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 September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to___________________
Commission File Number: 0-27488
INCYTE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3174 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices)
(650) 855-0555
(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.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 24,026,402 as of October 31, 1997.
2
INCYTE PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ----------------------------------------------------------------------------------- ----
ITEM 1 Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations - three and nine month
periods ended September 30, 1997 and 1996. . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows - nine months ended
September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 7
ITEM 2 Management's discussion and analysis of financial condition
and results of operations. . . . . . . . . . . . . . . . . . . . . . . 10
PART II: OTHER INFORMATION
- -----------------------------------------------------------------------------------
ITEM 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2 Changes in Securities.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 15
ITEM 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1997 1996*
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 51,286 $ 7,628
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 6,000 -
Marketable securities - available-for-sale . . . . . . . . . 65,006 30,622
Accounts receivable. . . . . . . . . . . . . . . . . . . . . 9,256 2,469
Prepaid expenses and other current assets. . . . . . . . . . 1,970 2,456
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . 133,518 43,175
Property and equipment, net. . . . . . . . . . . . . . . . . . 30,199 22,936
Long-term investments. . . . . . . . . . . . . . . . . . . . . 14,850 313
Deposits and other assets. . . . . . . . . . . . . . . . . . . 2,491 452
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 181,058 $ 66,876
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 4,402 $ 4,670
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 12,419 1,507
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 22,629 14,878
Current portion of capital lease obligations and
notes payable. . . . . . . . . . . . . . . . . . . . . . . 48 73
--------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . 39,498 21,128
Non-current portion of capital lease obligations and
notes payable. . . . . . . . . . . . . . . . . . . . . . . 19 37
Non-current portion of accrued rent. . . . . . . . . . . . . . 405 464
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . 39,922 21,629
--------------- --------------
Stockholders' equity:
Capital stock. . . . . . . . . . . . . . . . . . . . . . . . 12 10
Additional paid-in capital . . . . . . . . . . . . . . . . . 171,651 81,832
Unrealized gains (losses) on securities - available-for-sale 28 (73)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (30,555) (36,522)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . 141,136 45,247
--------------- --------------
Total liabilities and stockholders' equity . . . . . . . $ 181,058 $ 66,876
=============== ==============
* The condensed consolidated balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
See accompanying notes
4
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996
------- -------- ------- --------
Revenues . . . . . . . . . . . . . . . $22,662 $12,917 $61,714 $27,604
Costs and expenses:
Research and development . . . . . . 17,482 11,928 48,975 28,986
Selling, general and administrative. 3,252 1,735 8,731 4,263
Purchase of in-process research
and development. . . . . . . . . . - 3,165 - 3,165
------- -------- ------- --------
Total costs and expenses . . . . . . . 20,734 16,828 57,706 36,414
Income (loss) from operations. . . . . 1,928 (3,911) 4,008 (8,810)
Interest and other income, net . . . . 1,271 559 2,273 1,823
------- -------- ------- --------
Income (loss) before income taxes. . . 3,199 (3,352) 6,281 (6,987)
Provision for income taxes . . . . . . 155 - 314 -
------- -------- ------- --------
Net income (loss). . . . . . . . . . . $ 3,044 $(3,352) $ 5,967 $(6,987)
======= ======== ======= ========
Net income (loss) per share. . . . . . $ 0.12 $ (0.16) $ 0.25 $ (0.35)
======= ======== ======= ========
Shares used in computing net income
(loss) per share . . . . . . . . . . 24,796 20,358 23,524 20,212
======= ======== ======= ========
See accompanying notes
5
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 5,967 $ (6,987)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 7,260 4,282
Non-cash portion of purchase of in-process research
and development . . . . . . . . . . . . . . . . . . - 3,000
Changes in certain assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . (6,787) 4,615
Prepaid expenses, deposits and other assets . . . . (1,553) (459)
Accounts payable. . . . . . . . . . . . . . . . . . (268) 1,964
Accrued and other liabilities . . . . . . . . . . . 4,853 1,273
Deferred revenue. . . . . . . . . . . . . . . . . . 7,751 15,431
--------- ---------
Total adjustments . . . . . . . . . . . . . . . . . . . 11,256 30,106
--------- ---------
Net cash provided by operating activities . . . . . . . . 17,223 23,119
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term investments . . . . . . . . . . . . . . . . . (8,537) (313)
Transfer to restricted cash . . . . . . . . . . . . . . (6,000) -
Capital expenditures. . . . . . . . . . . . . . . . . . (16,251) (15,185)
Proceeds from sale of assets leased back under
operating leases. . . . . . . . . . . . . . . . . . . 1,694 -
Purchase of securities - available-for-sale. . . . . . (49,489) (11,230)
Sale of securities - available-for-sale . . . . . . . . 8,515 -
Maturity of securities - available-for-sale . . . . . . 6,725 11,600
--------- ---------
Net cash used in investing activities . . . . . . . . . . (63,343) (15,128)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock, net. . . . . . 89,821 1,251
Principal payments on capital lease obligations . . . . (43) (41)
--------- ---------
Net cash provided by financing activities . . . . . . . . 89,778 1,210
--------- ---------
Net increase in cash and cash equivalents . . . . . . . . 43,658 9,201
Cash and cash equivalents at beginning of period. . . . . 7,628 10,547
--------- ---------
Cash and cash equivalents at end of period. . . . . . . . $ 51,286 $ 19,748
========= =========
(Continued)
See accompanying notes
6
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
------ -----
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 39
====== =====
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ -
====== =====
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Property and equipment acquired pursuant to capital lease
obligations. . . . . . . . . . . . . . . . . . . . . . . . $ - $ 36
====== =====
Long-term investments acquired pursuant to future obligation
to distribute restricted cash. . . . . . . . . . . . . . . $6,000 $ -
====== =====
See accompanying notes
7
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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. The condensed consolidated balance sheet as of
September 30, 1997, statements of operations for the three and nine months
ended September 30, 1997 and 1996 and the statements of cash flows for the
nine months ended September 30, 1997 and 1996 are unaudited, but include all
adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented.
The condensed consolidated financial statements include the accounts of its
wholly-owned subsidiaries. In July 1996, all of the outstanding shares of
Genome Systems, Inc. ("Genome Systems") were acquired by the Company in a
business combination accounted for as a pooling of interests. Accordingly,
all prior financial data have been restated to represent the combined
financial results of the previously separate entities (Note 4). Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote information normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
Certain reclassifications were made to prior periods' balances to conform with
the 1997 presentation. Results for any interim period are not necessarily
indicative of results for any future interim period or for the entire year.
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
2. REVENUE RECOGNITION
The Company recognizes revenue for database collaboration agreements evenly
over the term of the agreement. Revenue is deferred for fees received before
earned. Revenues from custom orders, such as satellite databases, are
recognized upon shipment. Revenues from reagents and genomic screening
products are recognized when shipped, and revenues from genomic screening
services are recognized upon completion.
8
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares.
Common equivalent shares from stock options and warrants are excluded from the
computation for periods prior to 1997, as their effect is antidilutive. For
the three and nine months ended September 30, 1997, common equivalent shares
from stock options are included in the computation using the treasury stock
method as their effect is dilutive.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options and warrants will be excluded. Diluted
earnings per share will include the dilutive effect of stock options and
warrants using the treasury stock method. The treasury stock method will
be applied using the average market price of the Company's Common Stock during
the period. The basic earnings per share would have been $0.13 and $0.28 for
the three and nine months ended September 30, 1997, respectively. The diluted
earnings per share would have been $0.12 and $0.25 for the three and nine
months ended September 30, 1997, respectively.
4. BUSINESS COMBINATION
In July 1996, the Company issued 204,073 shares of Common Stock in exchange
for all of the capital stock of Genome Systems, Inc., a privately held
genomics company located in St. Louis, Missouri. Genome Systems provides
genomic research products and technical support services to scientists to
assist them in the identification and isolation of novel genes. The merger
has been accounted for as a pooling of interests and, accordingly, the
Company's financial statements and financial data have been restated to
include the accounts and operations of Genome Systems for all periods
presented.
5. JOINT VENTURE
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), in conjunction with SmithKline Beecham Corporation ("SB") which
will utilize genomic and bioinformatic technologies in the discovery and
commercialization of molecular diagnostics. The Company and SB each hold a 50
percent equity interest in diaDexus and the Company accounts for the
investment under the equity method. A portion of the investment is reflected
as restricted cash and in accrued liabilities on the balance sheet since that
balance is held in an escrow account and will be disbursed to diaDexus as
needed. As of September 30, 1997, no earnings or losses have been incurred by
diaDexus and, therefore, no equity in earnings or losses for diaDexus have
been recorded in the Company's statement of operations.
9
6. LONG-TERM INVESTMENTS
For the nine months ended September 30, 1997, the Company made equity
investments in a number of companies whose businesses may be
complementary to the Company's business. All investments, except
diaDexus, which is accounted for under the equity method, are carried at the
estimated fair market value.
7. STOCKHOLDERS' EQUITY
In August 1997, the Company completed a follow-on public stock offering and
issued 1,377,713 shares of Common Stock, including 177,713 shares covered by
the underwriters' over-allotment option, at $67.00 per share. Net proceeds
from this offering were approximately $87 million after deducting the
underwriting discount and offering expenses.
In October 1997, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a stock dividend paid on November 7, 1997
to holders of record on October 17, 1997. As a result, the number of shares
of Common Stock reserved for issuance under the 1991 Stock Plan, the
Non-Employee Directors' Stock Option Plan and the 1997 Employee Stock Purchase
Plan increased from 2,400,000 to 4,800,000, from 200,000 to 400,000 and from
200,000 to 400,000, respectively, on such payment date. All share and per
share data have been adjusted retroactively to reflect the split.
10
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 1997 and for the three and nine
month periods ended September 30, 1997 and 1996 should be read in conjunction
with the sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business - Factors That May Affect
Results" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and the section entitled "Risk Factors" in the Company's
Prospectus dated July 31, 1997 filed with the Securities and Exchange
Commission.
When used in this discussion, the word "expects" and similar expressions
are intended to identify forward-looking statements. Such statements, which
include statements as to expected expenditure levels and the adequacy of
capital resources, are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, the ability of the Company to
obtain and retain customers; competition from other entities; early
termination of a database collaborator agreement or failure to renew an
agreement upon expiration; the ability to successfully integrate the
operations of recent business combinations; the cost of accessing technologies
developed by other companies; uncertainty as to the scope of coverage,
enforceability or commercial protection from patents that issue on gene
sequences and other genetic information; the viability of joint ventures and
businesses in which the Company has purchased equity; and the matters
discussed in the section entitled "Business -- Factors That May Affect
Results" in the Company's Form 10-K for the year ended December 31, 1996 and
the section entitled "Risk Factors" in the Company's Prospectus dated July 31,
1997 filed with the Securities and Exchange Commission. These forward
looking statements speak only as of the date hereof. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
OVERVIEW
Incyte Pharmaceuticals, Inc. (the "Company") designs, develops and
markets genomic database products, genomic data management software tools and
related reagents and services. The Company's genomic databases integrate
bioinformatics software with proprietary and, when appropriate, publicly
available genetic information to create information-based tools used by
pharmaceutical and biotechnology companies in drug discovery and
development. In building the databases, the Company utilizes high-throughput,
computer-aided gene sequencing and analysis technologies to identify and
characterize the expressed genes of the human genome, as well as certain
animal, plant and microbial genomes.
Revenues recognized by the Company are predominantly related to database
collaboration agreements and consist primarily of non-exclusive database
access fees. Revenues also include the sales of genomic screening products
and services and fees for custom or
11
"satellite" database services. The Company's database collaboration agreements
provide for future milestone payments and royalties from the sale of products
derived from proprietary information obtained through the databases. There
can be no assurance that any database
collaborators will ever generate products from information contained within
the databases and thus that the Company will ever receive milestone payments
or royalties.
The Company incurred annual operating losses from inception through
December 31, 1996. While the Company reported net income in each of the first
three quarters of 1997, there can be no assurance that the Company can
maintain profitability. The Company's ability to achieve and maintain
significant revenues will be dependent upon its ability to obtain additional
database collaborators and retain existing collaborators. The Company's
ability to maintain profitability will also be dependent upon the level of
expenditures necessary for the Company to maintain and support its services to
its collaborators and the extent to which it incurs research and development,
investment, acquisition-related or other expenses related to the development
and provision of its products and services to database collaborators. Further,
the Company's database collaboration agreements typically have a term of three
years, which may be terminated earlier by a collaborator if the Company
breaches the database collaboration agreement, which may include certain
performance obligations, and fails to cure such breach within a specified
period. One of the Company's database collaboration agreements expires at the
end of 1997 and there can be no assurance that the agreement will be renewed,
and if renewed, under what terms. Further, beginning in August 1997, one
database collaborator has the right on 30 days' written notice to terminate
its database collaboration agreement. There can be no assurance that any of
the Company's database collaboration agreements will be renewed upon
expiration or not terminated earlier in accordance with its terms. The loss
of revenues from any database collaborator could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's operating results may fluctuate significantly from quarter
to quarter as a result of a variety of factors, including changes in the
demand for the Company's products and services, the pricing of database access
to database collaborators, the nature, pricing and timing of other products
and services provided to the Company's collaborators, changes in the research
and development budgets of the Company's collaborators and potential
collaborators, capital expenditures, acquisition and licensing costs and other
costs related to the expansion of Incyte's operations and the introduction of
competitive databases or services. In particular, the Company has a limited
ability to control the timing of database installations, there is a lengthy
sales cycle required for the Company's database products, the time required to
complete custom orders can vary significantly and the Company's increasing
investment in external research and development alliances could result in
significant quarterly fluctuations in expenses due to the payment of
milestones, license fees or research payments. The Company's investments in
joint ventures and businesses may require the Company to record losses or
expenses related to its proportionate ownership interest in such entities, the
acquisition of in-process technologies, or the impairment in the value of the
securities underlying such investments. In addition, the need for continued
investment in development of the Company's databases and related products and
services and for extensive ongoing collaborator support capabilities results
in significant fixed expenses. If revenue in a particular period does not
meet expectations, the Company may not be able to adjust significantly its
level of expenditures in such period, which would have an adverse effect on
the Company's operating results. The Company believes that quarterly
comparisons of its financial results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
12
In July 1996, the Company issued Common Stock in exchange for all of the
outstanding shares of Genome Systems, Inc. ("Genome Systems"), a genomics
service company located in St. Louis, Missouri. The transaction has been
accounted for as a pooling of interests, and the consolidated financial
statements discussed herein and all historical financial information have been
restated to reflect the combined operations of both companies. In August
1996, the Company acquired for stock Combion, Inc. ("Combion"), a microarray
technology company located in Pasadena, California. The acquisition of
Combion has been accounted for as a purchase, and the consolidated financial
statements discussed herein include the results of Combion from the date of
acquisition, August 15, 1996, forward. In September 1997, the Company formed
a joint venture, diaDexus, LLC ("diaDexus"), with SmithKline Beecham
Corporation ("SB") which will utilize genomic and bioinformatic technologies
in the discovery and commercialization of molecular diagnostics. The Company
and SB each hold a 50 percent equity interest in diaDexus. The investment is
accounted for under the equity method and the Company will record its share of
diaDexus' earnings and losses in its statement of operations. As of September
30, 1997, no earnings or losses have been incurred by diaDexus and, therefore,
no earnings or losses for diaDexus have been recorded in the Company's
statement of operations.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 1997 increased
to $22.7 million and $61.7 million, respectively, compared to $12.9 million
and $27.6 million for the corresponding periods in 1996. Revenues resulted
primarily from database access fees and, to a much lesser extent, from genomic
screening products and services and custom satellite database services. The
increase in revenues was predominantly driven by an increase in the number of
database collaboration agreements.
Total costs and expenses for the three and nine months ended September
30, 1997 increased to $20.7 million and $57.7 million, respectively, compared
to $16.8 million and $36.4 million for the corresponding periods in 1996.
Total costs and expenses for the three and nine month periods ended September
30, 1996 included a one-time charge of $3.2 million for the purchase of
in-process research and development relating to the acquisition of Combion.
Total costs and expenses are expected to increase in the foreseeable future
due to continued investment in new product development and data production,
obligations under existing and future research and development alliances, and
increased investment in marketing, sales and customer services. However, if
the Company does not obtain additional collaborators in a timely manner or if
the Company's database collaborators do not renew their collaboration
agreement at the end of their applicable terms, the Company may not be able to
adjust significantly its level of expenditures in any period, which would have
an adverse effect on the Company's operating results.
Research and development expenses for the three and nine months ended
September 30, 1997 increased to $17.5 million and $49.0 million, respectively,
compared to $11.9 million and $29.0 million for the corresponding periods in
1996. The increase in research and development expenses resulted primarily
from an increase in bioinformatics and software development efforts,
the continued and expanded operations relating to the acquisition of Combion
and Genome Systems, license and milestone payments under research and
development alliances, and increased costs related to intellectual property
protection. The Company expects research and development spending to increase
over the next few years as the Company continues to pursue
13
the development of new database products and services, invest in new
technologies, broaden its gene sequence production operations and invest in
the continued protection of its intellectual property.
Selling, general and administrative expenses for the three and nine
months ended September 30, 1997 increased to $3.3 million and $8.7 million,
respectively, compared to $1.7 million and $4.3 million for the corresponding
periods in 1996. The increase in selling, general and administrative expenses
resulted primarily from the growth in marketing, sales and customer support
and corporate administration. The Company expects that selling, general and
administrative expenses will increase throughout 1997 due to continued growth
in marketing, sales and customer support, as well as expanding operations.
Interest and other income, net for the three and nine months ended
September 30, 1997 increased to $1.3 million and $2.3 million, respectively,
from $0.6 million and $1.8 million for the corresponding periods in 1996
primarily as a result of increased interest income from higher average
combined cash, cash equivalent and marketable securities balances.
The estimated effective annual income tax rate for the third quarter of
1997 is 5%, which represents the provision for federal and state alternative
minimum taxes after utilization of net operating loss carryforwards. No
provisions have been recorded prior to the 1997 fiscal year as the Company
incurred annual net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had $116.3 million in cash, cash
equivalents and marketable securities, compared to $38.3 million as of
December 31, 1996. For the nine month period ended September 30, 1997, cash
provided by financing activities was partially offset by capital expenditures,
consisting primarily of purchases of data-processing-related computer
hardware, laboratory equipment and facilities improvements, as well as
investments in research and development alliances. The Company has
classified all of its marketable securities as short-term, as the Company may
not hold its marketable securities until maturity in order to take advantage
of favorable market conditions. Available cash is invested in accordance with
the primary objectives of the Company's investment policy: liquidity, safety
of principal and diversity of investments.
Net cash provided by operating activities was $17.2 million for the nine
months ended September 30, 1997, as compared to net cash provided by
operating activities of $23.1 million for the nine months ended September 30,
1996. The decrease in net cash provided by operating activities resulted
primarily from the increase in accounts receivable and decrease in the change
in deferred revenue partially offset by the change from net loss to net income
in 1997 and increased depreciation and amortization expense. Net cash
generated by operating activities may in the future fluctuate significantly
from quarter to quarter due to the timing of large prepayments by database
collaborators.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted of capital expenditures
and long-term investments in research and development alliances. Capital
expenditures for the nine months ended September 30, 1997 increased to $16.3
million from $15.2 million for the nine months ended September 30, 1996.
Long-term investments in companies with which the Company has research and
development alliances increased to $8.5 million for the nine months ended
September 30, 1997 from $0.3 million for the nine months ended September 30,
1996. In addition, $6.0 million
14
held in an escrow account was catagorized as restricted cash due to diaDexus
pursuant the joint venture agreement with SB. Net cash used by investing
activities may in the future fluctuate significantly from quarter to quarter
due to the timing of strategic equity investments, capital purchases and
maturity/sales and purchases of marketable securities.
Net cash provided by financing activities was $89.8 million and $1.2
million for the nine months ended September 30, 1997 and 1996, respectively.
The increase was primarily due to proceeds from the follow-on public stock
offering in August 1997.
The Company expects its cash requirements to increase through 1998
as it increases its investment in data-processing-related computer
hardware in order to support its existing and new database products,
continues to seek access to technologies through investments, research
and development alliances, license agreements and/or acquisitions, and
addresses its needs for larger facilities and/or improvements in
existing facilities. The Company expects to continue to fund future
operations with revenues from genomic database products and services in
addition to using its current cash, cash equivalents and marketable
securities.
Based upon its current plans, the Company believes that its existing
resources and anticipated cash flows from operations will be adequate to
satisfy its capital needs at least through 1998. However, the Company
can offer no assurance that the Company will be able to obtain additional
collaborators or retain existing collaborators for the Company's
databases or that such database products and services will produce
revenues, which together with the Company's cash, cash equivalents and
marketable securities, will be adequate to fund the Company's cash
requirements. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for
its databases and genomic products and services; the Company's research and
development activities, including expenditures in connection with alliances,
license agreements and acquisitions of and investments in complementary
technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights; the purchase of
additional capital equipment, including capital equipment necessary to
ensure that the Company's sequencing operation remains competitive; and
costs associated with the integration of new operations assumed through
mergers and acquisitions. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all.
In October 1997, the Company's Board of Directors authorized a
two-for-one stock split effected in the form of a stock dividend paid on
November 7, 1997 to holders of record on October 17, 1997. As a result, the
number of shares of Common Stock reserved for issuance under the 1991 Stock
Plan, the Non-Employee Directors' Stock Option Plan and the 1997 Employee
Stock Purchase Plan increased from 2,400,000 to 4,800,000, from 200,000 to
400,000 and from 200,000 to 400,000, respectively, on such payment date. All
share and per share data have been adjusted retroactively to reflect the
split.
15
PART II: OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities
None
ITEM 3 Defaults upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K.
a) Exhibits
See Exhibit Index on Page 17
b) Reports on Form 8-K
None
16
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.
INCYTE PHARMACEUTICALS, INC.
Date: November 12, 1997 By: /s/Roy A. Whitfield
--------------------------------
Roy A. Whitfield
Chief Executive Officer
Date: November 12, 1997 By: /s/Denise M. Gilbert
--------------------------------
Denise M. Gilbert
Executive Vice President and
Chief Financial Officer
17
INCYTE PHARMACEUTICALS, INC.
EXHIBIT INDEX
NO. EXHIBIT PAGE
----- ---------------------------------------------------- -----
10.18 Master Strategic Relationship Agreement dated as of
September 2, 1997 between SmithKline Beecham Corporation,
Incyte Pharmaceuticals, Inc. and diaDexus, LLC. +*
11.1 Statement Re: Computation of Earnings (Loss) Per Share. . . . 18
27 Financial Data Schedule. . . . . . . . . . . . . . . . . . . .19
_____________
+ Confidential treatment has been requested with respect to certain portions
of this Agreement.
* To be filed by amendment.
EXHIBIT 11.1
INCYTE PHARMACUETICALS, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996
------- -------- ------- --------
Primary Earnings (Loss) Per Share
- ------------------------------------------
Weighted average common shares
outstanding during the period. . . . . . 22,881 20,358 21,609 20,212
Adjustment for dilutive effect of
outstanding stock options. . . . . . . . 1,915 - 1,915 -
Weighted average common and common
stock equivalent shares used for
primary earnings (loss) per share. . . . 24,796 20,358 23,524 20,212
======= ======== ======= ========
Net income (loss). . . . . . . . . . . . . $ 3,044 $(3,352) $ 5,967 $(6,987)
======= ======== ======= ========
Net income (loss) per share. . . . . . . . $ 0.12 $ (0.16) $ 0.25 $ (0.35)
======= ======== ======= ========
Fully Diluted Earnings (Loss) Per Share
- ------------------------------------------
Weighted average common shares
outstanding during the period. . . . . . 22,881 20,358 21,609 20,212
Adjustment for dilutive effect of
outstanding stock options. . . . . . . . 2,146 - 2,057 -
Weighted average common and common
stock equivalent shares used for
fully diluted earnings (loss) per share. 25,027 20,358 23,666 20,212
======= ======== ======= ========
Net income (loss). . . . . . . . . . . . . $ 3,044 $(3,352) $ 5,967 $(6,987)
======= ======== ======= ========
Net income (loss) per share. . . . . . . . $ 0.12 $ (0.16) $ 0.25 $ (0.35)
======= ======== ======= ========
Note: Fully diluted earnings (loss) per share is not presented separately on
the face of the Statement of Operations as the dilution of
the outstanding stock options does not differ materially.
5
1,000
U.S. DOLLARS
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
1
57,286
65,006
9,256
0
0
133,518
47,102
16,582
181,058
39,498
0
0
0
12
141,124
181,058
0
61,714
0
0
48,975
0
0
6,281
314
5,967
0
0
0
5,967
.25
.25
