**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

#####  

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

 
| **ý** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|------------|----------------------------------------------------------------------------------------------------|

 

**For the quarterlyperiod ended March 31, 2002**

** **

**OR**

 
| o | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934 for the transition period  from          to          ** |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**Commission FileNumber:  000-31145**

 

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**VERSICOR INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                   |   | **04-3278032**                          |
|----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification Number) |
|                                                           |
| **34790 ARDENTECH COURT, FREMONT, CALIFORNIA 94555**           |
| (Address of principal executive offices) (Zip Code)            |
|                                                           |
| **(510) 739-3000**                                             |
| (Registrant’s telephone number, including area code)      |

 

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Indicate bycheck 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 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such report(s) and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o.

 

On May 8,2002, there were 26,310,641 common shares outstanding of the registrant’s onlyclass of common stock.

 

The Exhibit Index begins on page 25.

 

 

**VERSICOR INC.**

**Quarterly Report on Form 10-Q**

**For the Three Months Ended March 31, 2002**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                       |
|--------------|-------------------------------------------------------------------------------------------------|
|         |                                                                                            |
| **Item 1.**  | **Condensed Financial Statements**                                                              |
|         |                                                                                            |
|         | Condensed  Balance Sheets as of March 31, 2002 and December 31, 2001 (Unaudited)                |
|         |                                                                                            |
|         | Statements  of Operations for the Three Months Ended March 31, 2002 and 2001 (Unaudited)        |
|         |                                                                                            |
|         | Statements  of Cash Flows for the Three Months Ended March 31, 2002 and 2001 (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**                                                                       |
|         |                                                                                            |
| **Item 3.**  | **Defaults upon Senior Securities**                                                             |
|         |                                                                                            |
| **Item 4.**  | **Submission of Matters to a Vote of Security  Holders**                                        |
|         |                                                                                            |
| **Item 5.**  | **Other Information**                                                                           |
|         |                                                                                            |
| **Item 6.**  | **Exhibits Index and Report on Form 8-K**                                                       |
|         |                                                                                            |
|         | **Signatures**                                                                                  |
|         |                                                                                            |
|         | **Exhibit Index**                                                                               |

 

1

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**PART I –FINANCIAL INFORMATION**

 

**ITEM 1.  CONDENSED FINANCIAL STATEMENTS**

 

**VERSICOR INC.**

**CONDENSEDBALANCE SHEETS**

(unaudited)

(inthousands)

 
|                                       |   | **March 31,  2002** |   | **December  31,  2001** |   |
|--------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                 |   |                |   |                    |   |
| Current assets:                            |   |                |   |                    |   |
| Cash and cash equivalents                  |   | $                   | 26,887 |                    | $      | 31,349 |   |
| Marketable securities                      |   | 26,239              |   | 32,419                  |   |
| Employee notes receivable                  |   | 3                   |   | 13                      |   |
| Prepaid expenses and other current assets  |   | 1,046               |   | 1,624                   |   |
|                                       |   |                |   |                    |   |
| Total current assets                       |   | 54,175              |   | 65,405                  |   |
| Property and equipment, net                |   | 5,087               |   | 5,197                   |   |
| Other assets                               |   | 93                  |   | 95                      |   |
|                                       |   |                |   |                    |   |
| Total assets                               |   | $                   | 59,355 |                    | $      | 70,697 |   |
|                                       |   |                |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**   |   |                |   |                    |   |
| Current liabilities:                       |   |                |   |                    |   |
| Accounts payable                           |   | $                   | 3,570  |                    | $      | 4,335 |   |
| Accrued liabilities                        |   | 7,078               |   | 6,278                   |   |
| Current portion of term loan payable       |   | 3,734               |   | 3,950                   |   |
| Deferred revenue                           |   | —              |   | 1,561                   |   |
|                                       |   |                |   |                    |   |
| Total current liabilities                  |   | 14,382              |   | 16,124                  |   |
| Term loan payable                          |   | 878                 |   | 1,004                   |   |
| Deferred revenue                           |   | 500                 |   | 500                     |   |
| Other long-term liabilities                |   | 202                 |   | 175                     |   |
|                                       |   |                |   |                    |   |
| Total liabilities                          |   | 15,962              |   | 17,803                  |   |
|                                       |   |                |   |                    |   |
| Stockholders' equity:                      |   |                |   |                    |   |
| Common stock                               |   | 23                  |   | 23                      |   |
| Additional paid-in capital                 |   | 160,494             |   | 160,163                 |   |
| Deferred stock compensation                |   | (2,910              | )      | (3,567                  | )      |
| Accumulated other comprehensive income     |   | 12                  |   | 98                      |   |
| Accumulated deficit                        |   | (114,226            | )      | (103,823                | )      |
|                                       |   |                |   |                    |   |
| Total stockholders' equity                 |   | 43,393              |   | 52,894                  |   |
|                                       |   |                |   |                    |   |
| Total liabilities and stockholders' equity |   | $                   | 59,355 |                    | $      | 70,697 |   |

 

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

 

2

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**VERSICOR INC.**

## **STATEMENTS OFOPERATIONS**

(unaudited)

(inthousands, except per share amounts)

** **
|                                                             |   | **Three  Months Ended** |    |
|------------------------------------------------------------------|--------|-------------------------|---------|
|                                                             |   | **March 31,  2002**     |    | **March 31,  2001** |   |
| Revenues:                                                        |   |                    |    |   |   |
| Collaborative research and development and contract services     |   | $                       | 1,554   |   | $ | 1,486 |   |
| License fees and milestones                                      |   | 258                     |    | 8 |   |
|                                                             |   |                    |    |   |   |
| Total revenues                                                   |   | 1,812                   |    | 1,494 |   |
|                                                             |   |                    |    |   |   |
| Operating expenses:                                              |   |                    |    |   |   |
| Research and development - non-cash stock compensation expense   |   | 241                     |    | 513 |   |
| Research and development - other                                 |   | 9,756                   |    | 4,813 |   |
|                                                             |   |                    |    |   |   |
| Total research and development                                   |   | 9,997                   |    | 5,326 |   |
|                                                             |   |                    |    |   |   |
| General and administrative - non-cash stock compensation expense |   | 455                     |    | 1,216 |   |
| General and administrative - other                               |   | 2,046                   |    | 1,239 |   |
|                                                             |   |                    |    |   |   |
| Total general and administrative                                 |   | 2,501                   |    | 2,455 |   |
|                                                             |   |                    |    |   |   |
| Total operating expenses                                         |   | 12,498                  |    | 7,781 |   |
|                                                             |   |                    |    |   |   |
| Loss from operations                                             |   | (10,686                 | )       | (6,287 | ) |
|                                                             |   |                    |    |   |   |
| Other income (expense):                                          |   |                    |    |   |   |
| Interest income                                                  |   | 345                     |    | 1,219 |   |
| Interest expense                                                 |   | (62                     | )       | (98 | ) |
|                                                             |   |                    |    |   |   |
| Net loss                                                         |   | $                       | (10,403 | ) | $ | (5,166 | ) |
|                                                             |   |                    |    |   |   |
| Net loss per share:                                              |   |                    |    |   |   |
| Basic and diluted                                                |   | $                       | (0.45   | ) | $ | (0.22 | ) |
|                                                             |   |                    |    |   |   |
| Weighted average shares                                          |   | 23,261                  |    | 23,041 |   |

 

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

 

3

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**VERSICOR INC.**

**STATEMENTSOF CASH FLOWS**

(unaudited)

(inthousands)

 
|                                                                         |   | **Three  Months Ended** |    |
|------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                         |   | **March 31,  2002**     |    | **March 31,  2001** |   |
| **Cash flows from operating activities:**                                    |   |                    |    |   |   |
| Net loss                                                                     |   | $                       | (10,403 | ) | $ | (5,166 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                    |    |   |   |
| Depreciation                                                                 |   | 314                     |    | 220 |   |
| Non-cash stock compensation expense                                          |   | 696                     |    | 1,729 |   |
| Changes in operating assets and liabilities:                                 |   |                    |    |   |   |
| Employee notes receivable                                                    |   | 10                      |    | 25 |   |
| Prepaid expenses and other current assets                                    |   | 578                     |    | (141 | ) |
| Other assets                                                                 |   | 2                       |    | 1 |   |
| Accounts payable                                                             |   | (765                    | )       | (857 | ) |
| Accrued liabilities                                                          |   | 800                     |    | 148 |   |
| Related party payable                                                        |   | —                  |    | (12 | ) |
| Deferred revenue                                                             |   | (1,561                  | )       | (66 | ) |
| Other long-term liabilities                                                  |   | 27                      |    | — |   |
|                                                                         |   |                    |    |   |   |
| Net cash used in operating activities                                        |   | (10,302                 | )       | (4,119 | ) |
|                                                                         |   |                    |    |   |   |
| **Cash flows from investing activities:**                                    |   |                    |    |   |   |
| Purchases of marketable securities                                           |   | (7,526                  | )       | (4,847 | ) |
| Sales/maturities of marketable securities                                    |   | 13,620                  |    | 15,972 |   |
| Additions to property and equipment                                          |   | (204                    | )       | (511 | ) |
|                                                                         |   |                    |    |   |   |
| Net cash provided by investing activities                                    |   | 5,890                   |    | 10,614 |   |
|                                                                         |   |                    |    |   |   |
| **Cash flows from financing activities:**                                    |   |                    |    |   |   |
| Proceeds from issuance of common stock                                       |   | 292                     |    | 8 |   |
| Repayments of long-term debt                                                 |   | (342                    | )       | (216 | ) |
|                                                                         |   |                    |    |   |   |
| Net cash used in financing activities                                        |   | (50                     | )       | (208 | ) |
|                                                                         |   |                    |    |   |   |
| Net change in cash and cash equivalents                                      |   | (4,462                  | )       | 6,287 |   |
| Cash and cash equivalents at beginning of period                             |   | 31,349                  |    | 67,989 |   |
|                                                                         |   |                    |    |   |   |
| Cash and cash equivalents at end of period                                   |   | $                       | 26,887  |   | $ | 74,276 |   |
|                                                                         |   |                    |    |   |   |
| **Supplemental cash flow information:**                                      |   |                    |    |   |   |
| Cash paid during the period for interest                                     |   | $                       | 65      |   | $ | 98 |   |

 

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

 

4

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**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**1.  Basis of Presentation**

 

The accompanying interim financial statementsare unaudited and have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q.  Accordingly,certain information and footnote disclosures normally included in annualfinancial statements have been condensed or omitted. The year-end condensedbalance sheet data was derived from audited financial statements but does notinclude all disclosures required by accounting principles generally accepted inthe United States.  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 March 31, 2002 and 2001.

 

The results of operations for the interimperiods are not necessarily indicative of the results of operations to beexpected for the fiscal year.  Thesecondensed interim financial statements should be read in conjunction with theaudited financial statements for the year ended December 31, 2001, which areincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

**2.  Basic and Diluted Net Loss per Share**

 

Basic net lossper share is computed using the weighted-average number of shares of commonstock outstanding. Diluted net loss per share does not differ from basic netloss per share since potential common shares are anti-dilutive for all periodspresented and therefore are excluded from the calculation of diluted net lossper share. The following potentially dilutive common shares were excluded fromthe computation of net loss per share because their effect was anti-dilutive(in thousands):

 

|                               |   | **March 31,** |   |
|------------------------------------|--------|---------------|--------|
|                               |   | **2002**      |   | **2001** |   |
| Stock options                      |   | 3,308         |   | 2,494 |   |
| Common stock warrants              |   | 344           |   | 420 |   |
| Common stock subject to repurchase |   | 5             |   | 14 |   |
|                               |   | 3,657         |   | 2,928 |   |

 

**3.  Subsequent Events**

 

On April 9, 2002, we completed a privateplacement of 2,993,800 shares of common stock to selected institutionalinvestors at a purchase price of $15 per share.  We received net proceeds from the private placement ofapproximately $41.7 million.

 

5

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS****OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with the financial statements and notes to thosestatements included elsewhere in this Quarterly Report on Form 10-Q and ouraudited financial statements for the year ended December 31, 2001 included inour Annual Report on Form 10-K previously filed with the SEC. This discussionmay contain forward-looking statements that involve risks anduncertainties.  The words “believe,”“expect,” “anticipate”, “may,” “will,” or “could” and similar expressions orthe negatives of these words and phrases are intended to identifyforward-looking statements.  As a resultof many factors, such as those set forth under “Risk Factors” and elsewhere inthis document, our actual results may differ materially from those anticipatedin these forward-looking statements.*

 

**Overview**

 

We are a biopharmaceutical company focused onthe discovery, development and marketing of pharmaceutical products for thetreatment of bacterial and fungal infections.  Since our inception on May 2, 1995 as a wholly-owned subsidiary ofSepracor Inc., we have devoted substantially all of our efforts to establishingour business and conducting research and development activities related to ourproprietary product candidates, including anidulafungin and dalbavancin, aswell as collaborative product candidates.

 

Since 1996 we have been operating as anindependent company.  In August 2000, wesold 4,600,000 shares of our common stock at $11 per share in an initial publicoffering, and in September 2000 the underwriters exercised an over-allotmentoption and purchased an additional 690,000 shares.  We received total net proceeds from the initial public offeringand the over-allotment of approximately $52.7 million.

 

On April 9, 2002, we completed a privateplacement of 2,993,800 shares of common stock to selected institutionalinvestors at a purchase price of $15 per share.  We received net proceeds from the private placement of approximately$41.7 million.

 

Since we began our operations in May 1995, wehave not generated any revenues from product sales.  Our lead product candidate, anidulafungin, is in Phase IIIclinical trials and our second product candidate, dalbavancin, is in Phase II clinicaltrials.  We also have several leadcompounds in preclinical studies and in June 2001, Pharmacia Corporationstarted clinical development of one of the compounds in our oxazolidinoneprogram for which we have received a milestone payment.

 

Our revenues in the near term are expected toconsist primarily of collaborative research payments, license fees andmilestone payments to be received from our collaborators.  Certain of these payments are dependent onachievement of certain milestones. If our development efforts result inclinical success, regulatory approval and successful commercialization of ourproducts, we will generate revenues from sales of our products and from receiptof royalties on sales of licensed products.

 

Our expenses have consisted primarily of costsincurred in licensing existing product candidates, research and development ofnew product candidates and in connection with our collaboration agreements, andfrom general and administrative costs associated with our operations. We expectlicensing 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 expand our research anddevelopment operations.  In addition, weexpect to incur sales and marketing expenses in the future when we establishour sales and marketing organization.

 

Since our inception, we have incurredsignificant losses. As of March 31, 2002, we had an accumulated deficit of$114.2 million. We anticipate incurring additional losses, which may increase,for the foreseeable future, including at least through December 31, 2003.

 

6

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We have alimited history of operations. We anticipate that our quarterly results ofoperations will fluctuate for the foreseeable future due to several factors,including payments made or received pursuant to licensing or collaborationagreements, progress of our research and development efforts, and the timingand outcome of regulatory approvals. Our limited operating history makespredictions of future operations difficult or impossible to ascertain.

 

In February 1998, we entered into a licenseagreement and a collaborative agreement with Biosearch Italia.  Under the license agreement, Biosearchgranted us an exclusive license to develop and commercialize dalbavancin in theUnited States and Canada.  In exchangefor the license and upon the receipt of favorable results in pre-clinicalstudies, we paid an initial license fee of $2.0 million and issued 250,000shares of our common stock to Biosearch. In May 2001, we began a Phase II clinical trial for dalbavancin and paidBiosearch an additional milestone payment. We are obligated to make up to $8.0 million in additional payments toBiosearch upon the achievement of specified milestones and are also required topay Biosearch royalties in respect of sales of any product that results fromthe compound.

 

In March 1999, we entered into a collaborationagreement with Pharmacia Corporation pursuant to which we are collaborating todiscover, synthesize and develop second and third generation oxazolidinoneproduct candidates. Under the terms of this agreement, we have established withPharmacia a joint research committee and we are responsible for performing athree year research plan, which we have agreed with Pharmacia by amendment toextend at least until May 30, 2002. In connection with the collaboration,Pharmacia made an equity investment in us of $3.8 million and paid us researchsupport and license fee payments.  Underthe terms of the agreement and in consideration for our research obligations,we are entitled to receive funding from Pharmacia to support certain of ourfull-time researchers.  If specifiedmilestones are achieved, Pharmacia is obligated to pay us additional paymentsfor each compound, a portion of which may be credited against future royaltypayments to which we are entitled on the worldwide sales of any drug developedand commercialized from the collaboration. In October 2000, Pharmacia increased its funding for this collaborationby 30% and in June 2001 we received a milestone payment for the initiation ofclinical development of one of the compounds.

 

In March 1999, we entered into a collaborationagreement with Novartis Pharma AG pursuant to which we are collaborating todiscover and develop novel deformylase inhibitors. Under the terms of thisagreement, we have established with Novartis a joint research committee and weare responsible for performing a three year research plan, which we have agreedwith Novartis by amendment to extend an additional year. In connection with thecollaboration, Novartis made an initial equity investment in us of $3.0 millionand provides us with funding to support certain of our full-timeresearchers.  We have also received anumber of milestone payments from Novartis and are entitled to receiveadditional payments upon the achievement of specified milestones, a portion ofwhich may be credited against future royalty payments to which we are entitledon the worldwide sales of any drug developed and commercialized from thiscollaboration.

 

In May 1999, we obtained from Eli Lilly anexclusive worldwide license for the development and commercialization ofanidulafungin.  We paid $11.0 millionfor the license and have agreed to pay an additional $3.0 million for productinventory, which we have received, over a three-year period.  As a result, we recognized $14.0 million ofresearch and development costs in 1999. We are obligated to make additional payments to Eli Lilly if certainmilestones are achieved and royalty payments in respect of sales of any productresulting from the compound.  Eli Lillyhas an option to license the exclusive development and commercialization rightsto oral formulations of anidulafungin, which is exercisable upon successfulcompletion of Phase II clinical trials. If Eli Lilly exercises this option, we will have the right to receiveroyalty payments and reimbursement of prior development expenses and milestonepayments.  We will also have the rightto co-promote the product with Eli Lilly.

 

In June 2001,we entered into a manufacturing, development and supply agreement with AbbottLaboratories pursuant to which Abbott will manufacture final formulation ofanidulafungin.  Additionally, pursuantto the terms of the agreement and in consideration of Abbott’s obligations tous, we have agreed to pay Abbott (i) a non-refundable research and developmentfee, and (ii) subject to certain conditions, an additional research anddevelopment fee.  At such time as webegin commercial sales of a product containing anidulafungin and to the extentthat Abbott is able to meet our manufacturing and commercial supplyrequirements, and once we have agreed upon a satisfactory price with Abbott, wehave agreed to purchase a substantial portion of our commercial supplies ofanidulafungin from Abbott.  Theagreement

 

7

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may beterminated by either party upon 12-months prior notice at the end of the fourthyear following the date on which the product containing anidulafungin is madeby us.

# ** **

# **Deferred Stock Compensation**

 

We haverecorded deferred stock compensation expense in connection with the grant ofstock options to employees and consultants. Deferred stock compensation foroptions granted to employees is the difference between the fair value forfinancial reporting purposes of our common stock on the date such options weregranted and their exercise price. Deferred stock compensation for optionsgranted to consultants has been determined in accordance with Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock BasedCompensation,” as the fair value of the equity instruments issued. Deferredstock compensation for options granted to consultants is periodicallyremeasured as the underlying options vest in accordance with Emerging IssuesTask Force No. 96-18, “Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling Goods orServices.”

 

We recorded deferred stockcompensation of $39,000 and $1.1 million in the three months ended March 31,2002 and 2001, respectively.  Theseamounts were recorded as a component of stockholders’ equity and are beingamortized as charges to operations over the vesting periods of theoptions.  We recorded amortization ofdeferred stock compensation of $696,000 and $1.7 million in the three monthsended March 31, 2002 and 2001, respectively.

 

 

**Results ofOperations**

 

###### ***Three Monthsended March 31, 2002 Compared to Three Months Ended March 31, 2001***

 

# **Revenues**

 

Revenues were$1.8 million and $1.5 million in the three months ended March 31, 2002 andMarch 31, 2001, respectively.  Revenuesin both quarters consisted of collaborative research and development, contractservice and license fees from Pharmacia Corporation and collaborative researchand development fees from Novartis.  Theincrease in revenues in the first quarter of 2002 is due to the increase incollaborative research and development funding from both Pharmacia Corporationand Novartis and a milestone payment received from Novartis.

 

# **Research and Development Expenses**

 

Research anddevelopment expenses were $10.0 million and $5.3 million in the three monthsended March 31, 2002 and 2001, respectively. The increase is primarily due to the rise in clinical expenditure forthe development of anidulafungin and dalbavancin.  Since March 31, 2001, we have started two additional trials foranidulafungin, one Phase III trial and one Phase II trial, as well as two PhaseII trials for dalbavancin.  We have alsoincreased our development team headcount since March 31, 2001.

 

# **General and Administrative Expenses**

 

General and administrative expenses were $2.5million in each of the three months ended March 31, 2002 and 2001.  General and administrative expenses includeamortization of non-cash stock compensation expense of $455,000 and $1.2million in the three months ended March 31, 2002 and 2001, respectively.  Excluding these charges, general andadministrative expenses increased by $807,000 primarily due to businessdevelopment activity and the expansion of our research and developmentoperations.

 

**Other Income(Expense)**

 

Net interest income was $283,000 and $1.1million in the three months ended March 31, 2002 and 2001, respectively.  The 2001 period reflects greater interestincome as a result of higher average cash and investment balances during thequarter and also higher prevailing interest rates.

# ** **

8

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# **Liquidity and Capital Resources**

 

We have funded our operations principally withthe proceeds of $78.5 million from a series of nine preferred stock offeringsover the period 1995 through 1999, and net proceeds of $52.7 million from ourinitial public offering received in August and September 2000.  In addition, on April 9, 2002, we completeda private placement of 2,993,800 shares of common stock to selected institutionalinvestors at a purchase price of $15 per share, from which we received netproceeds of approximately $41.7 million.

 

As of March 31, 2002, we have also receivedapproximately $21.9 million in payments for collaborative research, contractservices and milestone payments, as well as license fees from ourcollaborators, including Sepracor. Of these payments, $500,000 constitutesdeferred revenue as of March 31, 2002.

 

In addition, we have a $6.0 million termloan and $2.0 million equipment note with a commercial bank.  As of March 31, 2002, there was anoutstanding loan balance of $3.2 million and an outstanding note balance of$1.4 million.  Proceeds from the loanwere used to repay Sepracor for leasehold improvements to our facilities andfor general corporate purposes. Proceeds from drawdowns on the equipment note are being used to financecapital expenditure.  The final loanbalance is payable on December 31, 2002 and the final note balance is payableon December 31, 2004.

 

Cash used in operations was $10.3 millionand $4.1 million in the three months ended March 31, 2002 and 2001,respectively.  The net loss of $10.4million in the first three months of 2002 was reduced by non-cash charges fordepreciation and non-cash stock compensation expense of $1.0 million offset bya decrease in deferred revenue of $1.6 million.  In the first three months of 2001, the net loss of $5.2 millionwas substantially reduced by non-cash charges for depreciation and non-cashstock compensation expense of $1.9 million offset by a decrease in accountspayable of $857,000.

 

Cash from investing activities was $5.9million and $10.6 million in the three months ended March 31, 2002 and 2001,respectively.  The principal source ofcash for both quarters resulted from the net sales of marketable securities.

 

At March 31, 2002, our cash, cash equivalentsand marketable securities totaled $53.1 million compared to $63.8 million atDecember 31, 2001.  The March 31, 2002balance excludes net proceeds of approximately $41.7 million that we receivedfrom the private placement completed in April 2002.

 

We expect to have negative cash flow fromoperations for the foreseeable future. We expect to incur increasing researchand development, and general and administrative expenses, including expensesrelating to additions to personnel, production and commercializationefforts.  Our future capitalrequirements will depend on a number of factors, including our success indeveloping markets for our products, payments received or made under collaborationagreements, the timing and outcome of regulatory approvals, the need to acquirelicenses to new products or compounds, the status of competitive products andthe availability of other financing. We believe our existing cash and cashequivalents and marketable securities will be sufficient to fund our operatingexpenses, debt repayments and capital requirements for at least the next twoyears.

 

9

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# **Factors Affecting Future Operating Results**

 

*Certaininformation contained in this Quarterly Report on Form 10-Q consists offorward-looking statements. Important factors that could cause actual resultsto differ materially from such forward-looking statements include thefollowing:*

 

**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 inlight of the uncertainties and complexities present in a biopharmaceuticalcompany. Most of our product candidates are in the early stages of development,and two are in clinical trials. We do not know whether any of our clinicaltrials will result in marketable products. Preclinical testing and clinicaltrials are long, expensive and uncertain processes. It may take us or ourcollaborators several years to complete this testing, and failure can occur atany stage of the process. Success in preclinical testing and early clinicaltrials does not ensure that later clinical trials will be successful. To date,we have not commercialized any products or recognized any revenue from productsales. To do so will require significant additional investment in research anddevelopment, preclinical testing and clinical trials, regulatory approval, andsales and marketing activities. Furthermore, our potential drug candidates willbe subject to the risks of failure inherent in the development ofpharmaceutical products based on new technologies.

 

These risks include:

 

•                  thepossibilities that any or all of our drug candidates will be found to beunsafe, ineffective or toxic, or otherwise fail to meet applicable regulatorystandards or receive necessary regulatory clearances;

 

•                  thatthese drug candidates, if safe and effective, will be difficult to develop intocommercially viable drugs or to manufacture on a large scale or will beuneconomical to market commercially;

 

•                  thatthird party proprietary rights will preclude us from marketing such drugs; or

 

•                  thatthird parties will market superior or equivalent drugs.

 

Finally, even if our productcandidates are successfully developed, they may not generate sufficient orsustainable revenues to enable us to become profitable.

 

**We expectto incur losses for the foreseeable future and may never achieve profitability.**

 

We have incurred netlosses since our inception in 1995. Before deemed dividends and accretion toredemption value of our 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, $32.8 million in 2001 and$10.4 million in the first quarter of 2002. As of March 31, 2002, our accumulated deficit was approximately $114.2million. Our losses to date have resulted principally from:

 

•                  researchand development costs relating to the development of our product candidates;

 

•                  costsof acquiring product candidates; and

 

•                  generaland administrative costs relating to our operations.

 

We expect to incursubstantial and increasing losses for the foreseeable future as a result ofincreases in our research and development costs, including costs associatedwith conducting preclinical testing and clinical trials, and charges related topurchases of technology or other assets. We expect that the amount of

 

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operating losses willfluctuate significantly from quarter to quarter as a result of increases ordecreases in our research and development efforts, the execution or terminationof collaborative arrangements, the initiation, success or failure of clinicaltrials, or other factors. Our chances for achieving profitability will dependon numerous factors, including success in:

 

•                  developingand testing new product candidates;

 

•                  receivingregulatory approvals;

 

•                  manufacturingproducts;

 

•                  marketingproducts; and

 

•                  competingwith products from other companies.

 

Many of these factors willdepend on circumstances beyond our control. We cannot assure you that we willever become profitable.

 

**Ourrevenues will be subject to significant fluctuations, which will make itdifficult to compare our operating results to prior periods.**

 

We expect thatsubstantially all of our revenues for the foreseeable future will result frompayments under collaborative arrangements. To date, these payments have been inthe form of up-front payments, reimbursement for research and developmentexpenses and milestone payments. We may not be able to generate additionalrevenues under existing or future collaborative agreements. Furthermore,payments to us under our existing and any future collaborative arrangementswill be subject to significant fluctuation in both timing and amount, and maynever be achieved or payable. In addition, we may not be able to generaterevenues from future product sales. Our revenues may not be indicative of ourfuture 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 wecannot enter into new licensing arrangements, our future product portfolio andpotential profitability could be harmed.**

 

An important component ofour business strategy is in-licensing drug compounds developed by otherpharmaceutical and biotechnology companies or academic research laboratories.Competition for promising compounds can be intense. If we are not able toidentify future licensing opportunities and enter into future licensingarrangements on acceptable terms, our future product portfolio and potentialprofitability could be harmed.

 

**If ourcollaborators do not perform, we will be unable to develop our joint productcandidates.**

 

We have entered intocollaborative arrangements with third parties to develop certain productcandidates. These collaborations are necessary in order for us to fund ourresearch and development activities and third-party manufacturing arrangements,seek and obtain regulatory approvals and successfully commercialize ourexisting and future product candidates. Only a limited number of productcandidates have been generated pursuant to our collaborations. We cannot assureyou that any of these product candidates will result in commercially successfulproducts. Current or future collaborative arrangements may not be successful.If we fail to maintain our existing collaborative arrangements or fail to enterinto additional collaborative arrangements, the number of product candidatesfrom which we could receive future revenues would decline.

 

Our dependence oncollaborative arrangements with third parties subjects us to a number of risks.These collaborative arrangements may not be on terms favorable to us.Agreements with collaborators typically allow the collaborators significantdiscretion in electing whether to pursue any of the planned activities. We

 

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cannot control the amountand timing of resources our collaborators may devote to the product candidatesor their prioritization of the product candidates, and our collaborators maychoose to pursue alternative products. Our collaborators may also not performtheir obligations as expected. Business combinations or significant changes ina collaborator’s business strategy may adversely affect a collaborator’swillingness or ability to complete its obligations to us. Moreover, we couldbecome involved in disputes with our collaborators which could lead to delaysin, or the termination of, our development programs with them, as well astime-consuming and expensive litigation or arbitration. Even if we fulfill ourobligations under a collaborative agreement, our collaborators can generallyterminate the agreements under certain circumstances. If any collaborator wasto terminate or breach our agreement with it, or otherwise fail to complete itsobligations in a timely manner, our chances of successfully commercializingproducts could be harmed.

 

**Ifclinical trials for our products are unsuccessful or delayed, we will be unableto meet our anticipated development and commercialization timelines, whichcould harm our business and cause our stock price to decline.**

 

Before obtainingregulatory approvals for the commercial sale of any products we develop, wemust demonstrate through preclinical testing and clinical trials that our productcandidates are safe and effective for use in humans. Conducting preclinicaltesting and clinical trials is a lengthy, time-consuming and expensive process.Completion of clinical trials may take several years or more. Our commencementand rate of completion of clinical trials may be delayed by many factors,including:

 

•                  slowerthan expected rate of hospital and patient recruitment;

 

•                  inabilityto manufacture sufficient quantities of materials for use in clinical trials;

 

•                  unforeseensafety issues;

 

•                  lackof efficacy during the clinical trials;

 

•                  inabilityto adequately follow patients after treatment; or

 

•                  governmentalor regulatory delays.

 

The results frompreclinical testing and early clinical trials are often not predictive ofresults obtained in later clinical trials. In general, a number of new drugshave shown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals. Data obtained from preclinical and clinical activities aresusceptible 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 the designof clinical trials and changes in regulatory policy during the period ofproduct development.

 

As of March 31, 2002, twoof our product candidates, anidulafungin and dalbavancin, were in clinicaltrials. Patient follow-up for these clinical trials has been limited and moretrials will be required before we will be able to apply for regulatoryapprovals. Clinical trials conducted by us or by third parties on our behalfmay not demonstrate sufficient safety and efficacy to obtain the requisiteregulatory approvals for anidulafungin and dalbavancin or any other potentialproduct candidates. This failure may delay development of other productcandidates and hinder our ability to conduct related preclinical testing andclinical trials. Regulatory authorities may not permit us to undertake anyadditional clinical trials for our product candidates. Our other productcandidates are in preclinical development, and we have not submittedinvestigational new drug applications, or INDs, to commence clinical trials involvingthese compounds. Our preclinical development efforts may not be successfullycompleted and we may not file further INDs. Any delays in, or termination of,our clinical trials will harm our development and commercialization timelines,which would cause our stock price to decline. Any of these events would alsoseriously impede our ability to obtain additional financing.

 

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**If ourthird-party clinical trial managers do not perform, clinical trials for ourproduct candidates may be delayed or unsuccessful.**

 

We have limited experiencein conducting and managing clinical trials, and currently have only nineteenfull-time clinical development employees. We rely on third parties, includingour collaborators, clinical research organizations and outside consultants, toassist us in managing and monitoring clinical trials. If these third partiesfail to perform satisfactorily under the terms of our agreements with them,clinical trials for our product candidates may be delayed or unsuccessful.Furthermore, the Food and Drug Administration, or the FDA, may inspect some ofour clinical investigational sites, our collaborators’ records and our facilityand files to determine if the clinical trials were conducted according to goodclinical practices. If the FDA determines that the trials were not incompliance, we may be required to repeat the clinical trials.

 

**If ourfuture products are not accepted by the market, we are not likely to generatesignificant revenues or become profitable.**

 

Even if we obtainregulatory approval to market products in the future, they may not gain marketacceptance among physicians, patients, healthcare payors and the medicalcommunity. The degree of market acceptance of any pharmaceutical product thatwe develop will depend on a number of factors, including:

 

•                  demonstrationof clinical efficacy and safety;

 

•                  cost-effectiveness;

 

•                  potentialadvantages over alternative therapies, including fewer side effects or easieradministration;

 

•                  reimbursementpolicies of government and third-party payors; and

 

•                  effectivenessof our marketing and distribution capabilities.

 

Physicians will notrecommend therapies using our products until clinical data or other factorsdemonstrate their safety and efficacy as compared to other drugs or treatments.Even if the clinical safety and efficacy of therapies using our products isestablished, physicians may elect not to recommend the therapies for a numberof other reasons, including whether the mode of administration of our productsis effective for certain indications. For example, many antibiotic orantifungal products are typically administered by infusion or injection, whichrequires substantial cost and inconvenience to patients. Our productcandidates, if successfully developed, will compete with a number of drugs andtherapies manufactured and marketed by major pharmaceutical and otherbiotechnology companies. Our products may also compete with new productscurrently under development or developed by others in the future. Physicians,patients, third-party payors and the medical community may not accept andutilize any product candidates that we or our collaborators develop. If ourproducts do not achieve significant market acceptance, we are not likely togenerate significant revenues or become profitable.

 

**If we areunable to attract and retain key employees and consultants, we will be unableto develop and commercialize our products.**

 

We are highly dependent onthe principal members of our scientific and management staff. In addition, wehave depended to date on third parties to perform significant managementfunctions. In order to pursue our product development, marketing andcommercialization plans, we may need to hire additional personnel with experiencein clinical testing, government regulation, manufacturing, marketing andfinance. 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 staff do not have employment contracts. If we lose any of thesepersons, or are unable to attract and retain qualified

 

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personnel, our business,financial condition and results of operations may be harmed. We do not have keyperson life insurance on any of our key personnel.

 

In addition, we rely onmembers of our scientific and clinical advisory boards and other consultants toassist us in formulating our research and development strategy. All of ourconsultants and the members of our scientific and clinical advisory boards areemployed by other entities, and they may have commitments to, or advisory orconsulting agreements with, other entities that may limit their availability tous. If we lose the services of these advisors, the achievement of ourdevelopment objectives may be impeded, and our business, financial conditionand results of operations may be harmed. 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 to obtain such licenses on favorableterms or at all.

 

**If ourthird-party manufacturers fail to deliver our product candidates, clinicaltrials and commercialization of our product candidates could be delayed.**

 

We do not have our ownmanufacturing facilities to produce our product candidates and anticipate thatwe will continue to rely on third parties to manufacture our product candidatesand our products. Our contract manufacturers have a limited number offacilities in which our product candidates can be produced. These manufacturershave limited experience in manufacturing anidulafungin and dalbavancin inquantities sufficient for conducting clinical trials or for commercialization.

 

Contract manufacturersoften encounter difficulties in scaling up production, including problemsinvolving production yields, quality control and assurance, shortage ofqualified personnel, compliance with FDA and other regulations, productioncosts, and development of advanced manufacturing techniques and process controls.Our contract manufacturers may not perform as agreed or may not remain in thecontract manufacturing business for the time required by us to successfullyproduce and market our product candidates. If our contract manufacturers failto perform satisfactorily under our agreements with them, including failing todeliver the required quantities of our product candidates for clinical use on atimely basis and at commercially reasonable prices, and if we fail to find areplacement manufacturer or develop our own manufacturing capabilities,clinical trials involving our product candidates, or commercialization of ourproducts, could be delayed.

 

**If wefail to establish successful marketing and sales capabilities or fail to enterinto successful marketing arrangements with third parties, we would not be ableto commercialize our products and we would not become profitable.**

 

We intend to sell aportion of our products through our own sales 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 future products toour customers. We may not be able to attract and retain qualified salespeopleor be able to build an efficient and effective sales and marketing force. Tothe extent 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.

 

**Ifcircumstances require us to obtain additional funding, we may be forced todelay or curtail the development of our product candidates.**

 

We expect to incurincreasing research and development and general and administrative expensesover the next several years. Our requirements for additional capital may besubstantial and will depend on many factors, some of which are beyond ourcontrol, including:

 

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•                  paymentsreceived or made under possible future collaborative agreements;

 

•                  continuedprogress in the research and development of our products;

 

•                  costsassociated with protecting our patent and other intellectual property rights;

 

•                  developmentof marketing and sales capabilities; or

 

•                  marketacceptance of our products.

 

To the extent our capitalresources are insufficient to meet future capital requirements, we will have toraise additional funds to continue the development of our product candidates.Other than with respect to our existing line of credit for equipment financing,we have no committed sources of additional capital. We cannot assure you thatfunds will be available to us on favorable terms, if at all. To the extent thatadditional capital is raised through the sale of equity or convertible debtsecurities, the securities could be sold at a discount to prevailing marketprice and the issuance of those securities could result in dilution to ourstockholders. Moreover, the incurrence of debt financing could result in asubstantial portion of our operating cash flow being dedicated to the paymentof principal and interest on such indebtedness, and we may be subject torestrictive covenants as a result of such debt financing. This could render usmore vulnerable to competitive pressures and economic downturns and couldimpose restrictions on our operations. If adequate funds are not available, wemay be required to delay, reduce the scope of, or eliminate one or more of ourresearch and development programs or otherwise significantly curtailoperations, obtain funds by entering into arrangements with collaborators onunattractive terms or relinquish rights to certain technologies or drugcandidates that we would not otherwise relinquish in order to continue independentoperations. Our inability to raise capital would harm our business, financialcondition and results of operations.

 

**Disruptionin our operations and United States commercial activities generally followingthe September 2001 terrorist attacks on the United States may adversely impactour results of operations, our ability to raise capital or our future growth.**

 

Although we have notsuffered directly as a result of the September 2001 terrorist attacks on theUnited States and recent related events, our operations may be harmedindirectly. For example, we may experience an increase in certain operatingcosts, such as costs for transportation, courier services, insurance andsecurity, or delays in receiving payments from parties that have been affectedby the attacks, which, in turn, would harm our business. We may also beaffected either directly or indirectly by possible future terrorist attacks.Moreover, any further terrorist activities, or the effect of the United States’political, economic or military response to such activities, could result inthe further deterioration of the United States and world economy. This economicdownturn could harm our results of operations, impair our ability to raisecapital or impede our ability to continue growing our business.

 

**If wemake any acquisitions, we will incur a variety of costs and may never realizethe anticipated benefits.**

 

If appropriateopportunities become available, we may attempt to acquire products, productcandidates or businesses that we believe are a strategic fit with our business.We currently have no agreements to consummate any material acquisitions. If wepursue any transaction of this sort, the process of negotiating the acquisitionand integrating an acquired product, product candidate or business may resultin operating difficulties and expenditures and may require significantmanagement attention that would otherwise be available for ongoing developmentof our business, whether or not any such transaction is ever consummated.Moreover, we may never realize the anticipated benefits of any acquisition.Future acquisitions could result in potentially dilutive issuances of equitysecurities, the incurrence of debt, contingent liabilities and/or impairmentexpenses related to goodwill and impairment or amortization expenses related toother intangible assets, which could harm our business, financial condition andresults of operations.

 

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**If ouruse of hazardous materials results in contamination or injury, we could suffersignificant financial loss.**

 

Our research andmanufacturing activities involve the controlled use of hazardous materials. Wecannot eliminate the risk of accidental contamination or injury from thesematerials. In the event of an accident or environmental discharge, we may beheld liable for any resulting damages, which may exceed our financialresources.

** **

**Risks Related to Operating in Our Industry**

 

**If weexperience delays in obtaining regulatory approvals, or are unable to obtainthem at all, we could be delayed in or precluded from commercializing ourproducts.**

 

Our product candidatesunder development are subject to extensive and rigorous domestic governmentregulation. The FDA regulates, among other things, the development, testing,manufacture, safety, efficacy, record-keeping, labeling, storage, approval,advertising, promotion, sale and distribution of pharmaceutical products. Ifour products are marketed abroad, they will also be subject to extensiveregulation by foreign governments. We must provide the FDA and foreignregulatory authorities with clinical data that demonstrate our products’ safetyand efficacy in humans before they can be approved for commercial sale. None ofour product candidates has been approved for sale in the United States or anyforeign market, and we cannot predict whether regulatory clearance will beobtained for any product that we are developing or hope to develop. Theregulatory review and approval process takes many years, is dependent upon thetype, complexity and novelty of the product, requires the expenditure ofsubstantial resources, involves post-marketing surveillance, and may involveongoing requirements for post-marketing studies. Delays in obtaining regulatoryapprovals may:

 

•                  adverselyaffect the commercialization of any drugs that we or our collaborators develop;

 

•                  imposecostly procedures on us or our collaborators;

 

•                  diminishany competitive advantages that we or our collaborators may attain; and

 

•                  adverselyaffect our receipt of revenues or royalties.

 

Any required approvals,once granted, may be withdrawn. Further, if we fail to comply with applicableFDA and other regulatory requirements at any stage during the regulatoryprocess, we may be subject to sanctions, including:

 

•                  delaysin clinical trials or commercialization;

 

•                  refusalof the FDA to review pending market approval applications or supplements toapproval applications;

 

•                  productrecalls or seizures;

 

•                  suspensionof production;

 

•                  withdrawalsof previously approved marketing applications; and

 

•                  fines,civil penalties and criminal prosecutions.

 

We expect to file INDs andgenerally direct the regulatory approval process for proprietary products wedevelop, and we expect to rely on our collaborators to generally direct theregulatory approval process for our collaboration products. Our collaboratorsmay not be able to conduct clinical testing or obtain necessary approvals fromthe FDA or other regulatory authorities for any product candidates. Inaddition,

 

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we may encounter delays orrejections based upon additional government regulation resulting from futurelegislation or administrative action or changes in FDA policy or interpretationduring the period of product development, clinical trials and FDA regulatoryreview. If we fail to obtain required governmental approvals, we or ourcollaborators will experience delays in or be precluded from marketing productsdeveloped through our research. In addition, the commercial use of our productswill be limited. If regulatory clearance for a product is granted, thisclearance will be limited to those disease states and conditions for which theproduct is demonstrated through clinical trials to be safe and efficacious. Wecannot ensure that any compound developed by us, alone or with others, willprove to be safe and efficacious in clinical trials and will meet all of theapplicable regulatory requirements needed to receive marketing clearance.

 

We and our contractmanufacturers also are required to comply with the applicable FDA current GoodManufacturing Practice regulations. Good Manufacturing Practice regulationsinclude requirements relating to quality control and quality assurance as wellas the corresponding maintenance of records and documentation. Manufacturingfacilities are subject to inspection by the FDA. These facilities must beapproved before we can use them in commercial manufacturing of our products. Weor our contract manufacturers may not be able to comply with the applicableGood Manufacturing Practice requirements and other FDA regulatory requirements.If we or our contract manufacturers fail to comply, we could be subject tofines or other sanctions, or be precluded from marketing our products.

 

Outside the United States,the ability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authorities. This foreignregulatory approval process typically includes all of the risks associated withFDA clearance described above and may include additional risks.

 

**If we donot compete successfully in the development and commercialization of productsand keep pace with rapid technological change, we will be unable to capture andsustain a meaningful market position.**

 

The biotechnology andpharmaceutical industries are highly competitive and subject to significant andrapid technological change as researchers learn more about diseases and developnew technologies for treatment. Our competitors in the United States and elsewhereare numerous and include, among others, major multinational pharmaceutical andchemical companies, specialized biotechnology firms and universities and otherresearch institutions. We are aware of several pharmaceutical and biotechnologycompanies that are actively engaged in research and development in areasrelated to antibiotic and antifungal products. These companies have commencedclinical trials or have successfully commercialized their products.

 

Many of these companiesare addressing the same diseases and disease indications as we, or ourcollaborators, are addressing. Many of these companies and institutions, eitheralone or together with their collaborators, have substantially greaterfinancial resources and larger research and development staffs than we do. Inaddition, many of these competitors, either alone or together with theircollaborators, have significantly greater experience than we do in developing,manufacturing and marketing products.

Developments by others mayrender our product candidates or technologies obsolete or noncompetitive. Weface and will continue to face intense competition from other companies forcollaborative arrangements with pharmaceutical and biotechnology companies forestablishing relationships with academic and research institutions, and forlicenses of proprietary technology. These competitors, either alone or withtheir collaborators, may succeed in developing technologies or products thatare more effective, less expensive, have fewer side effects or are easier toadminister than ours. In addition, some of our competitors have greaterexperience than us in conducting preclinical and human clinical trials andobtaining FDA and other regulatory approvals. Accordingly, our competitors maysucceed in obtaining FDA or other regulatory approvals for drug candidates morerapidly than us. Companies that complete clinical trials, obtain requiredregulatory agency approvals and commence commercial sales of their drugs beforetheir competitors may achieve a significant competitive advantage, includingcertain patent and FDA marketing exclusivity rights that would delay ourability to market certain products. There can be no assurance that drugsresulting from our research and development efforts, or from joint efforts withour

 

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collaborators, will obtainregulatory approval in the United States or elsewhere or will be able tocompete successfully with our competitors’ existing products or products underdevelopment.

 

**If ourintellectual property rights do not adequately protect our product candidates,others could compete against us more directly, which would hurt our business.**

 

Our success depends inpart on our ability to:

 

•                  obtainpatents or rights to patents;

 

•                  protecttrade secrets;

 

•                  operatewithout infringing upon the proprietary rights of others; and

 

•                  preventothers from infringing on our proprietary rights.

 

We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary rights are covered by valid and enforceable patentsor are effectively maintained as trade secrets. The patent position ofbiopharmaceutical companies involves complex legal and factual questions, and,therefore, we cannot predict with certainty whether they will be enforceable.Patents, if issued, may be challenged, invalidated or circumvented. Thus, anypatents that we own or license from third parties may not provide anyprotection against competitors. Our pending patent applications, those we mayfile in the future, or those we may license from third parties, may not resultin patents being issued. Also, patent rights may not provide us with adequateproprietary protection or competitive advantages against competitors with similartechnologies. The laws of certain foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

In addition to patents, werely on trade secrets and proprietary 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 and harm our business.

 

**If thirdparties claim we are infringing their intellectual property rights, we couldsuffer significant litigation or licensing expenses or be prevented frommarketing our products.**

 

Research has beenconducted for many years in the areas in which we have focused our research anddevelopment efforts. This has resulted in a substantial number of issuedpatents and an even larger number of still-pending patent applications. Patentapplications in the United States are, in most cases, maintained in secrecyuntil patents are issued. The publication of discoveries in the scientific orpatent literature frequently occurs substantially later than the date on whichthe underlying discoveries were made. Our commercial success dependssignificantly on our ability to operate without infringing the patents andother proprietary rights of third parties. Our technologies may infringe thepatents or violate other proprietary rights of third parties. In the event aninfringement claim is brought against us, we may be required to pay legal andother expenses to defend such claim and, if we are unsuccessful, we and ourcollaborators may be prevented from pursuing product development andcommercialization and may be subject to damage awards.

 

The biotechnology andpharmaceutical industries have been characterized by extensive litigationregarding patents and other intellectual property rights. The defense and prosecutionof intellectual property suits, United States 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:

 

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•                  enforcepatents that we own or license;

 

•                  protecttrade secrets or know-how that we own or license; or

 

•                  determinethe enforceability, scope and validity of the proprietary rights of others.

 

If we become involved inany litigation, interference or other administrative proceedings, we will incursubstantial expense and the efforts of our technical and management personnelwill be significantly diverted. An adverse determination may subject us to lossof our proprietary position or to significant liabilities, or require us toseek licenses that may not be available from third parties. We may berestricted or prevented from manufacturing and selling our products, if any, inthe event of an adverse determination in a judicial or administrativeproceeding or if we fail to obtain necessary licenses. Costs associated withthese arrangements may be substantial and may include ongoing royalties.Furthermore, we may not be able to obtain the necessary licenses onsatisfactory terms, if at all.

 

**If thegovernment and third-party payors fail to provide adequate coverage andreimbursement rates for our product candidates, our revenues and prospects forprofitability will be harmed.**

 

In both domestic andforeign markets, sales of our product candidates will depend in part upon theavailability of reimbursement from third-party payors. Such third-party payorsinclude 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 ultimately be considered cost-effective. Adequatethird-party reimbursement may not be available to enable us to maintain pricelevels sufficient to realize an appropriate return on our investment in productdevelopment. Domestic and foreign governments continue to propose and passlegislation designed to reduce the cost of healthcare. For example, in someforeign markets, the government controls prescription pharmaceuticals’ pricingand profitability. In the United States, we expect that there will continue tobe federal and state proposals to implement similar governmental control. Inaddition, increasing emphasis on managed care in the United States willcontinue to put pressure on pharmaceutical product pricing. Cost controlinitiatives could decrease the price that we would receive for any products inthe future, which would limit our revenues and profitability. Accordingly,legislation and regulations affecting the pricing of pharmaceuticals may changebefore our proposed products are approved for marketing. Adoption of suchlegislation could further limit reimbursement for pharmaceuticals.

 

**If asuccessful product liability claim or series of claims is brought against usfor uninsured liabilities or in excess of insured liabilities, we could beforced to pay substantial damage awards.**

 

The use of any of ourproduct candidates in clinical trials, and the sale of any approved products,may expose us to product liability claims. We have obtained limited productliability insurance coverage for our clinical trials. Our product liabilityinsurance coverage limits are $10 million per occurrence and $10 million in theaggregate. Such insurance coverage may not protect us against all of the claimsto which we may become subject. We may not be able to maintain adequateinsurance coverage at a reasonable cost or in sufficient amounts or scope toprotect us against potential losses. In the event a claim is brought againstus, we may be required to pay legal and other expenses to defend the claim, aswell as uncovered damage awards resulting from a claim brought successfullyagainst us. Furthermore, whether or not we are ultimately successful indefending any such claims, we may be required to direct financial andmanagerial resources to such defense and adverse publicity could result, all ofwhich could harm our business.

 

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**Risks Related to Ownership of Our Stock**

 

**Our stockprice has been and is likely to continue to be volatile, and your investmentcould suffer a decline in value.**

 

The trading price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in price in response to various factors, many of which are beyondour control, including:

 

•                  clinicaltrial data;

 

•                  generaleconomic conditions;

 

•                  changesin, or failure to achieve, financial estimates by securities analysts;

 

•                  futuresales of equity or debt securities;

 

•                  newproducts or services introduced or announced by us or our competitors;

 

•                  announcementsof scientific innovations by us or our competitors;

 

•                  actualor anticipated variations in our annual and quarterly operating results;

 

•                  conditionsor trends in the biotechnology and pharmaceutical industries;

 

•                  announcementsby us of significant acquisitions, strategic partnerships, joint ventures orcapital commitments;

 

•                  additionsor departures of key personnel;

 

•                  newregulatory legislation adopted in the United States or abroad; and

 

•                  salesof our common stock.

 

In addition, the stockmarket in general, and the Nasdaq National Market and the market forbiotechnology stocks in particular, have experienced significant price andvolume fluctuations. Volatility in the market price for particular companieshas often been unrelated or disproportionate to the operating performance ofthose companies. Further, there has been particular volatility in the marketprices of securities of biotechnology and pharmaceutical companies. These broadmarket and industry factors may seriously harm the market price of our commonstock, regardless of our operating performance. In addition, securities classaction litigation has often been initiated following periods of volatility inthe market price of a company’s securities. A securities class action suitagainst us could result in substantial costs, potential liabilities and thediversion of management’s attention and resources.

 

**We haveimplemented anti-takeover provisions that could discourage or prevent atakeover, even if an acquisition would be beneficial to our stockholders.**

 

Provisions of our restatedcertificate of incorporation and our amended and restated bylaws could make itmore difficult for a third-party to acquire us, even if doing so would bebeneficial to our stockholders. These provisions include:

 

•                  establishinga classified board of directors of which approximately one-third of the membersof the board will be elected each year, lengthening the time needed to elect anew majority of the board;

 

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•                  authorizingthe issuance of “blank check” preferred stock that could be issued by our boardof directors to increase the number of outstanding shares or change the balanceof voting control and thwart a takeover attempt;

 

•                  prohibitingstockholder action by written consent and requiring all stockholder actions tobe taken at a meeting of our stockholders; and

 

•                  requiringthe affirmative vote of 75% of our capital stock to approve amendments to ourbylaws and certain provisions of our restated certificate of incorporation.

 

In addition, in June 2001,our board of directors adopted a stockholder rights plan in which preferredstock purchase rights were distributed to our common stockholders as adividend. These provisions may make it more difficult for stockholders to takecorporate actions and may have the effect of delaying or preventing a change incontrol. We are also subject to the anti-takeover provisions of Section 203 ofthe Delaware General Corporation Law. Subject to specified exceptions, thissection provides that a corporation may not engage in any business combinationwith any interested stockholder during the three-year period following the timethat such stockholder becomes an interested stockholder. This provision couldhave the effect of delaying or preventing a change in our control. Theforegoing factors could also limit the price that investors or an acquirermight be willing to pay in the future for shares of our common stock.

 

**We mayneed additional capital in the future, which could dilute our shareholders orimpose burdensome financial restrictions on our business, and we may not beable to obtain any funds we need.**

 

We anticipate that ouravailable cash resources will be sufficient to fund our operating losses for atleast the next two years.  In thefuture, we may not have any bank credit facility or other working capitalcredit line under which we may borrow funds for working capital or othergeneral corporate purposes.  If ourplans or assumptions change or are inaccurate, we may need to seek capitalsooner than anticipated.  We may seek toraise any funds we need through public or private debt or equityofferings.  Additional equity financingmay be dilutive to the holders of our common stock.  If we obtain funds through a bank credit facility or throughissuance of debt securities or preferred shares, this indebtedness or preferredshares would have rights senior to the rights of holders of our common stock,and their terms could impose significant restrictions on our operations.  If we need to raise additional funds, we maynot be able to do so on favorable terms, or at all.  If we cannot obtain adequate funds on acceptable terms, we maynot be able to carry out our business strategy.

 

**Futuresales of shares of our common stock may cause our stock price to decline.**

 

Our stockholders hold asubstantial number of shares of our common stock which they are able to sell inthe public market today.  Sales ofshares of our common stock, or the perception that these sales could occur,could materially and adversely affect the market price of our common stock andimpair our ability to raise capital through the sale of additional equitysecurities.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

# ** **

# **Interest rates**

 

Our exposure to interest rate risk relates toour cash and cash equivalents and marketable securities as well as our termloan and equipment note with a commercial bank.  Our marketable securities are subject to interest rate risk andcould decline in value if interest rates fluctuate.  However, due to the conservative and short-term nature of theseinvestments, such exposure is limited. Borrowings under our term loan and equipment note are also exposed tointerest rate risk as they are subject to interest rates based on the bank’sbase rate or LIBOR.

 

The table below presents principal amounts andrelated weighted average interest rates by year of maturity for our cash andcash equivalents and marketable securities (in thousands):

 
|                      |   | **2002** |   | **2003** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Cash and cash equivalents |   | $        | 26,887 |     | $      | — |   |
| Average interest rate     |   | 1.88     | %      | —   |   |
|                      |   |     |   |     |   |
| Marketable securities     |   | $        | 21,824 |     | $      | 4,403 |   |
| Average interest rate     |   | 2.83     | %      | 2.43     | %      |

 

The estimated fair value of our cash and cashequivalents and marketable securities approximate the principal amountsreflected above based on the short-term maturities of these financial instruments.

 

The estimated fair value of our debtobligations approximates the principal amounts due based on the interest ratescurrently available to us for debt with similar terms and remaining maturities.

 

# **Inflation**

 

We do not believe that inflation has had amaterial adverse impact on our business or operating results during thequarters presented.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS**

 

We are not a party to any material legalproceedings.

 

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

 

# **Recent Sales of Unregistered Securities**

 

On April 9, 2002, we completed a privateplacement of 2,993,800 shares of our common stock to selected institutionalinvestors for gross proceeds of $44.9 million. The private placement was conducted pursuant to an exception under Rule506 of Regulation D of the Securities Act. These shares were subsequently registered with the SEC.

 

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

# **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

# **ITEM 5.  OTHER INFORMATION**

 

None

 

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

 

*Exhibits*

 

The exhibits listed on the Exhibit List, whichappears below following the signature page, are included or incorporated by referencein this Quarterly Report.

 

*Reports on Form 8-K*

 

On March 22, 2002, we filed a current report on Form 8-K attaching thefinal approved version of our amended and restated bylaws.

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|               | **VERSICOR  INC.**                                                                                |
|--------------------|---------------------------------------------------------------------------------------------------|
|               |                                                                                              |
| Date: May 13, 2002 | /s/ GEORGE F. HORNER III                                                                          |
|               | George F. Horner III                                                                              |
|               | President and Chief Executive Officer   (Principal Executive Officer)                             |
|               |                                                                                              |
|               |                                                                                              |
| Date: May 13, 2002 | /s/ DOV A. GOLDSTEIN, M.D.                                                                        |
|               | Dov A. Goldstein, M.D.                                                                            |
|               | Vice President, Finance and Chief Financial Officer (Principal  Financial and Accounting Officer) |

 

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**EXHIBITINDEX**

 

Pursuant to Item 601(a)(2) of Regulation S-K,this exhibit index immediately precedes the exhibits.

 

The following exhibits are part of thisQuarterly Report on Form 10-Q (and are numbered in accordance with Item 601 ofRegulation S-K).

** **
| **No.** |   | **Description**                                                                                                         |   |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
|    |   |                                                                                                                    |   |
| 3.1     |   | Restated Certificate of  Incorporation of Versicor Inc.(1)                                                         |   |
| 3.2     |   | Amended and Restated  Bylaws of Versicor Inc.(2)                                                                   |   |
| 4.1     |   | Form of Common Stock  Certificate(1)                                                                               |   |
| 4.2     |   | Form of Warrant for  the Purchase of Shares of Series C Preferred Stock dated as of  December 9, 1997(1) |   |
| 4.3     |   | Form of Warrant for  the Purchase of Shares of Series F Preferred Stock dated as of  June 25, 1999(1)    |   |
| 4.5     |   | Second Amended and  Restated Investor Rights Agreement(1)                                                               |   |

 

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(1)                                  Previously filed as an exhibit to theCompany’s registration statement on Form S-1, effective August 2,2000, and incorporated herein by reference.

 

(2)                                  Previouslyfiled as an exhibit to the Company’s current report on Form 8-K filed with theSEC on March 22, 2002, and incorporated herein by reference.

 

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