Anybody out there? Here's MCDE's most recent 10k:
MICROCIDE PHARMACEUTICALS' (MCDE) 10-K (http://sec.yahoo.com/e/990331/mcde.html)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Microcide is a biopharmaceutical company whose mission is to discover, develop and commercialize novel antimicrobials for the improved treatment of serious bacterial, fungal and viral infections. The
Company's discovery and development programs address the growing problem of bacterial drug resistance and the need for improved antifungal and antiviral agents through two principal themes: (i)
Targeted Antibiotics, which focuses on developing novel antibiotics and antibiotic potentiators to overcome bacterial resistance problems, and (ii) Targeted Genomics, which utilizes bacterial, fungal and
viral genetics to discover new classes of antimicrobials and other novel treatments for infectious diseases.
As part of the Company's strategy to enhance its research and development capabilities and to fund, in part, its capital requirements, Microcide has entered into collaborative agreements with three major pharmaceutical companies. Pursuant to the Company's collaborative agreements with J&J, Daiichi and Pfizer (the "Collaborative Agreements"), the Company has received license fees, milestone payments and research support payments, and can potentially receive additional research support payments, milestone payments and royalty payments. License payments are typically nonrefundable up-front payments for licenses to develop, manufacture and market products, if any, that are developed as a result of the collaboration. Research support payments are typically contractually obligated payments to fund research and development over the term of the collaboration. Milestone payments are payments contingent upon the achievement of specified milestones, such as selection of candidates for drug development, the commencement of clinical trials or receipt of regulatory approvals. If drugs are successfully developed and commercialized as a result of the Collaborative Agreements, the Company will receive royalty payments based upon the net sales of such drugs. In addition, the Company has derived other revenues principally through the sale of molecular diversity samples to other pharmaceutical and biotechnology companies for use in their research programs.
Through December 31, 1998, the Company had received in the aggregate $40.6 million in license fees, milestone payments and research support payments under the Collaborative Agreements. Assuming none of the Collaborative Agreements is terminated prior to its scheduled expiration and including the Pfizer Animal Health collaboration entered into in January 1999, the Company will be entitled to receive an additional $13.2 million in research support payments in the aggregate from J&J, Daiichi and Pfizer.
In the event that the Company achieves the specified research and product development milestones, it will be entitled to receive milestone payments as follows: up to $16.5 million for the first product and up to $15.5 million for each additional product developed pursuant to the J&J Agreements, up to $13.0 million for each product developed pursuant to the Daiichi Agreement, and up to $32.5 million for each product developed pursuant to the Pfizer Agreements. The Pfizer Animal Health collaboration provides for a lower level of milestone payments than those applicable to human health applications. Receipt of these milestone payments is contingent upon achieving specified research and product development milestones, a number of which may not be achieved for several years, if ever. The Company does not expect to receive royalties based upon net sales of drugs for a significant number of years, if at all.
On January 14, 1998, the Company announced the formation and financing of Iconix Pharmaceuticals, Inc. Iconix is a biotechnology company which will seek to develop surrogate genetics and chemical
informatics into a technology platform with broad applicability to multiple human diseases. Through a private placement, Iconix arranged a $12.5 million equity investment from institutional investors during
1998. As of December 31, 1998, after giving effect to the investment and including the stock option pool reserved for employees and consultants of Iconix, Microcide holds approximately 33% of Iconix'
outstanding equity on a fully diluted basis. Microcide accounts for its investment using the equity method of accounting and since Microcide's investment has a zero book basis, the losses of Iconix do not impact Microcide's statement of operations. Pursuant to the Core Technology Development and License Agreement, Microcide and Iconix expect to work together through January 14, 2001 to jointly develop
and utilize new technology in the areas of molecular diversity, high-throughput screening, informatics and genome sciences. Pursuant to the Support Services Agreement, Microcide provides Iconix with
facilities and various business support services for which the Company is reimbursed. In addition, through the Antiviral and Surrogate Genetics Research Agreement, Microcide is obligated to provide
Iconix with research support payments of up to $6.1 million during 1998, 1999 and 2000. Microcide is entitled to worldwide development, manufacturing and marketing rights to antiviral products which may
emerge from the collaboration and, if specified research and development milestones are achieved, will be obligated to pay Iconix milestone payments of up to $11.0 million for the first product and up to $10.5 million for each subsequent product, in addition to royalties on worldwide sales.
Quarterly results of operations are subject to significant fluctuations based on the timing and amount of certain revenues earned under the Collaborative Agreements. The Company expects to continue to incur operating losses in the future.
This Report contains forward-looking statements which involve risks and uncertainties, including but not limited to statements concerning the continuation of the Company's collaborative agreements with its
strategic partners and the continued receipt of research support payments and potential receipt of milestone payments thereunder, the successful development and commercialization of drugs and the
receipt of royalties thereon or sales revenue therefrom, and the expected period of time the Company's existing financial resources will enable the Company to maintain its current and planned future
operations. The Company's actual results and timing of certain events may differ significantly from the results discussed in such forward-looking statements. Factors that might cause a difference include risks inherent in the Company's business and the pharmaceutical industry in general, such as uncertainties with
regard to the successful continuation of the research and development activities under the Collaborative Agreements and in the Company's own programs, the possible decision of a strategic partner to cancel a
collaborative program, the achievement of research and product milestones, the successful completion of clinical trials and obtaining of required regulatory approvals, and the achievement of product
commercialization goals, as well as other factors set forth in this Form 10-K.
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 1998 and 1997
Revenues. Total revenues decreased from $14.9 million in 1997 to $11.2 million in 1998. There were no license and milestone revenues earned in 1998 as compared to $1.0 million in 1997 when a milestone fee
was received from Pfizer related to identifying, validating and sequencing an agreed upon number of bacterial essential genes. Research revenues decreased from $12.2 million in 1997 to $11.1 million in 1998 principally due to lower revenues recognized under the Daiichi and J&J collaborations relative to the prior year. Other revenues, consisting of the sale of molecular diversity samples to other pharmaceutical and biotechnology companies for use in their research programs, were $40,000 in 1998 as compared to $1.7 million in 1997.
Research and Development Expenses. The Company's research and development expenses increased 5% from $17.9 million in 1997 to $18.8 million in 1998. This increase was due primarily to higher compensation and other expenses associated with an increase in headcount to support the Company's corporate collaborations and its internal programs, higher spending for research supplies and materials, and the initiation of research support to Iconix Pharmaceuticals related to the Viral Genomics Program, partially offset by decreases in molecular diversity purchases. The Company expects research and development expenses to be relatively flat in 1999, as increased research support payments to Iconix in
conjunction with the Viral Genomics Program would be partially or largely offset by decreases in other expenses within the Company.
General and Administrative Expenses. General and administrative expenses decreased approximately 3% from $4.1 million in 1997 to $4.0 million in 1998. This decrease was primarily due to the sharing of
administrative costs with Iconix. These expenses are expected to remain relatively flat in 1999.
Interest Income and Expense. Interest income decreased from $2.6 million in 1997 to $1.9 million in 1998 as a result of a decrease in average investment balances. Interest expense declined from $144,000
to $32,000 as a result of the repayment of capital lease obligations. Interest income is expected to continue to decline in 1999 and interest expense is expected to increase in 1999.
Net Loss. Net loss increased from $4.6 million in 1997 to $9.8 million in 1998 as a result of the items discussed above.
Fiscal Years Ended December 31, 1997 and 1996
Revenues. Total revenues increased from $11.3 million in 1996 to $14.9 million in 1997. License and milestone fees were $2.0 million in 1996 and $1.0 million in 1997. During 1996, a license fee was generated by the signing of the Pfizer Agreement and a milestone fee was received from J&J triggered by the selection of a pre-clinical development candidate. During 1997, a milestone fee was received from Pfizer related to identifying, validating and sequencing an agreed upon number of bacterial essential genes. Research revenues increased from $9.3 million in 1996 to $12.2 million in 1997 due to a full year
of activity under the Pfizer collaboration and due to an increase in staffing on these partnered programs. During 1997, the Company derived other revenues of $1.7 million principally through the sale of molecular diversity samples to other pharmaceutical and biotechnology companies for use in their research programs; there were no such other revenues in 1996.
Reserch and Development Expenses. The Company's research and development expenses increased 67% from $10.7 million in 1996 to $17.9 million in 1997. This increase was due primarily to higher compensation and other employee-related expenses associated with an increase in headcount to support the Company's corporate collaborations and its internal programs, higher spending for research supplies and materials, higher expenses related to assembling the
Company's molecular diversity collection, higher costs related to expanded research and development facilities and higher expenses for outside consulting services.
General and Administrative Expenses. General and administrative expenses increased approximately 42% from $2.9 million in 1996 to $4.1 million in 1997. This increase was primarily due to increased
compensation expense resulting from an increase in the number of administrative personnel and higher costs for legal and other outside services.
Interest Income and Expense. Interest income increased from $1.9 million in 1996 to $2.6 million in 1997 as a result of an increase in average investment balances principally arising from proceeds
received from the sale of equity in May 1996. Interest expense declined from $236,000 to $144,000 as a result of the repayment of capital lease obligations.
Net Loss. Net loss increased from $670,000 in 1996 to $4.6 million in 1997 as a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the sale of equity securities, through funds provided under the Collaborative Agreements, through other revenues principally
consisting of sales of molecular diversity and through equipment financing. As of December 31, 1998, the Company had received $64.6 million from the sale of equity and $40.6 million in cash from license and milestone fees and research support payments under the Collaborative Agreements.
Cash, cash equivalents and short-term investments at December 31, 1998 were $33.2 million compared to $40.4 million at December 31, 1997. This decrease was due primarily to the net loss during 1998,
partially offset by the borrowing in December 1998 of $4.0 million under a new three-year debt facility. Net cash used in the Company's operations was $7.5 million in 1998 in contrast to net cash used
by the Company's operations of $2.6 million in 1997.
During 1998, the Company invested $3.1 million in capital expenditures as compared to $3.7 million in 1997 largely due to facilities expansion and the purchase of additional research equipment. The Company expects its capital expenditures in 1999 to be approximately $1.0 million. The present value of obligations under equipment financing arrangements at December 31, 1998 was $41,000 and the Company had other debt of $4.0 million. At December 31, 1998, the Company has an additional $1.0 million available for its use under this arrangement. The Company made principal payments under its lease
obligations of $795,000 in 1998; the remaining capital leases of $41,000 were repaid in February 1999.
The Company expects that its existing capital resources, interest income and future payments due under the Collaborative Agreements will enable the Company to maintain current and planned operations at
least through 2000. In the event that the Company requires additional funding at any point in the future, the Company will seek to raise such additional funding from other sources, including other collaborative arrangements, and through public or private financings, including sales of equity or debt securities. Any such collaborative or licensing arrangement could result in limitations on the Company's ability to control the commercialization of resulting drugs, if any, and could limit profits, if any, therefrom. Any such equity financing could result in dilution to the Company's then-existing stockholders. There can be no assurance that additional funds will be available on favorable terms or at all, or that such funds, if raised, would be sufficient to permit the Company to continue to conduct its operations. If adequate funds are not available, the Company may be required to curtail significantly or eliminate one or more of its research programs.
The Company has not generated significant taxable income to date. At December 31, 1998, the net operating losses available to offset future taxable income for federal income tax purposes were approximately $22.6 million. Because the Company has experienced ownership changes, future utilization of the carryforwards may be limited in any one fiscal year pursuant to Internal Revenue Code regulations. The carryforwards expire at various dates beginning in 2008 through 2018 if not utilized. As a result of the annual limitation, a portion of these carryforwards may expire before becoming available to reduce the Company's federal income tax liabilities.
IMPACT OF YEAR 2000
The "Year 2000" issue generally describes the various problems which may result from the improper processing of dates and date-sensitive calculations. Computers and other equipment containing computer-related components (such as programmable logic controllers and other embedded systems) using two digits to identify the year in a date may not be able to distinguish between dates in the 20th
century versus the 21st century. This issue could cause system or equipment malfunctions resulting in material and adverse interruptions in operations.
The Company has begun to assess the potential impact of the Year 2000 computer problem on its computer systems, research equipment with embedded chips or software, and on the ability of third parties to supply critical materials and services. The Company has completed the assessment of its computer systems and believes them to be Year 2000 compliant. The Company expects to complete the assessment of its embedded systems and certain third party suppliers by the second quarter of 1999, and to take necessary remediation action by the end of 1999. Expenditures to date have not been material and have consisted solely of the time of certain company personnel. Based on the partial assessment completed through March 1, 1999, the Company does not currently expect the future costs of completing the assessment and making equipment modifications to be material. Although the Company believes its key financial, information and operational systems are Year 2000 compliant, there can be no assurances that other defects will not be discovered in the future. The Company is unable to control whether the firms and vendors it does business with currently, and in the future, will have systems which are Year 2000 compliant. The Company's operations could be affected to the extent that firms and vendors would be unable to provide services or ship products. However, management does not believe the Year 2000 changes will have a material impact on its business, financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosure involves forward-looking statements. The Company is exposed to market risk related mainly to changes in interest rates. The Company does not invest in derivative financial instruments.
INTEREST RATE SENSITIVITY
The fair value of the Company's investments in marketable securities at December 31, 1998 was $29.4 million. The Company's investment policy is to manage its marketable securities portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio. The Company's marketable securities portfolio is primarily invested in corporate debt securities with an average maturity of under one year and a minimum investment grade rating of A or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold prior to maturity.
FOREIGN CURRENCY EXCHANGE RISK
At this time, the Company does not participate in any foreign currency exchange activities, therefore, is not subject to risk of gains or losses for changes in foreign exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable. |
