deposits and other assets 186,115 179,482
Notes receivable from employees 546,614 463,000
============ ============
Total assets $ 77,510,135 $ 48,000,857
============ ============
Current liabilities:
Accounts payable and accrued expenses $ 2,492,038 $ 2,775,380
Unearned revenue 3,626,301 2,311,856
Current portion of obligations under capital leases/loans 1,803,072 1,335,720
------------ ------------
Total current liabilities 7,921,411 6,422,956
Obligations under capital leases/loans 3,877,690 2,803,612
Shareholders' equity:
Common stock, $.001 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares -- 9,838,980 at
March 31, 1996 and 8,125,632 at December 31, 1995 9,839 8,126
Additional paid-in capital 85,933,348 55,484,707
Notes receivable for common stock (253,632) (254,144)
Deferred compensation, net (1,260,581) (1,368,802)
Accumulated deficit (18,717,940) (15,095,598)
------------ ------------
Total shareholders' equity 65,711,034 38,774,289
------------ ------------
Total liabilities and shareholders' equity $ 77,510,135 $ 48,000,857
============ ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to financial statements.
3
<PAGE> 4
SEQUANA THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------------
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Revenue under strategic alliances $ 1,885,555 $ 748,759
Expenses:
Research and development 5,078,728 2,455,568
General and administrative 989,461 775,569
----------- -----------
Total operating expenses 6,068,189 3,231,137
Interest income 646,952 262,570
Interest expense (86,660) (61,970)
=========== ===========
Net loss $(3,622,342) $(2,281,778)
=========== ===========
Net loss per share $ (.42) $ (.43)
=========== ===========
Shares used in computing net loss
per share 8,601,888 5,281,894
=========== ===========
</TABLE>
4
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SEQUANA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,622,342) $(2,281,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 456,920 125,682
Amortization of deferred compensation 108,221 447,881
Change in operating assets and liabilities:
Other current assets (148,916) 267,463
Accounts payable and accrued expenses (283,342) 159,679
Unearned revenue 1,314,445 845,422
------------ -----------
Net cash used in operating activities (2,175,014) (435,651)
INVESTING ACTIVITIES:
Purchases of investment securities (21,857,963) (2,955,150)
Sales/maturities of investment securities 5,816,628 3,000,000
Purchases of furniture and equipment (282,508) (324,196)
Deposits and other assets (6,835) (9,739)
Notes receivable from employees -
(83,614)
------------ -----------
Net cash used in investing activities (16,414,292) (289,085)
FINANCING ACTIVITIES:
Principal payments under capital leases/loans (395,448) (186,827)
Issuance of common stock, net of repurchased shares 30,450,354 78,125
Repayment of notes receivable 512
1,780
------------ -----------
Net cash provided by (used in) financing activities 30,055,418 (106,922)
Net increase (decrease) in cash and cash equivalents 11,466,112 (831,658)
Cash and cash equivalents at beginning of period 1,589,722
13,512,688
------------ -----------
Cash and cash equivalents at end of period $ 24,978,800 $ 758,064
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 86,660 $ 61,970
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases/loans $ 1,936,878 $ 59,430
============ ===========
</TABLE>
5
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SEQUANA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements 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.
Interim results are not necessarily indicative of results for a full
year. These financial statements should be read in conjunction with the
audited financial statements and footnotes thereto for the year ended
December 31, 1995, incorporated by reference from the Annual Report to
Shareholders in the Company's Form 10-K as filed with the Securities
and Exchange Commission.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
adoption of the new standard had no effect on the financial statements.
Effective January 1, 1996, the Company adopted SFAS No. 123 "Accounting
and Disclosure of Stock-Based Compensation." As allowed under the SFAS,
the Company has elected to continue to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) in accounting for its employee stock options. The adoption of the
standard had no effect on the financial statements.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares outstanding during the periods, as adjusted for the effects of
certain rules of the Securities and Exchange Commission for the periods
prior to the Company's initial public offering in July 1995.
3. SHAREHOLDERS' EQUITY
On March 6, 1996, the Company completed a follow-on offering of
1,700,000 shares of common stock at $19.00 per share, with the Company
receiving proceeds, net of underwriting discounts, of approximately
$30.4 million. The proceeds of this offering are being used to fund
research and development programs, capital expenditures and working
capital.
4. SUBSEQUENT EVENT
On April 4, 1996, the Company was awarded $500,000 from Glaxo Wellcome
Inc., the Company's strategic alliance partner in the area of Type II
Diabetes, for the attainment of an milestone in the program to discover
the genes responsible for Type II Diabetes.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in February 1993 and has devoted substantially all
of its resources since that time to the development of an integrated technology
platform for discovering genes associated with common human diseases. The
Company has incurred losses since inception and, as of March 31, 1996, had an
accumulated net deficit of $18.7 million. The Company anticipates incurring
additional losses over at least the next several years as it expands its gene
discovery efforts. Such expansion will result in increases in both research and
development and general and administrative expenses.
The Company does not anticipate revenues from product sales in the foreseeable
future. The Company's sources of revenue for the next several years will be
payments under existing strategic alliances, license fees, proceeds from the
sale of rights, payments from future strategic alliances and licensing
arrangements, if any, and interest income. Certain payments under strategic
alliances are contingent upon the Company meeting certain milestones. Payments
under strategic alliances and licensing arrangements will be subject to
significant fluctuations in both timing and amount and therefore the Company's
results of operations for any period may not be comparable to the results of
operations for any other period.
In July 1994, the Company entered into a strategic alliance with Glaxo Wellcome
Inc. ("Glaxo") to discover disease genes associated with type II diabetes. The
Company has granted Glaxo exclusive worldwide rights to develop and
commercialize therapeutic products based upon the Company's diabetes gene
discoveries and has retained rights to all diagnostic products. In June 1995,
the Company entered into strategic alliances with Boehringer Ingelheim
International GmbH ("Boehringer Ingelheim") in the area of asthma and with
Corange International, Ltd. ("Corange") in the area of osteoporosis. Under the
terms of the agreements with Boehringer Ingelheim and Corange, the Company will
be entitled to payments for research support, payments upon achievement of
certain research and product development milestones and payment of royalties on
the sale of any products developed by the strategic alliance partner. The
agreement with Boehringer Ingelheim provides Boehringer Ingelheim with exclusive
worldwide rights to develop and commercialize therapeutic products for asthma
based on genes discovered as a result of the alliance. Sequana retains the right
to develop and commercialize diagnostic products based on such gene discoveries.
The agreement with Corange provides Corange with exclusive worldwide rights to
develop and commercialize diagnostic and therapeutic products based on
osteoporosis genes which may be discovered as a result of the alliance.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 and 1995
Revenue under strategic alliances totaled $1.9 million and $749,000 in the three
months ended March 31, 1996 and 1995, respectively. The 1996 revenue resulted
from the Company's strategic alliances with Glaxo, Boehringer Ingelheim and
Corange and was comprised of payments for research support and DNA sample
collection. The 1995 revenue was entirely attributable to payments for research
support and DNA sample collection under the strategic alliance with Glaxo.
Research and development expenses increased to $5.1 million in the three months
ended March 31, 1996, from $2.5 million in the three months ended March 31,
1995. The increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional research and development personnel,
increased expenditures for the collection of patient information and DNA
7
<PAGE> 8
samples pursuant to collaborative research agreements, increased purchases of
lab supplies and increased depreciation and facilities expenses in connection
with the expansion of the Company's gene discovery efforts. The Company expects
to continue expanding its gene discovery efforts in future periods, which will
result in continued increases in research and development expenses, including
the costs associated with collection of patient information and DNA samples.
General and administrative expenses increased to $989,000 in the three months
ended March 31, 1996, from $776,000 in the three months ended March 31, 1995.
The increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional management and administrative
personnel, expense associated with Directors and Officers liability insurance
and increased depreciation and facility expenses.
The Company had net interest income of $560,000 and $201,000 in the three months
ended March 31, 1996 and 1995, respectively. The increase in net interest income
resulted from interest income earned on higher balances of cash and investment
securities derived from public placements of equity securities and, to a lesser
extent, strategic alliances, partially offset by increases in interest expense
incurred on capital lease and loan obligations entered into in 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily through
private placements of equity securities with aggregate net proceeds of
approximately $26.3 million, completion of an initial public offering of common
stock in July 1995 resulting in net proceeds of approximately $18.6 million,
$26.6 million generated under strategic alliances and $7.3 million in capital
leases and loans. In March 1996, the Company completed a follow-on public
offering of common stock resulting in proceeds, net of underwriting discounts,
of approximately $30.4 million. As of March 31, 1996, the Company had cash and
investments totaling approximately $68.9 million.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including progress of its gene discovery
programs, the number and breadth of these programs, achievement of milestones
under strategic alliance arrangements, the progress of the development and
commercialization efforts of the Company's strategic alliance partners,
competing technological and market developments, the costs associated with
collection of patient information and DNA samples, the costs involved in
preparing, filing, prosecuting and maintaining and enforcing patent claims and
other intellectual property rights, the regulatory process and other factors.
The Company believes that the net proceeds from the follow-on public offering,
existing cash and investment securities and anticipated cash flows from its
current strategic alliances will be sufficient to support the Company's
operations through 1999. In the event that additional financing is needed, the
Company may seek to raise such additional funds through public or private equity
or debt financings or additional strategic alliance and licensing arrangements.
No assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed or that, if available, such
financing or strategic alliance and licensing arrangements will be obtainable on
terms favorable to the Company or its shareholders. To the extent the Company
raises additional capital by issuing equity securities, ownership dilution to
shareholders will result. In the event that adequate funds are not available,
the Company's business may be adversely affected. The Company's forecast of the
period of time through which its financial resources will be adequate to support
its operations is forward-looking information, and actual results could vary.
The factors described earlier in this section will impact the Company's future
capital requirements and the adequacy of its available funds.
8
<PAGE> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1(2) Restated Articles of Incorporation of the Company.
3.3(1) Bylaws of the Company, as amended to date.
10.1(1) Shareholder Rights Agreement, dated October 21, 1994,
as amended to date.
10.2(1) 1994 Incentive Stock Plan.
10.3(1) 1995 Employee Stock Purchase Plan.
10.4(1) 1995 Director Stock Option Plan.
10.5(1) Form of Indemnification Agreement between the Company
and its officers and directors.
10.6(1) Master Lease Agreement dated November 1, 1993 by and
between Comdisco, Inc. and the Company.
10.7**(1) Collaborative Research Agreement dated as of July 27,
1994 by and between the Company and Glaxo, Inc.
10.8(2) Expansion Lease by and between Health Science
Properties, Inc. and the Company dated as of
November 20, 1995.
10.9**(1) Collaborative Research Agreement dated as of June 30,
1995 by and between the Company and Corange
International, Ltd.
10.10**(1) Collaborative Research Agreement dated as of June 12,
1995 by and between the Company and Boehringer
Ingelheim International GmbH.
10.11(1) Employment Agreement dated February 28, 1995 between
the Company and Kevin J. Kinsella.
10.12(1) Consulting Agreement dated March 6, 1995 between the
Company and Irwin Lerner.
10.13(1) Letter Agreement dated September 7, 1993 between the
Company and Timothy J.R. Harris.
11.1(2) Computation of net loss per share.
(b) Reports on Form 8-K
None
- - ----------
** Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (Reg. No. 33-93460) as declared effective by the
Commission on July 31, 1995.
(2) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (Reg. No. 333-01226) as filed with the Commission
on February 12, 1996.
9
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SEQUANA THERAPEUTICS, INC.
March 31, 1996
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Sequana Therapeutics, Inc.
Date: May 10, 1996 By: /s/ M. Scott Salka
------------------
Vice President of Operations,
Chief Financial Officer and
Principal Financial and
Accounting Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 24,979
<SECURITIES> 43,874
<RECEIVABLES> 587
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,584
<PP&E> 8,407
<DEPRECIATION> 2,213
<TOTAL-ASSETS> 77,510
<CURRENT-LIABILITIES> 7,921
<BONDS> 3,878
0
0
<COMMON> 85,943
<OTHER-SE> (1,514)
<TOTAL-LIABILITY-AND-EQUITY> 77,510
<SALES> 0
<TOTAL-REVENUES> 2,533
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (3,622)
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,622)
<EPS-PRIMARY> (0.42)
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