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 REPORTS 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)
(415) 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 9,909,791 as of April 30, 1996.
2
INCYTE PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements - Unaudited
Condensed Balance Sheets - March 31, 1996 and
December 31, 1995 ............................................... 3
Condensed Statements of Operations - three month
periods ended March 31, 1996 and 1995 ........................... 4
Condensed Statements of Cash Flows - three months ended
March 31, 1996 and 1995 ......................................... 5
Notes to Condensed Financial Statements ......................... 6
ITEM 2. Management's discussion and analysis of financial condition
and results of operations ....................................... 7
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................... 10
ITEM 2. Changes in Securities ........................................... 10
ITEM 3. Defaults Upon Senior Securities ................................. 10
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 10
ITEM 5. Other Information ............................................... 10
ITEM 6. Exhibits and Reports on Form 8-K ................................ 10
Signatures ...................................................... 11
Exhibit Index ................................................... 12
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
MARCH 31, DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 12,531 $ 10,386
Marketable securities - available-for-sale 36,475 30,634
Accounts receivable 67 7,233
Prepaid expenses and other current assets 1,202 749
-------- --------
Total current assets 50,275 49,002
Property and equipment, net 11,426 8,704
Deposits and other assets 430 118
-------- --------
Total assets $ 62,131 $ 57,824
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,258 $ 2,246
Accrued liabilities 1,563 840
Deferred revenue 12,793 7,267
Current portion of capital lease obligations 57 56
-------- --------
Total current liabilities 16,671 10,409
Noncurrent portion of capital lease obligations 28 42
Noncurrent portion of accrued rent 521 536
Stockholders' equity:
Capital stock 10 10
Additional paid-in capital 77,302 76,908
Unrealized gains (losses) on securities available-for-sale (229) 33
Accumulated deficit (32,172) (30,114)
-------- --------
Total stockholders' equity 44,911 46,837
-------- --------
Total liabilities and stockholders' equity $ 62,131 $ 57,824
======== ========
See accompanying notes
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
---- ----
Revenue $ 5,583 $ 1,482
Costs and expenses
Research and development 7,371 3,245
Selling, general and administrative 948 537
------- -------
Total costs and expenses 8,319 3,782
------- -------
Loss from operations (2,736) (2,300)
Interest and other income, net 678 336
------- -------
Net loss $(2,058) $(1,964)
======= =======
Net loss per share $ (0.21) $ (0.25)
======= =======
Shares used in computing net
loss per share 9,830 7,930
======= =======
See accompanying notes
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
CASHFLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,058) $(1,964)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 991 438
Changes in certain assets and liabilities:
Accounts receivable 7,166 (401)
Prepaid expenses and other assets (765) (75)
Accounts payable 12 204
Accrued liabilities 708 123
Deferred revenue 5,526 (380)
-------- -------
Total adjustments 13,638 (91)
-------- -------
Net cash provided by (used in) operating activities 11,580 (2,055)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,713) (1,392)
Purchases of securities - available-for-sale (11,181) (7,767)
Maturity of securities - available-for-sale 5,078 10,255
-------- -------
Net cash provided by (used in) investing activities (9,816) 1,096
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 394 10
Principal payments on capital lease obligations (13) (11)
-------- -------
Net cash provided by (used in) financing activities 381 (1)
-------- -------
Net increase (decrease) in cash and cash equivalents 2,145 (960)
Cash and cash equivalents at beginning of the period 10,386 6,846
-------- -------
Cash and cash equivalents at end of the period $ 12,531 $ 5,886
======== =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 3 $ 30
======== =======
See accompanying notes
6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 balance sheets as of March 31, 1996 and December 31, 1995, statements
of operations for the three months ended March 31, 1996 and 1995 and the
statements of cash flows for the three months ended March 31, 1996 and 1995 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. 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.
Results for any interim period are not necessarily indicative of results for any
future interim period or for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
2. REVENUE RECOGNITION
The Company recognizes revenue for subscriptions to the LIFESEQ database evenly
over the subscription period. Revenue is deferred for fees received before
earned. Revenues for custom orders, such as satellite databases, are recognized
upon delivery.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
7
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 March 31, 1996 and for the three month periods ended
March 31, 1996 and 1995 should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995 and with the section of the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 entitled "Item 1. Business - Factors That May
Affect Results".
WHEN USED IN THIS DISCUSSION, THE WORD "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
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 ADDITIONAL CUSTOMERS;
COMPETITION FROM OTHER ENTITIES OFFERING ACCESS TO GENOMIC DATABASES OR
SEQUENCING SERVICES; EARLY TERMINATION OF A DATABASE SUBSCRIPTION AGREEMENT OR
FAILURE TO RENEW AN AGREEMENT UPON EXPIRATION; THE NEED FOR THE CONTINUED
INVESTMENT IN THE DEVELOPMENT OF THE EXISTING AND NEW DATABASES AND RELATED
PRODUCTS IN ADVANCE OF OBTAINING ADDITIONAL CUSTOMERS; THE DEVELOPMENT OF NEW,
MORE ADVANCED SEQUENCING-RELATED TECHNOLOGIES NOT AVAILABLE TO THE COMPANY;
UNCERTAINTY AS TO THE PATENTABILITY OF GENE SEQUENCES AND OTHER GENETIC
INFORMATION; UNCERTAINTY AS TO THE SCOPE OF COVERAGE, ENFORCEABILITY OR
COMMERCIAL PROTECTION FROM PATENTS THAT ISSUE; AND THE MATTERS DISCUSSED IN ITEM
1 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 UNDER THE
CAPTION "BUSINESS -- FACTORS THAT MAY AFFECT RESULTS". 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 and services. These databases include the
LIFESEQ(TM) (Library of Information for Expressed SEQuences) gene expression and
gene sequence databases, the Gene Mapping database and the Full-Length Clone
database. The Company's databases integrate bioinformatics software with
proprietary and, when appropriate, publicly available genetic information to
create an information-based tool marketed to the pharmaceutical industry for use
in drug discovery and development. In building its genomic databases, the
Company utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome. The pharmaceutical companies that currently subscribe on a non-exclusive
basis to the Company's databases include: Abbott Laboratories; Hoechst AG and
its wholly owned subsidiary Hoechst Marion Roussel, Inc.; Johnson & Johnson;
Novo Nordisk A/S and its wholly owned subsidiary ZymoGenetics, Inc.; Pfizer Inc;
and Pharmacia & Upjohn, Inc. In April 1996 F. Hoffmann-La Roche, Ltd and
Hoffmann-La Roche, Inc. became the seventh pharmaceutical group to subscribe to
the database.
Revenues recognized are predominately nonexclusive database
subscription fees. To a smaller extent, certain subscribers also engage Incyte
for exclusive satellite database services. The Company's database subscription
agreements also 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 the database subscribers will ever
generate products from information contained within the database and thus that
the Company will ever receive milestone payments or royalties. There can be no
assurance that any of the Company's database subscription agreements will be
renewed upon expiration,
8
typically after a term of three years, or not terminated earlier if the Company
breaches any material provision of the database subscription agreement.
The Company has incurred operating losses since inception and, while it
currently expects operating losses to continue only through late 1996, the
Company may never achieve or maintain significant revenues or profitable
operations. There can be no assurance that the Company will be able to obtain
and retain additional customers for the Company's database and sequencing
products and services on acceptable terms or that such database products and
services will produce revenues adequate to fund the Company's operating
expenses.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1996 were $5.6 million
compared to $1.5 million for the corresponding period in 1995. Revenues in the
three months ended March 31, 1996 resulted primarily from database access fees
and, to a much lesser extent from custom satellite database services. The
increase in revenues for the quarter ended March 31, 1996 was due to an
increase in the number of subscribers and higher satellite database fees
recognized. Revenues were reported for six subscribers for the three months
ended March 31, 1996 compared to two for the same period in 1995.
Total operating expenses for the first quarter of 1996 increased to
$8.3 million from $3.8 million for the first quarter of 1995, an increase of
120%. Research and development expenses represented 91% of the increase and
selling, general and administrative expenses represented 9% of the increase.
Total operating expenses are expected to continue to increase over the next
several years, due to increasing costs associated with continued expansion of
the Company's facilities, continued investment in new technology, additional
scientific and administrative personnel required to expand the Company's
database development efforts and additional personnel needed to support existing
subscribers and market to prospective subscribers.
Research and development expenses increased to $7.4 million for the
three months ended March 31, 1996, compared to $3.2 million for the same period
in 1995. The increase from 1995 to 1996 was primarily attributable to the
expansion of gene sequencing operations, increased database development efforts
and investments in new technologies. Research and development expenses for the
three months ended March 31, 1996 included approximately $0.4 million in license
and related fees associated with an agreement signed with GeneTrace Systems Inc.
in February 1996. The Company expects research and development spending to
increase over the next several years as the Company continues to expand its gene
sequence and database operations, invests in new sequencing and database-related
technologies and pursues the development of new database products and services.
Selling, general and administrative expenses increased to $0.9 million
for the three months ended March 31, 1996, compared to $0.5 million for selling,
general and administrative expenses for the same period in 1995. The increase is
due primarily to expenses related to the recruitment and support of database
subscribers and increased administrative personnel. Selling, general and
administrative expenses are expected to continue to increase as the Company
broadens its marketing and customer service support programs and adds management
and support staff.
Interest and other income, net increased to $0.7 million for the three
months ended March 31, 1996, from $0.3 million for the same period in 1995
primarily as the result of higher average cash balances and higher interest
yields due to general market conditions.
The Company's net loss increased to $2.1 million for the three months
ended March 31, 1996 from $2.0 million for the three months ended March 31,
1995. The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, including the timing of the addition of new
database subscribers, the timing of the delivery of custom orders including
satellite databases, changes in the demand for the Company's products and
services resulting from changes in the research and development budgets of the
Company's existing or prospective customers and/or the introduction of
competitive databases or services, the expiration or termination of existing
subscription agreements, and costs related to the expansion of the Company's
gene sequencing and database operations, including expenses related to
investments in and/or acquisitions of new technologies. 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.
The Company recorded a net loss per share of $0.21 for the three months
ended March 31, 1996, representing a decrease from the net loss per share of
$0.25 for the corresponding period in 1995. The decrease in net loss per share
for the three month period was primarily the result of an increase in the
9
shares used in computing net loss per share subsequent to the issuance of common
stock in a follow-on public offering completed in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had $49.0 million in cash, cash
equivalents and marketable securities, compared to $41.0 million as of December
31, 1995.
Net cash provided by operating activities was $11.6 million for the
three months ended March 31, 1996, as compared to net cash used in operating
activities of $2.1 million for the three months ended March 31, 1995. The
increase in net cash provided by operating activities resulted primarily from a
decrease in accounts receivable and the receipt of payments pursuant to database
subscription agreements for which recognition of revenue was deferred. The
Company's investing activities, other than purchases and sales of short-term
investments, have consisted of capital expenditures, which totaled $3.7 million
and $1.4 million for the three months ended March 31, 1996 and 1995,
respectively. Net cash provided by financing activities was $381,000 for the
three months ended March 31, 1996, primarily as a result of issuances of common
stock through the exercise of stock options, and net cash used in financing
activities was $1,000 for the three months ended March 31, 1995, as a result of
principal payments on capital lease obligations, offset in part by proceeds from
issuances of common stock through the exercise of stock options.
The Company expects its cash requirements to increase in future
periods, particularly in 1996, as the Company continues to add personnel to
commercialize its gene sequencing and database products and services, conducts
new technology assessment and acquisition as well as research and development
with respect to its high-throughput sequencing effort, and develops software for
its database services. In addition, the Company expects to expend additional
cash in 1996 and beyond for improvements to its new facilities and the
associated lease expenses. The Company expects to continue to fund future
operations with revenues from subscriptions in addition to using its current
cash, cash equivalents and investments when necessary. The Company expects these
resources will satisfy the Company's projected working capital and capital
expenditure requirements at least through 1997. However, the Company can offer
no assurance that the Company will be able to obtain additional subscribers to
the Company's database 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 operating
expenses. The Company's cash requirements depend on numerous factors, including
the ability of the Company to attract subscribers to its database and sequencing
products and services; the Company's research and development activities;
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 insure that the Company's sequencing operation remains
competitive. There can be no assurance that additional funding, if necessary,
will be available on favorable terms, if at all.
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INCYTE PHARMACEUTICALS, INC.
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
b) Reports on Form 8-K
None
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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: May 13, 1996 By: /s/ Roy A. Whitfield
--------------------
Roy A. Whitfield
President and Chief Executive
Officer
Date: May 13, 1996 By: /s/ Denise M. Gilbert
---------------------
Denise M. Gilbert
Executive Vice President and
Chief Financial Officer
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INCYTE PHARMACEUTICALS, INC.
EXHIBIT INDEX
-------------
27 Financial Data Schedule
5
1,000
U.S. DOLLARS
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
1
12,531
36,475
67
0
0
50,275
11,426
0
62,131
16,671
0
0
0
10
44,901
62,131
0
5,583
0
0
7,371
0
0
(2,058)
0
(2,058)
0
0
0
(2,058)
(0.21)
(0.21)
