1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES AND EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______________________ to ____________________ Commission file number 0-28150 NEUROCRINE BIOSCIENCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0525145 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3050 SCIENCE PARK ROAD SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices) (619) 658-7600 (Registrant's telephone number, including area code) 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 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: Yes X No ----- ----- The number of outstanding shares of the registrant's Common Stock, no par value, was 16,949,772 as of July 31, 1997
2 NEUROCRINE BIOSCIENCES, INC FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I FINANCIAL INFORMATION ITEM 1: Financial Statements............................................................................... 3 Condensed Balance Sheets as of June 30, 1997 and December 31, 1996................................. 3 Condensed Statements of Operations for the three months and six months ended June 30, 1997 and 1996....................................................................... 4 Condensed Statements of Cash Flows for the six months ended June 30, 1997 and 1996....................................................................... 5 Notes to Financial Statements...................................................................... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 7 Overview........................................................................................... 7 Results of Operations.............................................................................. 7 Liquidity and Capital Resources.................................................................... 8 PART II OTHER INFORMATION.................................................................................. 10 ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 10 ITEM 6: Exhibits........................................................................................... 12 10.1 Employment agreement executed March 1, 1997 between the Registrant and Gary A. Lyons. 10.2 Employment agreement executed March 1, 1997 between the Registrant and Errol B. DeSouza. 10.3 Employment agreement executed March 1, 1997 between the Registrant and Paul W. Hawran. 27.1 Financial Data Schedule. SIGNATURES ................................................................................................... 13 </TABLE> 2
3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS NEUROCRINE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 ------------ ------------ (UNAUDITED) (NOTE) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 22,945,469 $ 11,325,361 Short-term investments, available for sale 40,631,271 58,594,853 Receivables under collaborative agreements 7,653,719 1,329,513 Other current assets 1,327,645 840,962 ------------ ------------ Total current assets 72,558,104 72,090,689 Property, equipment, and leasehold improvements, net 5,516,054 3,546,420 Licensed technology and patent application costs, net 1,352,265 1,443,403 Other assets 4,594,102 876,070 ------------ ------------ Total assets $ 84,020,525 $ 77,956,582 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 526,891 $ 800,157 Accrued expenses, other current liabilities, and current portion of obligations under capital leases 4,969,128 3,267,357 ------------ ------------ Total current liabilities 5,496,019 4,067,514 Long-term liabilities 1,150,187 1,122,100 Stockholders' equity: Preferred Stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding Common stock, no par value: Authorized shares - 100,000,000 Issued and outstanding shares - 16,938,569 shares in 1997 16,776,614 in 1996 83,151,069 82,788,513 Accumulated deficit (5,776,750) (10,021,545) ------------ ------------ Total stockholders' equity 77,374,319 72,766,968 ------------ ------------ Total liabilities and stockholders' equity $ 84,020,525 $ 77,956,582 ============ ============ </TABLE> Note: The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by generally accepted accounting principles. See accompanying notes to condensed financial statements. 3
4 NEUROCRINE BIOSCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues under collaborative research agreements: Sponsored research $ 2,637,500 $ 1,625,000 $ 5,275,000 $ 3,250,000 Milestones 1,000,000 3,000,000 6,000,000 3,000,000 Other revenue 1,163,694 886,416 2,380,085 1,420,394 ------------ ------------ ------------ ------------ Total revenues 4,801,194 5,511,416 13,655,085 7,670,394 Operating expenses Research and development 4,440,251 3,512,469 9,029,329 5,306,953 General and administration 1,343,901 724,387 2,488,450 1,295,184 ------------ ------------ ------------ ------------ Total operating expenses 5,784,152 4,236,856 11,517,779 6,602,137 ------------ ------------ ------------ ------------ Income (loss) from operations (982,958) 1,274,560 2,137,306 1,068,257 Interest income 910,037 489,051 1,833,268 748,215 Interest expense (40,785) (66,117) (88,411) (137,939) Other income 239,512 59,954 439,025 103,581 ------------ ------------ ------------ ------------ Income before income taxes 125,806 1,757,448 4,321,188 1,782,114 Provision for income taxes 22,393 -- 76,393 -- ------------ ------------ ------------ ------------ Net income $ 103,413 $ 1,757,448 $ 4,244,795 $ 1,782,114 ============ ============ ============ ============ Net income per share $ 0.01 $ 0.11 $ 0.23 $ 0.12 ============ ============ ============ ============ Shares used in computing net income per share 18,197,434 15,412,571 18,149,386 14,422,918 ============ ============ ============ ============ </TABLE> See accompanying notes to condensed financial statements. 4
5 NEUROCRINE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------------- 1997 1996 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net income $ 4,244,795 $ 1,782,114 Adjustments to reconcile net income to cash used in operating activities: Compensation expense recognized for stock options 71,216 27,989 Depreciation and amortization 559,185 433,491 Deferred revenue 1,750,000 326,616 Deferred rent 201,423 27,638 Change in operating assets and liabilities: Other current assets (6,810,888) (5,132,770) Other assets (3,718,032) (218,653) Accounts payable and accrued liabilities (83,934) 100,520 ------------ ------------ Net cash flows used in operating activities (3,786,235) (2,653,055) INVESTING ACTIVITIES Purchases of short-term investments (38,986,324) (51,111,011) Sales/maturities of short-term investments 56,870,228 22,955,598 Purchase of licensed technology and expenditures for patent application costs -- (405,296) Purchases of furniture, equipment and leasehold improvements (2,437,681) (677,013) ------------ ------------ Net cash flows provided by (used in) investing activities 15,446,223 (29,237,722) FINANCING ACTIVITIES Issuance of common stock, net 365,781 47,507,488 Principal payments on obligations under capital leases (410,898) (359,949) Payments received on notes receivable from stockholders 5,237 5,237 ------------ ------------ Net cash flows (used in) provided by financing activities (39,880) 47,152,776 ------------ ------------ Increase in cash and cash equivalents 11,620,108 15,261,999 Cash and cash equivalents at beginning of period 11,325,361 6,392,749 ------------ ------------ Cash and cash equivalents at end of period $ 22,945,469 $ 21,654,748 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 88,411 $ 71,836 ============ ============ Taxes paid $ 135,000 $ -- ============ ============ </TABLE> See accompanying notes to condensed financial statements. 5
6 NEUROCRINE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The interim unaudited condensed financial statements contained herein have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of results expected for the full year. The financial statements should be read in conjunction with the audited financial statements and notes 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. NET INCOME PER SHARE Net income per share is computed using the weighted average number of shares of common stock outstanding during each period. Common stock equivalent shares from stock options, warrants, and convertible preferred shares are excluded from the computation when their effect is antidilutive. For the three and six month periods ended June 30, 1997 and 1996, shares used in computing net income per share also include common equivalent shares arising from dilutive stock options, warrants, and convertible preferred shares using the treasury stock method. Income per share on a fully diluted basis was unchanged. 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 method, the dilutive effect of common stock equivalents will be excluded from "basic" earnings per share, and basic earnings per share for the three and six months ended June 30, 1997 and 1996 will be $0.01 and $0.25, respectively. Under the new method, "diluted" earnings per share will not be materially different than earnings per share as presented herein. 3. SUBSEQUENT EVENT In May 1997 the Company purchased two adjacent parcels of land in San Diego for approximately $5.0 million in cash. In August 1997 the Company sold one parcel of land for the purpose of constructing an expanded laboratory and office complex which it then intends to lease under a 15 year operating lease. The land purchase price of approximately $3.5 million plus a future cash payment of $355,000 will be repaid to the Company under a 10 year promissory note bearing interest at 8.25% per annum. The Company has an option to purchase the facility at any time during the lease at a predetermined price. 6
7 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations of Neurocrine Biosciences, Inc. ("Neurocrine" or the "Company") contain forward-looking statements which involve risks and uncertainties, pertaining generally to the expected continuation of the Company's collaborative agreements, the receipt of research payments thereunder, the future achievement of various milestones in product development and the receipt of payments related thereto, the potential receipt of royalty payments, the period of time the Company's existing capital resources will meet its funding requirements, and financial results and operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below and those outlined in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. OVERVIEW Since the founding of the Company in January 1992, Neurocrine has been engaged in the discovery and development of novel pharmaceutical products for diseases and disorders of the central nervous and immune systems. To date, Neurocrine has not generated any revenues from the sale of products, and does not expect to generate any product revenues for the foreseeable future. The Company's revenues are expected to come from its strategic alliances. The Company has generated net income for the three and six month periods ended June 30, 1996 and 1995 primarily from revenues from its strategic alliances. The Company does not anticipate continuing to generate net income as its operating expenses are anticipated to rise significantly in future periods as products are advanced through the various stages of clinical development. Neurocrine has incurred a cumulative deficit of approximately $5.8 million as of June 30, 1997 and expects to incur operating losses in the future which are potentially greater than losses in prior years. RESULTS OF OPERATIONS Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 Revenues decreased to $4.8 million for the quarter ended June 30, 1997 compared with $5.5 million for the same period in 1996. Decreased revenues were primarily the result of timing of research milestone payments received under the Company's corporate collaborations. Research and development expenses increased to $4.4 million for the quarter ended June 30, 1997 compared with $3.5 million for the same period in 1996. This increase reflected continued additions to scientific and clinical development personnel, and related support expenditures, as the Company increased its research and clinical development activities. Clinical development costs include significant amounts which are reimbursable under corporate collaborations. Revenues associated with such reimbursements are classified as "Other revenue". General and administrative expenses increased to $1.3 million for the quarter ended June 30, 1997 compared with $724,000 for the same period in 1996. This increase resulted from additional administrative personnel and related business development and professional services expenses to support the increased research and development efforts and higher patent application costs. Interest income increased to $910,000 for the quarter ended June 30, 1997 compared with $489,000 for the same period in 1996. This increase was due to increased investment income attributable to increased cash equivalents and short term investments. Net income decreased to $103,000 or $0.01 per share for the quarter ended June 30, 1997 compared with $1.8 million or $0.11 per share for the same period in 1996. The decrease in net income and net income per share was primarily attributable to a decrease in research milestone revenues and increased operating expenses. The Company's revenues to date have come from funded research and achievement of milestones under corporate collaborations which leads to substantial fluctuations in the results of quarterly revenues and earnings. Accordingly, results of one quarter are not predictive of future quarters. 7
8 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Revenues increased to $13.7 million for the six month period ended June 30, 1997 compared with $7.7 million for the same period in 1996. The increase was primarily due to achievement of a research milestone and sponsored research revenues recognized under the collaboration with Eli Lilly. Research and development expenses increased to $9.0 million for the six month period ended June 30, 1997 compared with $5.3 million for the same period in 1996. This increase reflected continued additions to scientific and clinical development personnel, and related support expenditures, as the Company increased its research and clinical development activities. Clinical development costs include significant amounts which are reimbursable under corporate collaborations. Revenues associated with such reimbursements are classified as "Other revenue". General and administrative expenses increased to $2.5 million for the six month period ended June 30, 1997 compared with $1.3 million for the same period in 1996. This increase resulted from additional administrative personnel and related business development and professional services expenses to support the increased research and development efforts and higher patent application costs. Interest income increased to $1.8 million for the six month period ended June 30, 1997 compared with $748,000 for the same period in 1996. This increase was due to increased investment income attributable to increased cash equivalents and short term investments. Net income increased to $4.2 million or $0.23 per share for the six month period ended June 30, 1997 compared with $1.8 million or $0.12 per share for the same period in 1996. The increase in net income and net income per share was primarily due to achievement of a research milestone, and sponsored research revenues recognized under the collaboration with Eli Lilly. The Company's revenues to date have come from funded research and achievement of milestones under corporate collaborations which leads to substantial fluctuations in the results of year-to-date revenues and earnings. Accordingly, results of one period are not predictive of future periods. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 the Company's cash, cash equivalents, and short-term investments totaled $63.6 million. Cash held by the Company excludes $7.7 million due from corporate collaborators of which $4.7 million had been collected as of July 31, 1997. Total cash, cash equivalents, and short-term investments also excludes approximately $7.5 million held by Neuroscience Pharma (NPI) Inc. which is available to fund certain of the Company's research and development activities. Cash used in operating activities during the six month period ended June 30, 1997 increased to $3.8 million compared with $2.7 million for the same period in 1996. The increase was primarily the result of increased operating expenses and the timing of receipt of receivables due from corporate collaborators. Cash provided by investing activities during the six month period ended June 30, 1997 increased to $15.4 million compared with a net use of $29.2 million for the same period in 1996. The increase was primarily the result of timing differences in investment purchases and sales/maturities and fluctuations in the Company's portfolio mix between cash equivalent and short-term investment holdings. Cash used in financing activities during the six month period ended June 30, 1997 increased to $40,000 compared with a net provision of $47.1 million for the same period in 1996. The increase was due to a decline in cash generated from equity offerings from the same period in 1996. 8
9 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Neurocrine has primarily financed its operations through proceeds of approximately $63.6 million from the sale of Common Stock in various private and public offerings and approximately $48.4 million from corporate collaborations. In May 1997 the Company purchased two adjacent parcels of land in San Diego for approximately $5.0 million in cash. In August 1997 the Company sold one parcel of land for the purpose of constructing an expanded laboratory and office complex which it then intends to lease under a 15 year operating lease. The land purchase price of approximately $3.5 million plus a future cash payment of $355,000 will be repaid to the Company under a 10 year promissory note bearing interest at 8.25% per annum. The Company has an option to purchase the facility at any time during the lease at a predetermined price. The remaining parcel will be held by the Company until such time as the Company's growth requires additional expansion. The Company believes that its existing capital resources, together with interest income and future payments due under the strategic alliances, will be sufficient to satisfy its current and projected funding requirements at least through 2000. However, no assurance can be given that such capital resources and payments will be sufficient to conduct its research and development programs as planned. The amount and timing of expenditures will vary depending upon a number of factors, including progress of the Company's research and development programs. The Company's business is subject to significant risks, including but not limited to, the risks inherent in its research and development activities, including the successful continuation of the Company's strategic collaborations, the successful completion of clinical trials, the lengthy, expensive and uncertain process of seeking regulatory approvals, uncertainties associated both with obtaining and enforcing its patents and with patent rights of others, uncertainties regarding government reforms and of product pricing and reimbursement levels, technological change and competition, manufacturing uncertainties and dependence on third parties. Even if the Company's product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the product will be ineffective or unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. Neurocrine will require additional funding for the continuation of its research and product development programs, for progress with preclinical testing and clinical trials, for operating expenses, for the pursuit of regulatory approvals for its product candidates, for the costs involved in filing and prosecuting patent applications and enforcing patent claims, if any, the cost of product in-licensing and any possible acquisitions, and may require additional funding for establishing manufacturing and marketing capabilities in the future. The Company may seek to access the public or private equity markets whenever conditions are favorable. The Company may also seek additional funding through strategic alliances and other financing mechanisms, potentially including off-balance sheet financing. There can be no assurance that adequate funding will be available on terms acceptable to the Company, if at all. If adequate funds are not available, the Company may be required to curtail significantly one or more of its research or development programs or obtain funds through arrangements with collaborative partners or others. This may require the Company to relinquish rights to certain of its technologies or product candidates. The Company has generated net income for the three and six month periods ended June 30, 1996 and 1995 primarily from revenues from its strategic alliances. Continued profitability is not expected as the Company's operating expenses are anticipated to rise significantly in future periods as products are advanced through the various development stages. Neurocrine expects to incur additional operating expenses over the next several years as its research, development, preclinical testing and clinical trial activities increase. To the extent that the Company is unable to obtain third party funding for such expenses, the Company expects that increased expenses will result in increased losses from operations. There can be no assurance that the Company's products under development will be successfully developed or that its products, if successfully developed, will generate revenues sufficient to enable the Company to earn a profit. 9
10 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of Neurocrine Biosciences, Inc. was held on May 27, 1997. (b) The following Class I Directors were elected to serve for a term of three years to expire at the Company's 2000 Annual Meeting of Stockholders: Name Position Term Expires --------------------- ----------------------------- ------------ Wylie W. Vale Class I Director 2000 Joseph A. Mollica Class I Director 2000 Errol B. DeSouza Class I Director 2000 The following Class II and III Directors continue to serve their respective terms which expire on the Company's Annual Meeting of Stockholders in the year as noted: Name Position Term Expires --------------------- ----------------------------- ------------ Howard Birndorf Class II Director 1998 David Robinson Class II Director 1998 Gary Lyons Class III Director 1999 Harry Hixson Class III Director 1999 (c) The matters voted upon at the meeting and the voting results were as follows: (i) Approval of amendment to the Company's Bylaws increasing the number of directors on the Board of Directors from six to seven: For Against Abstain -------------- ----------- ---------- 10,772,021 125,617 7,000 (ii) The election of three Class I Directors for a term of three years: Name For Against Abstain --------------------- -------------- ----------- ---------- Wylie W. Vale 10,834,170 156,502 -- Joseph A. Mollica 10,834,170 156,502 -- Errol B. DeSouza 10,834,170 156,502 -- (iii) Approval of amendment to the Company's 1992 Incentive Stock Plan, increasing the number of shares of Common Stock reserved for issuance from 3,300,000 to 4,100,000 Shares: For Against Abstain -------------- ----------- ---------- 10,281,373 600,067 231,198 (iv) Ratification of the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 1997: For Against Abstain -------------- ----------- ---------- 10,972,177 9,565 8,930 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this report: <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.1 Employment agreement executed March 1, 1997 between the Registrant and Gary A. Lyons. 10.2 Employment agreement executed March 1, 1997 between the Registrant and Errol B. DeSouza. 10.3 Employment agreement executed March 1, 1997 between the Registrant and Paul W. Hawran. 27.4 Financial Data Schedule </TABLE> b. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 1997. 10
11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEUROCRINE BIOSCIENCES, INC. Dated: 08/15/97 /s/ Paul Hawran ------------------------------------------------- PAUL W. HAWRAN Senior Vice President and Chief Financial Officer 11