SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Mark One:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2859704
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
215 College Road 07652
Paramus, NJ (Zip Code)
(Address of principal executive offices)
(201) 261-1331
(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, as amended, 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
As of May 1, 2001, there were 10,938,497 shares of the registrant's Common
Stock outstanding.
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2001
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited).................. 1
Balance Sheets at March 31, 2001 and
December 31, 2000................................. 1
Statements of Operations and Comprehensive
Income (Loss) for the three months ended
March 31, 2001 and 2000........................... 2
Statements of Cash Flows for the three months
ended March 31, 2001 and 2000..................... 3
Note to Financial Statements. .................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 5
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 11
Item 6. Exhibits and Reports on Form 8-K................. 12
Signatures....................................... 13
(i)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share information)
March 31, December 31,
Assets 2001 2000
--------------------------------------------------------------------------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 4,143 $ 2,037
Marketable securities--current maturities 14,638 20,627
Other current assets 1,097 814
--------------------------------------------------------------------------------
Total current assets 19,878 23,478
Property and equipment, net 4,757 4,781
Marketable securities 9,059 8,938
Patent and patent application costs, net of 151 227
accumulated amortization
Other assets 217 147
--------------------------------------------------------------------------------
$ 34,062 $ 37,571
================================================================================
Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,247 $ 1,128
Accrued liabilities 959 648
Accrued compensation 87 348
Deferred revenue 1,144 354
--------------------------------------------------------------------------------
Total current liabilities 3,437 2,478
Deferred rent obligation 634 564
Stockholders' equity:
Preferred Stock, $.01 par value; authorized--1,000,000 shares - -
Common Stock, $.01 par value; authorized--25,000,000 shares
issued and outstanding--10,938,497 shares in 2001 and
10,935,772 shares in 2000 109 109
Additional paid-in capital 99,405 99,392
Accumulated other comprehensive income--net unrealized
gains (losses) on securities 146 (183)
Accumulated deficit (69,669) (64,789)
--------------------------------------------------------------------------------
Total stockholders' equity 29,991 34,529
--------------------------------------------------------------------------------
$ 34,062 $ 37,571
================================================================================
See note to financial statements.
1
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
(Unaudited)
For the three months ended March 31, 2001 and 2000
2001 2000
------------------------------------------------------------------------------
Revenues:
Contract revenue $ 287 $ 214
License revenue 83 -
------------------------------------------------------------------------------
Total revenues 370 214
Expenses:
Research and development 4,013 3,139
General and administrative 1,790 1,364
------------------------------------------------------------------------------
Total expenses 5,803 4,503
------------------------------------------------------------------------------
Loss from operations (5,433) (4,289)
Other income, net:
Interest income 422 578
Other 131 7
------------------------------------------------------------------------------
Other income, net 553 585
------------------------------------------------------------------------------
Net loss $ (4,880) $ (3,704)
==============================================================================
Comprehensive loss:
Net loss $ (4,880) $ (3,704)
Unrealized gains arising during period 329 24
------------------------------------------------------------------------------
Comprehensive loss $ (4,551) $ (3,680)
==============================================================================
Basic and diluted net loss per share $ (0.45) $ (0.34)
==============================================================================
Shares used in computation of net loss per share 10,937,713 10,784,718
==============================================================================
See note to financial statements.
2
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months ended March 31, 2001 and 2000
2001 2000
-----------------------------------------------------------------------------
Operating activities:
Net loss $ (4,880) $ (3,704)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and patent amortization 346 399
Amortization of premiums (discounts) on
securities 107 121
Deferred rent, net - 82
Changes in operating assets and liabilties:
Increase in other current assets (283) (352)
Increase in accounts payable,
accrued liabilities and accrued compensation 169 198
Increase in deferred revenue 790 938
-----------------------------------------------------------------------------
Net cash (used in) operating activities (3,751) (2,318)
Investing activities:
Proceeds from sale or maturity of investments 6,090 2,187
Purchases of property and equipment (246) (532)
-----------------------------------------------------------------------------
Net cash provided by investing activities 5,844 1,655
Financing activities:
Issuance of common stock 13 511
-----------------------------------------------------------------------------
Net cash provided by financing activities 13 511
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,106 (152)
Cash and cash equivalents at beginning of period 2,037 6,236
-----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,143 $ 6,084
=============================================================================
See note to financial statements.
3
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTE TO FINANCIAL STATEMENTS
March 31, 2001
Note 1 -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and may not include all
information and footnotes required for a presentation in accordance with
generally accepted accounting principles. In the opinion of the management of
Synaptic Pharmaceutical Corporation (the "Company"), these financial statements
include all normal and recurring adjustments necessary for a fair presentation
of the financial position and the results of operations and cash flows of the
Company for the interim periods presented. For more complete financial
information, these financial statements should be read in conjunction with the
audited financial statements for the fiscal year ended December 31, 2000, and
notes thereto included in the Company's 2000 Annual Report on Form 10-K. The
results of operations for the fiscal quarter ended March 31, 2001, are not
necessarily indicative of the results of operations to be expected for the full
year.
4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a drug
discovery company utilizing G protein-coupled receptors ("GPCRs") as targets for
novel therapeutics. The Company is utilizing its large portfolio of patented
GPCR targets as a basis for the creation of improved drugs that act through
these targets. The Company and its licensees are first utilizing these receptor
targets to discover their function in the body and thus specific physiological
disorders with which they may be associated, and secondly, to design compounds
that can potentially be developed as drugs.
The Company is currently collaborating with Grunenthal GmbH ("Grunenthal ")
and Kissei Pharmaceutical Co., Ltd. ("Kissei"). Concurrently with the
establishment of the collaborative arrangement with Grunenthal, the Company
granted a license to certain of its technology and patent rights.
In addition to its ongoing collaborative arrangements, other pharmaceutical
companies have licenses to certain of our technology and patent rights. For
convenience of reference, the agreements pursuant to which the licenses referred
to in this paragraph and the preceding paragraph have been granted are
collectively referred to as the "License Agreements."
Since inception, the Company has financed its operations primarily through
the sale of its stock, through contract and license revenue under certain of its
License Agreements, and through interest income and capital gains resulting from
its investments. We also have received monies through government grants under
the Small Business Innovative Research ("SBIR") program of the National
Institutes of Health and through the sale of a portion of New Jersey State net
operating losses carryforwards.
Under the License Agreements, the Company may receive one or more of the
following types of revenue: license revenue, contract revenue, royalty revenue
or revenue from the sales of drugs. License revenue represents non-refundable
payments for a license to one or more of our patents and/or a license to our
technology. Payments for licenses are recognized as they are received or, if
earlier, when they become guaranteed, provided they are independent of any
continuing research activity, otherwise, they are recognized pro-rata during the
term of the related research agreement in accordance with Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements". Contract revenue
includes research funding to support a specified number of Synaptic's scientists
and payments upon the achievement of specified research and development
milestones. Research funding revenue is recognized ratably over the period of
the collaboration to which it relates and is based upon predetermined funding
requirements. Research and development milestone payment revenue is recognized
when the related research or development milestone is achieved. Under each of
the License Agreements (other than the Grunenthal Agreement), we are entitled to
receive royalty payments based upon the sales of drugs that may be developed
using our technology or that may be covered by our patents. Under the Grunenthal
Agreement, Synaptic has development and marketing rights in certain geographical
areas with respect to drugs, if any, that are jointly identified as part of the
collaboration with Grunenthal. Accordingly, we may receive revenue from sales in
our geographical areas (as defined) of drugs if we market them independently, or
we may receive royalty payments if we license our marketing rights to a third
party. To date, we have not received either royalty revenue or revenue from the
sales of drugs and we do not expect to receive such revenues for a number of
years, if at all.
5
To date, the Company's expenditures have been for research and development
related expenses, general and administrative related expenses, fixed asset
purchases and various patent related expenditures incurred in protecting our
technologies. Synaptic has been historically unprofitable and had an accumulated
deficit of $69,669,000 at March 31, 2001. We expect to continue to incur
operating losses for a number of years and may not become profitable, unless and
until we receive royalty revenue or revenue from sales of drugs that may be
developed with the use of our technology or patent rights.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 and 2000
Revenues. The Company recognized revenue of $370,000 and $214,000 for the
three months ended March 31, 2001 and 2000, respectively. The increase in
revenue of $156,000 resulted from revenue derived under the Company's agreement
with Kissei.
Research and Development Expenses. The Company incurred research and
development expenses of $4,013,000, and $3,139,000 for the three months ended
March 31, 2001 and 2000, respectively. The increase of $874,000, or 28%, was
attributable primarily to increases in preclinical testing costs, supply costs
and temporary staffing costs.
General and Administrative Expenses. The Company incurred general and
administrative expenses of $1,790,000 and $1,364,000 for the three months ended
March 31, 2001 and 2000, respectively. The increase of $426,000, or 31%, was
attributable primarily to legal expenses related to the Company's lawsuit and an
increase in fringe benefit expenses resulting from an increase in healthcare
claims.
Other Income, Net. The Company recorded other income of $553,000 and
$585,000 for the three months ended March 31, 2001 and 2000, respectively. The
decrease of $32,000 was primarily due to lower cash, cash equivalent and
marketable securities balances during 2001 as a result of the utilization of
these resources to fund the Company's operations offset by an increase in rental
income from the Company's sublessees.
Net Loss and Basic and Diluted Net Loss Per Share. The net loss incurred by
the Company was $4,880,000 ($0.45 per share), and $3,704,000 ($0.34 per share)
for the three months ended March 31, 2001 and 2000, respectively. The increase
in net loss per share of $0.11 resulted primarily from higher expenses partially
offset by higher revenues and other income during the first quarter of 2001 as
described above.
Operating Trends
Revenues may vary from period to period depending on numerous factors
including the timing of revenue earned under the License Agreements and revenue
that may be earned under future collaborative and/or license agreements.
Synaptic will recognize revenue under its research and licensing agreement with
Kissei Pharmaceutical Co., Ltd. during 2001 and expects to recognize additional
revenues under this agreement during 2002. Under the terms of certain of the
License Agreements, revenues may be recognized if certain milestones are
achieved. We continue to assess the
6
opportunity for obtaining additional funding under new collaborative and/or
license agreements as well as obtaining financing through equity transactions.
We continue to monitor our spending level in order to insure that we have enough
cash to last through the year 2002.
Preclinical expenses are expected to increase as Synaptic moves its own
drug discovery projects forward.
Legal expenses are expected to increase as a result of a suit filed by the
Company. See "Legal Proceedings" in PART II, Item 1, hereof.
Other income, net is expected to decline in 2001 and 2002 as existing funds
are utilized to support the Company's operations. This decline will be partially
offset by rental income that we expect to recognize under our sublease
agreements.
The Company is pursuing further sales of its State net operating loss
("NOL") carryforwards and its State research and development credits under the
State of New Jersey's Technology Business Tax Certificate Transfer Program (the
"Program"). No assurance can be given, however, as to the amount of NOL
carryforwards that may be sold under the Program in any one year. External
factors that may have an effect on future NOL sales are such items as:
limitations imposed by State law, the availability of buyers and related demand.
Property and equipment spending may vary from period to period depending on
numerous factors, including the number of collaborations in which we are
involved at any given time and replacement due to normal wear and obsolescence.
Equipment spending in 2001 is expected to decline from that of 2000.
At March 31, 2001, the Company held marketable securities with an estimated
fair value of $23,697,000. The Company's primary interest rate exposure results
from changes in short-term interest rates. The Company does not purchase
financial instruments for trading or speculative purposes. All of the marketable
securities held by the Company are classified as available-for-sale securities.
The following table provides information about marketable securities held by the
Company at March 31, 2001:
Principal Amount and Weighted Average
Stated Rate by Estimated Fair
Expected Maturity Value
--------------------------------------------------------- ----------------
(000's) 2001 2002 2003 Total (000's)
------------------- -------- -------- -------- ---------- ----------------
Principal $14,350 $2,500 $6,500 $23,350 $23,697
Weighted Average
Stated Rates 8.85% 6.50% 5.77% 7.74% --
--------------------------------------------------------- ----------------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities which the Company currently holds
since the Company has purchased some of its marketable securities at other than
face value. Additionally, some of the securities represented in the above table
may be called or redeemed, at the option of the issuer, prior to their expected
due dates. If such early redemptions occur, the Company may reinvest the
proceeds realized on such calls or
7
redemptions in marketable securities with stated rates of interest or yields
that are lower than those of current holdings, affecting both future cash
interest streams and future earnings.
In addition to investments in marketable securities, the Company places
some of its cash in money market funds in order to keep cash available to fund
operations and to hold cash pending investments in marketable securities.
Fluctuations in short term interest rates will affect the yield on monies
invested in such money market funds. Such fluctuations can have an impact on
future cash interest streams and future earnings of the Company, but the impact
of such fluctuations are not expected to be material.
The Company does not believe that inflation has had a material impact on
its results of operations.
Liquidity and Capital Resources
At March 31, 2001 and December 31, 2000, cash, cash equivalents and
marketable securities aggregated $27,840,000 and $31,602,000, respectively. This
decrease was a result of the utilization of these resources to fund the
Company's operations.
To date, Synaptic has met its cash requirements through the sale of its
stock, through contract and license revenue, through interest income and gains
resulting from its investments, through SBIR grants and through the sale of a
portion of its State NOL carryforwards. If the current biotechnology financing
environment remains unfavorable, raising additional capital may be difficult.
Synaptic leases laboratory and office facilities under an agreement
expiring on December 31, 2015. The minimum annual payment under the lease is
currently $2,249,000. The lease provides for fixed escalations in rent payments
in the years 2005 and 2010.
At March 31, 2001, the Company had $27,840,000 in cash, cash equivalents
and marketable securities. The Company currently intends to utilize these funds
primarily to conduct certain of its research programs, for patent related
expenditures, for general corporate purposes, to make leasehold improvements to
its facilities and to purchase property and equipment. We expect to continue to
incur operating losses for a number of years. We believe that cash on hand and
cash that we expect to receive through interest payments on investments, will be
sufficient to fund operations, as well as our share of certain development costs
under the Grunenthal Agreement, through the year 2002.
As of December 31, 2000, the Company had NOL carryforwards of approximately
$57,000,000 for Federal income tax purposes that will expire principally in the
years 2002 through 2020. In addition, the Company had research and development
credit carryforwards of approximately $1,610,000, which will expire principally
in 2002 through 2018. Also at December 31, 2000, Synaptic had NOL carryforwards
of approximately $41,637,000 for State income tax purposes and State research
and development credit carryforwards of $475,000. For financial reporting
purposes, a valuation allowance has been recognized to offset the deferred tax
assets related to these carryforwards. Due to the limitations imposed by the Tax
Reform Act of 1986, and as a result of significant changes in the Company's
ownership in 1993 and 1997, the utilization of $25,000,000 of Federal NOL
carryforwards is subject to annual limitation. The utilization of the research
and development credits is similarly limited.
8
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption of SFAS 133 had no effect on
Synaptic's results of operations, financial position or cash flows.
This Report on Form 10-Q contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Such statements include, but are not limited
to, those relating to future cash and spending plans, amounts of future research
funding, and any other statements regarding future growth, future cash needs,
future operations, business plans and financial results, and any other
statements which are not historical facts. When used in this document, the words
"expects," "may," "believes," and similar expressions are intended to be among
the words that identify forward-looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those risks and
uncertainties detailed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 (the "2000 Form 10-K"), including in Item 1
of the 2000 Form 10-K under the captions "Patents, Proprietary Technology and
Trade Secrets," "Competition" and "Government Regulation" as well as in the
section entitled "Disclosure Regarding Forward-Looking Statements" under the
captions "Early Stage of Product Development; Technological Uncertainty,"
"Dependence on Collaborative Partners and Licensees for Development, Regulatory
Approvals, Manufacturing, Marketing and Other Resources" and "Uncertainties
Related to Clinical Trials" or detailed from time to time in filings the Company
makes with the SEC. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated. Although the Company believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, it can give no assurance that such expectations will prove to be
correct. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e., interest
rate risk) are included in Item 2 of this Report.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 5, 2000, the Company filed suit in the United States District Court
for the District of New Jersey against M.D.S. Panlabs, Inc., a Washington
corporation, and Panlabs Taiwan Ltd., a Taiwanese corporation (collectively,
"Panlabs"). The suit alleges that Panlabs has infringed several issued U.S.
Patents owned by the Company, which relate to cloned human receptors and their
use in binding assays. The suit also alleges that Panlabs has been importing,
selling and offering to sell products of the Company's patented binding assay
processes to pharmaceutical companies and others in the United States and
particularly in New Jersey.
In the suit, the Company seeks an injunction against Panlabs' infringing
activities, an award of damages for the Company's lost profits, the destruction
of data obtained by the infringement of its patents, and other relief.
Company management believes that its complaint against Panlabs is well
founded and necessary to protect the value of its intellectual property
portfolio.
Management believes that the ultimate resolution of the above matter could
have a material impact on the Company's financial position, results of
operations and cash flows.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
12
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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.
SYNAPTIC PHARMACEUTICAL CORPORATION
Date: May 11, 2001 By: /s/ Kathleen P. Mullinix
------------------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President and
Chief Executive Officer
By: /s/ Robert L. Spence
------------------------------------
Name: Robert L. Spence
Title: Senior Vice President, Chief
Financial Officer & Treasurer
13