SEC Filing | Neurocrine Biosciences

================================================================================ 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 SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2000 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) 10555 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices) (858) 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, par value of $0.001, was 21,898,404 as of April 30, 2000. ================================================================================

Page 5 NEUROCRINE BIOSCIENCES, INC FORM 10-Q INDEX PAGE PART I FINANCIAL INFORMATION ITEM 1: Financial Statements ...................................... 3 Condensed Balance Sheets as of March 31, 2000 and December 31, 1999 ................................ 3 Condensed Statements of Operations for the three months ended March 31, 2000 and 1999 ........................ 4 Condensed Statements of Cash Flows for three months ended March 31, 2000 and 1999 ........................ 5 Notes to the Condensed Financial Statements ............... 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 7 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 10 PART II OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K .......................... 10 SIGNATURES ................................................ 11

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEUROCRINE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS (in thousands) March 31, December 31, 2000 1999 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents ....................... $ 11,988 $ 21,265 Short-term investments, available-for-sale ...... 77,763 69,833 Receivables under collaborative agreements ...... 722 1,458 Other current assets ............................ 1,547 2,257 --------- --------- Total current assets .......................... 92,020 94,813 Property and equipment, net ..................... 11,195 11,181 Other assets .................................... 3,184 3,228 --------- --------- Total assets .................................. $ 106,399 $ 109,222 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................ 1,741 $ 2,447 Accrued liabilities ............................. 5,466 5,069 Deferred revenues ............................... 1,733 155 Current portion of long-term debt ............... 149 149 Current portion of capital lease obligations .... 841 825 --------- --------- Total current liabilities ..................... 9,930 8,645 Long-term debt .................................. 274 312 Capital lease obligations ....................... 1,610 1,827 Deferred rent ................................... 1,179 1,005 Other liabilities ............................... 1,368 1,079 --------- --------- Total liabilities ............................. 14,361 12,868 Stockholders' equity: Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding ....... ....................... -- -- Common Stock, $0.001 par value; 100,000,000 shares authorized; issued and outstanding shares were 21,853,177 in 2000 and 21,608,011 in 1999 .......... ............. 22 22 Additional paid in capital ...................... 140,263 138,798 Deferred compensation and shareholder notes ..... (206) (530) Accumulated other comprehensive loss ............ (322) (264) Accumulated deficit ............................. (47,719) (41,672) --------- --------- Total stockholders' equity .................... 92,038 96,354 --------- --------- Total liabilities and stockholders' equity .... $ 106,399 $ 109,222 ========= ========= See accompanying notes to the condensed financial statements.

NEUROCRINE BIOSCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS (unaudited; in thousands except loss per share data) Three Months Ended March 31, -------------------- 2000 1999 -------- -------- Revenues: Sponsored research and development ............... $ 1,522 $ 2,789 Sponsored research and development from related party -- 494 Option Fees ...................................... 1,000 -- Milestones ....................................... -- -- Grant income and other revenues .................. 256 268 -------- -------- Total revenues ................................ 2,778 3,551 Operating expenses: Research and development ......................... 7,771 6,371 General and administrative ....................... 2,233 1,706 -------- -------- Total operating expenses ...................... 10,004 8,077 Loss from operations ................................. (7,226) (4,526) Other income and (expenses): Interest income .................................. 1,572 892 Interest expense ................................. (58) (46) Other income and expenses, net ................... (335) (409) -------- -------- Loss before taxes .................................... (6,047) (4,089) Income taxes ......................................... -- -- -------- -------- Net loss ............................................. $ (6,047) $ (4,089) ======== ======== Loss per common share: Basic & Diluted .................................. $ (0.28) $ (0.22) Shares used in the calculation of loss per common share: Basic & Diluted .................................. 21,771 18,955 See accompanying notes to the condensed financial statements.

NEUROCRINE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (unaudited; in thousands) Three Months Ended March 31, -------------------- 2000 1999 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net loss ............................................... $ (6,047) $ (4,089) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in NPI losses and other adjustments ....... -- 749 Depreciation and amortization .................... 519 632 Deferred revenues ................................ 1,578 525 Deferred rent .................................... 174 197 Compensation expenses for stock options .......... 326 31 Change in operating assets and liabilities: Accounts receivable and other current assets 1,446 480 Other non-current assets .................... 59 (147) Accounts payable and accrued liabilities .... (20) (2,412) -------- -------- Net cash flows used in operating activities ............ (1,965) (4,034) CASH FLOW FROM INVESTING ACTIVITIES Purchases of short-term investments .................... (24,988) (5,851) Sales/maturities of short-term investments ............. 17,000 5,000 Purchases of property and equipment .................... (548) (560) -------- -------- Net cash flows used in investing activities ............ (8,536) (1,411) CASH FLOW FROM FINANCING ACTIVITIES Issuance of Common Stock ............................... 1,463 125 Principal payments on long-term obligations ............ (239) (228) -------- -------- Net cash flows provided by (used in)financing activities 1,224 (103) -------- -------- Net decrease in cash and cash equivalents .............. (9,277) (5,548) Cash and cash equivalents at beginning of the period ... 21,265 11,708 -------- -------- Cash and cash equivalents at end of the period ......... $ 11,988 $ 6,160 ======== ======== See accompanying notes to the condensed financial statements.

NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION Neurocrine Biosciences, Inc. ("Neurocrine" or the "Company") was incorporated in California on January 17, 1992 and was reincorporated in Delaware in March 1996. In May 1998, the Company acquired Northwest NeuroLogic, Inc. ("NNL"), an Oregon-based research corporation. In December 1999, the NNL corporate structure was merged with and into the Company. Between March 1996 and December 1999, the Company owned a minority interest in Neuroscience Pharma, Inc. ("NPI"), a Canadian based research and development company. Neurocrine is a neuroscience-based company focused on the discovery and development of novel therapeutics for neuropsychiatric, neuroinflammatory and neurodegenerative diseases and disorders. The Company's neuroscience, endocrine and immunology disciplines provide a unique biological understanding of the molecular interaction between central nervous, immune and endocrine systems for the development of therapeutic interventions for anxiety, depression, insomnia, stroke, malignant brain tumors, multiple sclerosis, obesity and diabetes. 2. BASIS OF PRESENTATION The condensed financial statements included herein are unaudited. Current year financial statements include the accounts of the Company. Prior year financial statements include the Company and its wholly owned subsidiary, NNL. All significant intercompany transactions were eliminated in consolidation. The Company's minority ownership interest in NPI was accounted for under the equity method. Certain reclassifications have been made to prior year amounts to conform to the presentation for the three months ended March 31, 2000. The condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of the Securities and Exchange Commission ("SEC") on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these 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, 1999, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 3. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 4. NET INCOME PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Shares issuable upon exercise of outstanding stock options and warrants have not been included in the computation of diluted net loss per share since the effects of their inclusion would be anti-dilutive. The weighted average of the outstanding options and warrants at March 31, 2000 and 1999 were 2.5 million shares and 63,000 shares, respectively.

5. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires reporting and displaying comprehensive income (loss) and its components which, for the Company includes net loss and unrealized gains and losses on investments. In accordance with SFAS 130, the accumulated balance of other comprehensive income (loss) is disclosed as a separate component of stockholders' equity. 6. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB 101 provides guidance in applying generally accepted accounting principles to revenue recognition in financial statements, including the recognition of nonrefundable up-front fees received in conjunction with a research and development arrangement. The Company will implement the pronouncement upon the effective date as determined by the SEC. Management believes implementation will not have a material adverse affect on its results of operations. ITEM 2: MANAGEMENT'S 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 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, pre-clinical testing and clinical trials of potential products, 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 1999 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 in the foreseeable future. The Company has funded its operations primarily through public offering and payments under research and development agreements. The Company is developing a number of products with corporate collaborators and will rely on those collaborators and new collaborators to meet funding requirements. Revenues are expected to come from the Company's strategic alliances. The Company expects to generate future net losses in anticipation of significant increases in operating expenses as products are advanced through the various stages of clinical development. As of March 31, 2000, Neurocrine has incurred a cumulative deficit of $47.7 million and expects to incur operating losses in the future, which may be greater than losses in prior years.

RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 AND 1999 Revenues were $2.8 million for the first quarter 2000 compared with $3.6 million for the respective period last year. The decline in revenue for this year compared to last year is primarily a result of the reacquisition of the NBI-5788 compound for Multiple Sclerosis from Novartis and the completion of the sponsored research portion of the Eli Lilly ("Lilly") and NPI collaborations. This decline in revenues was partially off-set in the first quarter of 2000 by $1.0 million in option fees received from Taisho Pharmaceutical Co, LTD ("Taisho") and $675,000 of sponsored research funding received from Janssen Pharmaceutica, N.V. ("Janssen"). Revenues received under the Novartis, Lilly and NPI collaborations during the first quarter of 1999 were $1.0 million, $1.0 million and $494,000, respectively. Research and development expenses increased to $7.8 million for the first quarter 2000 compared with $6.4 million for the respective period in 1999. Increased expenses primarily reflect higher costs associated with increasing development expenditures and the addition of scientific personnel. The Company anticipates research and development expenses to increase significantly this year as it advances its compounds through clinical development and expands its research efforts. General and administration expenses increased to $2.2 million for the first quarter 2000 compared with $1.7 million during the same period last year. Increased expenses resulted from additional business development and professional services, including patent and legal services, to support the Company's expanded clinical development efforts. The Company expects general and administrative costs to increase moderately this year to provide continued support on patent matters and collaborative relationships. Interest income increased to $1.6 million during the first quarter of 2000 compared to $892,000 for the same period last year. The increase was primarily due to higher investment balances generated by the Company's private placement of its common stock. The private placement was completed in December 1999 and generated net proceeds of $39.3 million. The Company anticipates interest earnings for the remainder of the year to decline slightly from quarter to quarter as cash reserves will be needed to fund progressive clinical trials. Net loss for the first quarter of 2000 was $6.0 million or $0.28 per share compared to $4.1 million or $0.22 per share for the same period in 1999. The increase in net loss resulted from a decline in revenues of $773,000 and an increase in operating expenses of $1.9 million, partially off-set by increase interest income of $680,000. Net losses are expected to increase this year due to higher operating costs associated with the advancement of the Company's compounds through progressive clinical development. To date, the Company's revenues have come from funded research and achievements of milestones under corporate collaborations. The nature and amount of these revenues from period to period may lead to substantial fluctuations in the results of quarterly revenues and earnings. Accordingly, results and earnings of one period are not predictive of future periods. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company's cash, cash equivalents, and short-term investments totaled $89.8 million compared with $91.1 million at December 31, 1999. The decline in cash balances during 2000 reflects the increased operating expenses associated with clinical development programs and the addition of scientific personnel. Net cash used in operating activities during the first three months of 2000 was $2.0 million compared with $4.0 million for the same period last year. The decline in net cash used during 2000 compared with 1999 resulted primarily from higher accounts payable turnover during the first quarter of 1999. The Company expects cash usage to continue during the year as clinical trial efforts are expanded.

Net cash used by investing activities during the first quarter of 2000 was $8.5 million compared with $1.4 million during 1999. The increase in cash used resulted from the timing differences in the investment purchases and sales/maturities and the fluctuations in the Company's portfolio mix between cash equivalents and short-term investment holdings. The Company expects similar fluctuations to continue throughout the year. Net cash provided by financing activities during 2000 was $1.2 million compared to net cash used during 1999 of $103,000. Proceeds from the issuance of Common Stock provided cash during 2000, while payments on long-term debt resulted in cash used during 1999. 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 the year 2003. 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. 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 or defending 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. Neurocrine expects to incur operating losses 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. INTEREST RATE RISK The Company is exposed to interest rate risk on its short-term investments and on its long-term debt. The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company invests in highly liquid and high quality government and other debt securities. To minimize the exposure due to adverse shifts in interest rates, the Company invests in short-term securities with maturities of less than forty-four months. If a 10% change in interest rates were to have occurred on March 31, 2000, such a change would not have had a material effect on the fair value of the Company's investment portfolio as of that date. Due to the short holding period of the Company's investments, the Company has concluded that it does not have a material financial market risk exposure. Interest risk exposure on long-term debt relates to the Company's note payable, which bears a floating interest rate of prime plus one quarter percent (9.25% at March 31, 2000 and 8.75% at December 31, 1999). At March 31, 2000 and December 31, 1999, the note balance was $423,000 and $461,000, respectively. This note is payable in equal monthly installments through January 2003. Based on the balance of its long-term debt, the Company has concluded that it does not have a material financial market risk exposure.

CAUTION ON FORWARD-LOOKING STATEMENTS 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 the potential infringement of patents and other intellectual property rights of third parties, and with obtaining and enforcing its own patents and patent rights, 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 a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. For a further discussion of the risks associated with an investment in the Company, please see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A discussion of the Company's exposure to, and management of, market risk appears in Part 1, Item 2 of this Quarterly Report on Form 10-Q under the heading "Interest Rate Risk". PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits. The following exhibits are filed as part of this report: 27 Financial Data Schedule (B) Reports on Form 8-K. Form 8-K was filed on April 6, 2000 reporting Janssen Pharmaceutica's replacement of R121919 with a back-up compound.

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. Dated: 05/15/00 /s/ Paul W. Hawran -------- ------------------ Paul W. Hawran Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

5 1,000 3-MOS Dec-31-2000 Jan-01-2000 Mar-31-2000 11,988 77,763 722 0 0 92,020 0 0 106,399 9,930 0 0 0 22 92,016 106,399 0 2,778 0 10,004 702 0 58 (6,047) 0 0 0 0 0 (6,047) (0.28) (0.28)