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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 0-19125
ISIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
33-0336973
(I.R.S Employer Identification No.)
2292 Faraday Avenue, Carlsbad, CA 92008
(Address of principal executive offices, including zip code)
760-931-9200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or of 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.
(1) YES X (2) YES X
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Common stock $.001 par value 26,632,766 shares
(Class) (Outstanding at October 17, 1997)
EXHIBIT INDEX: NO. 27 : FINANCIAL DATA SCHEDULE
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ISIS PHARMACEUTICALS, INC.
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Condensed Statements of Operations for three months
and nine months ended September 30, 1997 and 1996 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 7
Liquidity and Capital Resources 8
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 9
ITEM 2: Changes in Securities 9
ITEM 3: Default upon Senior Securities 9
ITEM 4: Submission of Matters to a Vote of Security Holders 9
ITEM 5: Other Information 9
ITEM 6: Exhibits and Reports on Form 8-K 9
SIGNATURES 10
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ISIS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
ASSETS
September 30, December 31,
1997 1996
(Unaudited) (Note)
---------- ------------
Current assets:
Cash and cash equivalents $ 28,860 $ 37,082
Short-term investments 39,657 40,542
Prepaid expenses and other current assets 1,692 1,732
------ ------
Total current assets 70,209 79,356
Property, plant and equipment, net 18,493 15,334
Patent costs, net 7,063 6,157
Deposits and other assets 1,503 458
------ ------
$ 97,268 $ 101,305
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,104 $ 2,362
Accrued payroll and related expenses 1,569 1,489
Accrued liabilities 4,147 2,763
Deferred contract revenues 13,480 10,204
Current portion of long-term debt and
capital lease obligations 1,539 6,238
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Total current liabilities 21,839 23,056
Long-term debt and capital lease obligations,
less current portion 34,056 19,864
Stockholders' equity:
Common stock, $.001 par value;
50,000,000 shares authorized,
26,608,000 shares and 26,201,000 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 27 26
Additional paid-in capital 184,400 181,248
Unrealized gain on investments 183 178
Accumulated deficit (143,237) (123,067)
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Total stockholders' equity 41,373 58,385
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$ 97,268 $ 101,305
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Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes.
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(Unaudited)
Three months ended
September 30,
1997 1996
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Revenue:
Contract revenue $ 12,641 $ 5,142
Interest Income 1,133 944
------ ------
13,774 6,086
Expenses:
Research and development 13,368 10,219
General and administrative 1,805 1,572
Interest expense 791 280
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15,964 12,071
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Net loss $ (2,190) $ (5,985)
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Net loss per share $ (.08) $ (.23)
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Weighted average common shares 26,519 25,671
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Nine Months Ended
September 30,
1997 1996
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Revenue:
Contract revenue $ 23,060 $ 15,220
Interest income 2,846 3,005
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25,906 18,225
Expenses:
Research and development 38,528 31,247
General and administrative 5,566 4,571
Interest expense 1,982 766
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46,076 36,584
------ ------
Net loss $(20,170) $(18,359)
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Net loss per share $ (.76) $ (.72)
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Weighted average common shares 26,393 25,494
====== =======
See accompanying notes
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ISIS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
September 30,
1997 1996
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Cash used in operations: $ (14,366) $ (15,110)
Investing activities:
Short-term investments 885 (4,805)
Property and equipment (3,713) (853)
Other assets (2,088) (691)
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Net cash used in
investing activities (4,916) (6,349)
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Financing activities:
Net proceeds from issuance of common stock 3,153 2,528
Proceeds from long-term borrowings 11,386 0
Principal payments on debt and
capital lease obligations (3,479) (1,748)
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Net cash provided from financing
activities 11,060 780
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Net decrease in cash and cash equivalents (8,222) (20,679)
Cash and cash equivalents at beginning
of period 37,082 46,463
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Cash and cash equivalents at end of period $ 28,860 $ 25,784
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,408 $ 760
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Additions to capital lease obligations
for acquisitions of property, plant
and equipment $ 1,585 $ 2,038
See accompanying notes
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ISIS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of presentation
The unaudited interim financial statements for the three and nine month
periods ended September 30, 1997 and 1996 have been prepared on the same
basis as the Company's audited financial statements for the year ended
December 31, 1996. The financial statements include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such dates and
the operating results and cash flows for those periods. Results for the
interim periods are not necessarily indicative of the results for the entire
year. For more complete financial information, these financial statements,
and notes thereto, should be read in conjunction with the audited financial
statements for the year ended December 31, 1996 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
2. Accounting standard on earnings per share
In February 1997, the Financial Accounting Standards Board 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 primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of earnings per share is not expected to be
material.
3. Subsequent event
In October 1997, the Company obtained $25 million in private debt
financing. The terms of the financing provide for a ten year maturity on the
debt, interest of 14% per annum, and deferred interest payments for the first
five years of the loan. In conjunction with the debt financing, Isis will
issue warrants to the lender to purchase 500,000 shares, exercisable at $25
per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information contained in this Report, this
Report contains forward-looking statements regarding the Company's business
and products and their projected prospects and qualities, and the Company's
relationship with its corporate partners. Such statements are subject to
certain risks and uncertainties, particularly those inherent in both the
process of discovering, developing and commercializing safe and effective
drugs, and the endeavor of building a business around such potential products.
Actual results could differ materially from those projected in this Form 10-Q.
As a result, the reader is cautioned not to place undue reliance on these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Isis' Annual
Report on Form 10-K for the year ended December 31, 1996 which is on file with
the U.S. Securities and Exchange Commission, a copy of which is available from
the Company.
Since its inception in January 1989, the Company has devoted
substantially all of its resources to its research, drug discovery and
development programs. The Company has been unprofitable since its inception
and expects to incur additional operating losses for the next several years.
The Company has entered into collaborative research, development and
distribution agreements with pharmaceutical companies that generate revenue
to augment the level of research and development activity and to offset
portions of its research and development costs. To date, the Company has not
received any significant revenue from the sale of products.
RESULTS OF OPERATIONS
The Company had contract revenue of $12.6 million for the third quarter
and $23.1 million for the nine month period ended September 30, 1997, compared
with $5.1 million and $15.2 million, respectively, for the same periods in
1996. The revenue increase was primarily due the receipt of a $5 million
pre-commercial fee from CIBA Vision under the terms of a distribution
agreement for fomivirsen (ISIS 2922). A $2 million milestone payment from
Novartis contributed to the increase. The Company also had interest income
totaling $1.1 million for the quarter and $2.8 million for the nine month
period compared with $0.9 million and $3.0 million for the same periods in
1996. This variation in interest income was due to fluctuations in the level
of cash, cash equivalents and short-term investments during the three and
nine month periods.
Research and development expenses increased to $13.4 million for the
three months and $38.5 million for the nine months ended September 30, 1997
from $10.2 million and $31.2 million for the same periods in 1996. This
increase was attributable to an increase in preclinical and clinical
development activities including compounds advancing into more expensive
stages of clinical development. The Company expects that its development
expenses will continue to increase as its current preclinical and clinical
compounds advance and preclinical and clinical studies on additional compounds
are undertaken.
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General and administrative expenses increased to $1.8 million for the
quarter and $5.6 million for the nine months ended September 30, 1997, from
$1.6 million and $4.6 million for the same periods in 1996, reflecting
increased staffing costs in the business development and investor relations
functions as well as increased occupancy expenditures. The Company expects
that its general and administrative expenses will continue to increase in the
future in support of its growing research and development operations.
During the quarter ended September 30, 1997, the Company recorded a net
loss of $2.2 million, or $0.08 per share, compared with $6.0 million, or
$0.23 per share, for the same period in 1996. During the nine month period
ended September 30, 1997, the Company's net loss amounted to $20.2 million,
or $0.76 per share, compared to $18.4 million, or $0.72 per share for the
same period in 1996. The Company expects that its operating losses will
increase for the remainder of the fiscal year and beyond as its activities
grow, and may fluctuate from quarter to quarter as a result of differences
in the timing and composition of revenue earned and expenses incurred.
The Company believes that inflation and changing prices have not
had a material effect on its ongoing operations to date.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations
primarily through the sale of equity securities, raising net proceeds
aggregating approximately $180 million, as of September 30, 1997, from the
private and public sale of such securities. The Company has also financed
a portion of its operations through contract research and development revenue,
portions of which are paid in advance of work being performed, offsetting the
Company's cash usage for operations.
As of September 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $68.5 million and working capital of
$48.4 million. In comparison, the Company had cash, cash equivalents and
short-term investments of $77.6 million and working capital of $56.3 million
as of December 31, 1996. The decreases in cash and working capital resulted
from the use of cash to fund operating losses, investments in capital
equipment and principal payments on debt and capital lease obligations.
Subsequent to the end of the quarter, the Company obtained $25 million in
private debt financing (see Note 3 to the accompanying financial statements).
The 1995 agreement with Boehringer Ingelheim provided the Company with a
$40 million line of credit. This line of credit is available under certain
circumstances and is to be used in support of the combined cell adhesion
programs. As of September 30, 1997, the outstanding balance under this line
of credit was $22.6 million.
As of September 30, 1997, the Company's long-term debt and capital lease
obligations totaled $35.6 million, versus $26.1 million at December 31, 1996.
This increase was due to additional capital lease financing and a $6.4 million
borrowing under the Boehringer Ingelheim line of credit described above. In
addition, in the second quarter of this year two new term loans totaling
$9.7 million were obtained from a bank to refinance $6.5 million in existing
notes secured by real property. The Company expects that its capital lease
obligations will increase over time to fund capital equipment acquisitions
required for its growing business. Lease lines will continue to be used by
the Company to the extent that terms thereof remain commercially attractive.
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The Company expects to incur substantial additional research and
development costs, including costs related to clinical trials, manufacturing,
marketing and distribution and other capital expansion, and expects losses to
continue to increase as the Company's preclinical testing and clinical trial
efforts expand. It is the Company's intention to seek additional collaborative
research and development relationships with suitable potential corporate
partners. There can be no assurance that any agreements resulting from these
discussions will successfully reduce the Company's funding requirements, and
arrangements with collaborative partners or others may require the Company to
relinquish rights to certain of its technologies, product candidates or
products. Additional equity or debt financings will be required, and there
can be no assurance that these funds will be available on favorable terms,
if at all. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders may result.
The Company anticipates that its existing available cash,
cash equivalents and short-term investments, combined with anticipated
interest income, contract revenues and the proceeds of the $25 million debt
financing completed after the end of the quarter, will be adequate to satisfy
its anticipated capital requirements for approximately three years. The
Company's future capital requirements will depend on many factors, including
continued scientific progress in its research, drug discovery and development
programs; the magnitude of these programs and progress with preclinical and
clinical trials; the time and costs involved in obtaining regulatory
approvals; the cost involved in filing, prosecuting and enforcing patent
claims; competing technological and market developments; changes in the
existing collaborative research and development relationships and the ability
of the Company to establish additional research and development arrangements;
and the cost of manufacturing scale-up and effective commercialization
activities and arrangements. If adequate funds are not available, the Company
may be required to significantly curtail one or more of its research, drug
discovery or development programs.
Uncertainties associated with the length and expense of preclinical
and clinical testing of any of the Company's products could greatly
increase the cost of development of such product and affect the timing
of anticipated revenue from product sales, and failure by the Company to
obtain regulatory approval for any product will preclude its
commercialization. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products
commercially unattractive.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
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None.
b. Reports on Form 8-K
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The Company filed no reports on Form 8-K during the
quarter ended September 30, 1997.
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ISIS PHARMACEUTICALS, INC.
SIGNATURES
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.
ISIS PHARMACEUTICALS, INC.
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(Registrant)
Date: October 27, 1997 By: /S/ STANLEY T. CROOKE
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Stanley T. Crooke, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 27, 1997 By: /S/ B. LYNNE PARSHALL
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B. Lynne Parshall
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
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27 Financial Data Schedule
5
1,000
9-MOS
DEC-31-1996
JAN-01-1997
SEP-30-1997
28,860
39,657
0
0
0
70,209
18,493
0
97,268
21,839
34,056
0
0
27
41,346
97,268
0
25,906
0
0
44,094
0
1,982
(20,170)
0
(20,170)
0
0
0
(20,170)
(.76)
(.76)
