#### **SECURITIES ANDEXCHANGE COMMISSION**

## **WASHINGTON,D.C. 20549**

 

----

 

#### **FORM 10-Q**

 

**(MARK ONE)**

 

ý         **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

## **FOR THEQUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001**

 

## **OR**

 

##### **o**         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934

 

## **FOR THETRANSITION PERIOD FROM ______________ TO ______________**

 

## **COMMISSION FILENUMBER 000-31145**

 

 

**VERSICOR INC.**

(ExactName of Registrant as Specified in its Charter)

 

 

| **DELAWARE**                                                                                                                              |   | **04-3278032**                           |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State  or Other Jurisdiction of Organization or Incorporation)                                                                           |   | (I.R.S.  Employer Identification number) |
|                                                                                                                                      |   |                                     |
| **34790 ARDENTECH COURT, FREMONT, CALIFORNIA **** ****94555**

(Address  of Principal Executive Offices)   (Zip Code) |

** **

**(510) 739-3000**

(Registrant'sTelephone Number, Including Area Code)

 

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                Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

                Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of the latest practicable date.

 

                COMMONSTOCK, PAR VALUE $0.001 PER SHARE, 23,151,637 SHARES OUTSTANDING AT

NOVEMBER 5, 2001.

 

**VERSICOR INC.**

**INDEX**

 

 

 

| **Part I -  Financial Information**                                                                    |   |
|--------------------------------------------------------------------------------------------------------|--------|
|                                                                                                   |   |
| Item 1.  Condensed Financial Statements                                                                |   |
|                                                                                                   |   |
| Condensed  Balance Sheets as of September 2001 (Unaudited) and December 31, 2000                       |   |
|                                                                                                   |   |
| Statements  of Operations for the Three and Nine Months Ended September 30, 2001 and 2000  (Unaudited) |   |
|                                                                                                   |   |
| Statements  of Cash Flows for the Nine Months Ended September 30, 2001 and 2000  (Unaudited)           |   |
|                                                                                                   |   |
| Notes to  Condensed Financial Statements                                                               |   |
|                                                                                                   |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations   |   |
|                                                                                                   |   |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                    |   |
|                                                                                                   |   |
|                                                                                                   |   |
| **Part II - Other Information**                                                                        |   |
|                                                                                                   |   |
| Item 1. Legal Proceedings                                                                              |   |
|                                                                                                   |   |
| Item  2. Changes in Securities and Use of Proceeds                                                     |   |
|                                                                                                   |   |
| Item 3.  Defaults upon Senior Securities                                                               |   |
|                                                                                                   |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                           |   |
|                                                                                                   |   |
| Item 5. Other Information                                                                              |   |
|                                                                                                   |   |
| Item 6.  Exhibits and Reports on Form 8-K                                                              |   |
|                                                                                                   |   |
| Signatures                                                                                             |   |

**ITEM 1. CONDENSED FINANCIAL STATEMENTS**

 

**VERSICOR INC.**

**CONDENSEDBALANCE SHEETS**

**(IN THOUSANDS)**

 

 

 

|                                       |   | **September  30,  2001** |   | **December  31,  2000** |   |
|--------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                       |   | (unaudited)              |   |                    |   |
| **ASSETS**                                 |   |                     |   |                    |   |
| Current assets:                            |   |                     |   |                    |   |
| Cash and cash equivalents                  |   | $                        | 44,041 |                    | $      | 67,989 |   |
| Marketable securities                      |   | 25,171                   |   | 17,945                  |   |
| Employee notes receivable                  |   | 23                       |   | 357                     |   |
| Prepaid expenses and other current assets  |   | 753                      |   | 591                     |   |
| Total current assets                       |   | 69,988                   |   | 86,882                  |   |
| Property and equipment, net                |   | 5,102                    |   | 4,384                   |   |
| Employee notes receivable                  |   | -                        |   | 188                     |   |
| Other assets                               |   | 157                      |   | 142                     |   |
| Total assets                               |   | $                        | 75,247 |                    | $      | 91,596 |   |
|                                       |   |                     |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**  |   |                     |   |                    |   |
| Current liabilities:                       |   |                     |   |                    |   |
| Accounts payable                           |   | $                        | 2,069  |                    | $      | 1,421 |   |
| Accrued liabilities                        |   | 6,500                    |   | 3,225                   |   |
| Related party payable                      |   | -                        |   | 12                      |   |
| Current portion of term loan payable       |   | 862                      |   | 862                     |   |
| Deferred revenue                           |   | 217                      |   | 1,233                   |   |
| Total current liabilities                  |   | 9,648                    |   | 6,753                   |   |
| Deferred revenue                           |   | 500                      |   | 108                     |   |
| Term loan payable                          |   | 2,801                    |   | 3,448                   |   |
| Other long-term liabilities                |   | 159                      |   | 1,000                   |   |
| Total liabilities                          |   | 13,108                   |   | 11,309                  |   |
|                                       |   |                     |   |                    |   |
| Stockholders' equity:                      |   |                     |   |                    |   |
| Common stock                               |   | 23                       |   | 23                      |   |
| Additional paid-in capital                 |   | 159,900                  |   | 160,059                 |   |
| Deferred stock compensation                |   | (4,526                   | )      | (8,819                  | )      |
| Accumulated other comprehensive income     |   | 100                      |   | -                       |   |
| Accumulated deficit                        |   | (93,358                  | )      | (70,976                 | )      |
| Total stockholders' equity                 |   | 62,139                   |   | 80,287                  |   |
| Total liabilities and stockholders' equity |   | $                        | 75,247 |                    | $      | 91,596 |   |

 

 

Theaccompanying notes are an integral part of the condensed financial statements.

**VERSICOR INC.**

**STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)**

 

 
|                                                          |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|---------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                          |   | **September  30,  2001** |   | **September  30,  2000** |   | **September  30,  2001** |   | **September  30,  2000** |   |
| Revenues:                                                     |   |                     |   |                     |   |   |   |   |   |
| Collaborative research and development and contract  services |   | $                        | 1,554  |                     | $      | 1,301 |   | $ | 4,594 |   | $ | 3,852 |   |
| License fees and milestones                                   |   | 9                        |   | 8                        |   | 276 |   | 275 |   |
| Total revenues                                                |   | 1,563                    |   | 1,309                    |   | 4,870 |   | 4,127 |   |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Operating expenses:                                           |   |                     |   |                     |   |   |   |   |   |
| Research and development - non-cash compensation  expense     |   | 544                      |   | 790                      |   | 1,739 |   | 2,002 |   |
| Research and development - other                              |   | 8,665                    |   | 3,145                    |   | 21,624 |   | 8,107 |   |
| Total research and development                                |   | 9,209                    |   | 3,935                    |   | 23,363 |   | 10,109 |   |
| General and administrative - non-cash compensation  expense   |   | 32                       |   | 1,735                    |   | 2,141 |   | 4,545 |   |
| General and administrative - other                            |   | 1,458                    |   | 625                      |   | 4,262 |   | 1,709 |   |
| Total general and administrative                              |   | 1,490                    |   | 2,360                    |   | 6,403 |   | 6,254 |   |
| Total operating expenses                                      |   | 10,699                   |   | 6,295                    |   | 29,766 |   | 16,363 |   |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Loss from operations                                          |   | (9,136                   | )      | (4,986                   | )      | (24,896 | ) | (12,236 | ) |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Other income (expense):                                       |   |                     |   |                     |   |   |   |   |   |
| Interest income                                               |   | 692                      |   | 1,193                    |   | 2,824 |   | 2,375 |   |
| Interest expense                                              |   | (70                      | )      | (123                     | )      | (250 | ) | (365 | ) |
| Other income (expense)                                        |   | (60                      | )      | -                        |   | (60 | ) | 18 |   |
| Net loss                                                      |   | (8,574                   | )      | (3,916                   | )      | (22,382 | ) | (10,208 | ) |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Accretion of dividends on preferred stock                     |   | -                        |   | (615                     | )      | - |   | (3,486 | ) |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Net loss available to common stockholders                     |   | $                        | (8,574 | )                        | $      | (4,531 | ) | $ | (22,382 | ) | $ | (13,694 | ) |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Net loss per share:                                           |   |                     |   |                     |   |   |   |   |   |
| Basic and diluted                                             |   | $                        | (0.37  | )                        | $      | (0.33 | ) | $ | (0.97 | ) | $ | (2.66 | ) |
|                                                          |   |                     |   |                     |   |   |   |   |   |
| Weighted average shares                                       |   | 23,085                   |   | 13,690                   |   | 23,060 |   | 5,147 |   |

 

 

Theaccompanying notes are an integral part of the condensed financial statements.

**VERSICOR INC.**

**STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(IN THOUSANDS)**

 

 
|                                                                         |   | **Nine  Months Ended** |    |
|------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                         |   | **September  30,2001** |    | **September  30,2000** |   |
|                                                                         |   |                   |    |   |   |
| **Cash flows from operating  activities:**                                   |   |                   |    |   |   |
| Net loss                                                                     |   | $                      | (22,382 | ) | $ | (10,208 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                   |    |   |   |
| Depreciation                                                                 |   | 750                    |    | 659 |   |
| Loss on disposal of fixed assets                                             |   | 60                     |    | - |   |
| Non-cash compensation expense                                                |   | 3,880                  |    | 6,547 |   |
| Changes in operating assets and liabilities:                                 |   |                   |    |   |   |
| Prepaid expenses and other current assets                                    |   | (162                   | )       | (462 | ) |
| Employee notes receivable                                                    |   | 522                    |    | (22 | ) |
| Other assets                                                                 |   | (15                    | )       | 19 |   |
| Accounts payable                                                             |   | 648                    |    | 128 |   |
| Accrued liabilities                                                          |   | 3,275                  |    | 990 |   |
| Related party payable                                                        |   | (12                    | )       | 9 |   |
| Deferred revenue                                                             |   | (624                   | )       | (325 | ) |
| Other long-term liabilities                                                  |   | (841                   | )       | (1,000 | ) |
| Net cash used in operating activities                                        |   | (14,901                | )       | (3,665 | ) |
|                                                                         |   |                   |    |   |   |
| **Cash flows from investing  activities:**                                   |   |                   |    |   |   |
| Purchases of marketable securities                                           |   | (39,705                | )       | (41,610 | ) |
| Sales/maturities of marketable securities                                    |   | 32,579                 |    | 5,000 |   |
| Additions to property and equipment, net                                     |   | (1,528                 | )       | (347 | ) |
| Net cash used in investing activities                                        |   | (8,654                 | )       | (36,957 | ) |
|                                                                         |   |                   |    |   |   |
| **Cash flows from financing  activities:**                                   |   |                   |    |   |   |
| Proceeds from initial public offering, net                                   |   | -                      |    | 52,688 |   |
| Proceeds from issuance of common stock                                       |   | 254                    |    | 145 |   |
| Repayments of long-term debt                                                 |   | (647                   | )       | (431 | ) |
| Net cash (used in) provided by financing activities                          |   | (393                   | )       | 52,402 |   |
|                                                                         |   |                   |    |   |   |
| Net change in cash and cash equivalents                                      |   | (23,948                | )       | 11,780 |   |
| Cash and cash equivalents at beginning of period                             |   | 67,989                 |    | 34,619 |   |
| Cash and cash equivalents at end of period                                   |   | $                      | 44,041  |   | $ | 46,399 |   |
|                                                                         |   |                   |    |   |   |
| **Supplemental cash flow information:**                                      |   |                   |    |   |   |
| Cash paid during the period for interest                                     |   | $                      | 250     |   | $ | 366 |   |

 

 

 

Theaccompanying notes are an integral part of the condensed financial statements.

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**1.  BASIS OF PRESENTATION**

 

      The accompanying interimfinancial statements are unaudited and have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normallyincluded in annual financial statements have been condensed or omitted. Theyear-end condensed balance sheet data was derived from audited financialstatements but does not include all disclosures required by generally acceptedaccounting principles.  The interimfinancial statements, in the opinion of management, reflect all adjustments(including normal recurring accruals) necessary for a fair presentation of theresults for the interim periods ended September 30, 2001 and 2000.

 

      The results of operations for the interim periods are notnecessarily indicative of the results of operations to be expected for thefiscal year.  These condensed interimfinancial statements should be read in conjunction with the audited financialstatements for the year ended December 31, 2000, which are included in theCompany's Annual Report on Form 10-K for the year ended December 31, 2000.

 

 

**2.  BASIC AND DILUTED NET LOSS PER SHARE**

 

      Basic net loss per share is computed using theweighted-average number of shares of common stock outstanding. Diluted net lossper share does not differ from basic net loss per share since potential commonshares are anti-dilutive for all periods presented and therefore are excludedfrom the calculation of diluted net loss per share. The followingweighted-average potentially dilutive common shares were excluded from the computationof net loss per share because their effect was anti-dilutive (in thousands):

 
|                                                    |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|---------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                    |   | **September  30,2001**  |   | **September  30,2000** |   | **September  30,2001** |   | **September  30,2000** |   |
| Convertible and redeemable convertible preferred  stock |   | -                       |   | 7,147                  |   | - |   | 13,562 |   |
| Stock options                                           |   | 2,796                   |   | 1,673                  |   | 2,651 |   | 1,653 |   |
| Common stock warrants                                   |   | 421                     |   | 431                    |   | 421 |   | 424 |   |
| Common stock subject to repurchase                      |   | 11                      |   | 25                     |   | 13 |   | 26 |   |
|                                                    |   | 3,228                   |   | 9,276                  |   | 3,085 |   | 15,665 |   |

 

 

**3.  RECENT ACCOUNTING PRONOUNCEMENTS**

 

      In July 2001, the Financial AccountingStandards Board (“FASB”) issued Statements of Financial Accounting StandardsNo. 141 (“SFAS 141”), “Business Combinations,” and No. 142 (“SFAS 142”),“Goodwill and Other Intangible Assets.” SFAS 141 requires that all business combinations initiated after June30, 2001 be accounted for under a single method—the purchase method.  Use of the pooling-of-interests method is nolonger permitted.  SFAS 142 requiresthat goodwill no longer be amortized to earnings, but instead be reviewed forimpairment upon initial adoption of the Statement and on an annual basis goingforward.  The amortization of goodwillwill cease upon adoption of SFAS 142. The provisions of SFAS 142 will be effective for fiscal years beginningafter December 15, 2001. Versicor is required to adopt SFAS 142 in the firstquarter of fiscal year 2002.  We believethat the adoption of these standards will have no impact on our financialstatements.

 

      In October 2001, the FASB issued Statement of FinancialAccounting Standards No. 144 ("SFAS 144"), "Accounting for theImpairment or Disposal of Long-Lived Assets," which is effective forfiscal years beginning after December 15, 2001 and interim periods within thosefiscal periods.  This Statement supersedesFASB Statement No. 121and APB 30, however, this Statement retains therequirement of Opinion 30 to report discontinued operations separately fromcontinuing operations and extends that reporting to a component of an entitythat either has been disposed of (by sale, by abandonment, or in a distributionto owners) or is classified as held for sale. This Statement addressesfinancial accounting and reporting for the impairment of certain long-livedassets and for long-lived assets to be disposed of.  Management does not expect the adoption of SFAS 144 to have amaterial impact on the Company's financial position and results of operations.

**ITEM 2.**

## **MANAGEMENT'SDISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

      The following discussion of our financial condition and resultsof operations should be read in conjunction with the financial statementsincluded elsewhere in this Quarterly Report on Form 10-Q and Versicor’s auditedfinancial statements for the year ended December 31, 2000 included in ourAnnual Report on Form 10-K previously filed with the SEC. This Quarterly Reporton Form 10-Q contains, in addition to historical information, forward-lookingstatements, which involve risk and uncertainties. The words "believe,""expect," "estimate," "may," "will,""could," "plan," or "continue," and similarexpressions are intended to identify forward-looking statements.  Versicor's actual results could differsignificantly from the results discussed in such forward-looking statements. See"Factors Affecting Future Operating Results" below.

 

**OVERVIEW**

 

      Versicor is a biopharmaceutical company focused on thediscovery, development and marketing of drugs for the treatment of seriousbacterial and fungal infections, primarily in the hospital setting.  Since our inception on May 2, 1995 as awholly-owned subsidiary of Sepracor Inc., we have devoted substantially all ofour efforts to establishing our business and conducting research anddevelopment activities related to our proprietary product candidates, includinganidulafungin and dalbavancin, as well as collaborative product candidates.Since 1996, we have been operating as an independent company located inCalifornia.

 

      On August 8, 2000, we sold 4,600,000 shares of our common stockat $11 per share in an initial public offering.  On September 7, 2000, the underwriters exercised anover-allotment option and purchased an additional 690,000 shares of commonstock at $11 per share.  We receivedtotal net proceeds from the initial public offering and the over-allotment ofapproximately $52.7 million.

 

      Since we began our operations in May 1995, we have notgenerated any revenues from product sales. Our lead product candidate, anidulafungin, is in Phase III clinicaltrials.  Our second product candidate,dalbavancin, is in Phase II clinical trials and we also have several leadcompounds in preclinical studies.  InJune 2001, Pharmacia Corporation started clinical development of one of ourcompounds in our oxazolidinone program for which we have received a milestonepayment.

 

      Our revenues in the near term are expected to consist primarilyof license fees, milestone payments and collaborative research payments to bereceived from our collaborators. Certain of these payments are dependent on achievement of certainmilestones. If our development efforts result in clinical success, regulatoryapproval and successful commercialization of our products, we will generaterevenues from sales of our products and from receipt of royalties on sales oflicensed products.

 

      Our expenses have consisted primarily of costs incurred inlicensing existing product candidates, research and development of new productcandidates and in connection with our collaboration agreements, and fromgeneral and administrative costs associated with our operations. We expect ourlicensing costs to increase as certain milestones are achieved, and ourresearch and development expenses to increase as we continue to develop ourproduct candidates. We also expect that our general and administrative expenseswill increase as we add personnel and continue to increase our research anddevelopment operations.  In addition, weexpect to incur sales and marketing expenses in the future when we establishour sales and marketing organization.

 

      We have recorded deferred stock compensation expense inconnection with the grant of stock options to employees and consultants.Deferred stock compensation for options granted to employees is the differencebetween the fair value for financial reporting purposes of our common stock onthe date such options were granted and their exercise price. Deferred stockcompensation for options granted to consultants has been determined inaccordance with Statement of Financial Accounting Standards No. 123 as the fairvalue of the equity instruments issued. Deferred stock compensation for optionsgranted to consultants is periodically remeasured as the underlying optionsvest in accordance with Emerging Issues Task Force No. 96-18.

 

      Werecorded deferred stock compensation of ($414,000) and $4.9 million for thenine months ended September 30, 2001 and 2000, respectively.  These amounts were recorded as a componentof stockholders’ equity and are being amortized as charges to operations overthe vesting periods of the options.  Werecorded amortization of deferred stock compensation of $3.9 million and $6.5million for the nine months ended September 30, 2001 and 2000, respectively.

 

      Since our inception, we have incurred significant losses. As ofSeptember 30, 2001, we had an accumulated deficit of $93.4 million. Weanticipate incurring additional losses, which may increase, for the foreseeablefuture, including at least through December 31, 2002.

 

      We have a limited history of operations. We anticipate that ourquarterly results of operations will fluctuate for the foreseeable future dueto several factors, including payments made or received pursuant to licensingor collaboration agreements, progress of our research and development efforts,and the timing and outcome of regulatory approvals. Our limited operatinghistory makes predictions of future operations difficult or impossible.

 

      In May 1999, we obtained from Eli Lilly an exclusive worldwidelicense for the development and commercialization of anidulafungin (formerly knownas V-Echinocandin).  We began a PhaseIII clinical trial for anidulafungin in the first quarter of 2001.  We paid $11.0 million for the license andhave agreed to pay an additional $3 million for product inventory of which wehave paid $2.0 million.  We are alsoobligated to make $51.0 million in additional payments to Eli Lilly ifspecified milestones are achieved on the intravenous formulations ofanidulafungin. Of the $51.0 million payment obligation for the intravenousformulation, $14.0 million is contingent on developments in the United Statesand Canada, $16.0 million is contingent on developments in Japan and Europe and$21.0 million is contingent on cumulative sales of the intravenous formulation.We are obligated to make $79 million in additional payments to Eli Lilly ifspecified milestones are achieved on the oral formulations ofanidulafungin.  We are also required topay to Eli Lilly royalties in respect of sales of any product resulting fromthe compound. We may terminate this agreement at any time by giving ninetydays' written notice.  Otherwise, thelicense terminates on a country-by-country basis as all of our royaltyobligations are satisfied in each country.

 

      In March 1999, we entered into a collaboration agreement withPharmacia Corporation pursuant to which we are collaborating to discover secondand third generation oxazolidinone product candidates. In connection with thecollaboration, Pharmacia Corporation made an equity investment in us of $3.8million and paid research support and license fee payments of $1.2 million tous. Under the terms of the agreement, we are entitled to receive additionalresearch support payments, and if specified milestones are achieved, up to$14.0 million in additional milestone payments per compound.  We are also entitled to receive royalties onthe worldwide sales of any drug developed and commercialized as a result of thecollaboration.  In October 2000,Pharmacia increased its research support payments by approximately 30% and inJune 2001 we received a milestone payment for the initiation of clinicaldevelopment of one of the oxazolidinone compounds.

 

      In March 1999, we entered into a collaboration agreement withNovartis Pharma AG pursuant to which we are collaborating to discover anddevelop novel deformylase inhibitors. In connection with the collaboration,Novartis has made a $3.0 million equity investment in us and paid $1.3 millionin milestone payments to us. Under the terms of this agreement, we are entitledto receive up to $21.0 million in additional payments from Novartis upon theachievement of specified milestones, a portion of which may be credited againstfuture royalty payments to which we are entitled on the worldwide sales of anydrug developed and commercialized from this collaboration.

 

      In February 1998, we entered into two agreements with BiosearchItalia: a license agreement and a collaborative agreement. Under the licenseagreement, Biosearch Italia granted us an exclusive license to develop andcommercialize dalbavancin (formerly known as V-Glycopeptide) in the UnitedStates and Canada.  In exchange for thelicense and upon the receipt of favorable results in pre-clinical studies, wepaid $3.0 million and issued 250,000 shares of our common stock to BiosearchItalia. In May 2001, we began a Phase II clinical trial for dalbavancin andpaid Biosearch Italia an additional milestone payment.  We are obligated to make up to $8.0 millionin additional payments to Biosearch Italia upon the achievement of specifiedmilestones. We are also required to pay Biosearch Italia royalties in respectof sales of any product that results from the compound.  Under the collaborative agreement withBiosearch Italia, we established a lead optimization partnership called BIOCOR.Biosearch contributes leads and we contribute our combinatorial and medicinalchemistry expertise to optimize the leads.

 

      In June 2001, we entered into an agreement with AbbottLaboratories.  Pursuant to thisagreement, Abbott has agreed to manufacture, develop and supply commercialquantities of both API (the bulk form of the final active pharmaceuticalingredient for anidulafungin) and ECBN-HC1 (the bulk form of intermediateanidulafungin B nucleus hydrochloride used in the production of API).

 

 

**RESULTS OFOPERATIONS**

 

**THREE MONTHSENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000**

 

# **REVENUES**

 

      Revenues were $1.6 million and $1.3 million inthe three months ended September 30, 2001 and 2000, respectively.  Revenues consisted of $951,000 and $723,000of collaborative research and development, contract service and license feesfrom Pharmacia Corporation and $612,000 and $586,000 of collaborative researchand development fees from Novartis in the three months ended September 30, 2001and 2000, respectively.  The increase inrevenues in the third quarter of 2001 is due to the increase in collaborativeresearch and development funding from both Pharmacia Corporation and Novartis.

 

# **RESEARCH AND DEVELOPMENT EXPENSES**

 

      Research and development expenses were $9.2million and $3.9 million in the three months ended September 30, 2001 and 2000,respectively.  Research and developmentexpenses include amortization of non-cash stock compensation expense of$544,000 and $790,000 in the three months ended September 30, 2001 and 2000,respectively.  Excluding these charges,research and development expenses increased by $5.5 million primarily due tothe increase in clinical expenses for the development of anidulafungin, whichmoved into Phase III trials in the first half of 2001 and dalbavancin, whichmoved into Phase II trials in the second quarter of 2001.

 

# **GENERAL AND ADMINISTRATIVE EXPENSES**

 

      General and administrative expenses were $1.5 million and $2.4million in the three months ended September 30, 2001 and 2000, respectively.  General and administrative expenses includeamortization of non-cash stock compensation expense of $32,000 and $1.7 millionin the three months ended September 30, 2001 and 2000, respectively.  Excluding these charges, general andadministrative expenses increased by $833,000 primarily due to the increase inlegal, audit, insurance, personnel, and consultant expenses associated withbeing a public company.

 

**OTHER INCOME(EXPENSE)**

 

      Net interest income was $622,000 and $1.1 million in the threemonths ended September 30, 2001 and 2000, respectively.  The 2000 period reflects greater interestincome as a result of higher cash and investment balances resulting from ourinitial public offering in August 2000.

 

**NINE MONTHSENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000**

 

# **REVENUES**

 

      Revenues were $4.9 million and $4.1 million inthe nine months ended September 30, 2001 and 2000, respectively.  Revenues consisted of $2.8 million and $2.1million of collaborative research and development, contract service and licensefees from Pharmacia Corporation and $2.1 million and $2.0 million ofcollaborative research and development fees and milestone payments fromNovartis in the nine months ended September 30, 2001 and 2000, respectively.  The increase in revenues in the first ninemonths of 2001 is due to the increase in collaborative research and developmentfunding from both Pharmacia Corporation and Novartis.

 

# **RESEARCH AND DEVELOPMENT EXPENSES**

 

      Research and development expenses were $23.4million and $10.1 million in the nine months ended September 30, 2001 and 2000,respectively.  Research and developmentexpenses include amortization of non-cash stock compensation expense of $1.7million and $2.0 million in the nine months ended September 30, 2001 and 2000,respectively.  Excluding these charges,research and development expenses increased by $13.5 million primarily due tothe increase in clinical expenses for the development of anidulafungin, whichmoved into Phase III trials in the first half of 2001 and dalbavancin whichmoved into Phase II trials in the second quarter of 2001 and for which we paida milestone payment to Biosearch Italia, as well as the expansion of ourcollaborative and internal research projects.

 

# **GENERAL AND ADMINISTRATIVE EXPENSES**

 

      General and administrative expenses were $6.4 million and $6.3million in the nine months ended September 30, 2001 and 2000,respectively.  General andadministrative expenses include amortization of non-cash stock compensationexpense of $2.1 million and $4.5 million in the nine months ended September 30,2001 and 2000, respectively.  Excludingthese charges, general and administrative expenses increased by $2.6 millionprimarily due to the increase in legal, audit, insurance, personnel, andconsultant expenses associated with being a public company.

 

**OTHER INCOME (EXPENSE)**

 

      Net interest income was $2.6 million and $2.0 million in thenine months ended September 30, 2001 and 2000, respectively.  The 2001 period reflects greater interest incomeas a result of higher cash and investment balances resulting from our initialpublic offering in August 2000.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

      We have funded our operations principally with the proceeds ofapproximately $78.5 million from a series of nine preferred stock offeringsover the period 1995 through 1999 and net proceeds of approximately $52.7million from the our initial public offering received in August and September2000.

 

       As of September 30,2000, we had received approximately $18.7 million in payments for collaborativeresearch, contract services and milestone payments, as well as license feesfrom our collaborators, including Sepracor. Of these payments, $717,000constitutes deferred revenue as of September 30, 2001.

 

      Inaddition, we have a $6.0 million term loan agreement with Fleet National Bank.This loan bears interest at the prime rate plus 0.50% and is payable in 15equal quarterly installments of $216,000, with the balance due on December 31,2002. The net proceeds of this loan were used to repay Sepracor for leaseholdimprovements to our facilities and for general corporate purposes. As ofSeptember 30, 2001, there was an outstanding loan balance of $3.7 million.  In October 2001, the loan agreement wasamended to include a four-year equipment note for $2.0 million that we are ableto draw down on through June 30, 2002. The note bears interest at the prime rate unless we exercise an optionto have the interest on all or any portion of the principal amount based on theLIBOR rate plus an applicable margin. The interest on the note is payable in quarterly installments commencingon March 31, 2002.  Depending on thedrawdowns, the principal of the note is payable in equal installments beginningon March 31, 2002 with the final payment due on December 31, 2004.  Proceeds from the drawdowns will be used tofinance capital expenditure.

 

      Cash used in operations was $14.9 million and$3.7 million in the nine months ended September 30, 2001 and 2000,respectively.  The net loss of $22.4million in the first nine months of 2001 was partially offset by non-cashcharges for depreciation and non-cash stock compensation of $4.6 million and anincrease in accrued liabilities of $3.3 million.  In the first nine months of 2000, the net loss of $10.2 millionwas substantially offset by non-cash charges for depreciation and non-cashstock compensation of $7.2 million.

 

      Cash used in investing activities was $8.7 million and $37.0million in the nine months ended September 30, 2001 and 2000, respectively.  The principal use of cash in the first halfof 2001 resulted from the net purchases of marketable securities as well ascapital expenditure of $1.5 million mainly relating to one-time leaseholdimprovements at our Fremont facility.

 

      At September 30, 2001, our cash, cash equivalents andmarketable securities totaled $69.2 million compared to $85.9 million atDecember 31, 2000.

 

      We expect to have negative cash flow from operations for theforeseeable future. We expect to incur increasing research and development andgeneral and administrative expenses including expenses relating to additions topersonnel and production and commercialization efforts.  Our future capital requirements will dependon a number of factors, including our success in developing markets for ourproducts, payments received or made under collaboration agreements, the timingand outcome of regulatory approvals, the need to acquire licenses to newproducts or compounds, the status of competitive products and the availabilityof other financing. We believe our existing cash and cash equivalents andmarketable securities will be sufficient to fund our operating expenses, debtrepayments and capital requirements for about the next two years.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

      In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statements of Financial Accounting Standards No. 141 (“SFAS 141”),“Business Combinations,” and No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets.”  SFAS 141 requiresthat all business combinations initiated after June 30, 2001 be accounted forunder a single method—the purchase method. Use of the pooling-of-interests method is no longer permitted.  SFAS 142 requires that goodwill no longer beamortized to earnings, but instead be reviewed for impairment upon initialadoption of the Statement and on an annual basis going forward.  The amortization of goodwill will cease uponadoption of SFAS 142.  The provisions ofSFAS 142 will be effective for fiscal years beginning after December 15, 2001.Versicor is required to adopt SFAS 142 in the first quarter of fiscal year2002.  We believe that the adoption ofthese standards will have no impact on our financial statements.

 

      InOctober 2001, the FASB issued Statement of Financial Accounting Standards No.144 ("SFAS 144"), "Accounting for the Impairment or Disposal ofLong-Lived Assets," which is effective for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal periods.  This Statement supersedes FASB Statement No.121and APB 30, however, this Statement retains the requirement of Opinion 30 toreport discontinued operations separately from continuing operations andextends that reporting to a component of an entity that either has beendisposed of (by sale, by abandonment, or in a distribution to owners) or isclassified as held for sale. This Statement addresses financial accounting andreporting for the impairment of certain long-lived assets and for long-livedassets to be disposed of.  Managementdoes not expect the adoption of SFAS 144 to have a material impact on theCompany's financial position and results of operations.

**FACTORSAFFECTING FUTURE OPERATING RESULTS**

 

      Certain information contained in the Quarterly Report on Form10-Q consists of forward-looking statements. Important factors that could causeactual results to differ materially from the forward-looking statements includethe following:

# ** **

# **RISKS RELATED TO OUR BUSINESS**

 

**IF WE AREUNABLE TO DEVELOP AND SUCCESSFULLY COMMERCIALIZE OUR PRODUCT CANDIDATES, WE MAYNEVER GENERATE SIGNIFICANT REVENUES OR BECOME PROFITABLE.**

 

      You must evaluate us in light of the uncertainties andcomplexities present in an early stage biopharmaceutical company. All of ourproduct candidates are in development, and only two are in Phase II or PhaseIII clinical trials. To date we have not commercialized any products orrecognized any revenue from product sales. We will require significantadditional investment in research and development, pre-clinical testing andclinical trials, regulatory approval, and sales and marketing activities. Ourproduct candidates, if successfully developed, may not generate sufficient orsustainable revenues to enable us to be profitable.

 

**WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLEFUTURE AND MAY NEVER ACHIEVE PROFITABILITY.**

 

      We have incurrednet losses since our inception in 1995. Before deemed dividends and accretionto redemption value of preferred stock, our net losses were approximately $1.1million in 1995, $4.8 million in 1996, $6.3 million in 1997, $12.6 million in1998, $29.2 million in 1999, $15.3 million in 2000 and $22.4 million in thefirst nine months of 2001.  As ofSeptember 30, 2001, our accumulated deficit was approximately $93.4 million.Our losses to date have resulted principally from:

 

      - research and development costs relating to the development ofour product

        candidates;

 

      - costs of acquiring product candidates; and

 

      - general and administrative costs relating to our operations.

 

      We expect to incur substantial and increasing losses for theforeseeable future as a result of increases in our research and developmentcosts, including costs associated with conducting pre-clinical testing andclinical trials, and charges related to purchases of technology or other assets.We expect that the amount of operating losses will fluctuate significantly fromquarter to quarter as a result of increases or decreases in our research anddevelopment efforts, the execution or termination of collaboration agreements,the initiation, success or failure of clinical trials, or other factors.  Our chances for achieving profitability willdepend on numerous factors, including success in:

 

      - developing and testing new product candidates;

 

      - receiving regulatory approvals;

 

      - manufacturing products;

 

      - marketing products; and

 

      - competing with products from other companies.

 

      Many of these factors will depend on circumstances beyond ourcontrol. We expect to rely heavily on third parties with respect to manyaspects of our business, including research and development, clinical testing,manufacturing and marketing. We cannot assure you that we will ever becomeprofitable.

 

**OUR REVENUES WILL BE SUBJECT TO SIGNIFICANTFLUCTUATIONS, WHICH WILL MAKE IT DIFFICULT TO COMPARE OUR OPERATING RESULTS TOPRIOR PERIODS.**

 

      We expect that substantially all of our revenues for theforeseeable future will result from payments under collaboration agreements. Todate, these payments have been in the form of upfront payments, reimbursementfor research and development expenses and milestone payments. We may not beable to generate additional revenues. Furthermore, payments under our existingand any future collaboration agreements will be subject to significantfluctuation in both timing and amount. Our revenues may not be indicative ofour future performance or of our ability to continue to achieve additionalmilestones. Our revenues and results of operations for any period may also notbe comparable to the revenues or results of operations for any other period.

 

**IF WE CANNOT ENTER INTO NEW LICENSINGARRANGEMENTS, OUR FUTURE PRODUCT PORTFOLIO COULD BE ADVERSELY AFFECTED.**

 

      An important component of our business strategy is in-licensingdrug compounds developed by other pharmaceutical and biotechnology companies oracademic research laboratories. Competition for promising compounds can beintense. If we are not able to identify future licensing opportunities or enterinto future licensing arrangements on acceptable terms, our future productportfolio could be adversely affected.

 

**IF OURCOLLABORATORS DO NOT PERFORM, WE WILL BE UNABLE TO DEVELOP OUR JOINT PRODUCTCANDIDATES.**

 

      We have entered into collaboration agreements with thirdparties to develop certain product candidates. These collaborations arenecessary in order for us to:

 

      - fund our research and development activities;

 

      - fund manufacturing by third parties;

 

      - seek and obtain regulatory approvals; and

 

      - successfully commercialize existing and future productcandidates.

 

      Only a limited number of product candidates have been generatedpursuant to our collaborations. We cannot assure you that any of them willresult in commercially successful products. Current or future collaborationagreements may not be successful. If we fail to maintain our existingcollaboration agreements or fail to enter into additional collaborationagreements, the number of product candidates from which we could receive futurerevenues would decline.

 

      Our dependence on collaboration agreements with third partiessubjects us to a number of risks. These collaboration agreements may not be onterms favorable to us. Agreements with collaborators typically allow thecollaborators significant discretion in electing whether to pursue any of theplanned activities. We cannot control the amount and timing of resources ourcollaborators may devote to the product candidates, and our collaborators maychoose to pursue alternative products. Our collaborators may not perform theirobligations as expected. Business combinations or significant changes in acollaborator’s business strategy may adversely affect a collaborator’swillingness or ability to complete its obligations under the arrangement.  Moreover, we could become involved indisputes with our collaborators, which could lead to delays or termination ofour development programs with them and time-consuming and expensive litigationor arbitration. Even if we fulfill our obligations under a collaborativeagreement, our collaborator can terminate the agreement under certaincircumstances. If any collaborator were to terminate or breach our agreementwith it, or otherwise fail to complete its obligations in a timely manner, ourchances of successfully commercializing products would be materially andadversely affected.

**IFCLINICAL TRIALS FOR OUR PRODUCTS ARE UNSUCCESSFUL OR DELAYED, WE WILL BEUNABLE TO MEET OUR ANTICIPATED DEVELOPMENT AND COMMERCIALIZATION TIMELINES,WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.**

 

      Before obtaining regulatory approvals for the commercial saleof any products, we must demonstrate through pre-clinical testing and clinicaltrials that our product candidates are safe and effective for use in humans.Conducting clinical trials is a lengthy, time-consuming and expensive process.

 

      Completion of clinical trials may take several years or more.Our commencement and rate of completion of clinical trials may be delayed bymany factors, including:

 

      - lack of efficacy during the clinical trials;

 

      - unforeseen safety issues;

 

      - slower than expected rate of patient recruitment;

 

      - government or regulatory delays;

 

      - inability to adequately follow patients after treatment; and

 

      - inability to manufacture sufficient quantities of materialsfor use in clinical trials.

 

      The results from pre-clinical testing and early clinical trialsare often not predictive of results obtained in later clinical trials. A numberof new drugs have shown promising results in clinical trials, but subsequentlyfailed to establish sufficient safety and efficacy data to obtain necessaryregulatory approvals. Data obtained from pre-clinical and clinical activitiesare susceptible to varying interpretations, which may delay, limit or preventregulatory approval. In addition, regulatory delays or rejections may beencountered as a result of many factors, including perceived defects in thedesign of clinical trials and changes in regulatory policy during the period ofproduct development.

 

      As of September 30, 2001, two of ourproduct candidates, anidulafungin and dalbavancin, were in clinical trials.Patient follow-up for these clinical trials has been limited and more trialswill be required before we will be able to apply for regulatory approvals.Clinical trials conducted by us or by third parties on our behalf may notdemonstrate sufficient safety and efficacy to obtain the requisite regulatoryapprovals for anidulafungin and dalbavancin or any other potential productcandidates. This failure may delay development of other product candidates andhinder our ability to conduct related pre-clinical testing and clinical trials.Regulatory authorities may not permit us to undertake any additional clinicaltrials for our product candidates. Our other product candidates are inpre-clinical development, and we have not submitted investigational new drug applicationsto commence clinical trials involving these compounds. Our pre-clinicaldevelopment efforts may not be successfully completed and we may not filefurther investigational new drug applications. Any delays in, or terminationof, our clinical trials will materially and adversely affect our developmentand commercialization timelines, which would cause our stock price to decline.Any of these events would also seriously impede our ability to obtainadditional financing.

** **

**IF OUR THIRD PARTY CLINICAL TRIAL MANAGERS DONOT PERFORM, CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES MAY BE DELAYED ORUNSUCCESSFUL.**

 

      We have limited experience in conducting and managing clinicaltrials, and currently only have seven full-time clinical developmentemployees.  We rely on third parties,including our collaborators, clinical research organizations and outsideconsultants, to assist us in managing and monitoring clinical trials. Ourreliance on these third parties may result in delays in completing, or failingto complete, these trials if they fail to perform under the terms of ouragreements with them.

**IF OURPRODUCTS ARE NOT ACCEPTED BY THE MARKET, WE ARE NOT LIKELY TO GENERATESIGNIFICANT REVENUES OR BECOME PROFITABLE.**

 

      Even if we obtain regulatory approval tomarket a product, our products may not gain market acceptance among physicians,patients, healthcare payors and the medical community. The degree of marketacceptance of any pharmaceutical product that we develop will depend on anumber of factors, including:

 

      - demonstration of clinical efficacy and safety;

 

      - cost-effectiveness;

 

      - potential advantages over alternative therapies;

 

      - reimbursement policies of government and third-party payors;and

 

      - effectiveness of our marketing and distribution capabilities.

 

      Physicians will not recommend therapies using our productsuntil clinical data or other factors demonstrate their safety and efficacy ascompared to other drugs or treatments. Even if the clinical safety and efficacyof therapies using our products is established, physicians may elect not torecommend the therapies for any number of other reasons, including whether themode of administration of our products is effective for certain indications.For example, many antibiotic or antifungal products are typically administeredby infusion or injection, which requires substantial cost and inconvenience topatients. Our product candidates, if successfully developed, will compete witha number of drugs and therapies manufactured and marketed by major pharmaceuticaland other biotechnology companies. Our products may also compete with newproducts currently under development by others. Physicians, patients,third-party payors and the medical community may not accept and utilize anyproduct candidates that we or our collaborators develop. If our products do notachieve significant market acceptance, we are not likely to generatesignificant revenues or become profitable.

** **

**IF WE ARE UNABLE TO ATTRACT AND RETAIN KEYEMPLOYEES AND CONSULTANTS, WE WILL BE UNABLE TO DEVELOP AND COMMERCIALIZE OURPRODUCTS.**

 

      We are highly dependent on the principal members of ourscientific, clinical and management staff. In addition, we have depended todate on third parties to perform significant management functions. In order topursue our product development, marketing and commercialization plans, we willneed to hire personnel with experience in clinical testing, governmentregulation, manufacturing and marketing. We may not be able to attract and retain personnel on acceptable termsgiven the intense competition for such personnel among high technologyenterprises, including biotechnology, pharmaceutical and healthcare companies,universities and non-profit research institutions. Most of our scientific andmanagement employees do not have employment agreements. If we lose any of thesepersons, or are unable to attract and retain qualified personnel, our business,financial condition and results of operations may be materially and adverselyaffected.

 

      In addition, we rely on members of our scientific and clinicaladvisory boards and other consultants to assist us in formulating our researchand development strategies. All of our consultants and the members of ourscientific and clinical advisory boards are employed by other entities. Theymay have commitments to, or advisory or consulting agreements with, otherentities that may limit their availability to us. If we lose the services ofthese advisors, the achievement of our development objectives may be impeded.Such impediments may materially and adversely affect our business, financialcondition and results of operations. In addition, except for work performedspecifically for and at our direction, the inventions or processes discoveredby our scientific and clinical advisory board members and other consultantswill not become our intellectual property, but will be the intellectualproperty of the individuals or their institutions. If we desire access to theseinventions, we will be required to obtain appropriate licenses from the owners.  We cannot assure you that we will be able toobtain such licenses.

**IFOUR THIRD-PARTY MANUFACTURERS FAIL TO DELIVER OUR PRODUCT CANDIDATES, CLINICALTRIALS AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE DELAYED.**

 

      We do not have our own manufacturing facilities to produce ourproduct candidates and anticipate that we will continue to rely on thirdparties to manufacture our product candidates and our products. Our contractmanufacturers have a limited number of facilities in which our productcandidates can be produced. These manufacturers have limited experience inmanufacturing anidulafungin and dalbavancin in quantities sufficient forconducting clinical trials or for commercialization.

 

      Contract manufacturers often encounter difficulties in scalingup production, including problems involving production yields, quality controland assurance, shortage of qualified personnel, compliance with FDAregulations, production costs, and development of advanced manufacturingtechniques and process controls. Our contract manufacturers may not perform asagreed or may not remain in the contract manufacturing business for the timerequired by us to successfully produce and market our product candidates. Ifour contract manufacturers fail to deliver the required quantities of ourproduct candidates for clinical use on a timely basis and at commerciallyreasonable prices, and if we fail to find a replacement manufacturer or developour own manufacturing capabilities, clinical trials involving our products, orcommercialization of our products, could be delayed.

** **

**IF WE FAIL TO ESTABLISH SUCCESSFUL MARKETINGAND SALES CAPABILITIES OR FAIL TO ENTER INTO SUCCESSFUL MARKETING ARRANGEMENTSWITH THIRD PARTIES, WE WOULD NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS AND WEWOULD NOT BECOME PROFITABLE.**

 

      We intend to sell a portion of our products through our ownsales force.  We currently have no salesand marketing infrastructure and have no experience in direct marketing, salesand distribution. Our future profitability will depend in part on our abilityto develop a direct sales and marketing force to sell our products to ourcustomers. We may not be able to attract and retain qualified salespeople or beable to build an efficient and effective sales and marketing force. To theextent that we enter into marketing and sales arrangements with othercompanies, our revenues will depend on the efforts of others. These efforts maynot be successful. If we are unable to enter into third-party arrangements,then we must substantially expand our marketing and sales force in order toachieve commercial success for certain products, and compete with othercompanies that have experienced and well-funded marketing and sales operations.

** **

**IF CIRCUMSTANCES REQUIRE US TO OBTAIN ADDITIONALFUNDING, WE MAY BE FORCED TO DELAY OR CURTAIL THE DEVELOPMENT OF OUR PRODUCTCANDIDATES.**

 

      Our requirements for additional capital may be substantial andwill depend on many factors, some of which are beyond our control, including:

 

      - payments received or made under possible future collaborationagreements;

 

      - continued progress of our research and development of ourproducts;

 

      - costs associated with protecting our patent and otherintellectual

        property rights;

 

      - development of marketing and sales capabilities; or

 

      - market acceptance of our products.

 

      We have no committed sources of additional capital. To theextent our capital resources are insufficient to meet future capitalrequirements, we will have to raise additional funds to continue thedevelopment of our product candidates. We cannot assure you that funds will beavailable on favorable terms, if at all. To the extent that additional capitalis raised through the sale of equity or convertible debt securities, theissuance of those securities could result in dilution to our stockholders.  Moreover, the incurrence of debt financingcould result in a substantial portion of our operating cash flow beingdedicated to the payment of principal and interest on such indebtedness. Thiscould render us more vulnerable to competitive pressures and economic downturnsand could impose restrictions on our operations. If adequate funds are notavailable, we may be required to curtail operations significantly or to obtainfunds through entering into collaboration agreements on unattractive terms. Ourinability to raise capital would have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESSCOULD BE HARMED.**

 

      Our business plan contemplates a period of rapid andsubstantial growth that will place a strain on our administrative andoperational infrastructure. To date, our management infrastructure has beenvery limited and dependent on third parties, including our former parentcompany, to provide significant administrative and operational assistance. Ourability to manage effectively our operations and growth requires us to expandand improve our operational, financial and management controls, reportingsystems and procedures and to attract and retain sufficient numbers of talentedemployees. We may not successfully implement improvements to our managementinformation and control systems in an efficient or timely manner and maydiscover deficiencies in existing systems and controls.

 

**IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR AVARIETY OF COSTS AND MAY NEVER REALIZE THE ANTICIPATED BENEFITS.**

 

      If appropriate opportunities become available, we may attemptto acquire products, product candidates or businesses that we believe are astrategic fit with our business. We currently have no commitments or agreementswith respect to any material acquisitions. If we do undertake any transactionof this sort, the process of integrating an acquired product, product candidateor business may result in operating difficulties and expenditures and mayabsorb significant management attention that would otherwise be available forongoing development of our business. Moreover, we may never realize theanticipated benefits of any acquisition. Future acquisitions could result inpotentially dilutive issuances of equity securities, the incurrence of debt,contingent liabilities and/or amortization expenses related to goodwill andother intangible assets, which could adversely affect our business, financialcondition and results of operations.

 

**IF OUR USE OF HAZARDOUS MATERIALS RESULTS INCONTAMINATION OR INJURY, WE COULD SUFFER SIGNIFICANT FINANCIAL LOSS.**

 

      Our research and manufacturing activities involve thecontrolled use of hazardous materials. We cannot eliminate the risk ofaccidental contamination or injury from these materials. In the event of anaccident or environmental discharge, we may be held liable for any resultingdamages, which may exceed our financial resources.

##  

## **RISKS RELATED TO OPERATING IN OUR INDUSTRY**

 

**IF WE DO NOT COMPETE SUCCESSFULLY IN THEDEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS AND KEEP PACE WITH RAPIDTECHNOLOGICAL CHANGE, WE WILL BE UNABLE TO CAPTURE AND SUSTAIN A MEANINGFULMARKET POSITION.**

 

      The biotechnology and pharmaceutical industries are highlycompetitive and subject to significant and rapid technological change. We areaware of several pharmaceutical and biotechnology companies that are activelyengaged in research and development in areas related to antibiotic andantifungal products. These companies have commenced clinical trials or havesuccessfully commercialized their products. Many of these companies areaddressing the same diseases and disease indications as us or ourcollaborators.

 

      Many of these companies and institutions, either alone ortogether with their collaborators, have substantially greater financialresources and larger research and development staffs than we do. In addition,many of these competitors, either alone or together with their collaborators,have significantly greater experience than we do in:

 

      - developing products;

 

      - undertaking pre-clinical testing and human clinical trials;

 

      - obtaining FDA and other regulatory approvals of products; and

 

      - manufacturing and marketing products.

 

      Developments by others may render our product candidates ortechnologies obsolete or non-competitive. We face and will continue to faceintense competition from other companies for collaboration agreements withpharmaceutical and biotechnology companies for establishing relationships withacademic and research institutions, and for licenses of proprietarytechnology.  These competitors, eitheralone or with their collaborators, may succeed in developing technologies orproducts that are more effective than ours.

 

**IF OUR INTELLECTUAL PROPERTY DOES NOTADEQUATELY PROTECT OUR PRODUCT CANDIDATES, OTHERS COULD COMPETE AGAINST US MOREDIRECTLY, WHICH WOULD HURT OUR PROFITABILITY.**

 

      Our success depends in part on our ability to:

 

      - obtain patents or rights to patents;

 

      - protect trade secrets;

 

      - operate without infringing upon the proprietary rights ofothers; and

 

      - prevent others from infringing on our proprietary rights.

 

      We will be able to protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietaryrights are covered by valid and enforceable patents or are effectivelymaintained as trade secrets.  The patentposition of biopharmaceutical companies involves complex legal and factualquestions and, therefore, enforceability cannot be predicted with certainty.Patents, if issued, may be challenged, invalidated or circumvented.  Thus, any patents that we own or licensefrom third parties may not provide any protection against competitors. Ourpending patent applications, those we may file in the future, or those we maylicense from third parties, may not result in patents being issued. Also,patent rights may not provide us with adequate proprietary protection orcompetitive advantages against competitors with similar technologies. The lawsof certain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

      In addition to patents, we rely on trade secrets andproprietary know-how.  We seek protection,in part, through confidentiality and proprietary information agreements. Theseagreements may not provide meaningful protection or adequate remedies for ourtechnology in the event of unauthorized use or disclosure of confidential andproprietary information. Failure to protect our proprietary rights couldseriously impair our competitive position.

** **

**IF THIRD PARTIES CLAIM WE ARE INFRINGING THEIRINTELLECTUAL PROPERTY RIGHTS, WE COULD SUFFER SIGNIFICANT LITIGATION ORLICENSING EXPENSES OR BE PREVENTED FROM MARKETING OUR PRODUCTS.**

 

      Research has been conducted for many years in the areas inwhich we have focused our research and development efforts. This has resultedin a substantial number of issued patents and an even larger number ofstill-pending patent applications. Patent applications in the United Statesare, in most cases, maintained in secrecy until patents issue. The publicationof discoveries in the scientific or patent literature frequently occurssubstantially later than the date on which the underlying discoveries weremade. Our commercial success depends significantly on our ability to operatewithout infringing the patents and other proprietary rights of third parties.Our technologies may infringe the patents or violate other proprietary rightsof third parties. In the event of such infringement or violation, we and ourcollaborators may be prevented from pursuing product development orcommercialization.

 

      The biotechnology and pharmaceutical industries have beencharacterized by extensive litigation regarding patents and other intellectualproperty rights.  The defense andprosecution of intellectual property suits, U.S. Patent and Trademark Officeinterference proceedings and related legal and administrative proceedings inthe United States and internationally involve complex legal and factualquestions. As a result, such proceedings are costly and time-consuming topursue and their outcome is uncertain. Litigation may be necessary to:

 

      - enforce patents that we own or license;

 

      - protect trade secrets or know-how that we own or license; or

 

      - determine the enforceability, scope and validity of theproprietary rights of others.

 

      If we become involved in any litigation, interference or otheradministrative proceedings, we will incur substantial expense and the effortsof our technical and management personnel will be significantly diverted. Anadverse determination may subject us to loss of our proprietary position or tosignificant liabilities, or require us to seek licenses that may not beavailable from third parties. We may be restricted or prevented frommanufacturing and selling our products, if any, in the event of an adversedetermination in a judicial or administrative proceeding or if we fail toobtain necessary licenses. Costs associated with these arrangements may besubstantial and may include ongoing royalties. Furthermore, we may not be ableto obtain the necessary licenses on satisfactory terms, if at all.

 

**IF WE EXPERIENCE DELAYS IN OBTAININGREGULATORY APPROVALS, OR ARE UNABLE TO OBTAIN THEM AT ALL, WE COULD BE DELAYEDOR PRECLUDED FROM COMMERCIALIZING OUR PRODUCTS.**

 

      Our product candidates under development are subject toextensive and rigorous domestic government regulation. The FDA regulates, amongother things, the development, testing, manufacture, safety, efficacy,record-keeping, labeling, storage, approval, advertising, promotion, sale anddistribution of pharmaceutical products. If our products are marketed abroad,they will also be subject to extensive regulation by foreign governments. Noneof our product candidates has been approved for sale in the United States orany foreign market. The regulatory review and approval process takes manyyears, requires the expenditure of substantial resources, involves post-marketingsurveillance, and may involve ongoing requirements for post-marketingstudies.  Delays in obtaining regulatoryapprovals may:

 

      - adversely affect the commercialization of any drugs that weor our

        collaborators develop;

 

      - impose costly procedures on us or our collaborators;

 

      - diminish any competitive advantages that we or ourcollaborators

        may attain; and

 

      - adversely affect our receipt of revenues or royalties.

 

      Any required approvals, once obtained, may be withdrawn.Further, if we fail to comply with applicable FDA and other regulatoryrequirements at any stage during the regulatory process, we may be subject tosanctions, including:

 

      - delays in clinical trials or commercialization;

 

      - refusal of the FDA to review pending market approvalapplications or

        supplements toapproval applications;

 

      - product recalls or seizures;

 

      - suspension of production;

 

      - withdrawals of previously approved marketing applications;and

 

      - fines, civil penalties and criminal prosecutions.

 

      We expect to rely on our collaborators to file investigationalnew drug applications and generally direct the regulatory approval process formany of our products. Our collaborators may not be able to conduct clinicaltesting or obtain necessary approvals from the FDA or other regulatoryauthorities for any product candidates. If we fail to obtain requiredgovernmental approvals, we or our collaborators will experience delays in or beprecluded from marketing products developed through our research. In addition, thecommercial use of our products will be limited.

 

      We and our contract manufacturers also are required to complywith the applicable FDA current good manufacturing practice regulations. Goodmanufacturing practice regulations include requirements relating to qualitycontrol and quality assurance as well as the corresponding maintenance ofrecords and documentation. Manufacturing facilities are subject to inspectionby the FDA. These facilities must be approved before we can use them incommercial manufacturing of our products. We or our contract manufacturers maynot be able to comply with the applicable good manufacturing practicerequirements and other FDA regulatory requirements. If we or our contractmanufacturers fail to comply, we could be subject to fines or other sanctions,or be precluded from marketing our products.

 

**IF THE GOVERNMENT AND THIRD-PARTY PAYORS FAILTO PROVIDE ADEQUATE COVERAGE AND REIMBURSEMENT RATES FOR OUR PRODUCTCANDIDATES, THE MARKET ACCEPTANCE OF OUR PRODUCTS MAY BE ADVERSELY AFFECTED.**

 

      In both domestic and foreign markets, sales of our productcandidates will depend in part upon the availability of reimbursement fromthird-party payors.  Such third-partypayors include government health administration authorities, managed care providers,private health insurers and other organizations. These third-party payors areincreasingly challenging the price and examining the cost effectiveness ofmedical products and services. In addition, significant uncertainty exists asto the reimbursement status of newly approved healthcare products. We may needto conduct post-marketing studies in order to demonstrate thecost-effectiveness of our products. Such studies may require us to commit asignificant amount of management time and financial and other resources. Ourproduct candidates may not be considered cost-effective. Adequate third-partyreimbursement may not be available to enable us to maintain price levelssufficient to realize an appropriate return on our investment in product development.Domestic and foreign governments continue to propose and pass legislationdesigned to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing ofpharmaceuticals may change before our proposed products are approved formarketing. Adoption of such legislation could further limit reimbursement forpharmaceuticals.

 

**IF A SUCCESSFUL PRODUCT LIABILITY CLAIM ORSERIES OF CLAIMS IS BROUGHT AGAINST US FOR UNINSURED LIABILITIES OR IN EXCESSOF INSURED LIABILITIES, WE COULD BE FORCED TO PAY SUBSTANTIAL DAMAGE AWARDS.**

 

      The use of any of our product candidates in clinical trials,and the sale of any approved products, may expose us to liability claims andfinancial losses resulting from the use or sale of our products. We haveobtained limited product liability insurance coverage for our clinical trials.Our insurance coverage limits are $4 million per occurrence and $4 million inthe aggregate. We intend to expand our insurance coverage to include the saleof commercial products if marketing approval is obtained for product candidatesin development. We may not be able to maintain insurance coverage at areasonable cost or in sufficient amounts or scope to protect us against losses.

 

**RISKS RELATED TO OWNERSHIP OF OUR STOCK**

**OUR STOCK PRICE COULD BEVOLATILE, AND YOUR INVESTMENTS COULD SUFFER A DECLINE IN VALUE.**

The trading price of our commonstock is likely to be highly volatile and could be subject to wide fluctuationsin price in response to various factors, many of which are beyond our control,including:

 

-       changes in, or failure to achieve, financial estimates bysecurities analysts;

-       new products or services introduced or announced by us or ourcompetitors;

-       announcements of technological innovations by us or ourcompetitors;

-       actual or anticipated variations in quarterly operatingresults;

-       conditions or trends in the biotechnology and pharmaceuticalindustries;

-       announcements by us of significant acquisitions, strategicrelationships, joint ventures or capital commitments;

-       additions or departures of key personnel; and

-       sales of our common stock.

In addition, the stockmarket in general, and the Nasdaq National Market in particular, hasexperienced significant price and volume fluctuations.  Volatility in the market price forparticular companies has often been unrelated or disproportionate to theoperating performance of those companies. Further, there has been particular volatility in the market prices ofsecurities of biotechnology and pharmaceutical companies.  These broad market and industry factors mayseriously harm the market price of our common stock, regardless of ouroperating performance.  In addition,securities class action litigation has often been initiated following periodsof volatility in the market price of a company’s securities.  A securities class action suit against uscould result in substantial costs, potential liabilities and the diversion ofmanagement’s attention and resources.

**OUR PRINCIPALSTOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OWN A SIGNIFICANT POTION OF OURCOMMON STOCK, WHICH MAY PREVENT NEW INVESTORS FROM INFLUENCING CORPORATEDECISIONS.**

 

Our principalstockholders, directors and executive officers currently own a significantportion of our common stock.  Thesestockholders will be able to exercise significant influence over all mattersrequiring stockholder approval, including the election of directors and theapproval of significant corporate transactions.  This concentration of ownership may also delay or prevent achange in control of Versicor even if beneficial to our stockholders anddeprive the stockholders of a control premium for their shares.

 

**FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.**

The market price of ourcommon stock could decline as a result of sales of substantial amounts of ourcommon stock in the public market, or the perception that these sales couldoccur.  In addition, these factors couldmake it more difficult for us to raise funds through future offerings of commonstock.  There were 23,151,637 shares ofcommon stock outstanding as of November 5, 2001.  Of these share outstanding, a substantial number of shares are“restricted securities” as defined in Rule 144.  These shares may be sold in the future without registration underthe Securities Act to the extent permitted by Rule 144 or other exemption underthe Securities Act.

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

      Our exposure to market risk relates to our cash and cashequivalents, our available-for-sale securities and our term loan with acommercial bank.  Our available-for-saleinvestments are sensitive to changes in interest rates; however such exposureis limited due to the short-term nature of our investments.

 

## **PART II**

**OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS**

 

      We are not a party to any material legal proceedings.

 

# **ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

      None.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

      None.

 

# **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

(a)   On September27, 2001, a Special Meeting of Stockholders of Versicor was held for thepurpose of voting on the adoption of our 2001 Stock Option Plan.

 

(b)   Thestockholders of Versicor approved the 2001 Stock Option Plan with the votescast as follows:

 

| **Shares Voted For** |   | **Shares Voted Against** |   | **Shares Withheld** |
|----------------------|--------|--------------------------|--------|---------------------|
| 14,756,594           |   | 626,907                  |   | 999                 |

 

 

# **ITEM 5. OTHER INFORMATION**

 

      None

 

# **ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

      a) Exhibits

 

10.1   2001Stock Option Plan

 

       b)Reports on Form 8-K

 

None.

**SIGNATURES**

 

      Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 

 
|                   | **VERSICOR  INC.**                                                                                                          |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                   |                                                                                                                        |
|                   |                                                                                                                        |
| Date: November 9, 2001 | /s/ GEORGE F. HORNER III                                                                                                    |
|                   | George F. Horner III                                                                                                        |
|                   | President and Chief Executive Officer   (Principal Executive Officer)                                                       |
|                   |                                                                                                                        |
|                   |                                                                                                                        |
| Date: November 9, 2001 | /s/ DOV A. GOLDSTEIN, M.D.                                                                                                  |
|                   | Dov A. Goldstein, M.D.

Vice  President, Finance and Chief Financial   Officer (Principal Financial and Accounting Officer) |

**EXHIBIT INDEX**

 
| **Exhibit** |   |                   |
|-------------|--------|------------------------|
| **Number**  |   | **Description**        |
|        |   |                   |
| 10.1        |   | 2001 Stock Option Plan |