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 June 30, 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 10,121,460 as of July 31, 1996.
Page 1 of 15
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INCYTE PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements - Unaudited
Condensed Balance Sheets - June 30, 1996 and
December 31, 1995........................................................ 3
Condensed Statements of Operations - three and six month
periods ended June 30, 1996 and 1995..................................... 4
Condensed Statements of Cash Flows - six months ended
June 30, 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....................................................... 11
ITEM 2. Changes in Securities................................................... 11
ITEM 3. Defaults Upon Senior Securities......................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders..................... 11
ITEM 5. Other Information....................................................... 12
ITEM 6. Exhibits and Reports on Form 8-K........................................ 12
Exhibit Index........................................................... 13
Signatures.............................................................. 14
Page 2 of 15
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
JUNE 30, DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 7,172 $ 10,386
Marketable securities - available-for-sale 30,348 30,634
Accounts receivable 9,365 7,233
Prepaid expenses and other current assets 955 749
-------- --------
Total current assets 47,840 49,002
Property and equipment, net 17,777 8,704
Deposits and other assets 431 118
-------- --------
Total assets $ 66,048 $ 57,824
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,950 $ 2,246
Accrued liabilities 1,843 840
Deferred revenue 15,295 7,267
Current portion of capital lease obligations 59 56
-------- --------
Total current liabilities 22,147 10,409
Noncurrent portion of capital lease obligations 13 42
Noncurrent portion of accrued rent 506 536
Stockholders' equity:
Capital stock 10 10
Additional paid-in capital 77,470 76,908
Unrealized gains (losses) on securities available-for-sale (323) 33
Accumulated deficit (33,775) (30,114)
-------- --------
Total stockholders' equity 43,382 46,837
-------- --------
Total liabilities and stockholders' equity $ 66,048 $ 57,824
======== ========
Page 3 of 15
See accompanying notes
4
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
1996 1995 1996 1995
-------------- ------------- ------------- -------------
Revenue $ 7,630 $ 1,953 $ 13,213 $ 3,435
Costs and expenses:
Research and development 8,831 4,443 16,202 7,688
Selling, general and administrative 1,001 686 1,949 1,223
-------- -------- -------- --------
Total costs and expenses 9,832 5,129 18,151 8,911
-------- -------- -------- --------
Loss from operations (2,202) (3,176) (4,938) (5,476)
Interest and other income, net 599 283 1,277 619
-------- -------- -------- --------
Net loss ($ 1,603) ($ 2,893) ($ 3,661) ($ 4,857)
======== ======== ======== ========
Net loss per share ($ 0.16) ($ 0.36) ($ 0.37) ($ 0.61)
======== ======== ======== ========
Shares used in computing net
loss per share 9,900 7,934 9,865 7,932
======== ======== ======== ========
Page 4 of 15
See accompanying notes
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 3,661) ($ 4,857)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,258 1,010
Changes in certain assets and liabilities:
Accounts receivable (2,132) (621)
Prepaid expenses and other assets (519) (131)
Accounts payable 2,704 (322)
Accrued liabilities 973 341
Deferred revenue 8,028 (1,001)
-------- --------
Total adjustments 11,312 (724)
-------- --------
Net cash provided by (used in) operating activities 7,651 (5,581)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,331) (2,783)
Purchases of securities - available-for-sale (11,181) (11,641)
Maturity of securities - available-for-sale 11,111 20,511
-------- --------
Net cash provided by (used in) investing activities (11,401) 6,087
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 562 37
Principal payments on capital lease obligations (26) (24)
-------- --------
Net cash provided by financing activities 536 13
-------- --------
Net increase (decrease) in cash and cash equivalents (3,214) 519
Cash and cash equivalents at beginning of the period 10,386 6,846
-------- --------
Cash and cash equivalents at end of the period $ 7,172 $ 7,365
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 5 $ 34
======== ========
Page 5 of 15
See accompanying notes
6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1996 and December 31, 1995, statements of
operations for the three and six months ended June 30, 1996 and 1995 and the
statements of cash flows for the six months ended June 30, 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.
4. SUBSEQUENT EVENTS
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 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. Genome Systems will maintain its
name and operations and continue to operate as a wholly-owned subsidiary of
Incyte.
Page 6 of 15
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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 June 30, 1996 and for the three and six month
periods ended June 30, 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; cost of accessing
technologies developed by other companies; 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; the ability to successfully integrate Genome Systems'
operations; 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 database, the LifeSeq Atlas(TM) gene mapping database, the
Microbial database and the Database of full-length genes. The Company's
databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
tools marketed to the pharmaceutical industry on a non-exclusive basis 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. During the quarter ended June 30, 1996, three pharmaceutical companies
were added as subscribers to the Company's databases. With the addition of
Schering AG, Berlin, which was added in July 1996, the total number of
subscribers is ten.
Page 7 of 15
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Revenues recognized are predominately nonexclusive database
subscription fees. To a smaller extent, certain subscribers also engage Incyte
for exclusive, custom or "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, 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 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 and six months ended June 30, 1996 increased to
$7.6 million and $13.2 million, respectively, compared to $2.0 million and $3.4
million for the corresponding periods in 1995. Revenues resulted primarily from
database access fees and, to a much lesser extent from custom satellite database
services. The increase in revenues in comparable quarters was due to an increase
in the number of subscribers and higher satellite database fees recognized.
Revenues were reported for seven subscribers for the three months ended June 30,
1996 compared to two for the same period in 1995.
Total operating expenses for the three and six months ended June 30,
1996 were $9.8 million and $18.2 million, respectively, compared to $5.1 million
and $8.9 million for the same periods of 1995. Research and development expenses
represented over 90% of the increase in the comparable three month and six month
periods. Total operating expenses are expected to continue to increase over the
next several years, due to 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 $8.8 million and $16.2
million for the three and six months ended June 30, 1996, respectively, compared
to $4.4 million and $7.7 million for the same periods in 1995. The increase from
1995 to 1996 was primarily attributable to expansion of gene sequencing
operations, an increase in bioinformatics and database development efforts and
increased investment in intellectual property and new technologies. 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 $1.0 and $1.9
million for the three and six months ended June 30, 1996, respectively, compared
to $0.7 million and $1.2 million for the same periods in 1995. The increase is
due primarily to expenses related to the recruitment and support of database
subscribers and additional 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.
Page 8 of 15
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Interest and other income, net increased to $0.6 million and $1.3
million for the three and six months ended June 30, 1996, respectively, from
$0.3 million and $0.6 million for the same periods in 1995 primarily as the
result of higher average cash balances.
The Company's net loss decreased to $1.6 million and $3.7 million for
the three and six month ended June 30, 1996, respectively, from $2.9 million and
$4.9 million for the three and six months ended June 30, 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, 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. These factors will be influenced by 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 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 $0.16 and $0.37 for the
three and six months ended June 30, 1996, respectively, representing a decrease
from the net loss per share of $0.36 and $0.61 for the corresponding periods in
1995. The decrease in net loss per share for the comparable 1995 and 1996
periods was primarily the result of an increase in the number of subscribers and
resulting subscription revenues and, to a smaller extent, the increase in the
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 June 30, 1996, the Company had $37.5 million in cash, cash
equivalents and marketable securities, compared to $41.0 million as of December
31, 1995.
Net cash generated by operating activities was $7.7 million for the six
months ended June 30, 1996, as compared to net cash used in operating activities
of $5.6 million for the six months ended June 30, 1995. The increase in net cash
generated by operating activities resulted primarily from increases in accounts
payable and deferred revenue as well as a decrease in the Company's net loss,
offset in part by an increase in accounts receivable. Net cash generated by
operating activities may in the future fluctuate significantly from quarter to
quarter due to periodic large prepayments by subscribers. The Company's
investing activities, other than purchases and sales of short-term investments,
have consisted of capital expenditures, which totaled $11.3 million and $2.8
million for the six months ended June 30, 1996 and 1995, respectively. The
increase was due to tenant improvements on the Company's facilities and
purchases of sequencing equipment and computer hardware required to support the
increase in data content of the Company's LifeSeq(TM) database as well as the
generation of information for the Company's new database modules. Net cash
provided by financing activities was $0.5 million for the six months ended June
30, 1996, primarily as a result of issuances of common stock through the
exercise of stock options. Net cash provided by financing activities was $13,000
for the six months ended June 30, 1995, as a result of proceeds from issuances
of common stock through the exercise of stock options offset in part by
principal payments on capital lease obligations.
The Company expects its cash requirements to increase in future
periods, particularly in 1996, as the Company completes collaboration
agreements, license agreements and/or acquisitions to access new technologies.
In addition, the Company expects to expend additional cash in 1996 and beyond
for improvements to its facilities and investments in sequencing equipment and
computer
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hardware required in the development and production of new products and
the improvement of existing products. 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.
SUBSEQUENT EVENTS
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 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. Genome Systems produces large
DNA insert libraries and clones and provides contract DNA preparation services
and high-throughput genomic screening and mapping services. Genome Systems will
maintain its name and operations and continue to operate as a wholly-owned
subsidiary of Incyte.
Page 10 of 15
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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
On May 21, 1996 the Company held its Annual Meeting of
Stockholders. The following actions were taken at the annual
meeting.
1. The following Directors were elected:
a. Roy A. Whitfield. 7,300,814 shares voted in favor of
the nominee, 118,700 shares withheld their vote, and
2,430,019 shares were not voted;
b. Randal W. Scott. 7,300,814 shares voted in favor of the
nominee, 118,700 shares withheld their vote, and
2,430,019 shares were not voted;
c. Barry M. Bloom. 7,300,414 shares voted in favor of the
nominee, 119,100 shares withheld their vote, and
2,430,019 shares were not voted;
d. Jeffrey J. Collinson. 7,300,814 shares voted in favor
of the nominee, 118,700 shares withheld their vote, and
2,430,019 shares were not voted; and
e. Frederick B. Craves. 7,300,414 shares voted in favor of
the nominee, 119,100 shares withheld their vote, and
2,430,019 shares were not voted;
f. Jon S. Saxe. 7,300,414 shares voted in favor of the
nominee, 119,100 shares withheld their vote, and
2,430,019 shares were not voted;
2. A proposal to amend and restate the Company's 1991 Stock
Plan. 5,886,248 shares were voted in favor of the
proposal, 1,465,751 shares were voted against the
proposal, 6,377 shares abstained, and 2,491,157 shares
were not voted (including 61,138 broker non-votes).
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3. The selection of the Company's independent auditors was
ratified. 7,415,839 shares were voted in favor of the
proposal, 2,075 shares were voted against the proposal,
1,600 shares abstained, and 2,430,019 shares were not
voted.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
See Exhibit Index on Page 14
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: August 13, 1996 By: /s/ Roy A. Whitfield
-------------------------------
Roy A. Whitfield
President and Chief Executive
Officer
Date: August 13, 1996 By: /s/ Denise M. Gilbert
-------------------------------
Denise M. Gilbert
Executive Vice President and
Chief Financial Officer
Page 13 of 15
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INCYTE PHARMACEUTICALS, INC.
EXHIBIT INDEX
Page No.
--------
27 Financial Data Schedule 15
Page 14 of 15
5
1,000
U.S. DOLLARS
6-MOS
DEC-31-1995
JAN-01-1996
JUN-30-1996
1
7,172
30,348
9,365
0
0
47,840
17,777
0
66,048
22,147
0
0
0
10
43,372
66,048
0
13,213
0
0
18,151
0
0
(3,661)
0
(3,661)
0
0
0
(3,661)
(.37)
(.37)
