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 SEPTEMBER 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 17,041,235 as of October 31, 1997 1
2 NEUROCRINE BIOSCIENCES, INC FORM 10-Q INDEX <TABLE> <CAPTION> PART I FINANCIAL INFORMATION PAGE ---- <S> <C> <C> ITEM 1: Financial Statements................................................................................... 3 Condensed Balance Sheets as of September 30, 1997 and December 31, 1996................................ 3 3 Condensed Statements of Operations for the 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.............................................................................. 7 Overview............................................................................................... 7 Results of Operations.................................................................................. 7 Liquidity and Capital Resources........................................................................ 8 ITEM 6: Exhibits and Reports on Form 8-K....................................................................... 10 10.1 Lease between Science Park Center LLC (Lessor) and Neurocrine Biosciences, Inc. (Lessee) 10.2 Option Agreement between Science Park Center LLC (Optioner) and Neurocrine Biosciences, Inc. (Optionee) 10.3 Construction Loan Agreement 10.4 Secured Promissory Note 10.5 Operating Agreement for Science Park Center LLC 27.1 Financial Data Schedule SIGNATURES ......................................................................................................... 11 </TABLE> 2
3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS NEUROCRINE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------- (UNAUDITED) (NOTE) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 15,094,554 $ 11,325,361 Short-term investments, available for sale 53,832,352 58,594,853 Receivables under collaborative agreements 2,631,488 1,329,513 Other current assets 1,954,596 840,962 ------------ ------------ Total current assets 73,512,990 72,090,689 Property, equipment, and leasehold improvements, net 5,340,892 3,546,420 Licensed technology and patent application costs, net 1,306,705 1,443,403 Other assets 4,745,245 876,070 ------------ ------------ Total assets $ 84,905,832 $ 77,956,582 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,692,261 $ 800,157 Accrued expenses, other current liabilities, and current portion of obligations under capital leases 3,579,421 3,267,357 ------------ ------------ Total current liabilities 5,271,682 4,067,514 Long-term liabilities 1,101,682 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 - 16,951,073 and 16,776,614 at September 30, 1997 and December 31 1996, respectively 83,496,706 82,788,513 Accumulated deficit (4,964,238) (10,021,545) ------------ ------------ Total stockholders' equity 78,782,468 72,766,968 ------------ ------------ Total liabilities and stockholders' equity $ 84,905,832 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues under collaborative research agreements: Sponsored research $ 2,987,500 $ 1,625,000 $ 8,262,500 $ 4,875,000 Milestones 1,750,000 -- 7,750,000 3,000,000 Other revenue 1,503,279 562,965 3,883,363 1,983,359 ------------ ------------ ------------ ------------ Total revenues 6,240,779 2,187,965 19,895,863 9,858,359 Operating expenses Research and development 4,997,731 3,032,562 14,027,058 8,339,515 General and administration 1,566,683 717,370 4,055,133 2,012,554 ------------ ------------ ------------ ------------ Total operating expenses 6,564,414 3,749,932 18,082,191 10,352,069 ------------ ------------ ------------ ------------ Income (loss) from operations (323,635) (1,561,967) 1,813,672 (493,710) Interest income 1,059,015 938,005 2,892,283 1,686,220 Interest expense (35,088) (60,277) (123,499) (198,216) Other income 257,380 279,200 696,405 382,781 ------------ ------------ ------------ ------------ Income (loss) before income taxes 957,672 (405,039) 5,278,861 1,377,075 Provision for income taxes 145,161 -- 221,554 -- ------------ ------------ ------------ ------------ Net income (loss) $ 812,511 $ (405,039) $ 5,057,307 $ 1,377,075 ============ ============ ============ ============ Net income (loss) per share $ 0.04 $ (0.02) $ 0.28 $ 0.09 ============ ============ ============ ============ Shares used in computing net income (loss) per share 18,439,495 16,764,209 18,381,141 16,160,506 ============ ============ ============ ============ </TABLE> See accompanying notes to condensed financial statements. 4
5 NEUROCRINE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net income $ 5,057,307 $ 1,377,075 Adjustments to reconcile net income to cash provided by (used in) operating activities: Compensation expense recognized for stock options 98,055 56,115 Depreciation and amortization 890,388 697,887 Deferred revenue 125,000 324,065 Deferred rent 292,634 41,457 Change in operating assets and liabilities: Other current assets and receivables under collaborative agreements (2,415,609) (4,447,227) Other assets (3,869,175) (735,374) Accounts payable and accrued liabilities 1,360,062 (576,433) ------------ ------------ Net cash flows provided by (used in) operating activities 1,538,662 (3,262,435) INVESTING ACTIVITIES Purchases of short-term investments (85,019,124) (64,454,483) Sales/maturities of short-term investments 89,932,032 23,336,485 Purchases of furniture, equipment, leasehold improvements, licensed technology and patent application costs (2,548,162) (1,831,338) ------------ ------------ Net cash flows provided by (used in) investing activities 2,364,746 (42,949,336) FINANCING ACTIVITIES Issuance of common stock, net 451,875 47,518,523 Principal payments on obligations under capital leases (593,946) (547,632) Payments received on notes receivable from stockholders 7,856 7,853 ------------ ------------ Net cash flows (used in) provided by financing activities (134,215) 46,978,744 ------------ ------------ Increase in cash and cash equivalents 3,769,193 766,973 Cash and cash equivalents at beginning of period 11,325,361 6,392,749 ------------ ------------ Cash and cash equivalents at end of period $ 15,094,554 $ 7,159,722 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 123,499 $ 198,216 ============ ============ Taxes paid $ 225,000 $ -- ============ ============ </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 nine month periods ended September 30, 1997, 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 nine months ended September 30, 1997 and 1996 will be $0.05, $0.30, ($0.02) and $0.10, respectively. Under the new method, "diluted" earnings per share will not be materially different than net income (loss) per share as presented herein. 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 nine month periods ended September 30, 1997 and the nine months ended September 30, 1996 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 $5.0 million as of September 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 September 30, 1997 Compared to Three Months Ended September 30, 1996 Revenues increased to $6.2 million for the quarter ended September 30, 1997 compared with $2.2 million for the same period in 1996. Increased revenues were primarily the result of increased sponsored research and development, and milestone revenues under the Company's collaborations. Research and development expenses increased to $5.0 million for the quarter ended September 30, 1997 compared with $3.0 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 $1.6 million for the quarter ended September 30, 1997 compared with $717,000 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 prosecution costs. Interest income increased to $1.1 million for the quarter ended September 30, 1997 compared with $938,000 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 $813,000 or $0.04 per share for the quarter ended September 30, 1997 compared with a loss of $405,000 or $0.02 per share for the same period in 1996. The increase in net income and net income per share was primarily attributable to increased sponsored research and development, and milestone revenues under the Company's collaborations. 7
8 The Company's revenues to date have come from funded research and achievement of milestones under corporate collaborations, which may lead to substantial fluctuations in the results of quarterly revenues and earnings. Accordingly, results of one quarter are not predictive of future quarters. Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Revenues increased to $19.9 million for the nine month period ended September 30, 1997 compared with $9.9 million for the same period in 1996. Increased revenues were primarily the result of increased sponsored research and development, and milestone revenues under the Company's collaborations. Research and development expenses increased to $14.0 million for the nine month period ended September 30, 1997 compared with $8.3 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 $4.1 million for the nine month period ended September 30, 1997 compared with $2.0 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 prosecution costs. Interest income increased to $2.9 million for the nine month period ended September 30, 1997 compared with $1.7 million 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 $5.1 million or $0.28 per share for the nine month period ended September 30, 1997 compared with $1.4 million or $0.09 per share for the same period in 1996. The increase in net income and net income per share was primarily due to increased sponsored research and development, and milestone revenues under the Company's collaborations. The Company's revenues to date have come from funded research and achievement of milestones under corporate collaborations, which may lead 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 September 30, 1997 the Company's cash, cash equivalents, and short-term investments totaled $68.9 million. Cash held by the Company excludes $2.6 million due from corporate collaborators of which $1.0 million had been collected as of October 31, 1997. Total cash, cash equivalents, and short-term investments also excludes approximately $7.7 million held by Neuroscience Pharma (NPI) Inc. which is available to fund certain of the Company's research and development activities. Cash provided by operating activities during the nine month period ended September 30, 1997 increased to $1.5 million compared with a net use of cash of $3.3 million for the same period in 1996. The increase was primarily the result of increased operating revenues from the Company's collaborators. Cash provided by investing activities during the nine month period ended September 30, 1997 increased to $2.4 million compared with a net use of cash of $42.9 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. 8
9 Cash used in financing activities during the nine month period ended September 30, 1997 increased to $134,000 compared with a net provision of $47.0 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. In May 1997, the Company purchased two adjacent parcels of land in San Diego for approximately $5.0 million in cash. In July 1997, the Company sold one parcel of land to Science Park Center LLC, a California limited liability company ("the LLC"), of which the Company owns a significant minority intrest, which the Company then agreed to lease from the LLC under a 15 year operating lease for the purpose of constructing an expanded laboratory and office complex. The land purchase price of approximately $3.5 million plus a future cash payment of $368,000 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. 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 $53.4 million from corporate collaborations. 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 nine month periods ended September 30, 1997 and the nine month period ended September 30, 1996 primarily from revenues under 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 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* Lease between Science Park Center LLC (Lessor) and Neurocrine Biosciences, Inc. (Lessee) 10.2* Option Agreement between Science Park Center LLC (Optioner) and Neurocrine Biosciences, Inc. (Optionee) 10.3* Construction Loan Agreement 10.4 Secured Promissory Note 10.5* Operating Agreement for Science Park Center LLC 27.1 Financial Data Schedule * Certain confidential portions of this Exhibit were omitted by means of blackout of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act. </TABLE> (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 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: 11/14/97 /s/ Paul Hawran ----------------------------------------- PAUL W. HAWRAN Senior Vice President and Chief Financial Officer 11