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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 SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 000-30111
LEXICON GENETICS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0474169
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
8800 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES AND ZIP CODE)
(281) 863-3000
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
Yes [X] No [ ]
As of May 3, 2005, 63,568,464 shares of the registrant's common stock, par
value $0.001 per share, were outstanding.
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LEXICON GENETICS INCORPORATED
TABLE OF CONTENTS
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS.......................................................... 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2005 (unaudited) and December 31, 2004................ 3
Consolidated Statements of Operations (unaudited) - Three Months Ended
March 31, 2005 and 2004.................................................................. 4
Consolidated Statements of Cash Flows (unaudited) - Three Months Ended
March 31, 2005 and 2004.................................................................. 5
Notes to Consolidated Financial Statements (unaudited)........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 16
Item 4. Controls and Procedures....................................................................... 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 17
SIGNATURES............................................................................................ 18
The Lexicon name and logo, LexVision(R) and OmniBank(R) are registered
trademarks and Genome5000(TM) and e-Biology(TM) are trademarks of Lexicon
Genetics Incorporated.
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements.
These statements relate to future events or our future financial performance. We
have attempted to identify forward-looking statements by terminology including
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should" or "will" or the
negative of these terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors," that
may cause our or our industry's actual results, levels of activity, performance
or achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by these
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this quarterly report on
Form 10-Q to conform these statements to actual results, unless required by law.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXICON GENETICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
AS OF AS OF
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents............................................ $ 12,809 $ 14,612
Short-term investments, including restricted investments of $430..... 57,930 72,946
Accounts receivable, net of allowance for doubtful accounts of $75... 1,747 5,345
Other receivables.................................................... - 1,052
Prepaid expenses and other current assets............................ 3,084 4,793
---------- ------------
Total current assets.............................................. 75,570 98,748
Property and equipment, net of accumulated depreciation
of $42,596 and $41,892, respectively................................. 85,026 84,573
Goodwill................................................................. 25,798 25,798
Intangible assets, net of amortization of $4,460 and $4,160,
respectively............................................................ 1,540 1,840
Other assets............................................................. 974 1,021
---------- ------------
Total assets...................................................... $ 188,908 $ 211,980
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 3,495 $ 7,574
Accrued liabilities.................................................. 5,682 6,945
Current portion of deferred revenue.................................. 19,066 19,500
Current portion of long-term debt.................................... 4,705 4,691
---------- ------------
Total current liabilities......................................... 32,948 38,710
Deferred revenue, net of current portion................................. 14,136 18,092
Long-term debt........................................................... 32,748 32,940
Other long-term liabilities.............................................. 677 644
---------- ------------
Total liabilities................................................. 80,509 90,386
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized;
no shares issued and outstanding.................................. - -
Common stock, $.001 par value; 120,000 shares authorized;
63,552 and 63,491 shares issued and outstanding................... 63 63
Additional paid-in capital........................................... 382,757 382,666
Deferred stock compensation.......................................... (7) (20)
Accumulated deficit.................................................. (274,381) (261,115)
Accumulated other comprehensive loss................................. (33) -
---------- ------------
Total stockholders' equity........................................ 108,399 121,594
---------- ------------
Total liabilities and stockholders' equity........................ $ 188,908 $ 211,980
========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
LEXICON GENETICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------- ------------
Revenues:
Subscription and license fees................................... $ 5,042 $ 3,548
Collaborative research.......................................... 8,883 8,294
------------- ------------
Total revenues................................................ 13,925 11,842
Operating expenses:
Research and development........................................ 22,760 22,401
General and administrative...................................... 4,432 5,044
------------- ------------
Total operating expenses...................................... 27,192 27,445
------------- ------------
Loss from operations............................................... (13,267) (15,603)
Interest income.................................................... 491 432
Interest expense................................................... (805) (291)
Other income, net.................................................. 315 (4)
------------- ------------
Net loss ......................................................... $ (13,266) $ (15,466)
============= ============
Net loss per common share, basic and diluted....................... $ (0.21) $ (0.25)
Shares used in computing net loss per common share,
basic and diluted............................................... 63,525 63,065
The accompanying notes are an integral part of these consolidated
financial statements.
4
LEXICON GENETICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss.............................................................. $ (13,266) $ (15,466)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation........................................................ 2,585 2,821
Amortization of intangible assets, other than goodwill.............. 300 300
Amortization of deferred stock compensation......................... (11) 830
Loss on disposal of property and equipment.......................... 10 -
Changes in operating assets and liabilities:
Decrease in accounts receivable................................... 4,650 3,390
Decrease in prepaid expenses and other current assets............. 1,709 489
(Increase) decrease in other assets............................... 47 (22)
Decrease in accounts payable and other liabilities................ (5,309) (2,890)
Decrease in deferred revenue...................................... (4,390) (4,939)
------------- -------------
Net cash used in operating activities........................... (13,675) (15,487)
Cash flows from investing activities:
Purchases of property and equipment................................... (3,133) (1,291)
Proceeds from disposal of property and equipment...................... 85 -
Increase in restricted cash........................................... - (147)
Purchases of investments.............................................. (29,226) (46,633)
Maturities of investments............................................. 44,208 34,061
------------- -------------
Net cash provided by investing activities......................... 11,934 14,010
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 116 1,202
Repayment of debt borrowings.......................................... (178) -
------------- -------------
Net cash provided by (used in) financing activities............... (62) 1,202
------------- -------------
Net decrease in cash and cash equivalents................................ (1,803) (28,295)
Cash and cash equivalents at beginning of period......................... 14,612 35,856
------------- -------------
Cash and cash equivalents at end of period............................... $ 12,809 $ 7,561
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 692 $ 206
Supplemental disclosure of non-cash investing and financing activities:
Unrealized loss on investments........................................ $ (33) $ -
Reversal of deferred stock compensation, in connection
with stock options.................................................. $ 24 $ 7
Retirement of property and equipment.................................. $ 1,976 $ 30
The accompanying notes are an integral part of these consolidated
financial statements.
5
LEXICON GENETICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Lexicon
Genetics Incorporated (Lexicon or the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). 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, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005.
The accompanying consolidated financial statements include the accounts of
Lexicon and its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation.
For further information, refer to the financial statements and footnotes
thereto included in Lexicon's annual report on Form 10-K for the year ended
December 31, 2004, as filed with the SEC.
2. RECLASSIFICATION
As of March 31, 2004 and December 31, 2003, Lexicon reclassified auction
rate securities of $43.6 million and $46.1 million, respectively, from cash
equivalents to short-term investments and $42.4 million and $42.6 million,
respectively, from restricted cash to short-term investments. The accompanying
consolidated statement of cash flows for the three months ended March 31, 2004
has been adjusted to reflect these reclassifications.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the applicable period. Shares associated with
stock options and warrants are not included because they are antidilutive. There
are no differences between basic and diluted net loss per share for all periods
presented.
4. STOCK-BASED COMPENSATION
Lexicon's stock-based compensation plans are accounted for under the
recognition and measurement provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees, and Related
Interpretations." Under the intrinsic value method described in APB Opinion No.
25, no compensation expense is recognized if the exercise price of the employee
stock option equals the market price of the underlying stock on the date of
grant. Lexicon recognized no stock-based compensation expense during the
three-month period ended March 31, 2005 and $0.8 million during the three-month
period ended March 31, 2004, which expenses were primarily related to option
grants made prior to Lexicon's April 2000 initial public offering. The following
table illustrates the effect on net loss and net loss per share if the fair
value recognition provisions of Financial Accounting Standards Board
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(FASB) Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock Based Compensation," had been applied to all outstanding and unvested
awards in each period:
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
--------- --------
Net loss, as reported:.................................. $ (13,266) $(15,466)
Add: Stock-based employee compensation
expense included in reported net loss................ (11) 830
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards....................................... (3,130) (4,882)
--------- --------
Pro forma net loss...................................... $ (16,407) $(19,518)
========= ========
Net loss per common share, basic and diluted
As reported.......................................... $ (0.21) $ (0.25)
========= ========
Pro forma............................................ $ (0.26) $ (0.31)
========= ========
5. DEBT OBLIGATIONS
Genentech Loan: On December 31, 2002, Lexicon borrowed $4.0 million under
a note agreement with Genentech, Inc. The proceeds of the loan are to be used to
fund research efforts under the alliance agreement with Genentech. The note
matures on December 31, 2005, but the Company may prepay it at any time. The
Company may repay the note, at its option, in cash, in shares of common stock
valued at the then-current market price, or in a combination of cash and shares,
subject to certain limitations. The note accrues interest at an annual rate of
8%, compounded quarterly.
Mortgage Loan: In April 2004, Lexicon purchased its facilities in The
Woodlands, Texas that were previously subject to a synthetic lease. The Company
repaid the $54.8 million funded under the synthetic lease with proceeds from a
$34.0 million third-party mortgage financing and $20.8 million in cash. The
mortgage loan has a ten-year term with a 20-year amortization and bears interest
at a fixed rate of 8.23%. As a result of the refinancing, all restrictions on
the cash and investments that had secured the obligations under the synthetic
lease were eliminated.
6. COMMITMENTS AND CONTINGENCIES
In May 2002, Lexicon's subsidiary Lexicon Pharmaceuticals (New Jersey),
Inc. leased a 76,000 square-foot laboratory and office space in Hopewell, New
Jersey under an agreement which expires in June 2013. The lease provides for an
escalating yearly rent payment of $1.3 million in the first year, $2.1 million
in years two and three, $2.2 million in years four to six, $2.3 million in years
seven to nine and $2.4 million in years ten and eleven. Lexicon is the guarantor
of the obligations of its subsidiary under the lease. The Company is required to
maintain restricted investments to collateralize the Hopewell lease. As of March
31, 2005, the Company had $430,000 in restricted investments to collateralize a
standby letter of credit for this lease.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a biopharmaceutical company focused on discovering and developing
breakthrough treatments for human disease. We are using gene knockout technology
to systematically discover the physiological functions of genes in living
mammals, or in vivo. We generate our gene function discoveries using knockout
mice - mice whose DNA has been altered to disrupt, or "knock out," the function
of the altered gene. Our patented gene trapping and gene targeting technologies
enable us to rapidly generate these knockout mice by altering the DNA of genes
in a special variety of mouse cells, called embryonic stem cells, which can be
cloned and used to generate mice with the altered gene. We employ an integrated
platform of advanced medical technologies to systematically discover and
validate which genes, when knocked out, result in a favorable medical profile
with pharmaceutical utility. We then pursue those genes and the proteins they
encode as potential targets for therapeutic intervention in our drug discovery
programs.
We employ internal resources and drug discovery alliances to discover
potential small molecule, antibody and protein drugs for in vivo-validated drug
targets that we consider to have high pharmaceutical value. We use our own
sophisticated libraries of drug-like chemical compounds and an industrialized
medicinal chemistry platform to identify small molecule drug candidates for our
in vivo-validated drug targets. We have established alliances with Bristol-Myers
Squibb Company to discover and develop novel small molecule drugs in the
neuroscience field; with Genentech, Inc. for the discovery of therapeutic
proteins and antibody targets; and with Takeda Pharmaceutical Company Limited to
discover new drugs for the treatment of high blood pressure. In addition, we
have established collaborations and license agreements with many other leading
pharmaceutical and biotechnology companies under which we receive fees and, in
some cases, are eligible to receive milestone and royalty payments, for access
to some of our technologies and discoveries for use in their own drug discovery
efforts.
We derive substantially all of our revenues from drug discovery alliances,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice and
technology licenses. To date, we have generated a substantial portion of our
revenues from a limited number of sources.
Our operating results and, in particular, our ability to generate
additional revenues are dependent on many factors, including our success in
establishing research collaborations and technology licenses, expirations of our
research collaborations, the success rate of our discovery efforts leading to
opportunities for new research collaborations and licenses, as well as milestone
payments and royalties, the timing and willingness of collaborators to
commercialize products which may result in royalties, and general and
industry-specific economic conditions which may affect research and development
expenditures. Our future revenues from collaborations and alliances are
uncertain because our existing agreements have fixed terms or relate to specific
projects of limited duration. Our future revenues from technology licenses are
uncertain because they depend, in large part, on securing new agreements.
Subject to limited exceptions, we do not intend to offer subscriptions to our
databases or make our compound libraries available for purchase in the future.
Our ability to secure future revenue-generating agreements will depend upon our
ability to address the needs of our potential future collaborators and
licensees, and to negotiate agreements that we believe are in our long-term best
interests. We may determine that our interests are better served by retaining
rights to our discoveries and advancing our therapeutic programs to a later
stage, which could limit our near-term revenues. Because of these and other
factors, our operating results have fluctuated in the past and are likely to do
so in the future, and we
8
do not believe that period-to-period comparisons of our operating results are a
good indication of our future performance.
Since our inception, we have incurred significant losses and, as of March
31, 2005, we had an accumulated deficit of $274.4 million. Our losses have
resulted principally from costs incurred in research and development, general
and administrative costs associated with our operations, and non-cash
stock-based compensation expenses associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs, material costs, facility costs, depreciation on property and
equipment, legal expenses resulting from intellectual property prosecution and
other expenses related to our drug discovery and Genome5000(TM) programs, the
development and analysis of knockout mice and our other target validation
research efforts, and the development of compound libraries. General and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees and
other corporate expenses, including information technology, facilities costs and
general legal activities. In connection with the expansion of our drug discovery
programs and our target validation research efforts, we expect to incur
increasing research and development and general and administrative costs. As a
result, we will need to generate significantly higher revenues to achieve
profitability.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
We recognize revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed and
determinable, and collectibility is reasonably assured. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.
Upfront fees and annual research funding under our drug discovery
alliances are recognized as revenue on a straight-line basis over the estimated
period of service, generally the contractual research term, to the extent they
are non-refundable. Milestone-based fees are recognized upon completion of
specified milestones according to contract terms. Fees for access to our
databases and other target validation resources are recognized ratably over the
subscription or access period. Payments received under target validation
collaborations and government grants are recognized as revenue as we perform our
obligations related to such research to the extent such fees are non-refundable.
Non-refundable technology license fees are recognized as revenue upon the grant
of the license, when performance is complete and there is no continuing
involvement.
Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair value of the elements. The
determination of fair value of each element is based on objective evidence. When
revenues for an element are specifically tied to a separate earnings process,
revenue is recognized when the specific performance obligation associated with
the element is completed. When revenues for an element are not specifically tied
to a separate earnings process, they are recognized ratably over the term of the
agreement.
A change in our revenue recognition policy or changes in the terms of
contracts under which we recognize revenues could have an impact on the amount
and timing of our recognition of revenues.
9
Research and Development Expenses
Research and development expenses consist of costs incurred for
company-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses and are
expensed as incurred. Patent costs and technology license fees for technologies
that are utilized in research and development and have no alternative future use
are expensed when incurred.
Prior to preclinical development work, we are unable to segregate the
costs related to research performed on drug candidates because the drug
candidate is often not specifically identified until the later stages of our
research. With the commencement of formal preclinical development in 2005, we
will account on a program-by-program basis for the costs related to the
development of the identified drug products.
Goodwill Impairment
Goodwill is not amortized, but is tested at least annually for impairment
at the reporting unit level. We have determined that the reporting unit is the
single operating segment disclosed in our current financial statements.
Impairment is the condition that exists when the carrying amount of goodwill
exceeds its implied fair value. The first step in the impairment process is to
determine the fair value of the reporting unit and then compare it to the
carrying value, including goodwill. We determined that the market capitalization
approach is the most appropriate method of measuring fair value of the reporting
unit. Under this approach, fair value is calculated as the average closing price
of our common stock for the 30 days preceding the date that the annual
impairment test is performed, multiplied by the number of outstanding shares on
that date. A control premium, which is representative of premiums paid in the
marketplace to acquire a controlling interest in a company, is then added to the
market capitalization to determine the fair value of the reporting unit. If the
fair value exceeds the carrying value, no further action is required and no
impairment loss is recognized. Additional impairment assessments may be
performed on an interim basis if we encounter events or changes in circumstances
that would indicate that, more likely than not, the carrying value of goodwill
has been impaired.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 and 2004
Revenues. Total revenues and dollar and percentage changes as compared to
the corresponding period in the prior year are as follows (dollar amounts are
presented in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Total revenues........................... $ 13.9 $ 11.8
Dollar increase.......................... $ 2.1
Percentage increase...................... 18%
- Subscription and license fees - Revenue from subscriptions and
license fees increased 42% to $5.0 million primarily due to
technology license fees received from Deltagen, Inc. in connection
with the settlement of Lexicon's claim in Deltagen's bankruptcy
proceedings. This was offset in part by decreased subscription fees
as a result of the termination of Incyte Corporation's and
Bristol-Myers Squibb's subscriptions to our LexVision(R) database in
June 2004 and December 2004, respectively.
10
- Collaborative research - Revenue from collaborative research
increased 7% to $8.9 million primarily due to our recognition of
revenues under our hypertension drug discovery alliance with Takeda,
which was entered into in July 2004. This was offset in part by a
decrease in revenues from the termination of our therapeutic protein
discovery alliance with Incyte Corporation in June 2004.
Research and Development Expenses. Research and development expenses and
dollar and percentage changes as compared to the corresponding period in the
prior year are as follows (dollar amounts are presented in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Total research and development expense.... $ 22.8 $ 22.4
Dollar increase........................... $ 0.4
Percentage increase....................... 2%
Research and development expenses consist primarily of salaries and other
personnel-related expenses, stock-based compensation expenses, laboratory
supplies, facility and equipment costs, consulting and other services. The
change in the three months ended March 31, 2005 as compared to the corresponding
period in 2004 resulted primarily from the following costs:
- Personnel - Personnel costs increased 12% to $11.7 million primarily
due to increased personnel to support the expansion of our drug
discovery programs and merit-based pay increases for employees.
Salaries, bonuses, employee benefits, payroll taxes, recruiting and
relocation costs are included in personnel costs.
- Stock-based compensation - We had no stock-based compensation
expenses for the three months ended March 31, 2005, as compared to
$0.4 million for the corresponding period in 2004, primarily
relating to option grants made prior to our April 2000 initial
public offering. All deferred stock compensation relating to these
options was fully amortized as of January 31, 2004 when these
options became fully vested.
- Laboratory supplies - Laboratory supplies expense decreased 9% to
$3.1 million due primarily to the bulk purchase of certain supplies
in the prior year quarter.
- Facilities and equipment - Facilities and equipment costs were
unchanged at $5.1 million in both of the three-month periods ended
March 31, 2005 and 2004.
- Third-party services - Costs associated with third-party services
decreased 18% to $1.4 million primarily due to the termination in
June 2004 of our LifeSeq(R) Gold database subscription, offset in
part by an increase in third-party research costs. Costs associated
with third-party services include third-party research,
subscriptions to third-party databases, technology licenses, legal
and patent fees.
- Other - Other costs increased by 11% to $1.3 million primarily
related to increased information technology costs.
11
General and Administrative Expenses. General and administrative expenses
and dollar and percentage changes as compared to the corresponding period in the
prior year are as follows (dollar amounts are presented in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Total general and administrative expense..... $ 4.4 $ 5.0
Dollar decrease.............................. $ 0.6
Percentage decrease.......................... 12%
General and administrative expenses consist primarily of personnel costs
to support our research activities, stock-based compensation expense, facility
and equipment costs and professional fees, such as legal fees. The change in the
three months ended March 31, 2005 as compared to the corresponding period in
2004 resulted primarily from the following costs:
- Personnel - Personnel costs decreased 6% to $2.7 million. Salaries,
bonuses, employee benefits, payroll taxes, recruiting and relocation
costs are included in personnel costs.
- Stock-based compensation - Stock-based compensation expense,
primarily relating to option grants made prior to our April 2000
initial public offering, decreased 100%. All deferred stock
compensation relating to these options was fully amortized as of
January 31, 2004 when these options became fully vested.
- Facilities and equipment - Facilities and equipment costs decreased
6% to $0.8 million.
- Professional fees - Professional fees increased 23% to $0.4 million
primarily due to increased consulting fees.
- Other - Other costs decreased 8% to $0.6 million.
Interest Income. Interest income increased 14% to $0.5 million in the
three months ended March 31, 2005 from $0.4 million in the corresponding period
in 2004.
Interest Expense. Interest expense increased to $0.8 million in the three
months ended March 31, 2005 from $0.3 million in the corresponding period in
2004. The increase was attributable to the interest expense on the $34.0 million
mortgage loan on our facilities in The Woodlands, Texas.
Net Loss and Net Loss Per Common Share. Net loss decreased 14% to $13.3
million in the three months ended March 31, 2005 from $15.5 million in the
corresponding period in 2004. Net loss per common share decreased to $0.21 in
the three months ended March 31, 2005 from $0.25 in the corresponding period in
2004. Net loss includes stock-based compensation expense of $0.8 million in the
three months ended March 31, 2004.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future, and we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales of
common and preferred stock, contract and milestone payments to us under our drug
discovery alliance, target validation, database subscription and license
agreements, equipment financing arrangements and leasing arrangements. From our
inception through March 31, 2005, we had received net proceeds of
12
$294.9 million from issuances of common and preferred stock, including $203.2
million of net proceeds from the initial public offering of our common stock in
April 2000 and $50.1 million from our July 2003 common stock offering. In
addition, from our inception through March 31, 2005, we received $238.1 million
in cash payments from drug discovery alliances, target validation
collaborations, database subscription and technology license fees, sales of
compound libraries and reagents, and government grants, of which $207.0 million
had been recognized as revenues through March 31, 2005.
As of March 31, 2005, we had $70.7 million in cash, cash equivalents and
short-term investments (including $0.4 million of restricted investments), as
compared to $87.6 million (including $0.4 million of restricted investments) as
of December 31, 2004. We used cash of $13.7 million in operations in the three
months ended March 31, 2005. This consisted primarily of the net loss for the
period of $13.3 million offset by non-cash charges of $2.6 million related to
depreciation expense and $0.3 million related to amortization of intangible
assets other than goodwill; a $4.4 million decrease in deferred revenue; and
changes in other operating assets and liabilities of $1.1 million. Investing
activities provided cash of $11.9 million in the three months ended March 31,
2005, primarily due to net maturities of short-term investments of $15.0
million. This was offset by purchases of property and equipment of $3.1 million.
We used cash of $0.1 million in financing activities.
In April 2004, we purchased our facilities in The Woodlands, Texas from
the lessor under our previous synthetic lease agreement. In connection with such
purchase, we repaid the $54.8 million funded under the synthetic lease with
proceeds from a $34.0 million third-party mortgage financing and $20.8 million
in cash. The mortgage loan has a ten-year term with a 20-year amortization and
bears interest at a fixed rate of 8.23%. As a result of the refinancing, all
restrictions on the cash and investments that had secured our obligations under
the synthetic lease were eliminated.
In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
signed a ten-year lease for a 76,000 square-foot facility in Hopewell, New
Jersey. The term of the lease extends until June 30, 2013. The lease provides
for an escalating yearly base rent payment of $1.3 million in the first year,
$2.1 million in years two and three, $2.2 million in years four to six, $2.3
million in years seven to nine and $2.4 million in years ten and eleven. We are
the guarantor of the obligations of our subsidiary under the lease.
In December 2002, we borrowed $4.0 million under a note agreement with
Genentech. The proceeds of the loan are to be used to fund research efforts
under our alliance with Genentech for the discovery of therapeutic proteins and
antibody targets. The note matures on or before December 31, 2005, but we may
prepay it at any time. We may repay the note, at our option, in cash, in shares
of our common stock valued at the then-current market value, or in a combination
of cash and shares, subject to certain limitations. The note accrues interest at
an annual rate of 8%, compounded quarterly.
Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain alliance, collaboration and
technology license agreements, the amount and timing of payments under such
agreements, the level and timing of our research and development expenditures,
market acceptance of our products, the resources we devote to developing and
supporting our products and other factors. Our capital requirements will also be
affected by any expenditures we make in connection with license agreements and
acquisitions of and investments in complementary technologies and businesses. We
expect to devote substantial capital resources to continue our research and
development efforts, to expand our support and product development activities,
and for other general corporate activities. We believe that our current
unrestricted cash and investment balances and revenues we expect to derive from
drug discovery alliances, target validation collaborations and technology
licenses will be sufficient to fund our operations at least through the next two
years. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we will need to
13
sell additional equity or debt securities or obtain additional credit
arrangements. Additional financing may not be available on terms acceptable to
us or at all. The sale of additional equity or convertible debt securities may
result in additional dilution to our stockholders.
DISCLOSURE ABOUT MARKET RISK
We are exposed to limited market and credit risk on our cash equivalents,
which have maturities of three months or less at the time of purchase. We
maintain a short-term investment portfolio which consists of U.S. government
agency debt obligations, investment grade commercial paper, corporate debt
securities and certificates of deposit that mature within twelve months and
auction rate securities that mature greater than twelve months from the time of
purchase, which we believe are subject to limited market and credit risk. We
currently do not hedge interest rate exposure or hold any derivative financial
instruments in our investment portfolio.
We have operated primarily in the United States and substantially all
sales to date have been made in U.S. dollars. Accordingly, we have not had any
material exposure to foreign currency rate fluctuations.
RISK FACTORS
Our business is subject to certain risks and uncertainties, including
those referenced below:
Risks Related to Our Company and Business
- we have a history of net losses, and we expect to continue to incur net
losses and may not achieve or maintain profitability
- we will need additional capital in the future and, if it is not available,
we will have to curtail or cease operations
- any sale of additional equity securities in the future may be dilutive to
our stockholders
- we are an early-stage company, and we may not successfully develop or
commercialize any therapeutics or drug targets that we have identified
- we face substantial competition in the discovery of the DNA sequences of
genes and their functions and in our drug discovery and product
development efforts
- we rely heavily on our collaborators to develop and commercialize
pharmaceutical products based on genes that we identify as promising
candidates for development as drug targets, and our collaborators' efforts
may fail to yield pharmaceutical products on a timely basis, if at all
- we rely on several key collaborators for a significant portion of our
revenues, the loss of any of which would negatively impact our business to
the extent such losses are not offset by additional collaborators
- cancellations by or conflicts with our collaborators could harm our
business
- we may be unsuccessful in developing and commercializing pharmaceutical
products on our own
- we lack the capability to manufacture materials for preclinical studies,
clinical trials or commercial sales and will rely on third parties to
manufacture our potential products, which may harm or delay our product
development and commercialization efforts
14
- we may engage in future acquisitions, which may be expensive and time
consuming and from which we may not realize anticipated benefits
- if we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to pursue collaborations or develop
our own products
- any contamination among our knockout mouse population could negatively
affect the reliability of our scientific research or cause us to incur
significant remedial costs
- because all of our target validation operations are located at a single
facility, the occurrence of a disaster could significantly disrupt our
business
- our operating results have been and likely will continue to fluctuate, and
we believe that period-to-period comparisons of our operating results are
not a good indication of our future performance
Risks Related to Our Industry
- our ability to patent our inventions is uncertain because patent laws and
their interpretation are highly uncertain and subject to change
- our patent applications may not result in enforceable patent rights and,
as a result, the protection afforded to our scientific discoveries may be
insufficient
- if other companies and institutions obtain patents relating to our drug
target or product candidate discoveries, we may be unable to obtain
patents for our inventions based upon those discoveries and may be blocked
from using or developing some of our technologies and products
- issued or pending patents may not fully protect our discoveries, and our
competitors may be able to commercialize technologies or products similar
to those covered by our issued or pending patents
- we may be involved in patent litigation and other disputes regarding
intellectual property rights and may require licenses from third parties
for our discovery and development and planned commercialization
activities, and we may not prevail in any such litigation or other dispute
or be able to obtain required licenses
- we use intellectual property that we license from third parties, and if we
do not comply with these licenses, we could lose our rights under them
- we have not sought patent protection outside of the United States for some
of our inventions, and some of our licensed patents only provide coverage
in the United States, and as a result, our international competitors could
be granted foreign patent protection with respect to our discoveries
- we may be unable to protect our trade secrets
- our efforts to discover, evaluate and validate potential targets for drug
intervention and our drug discovery programs are subject to evolving data
and other risks inherent in the drug discovery process
- our industry is subject to extensive and uncertain government regulatory
requirements, which could significantly hinder our ability, or the ability
of our collaborators, to obtain, in a timely
15
manner or at all, government approval of products based on genes that we
identify, or to commercialize such products
- if our potential products receive regulatory approval, we or our
collaborators will remain subject to extensive and rigorous ongoing
regulation
- the uncertainty of pharmaceutical pricing and reimbursement may decrease
the commercial potential of any products that we or our collaborators may
develop and affect our ability to raise capital
- we use hazardous chemicals and radioactive and biological materials in our
business; any disputes relating to improper handling, storage or disposal
of these materials could be time consuming and costly
- we may be sued for product liability
- public perception of ethical and social issues may limit or discourage the
use of our technologies, which could reduce our revenues
For additional discussion of the risks and uncertainties that affect our
business, see "Item 1. Business - Risk Factors" included in our annual report on
Form 10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Disclosure about Market Risk" under "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations" for quantitative
and qualitative disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are
sufficiently effective to ensure that the information required to be disclosed
by us in the reports we file under the Exchange Act is gathered, analyzed and
disclosed with adequate timeliness, accuracy and completeness, based on an
evaluation of such controls and procedures as of the end of the period covered
by this report.
Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 -- Consulting Agreement with C. Thomas Caskey, M.D. dated March 28, 2005 (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 28, 2005 and
incorporated by reference herein)
31.1 -- Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 -- Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On January 7, 2005, we filed a Current Report on Form 8-K dated
January 7, 2005 related to our financial results for the year ended December 31,
2004 and our expectations with respect to our financial results for the year
ending December 31, 2005.
On February 24, 2005, we filed a Current Report on Form 8-K dated
February 24, 2005 related to our issuance of a press release reporting our
financial results for the year and quarter ended December 31, 2004, which press
release included our consolidated balance sheet data and consolidated statements
of operations data for the periods.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEXICON GENETICS INCORPORATED
Date: May 5, 2005 By: /s/ Arthur T. Sands
------------------------------------------------
Arthur T. Sands, M.D., Ph.D.
President and Chief Executive Officer
Date: May 5, 2005 By: /s/ Julia P. Gregory
------------------------------------------------
Julia P. Gregory
Executive Vice President, Corporate Development
and Chief Financial Officer
18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 -- Consulting Agreement with C. Thomas Caskey, M.D. dated March 28, 2005 (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 28, 2005
and incorporated by reference herein)
31.1 -- Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 -- Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002