**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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##### **FORM10-Q**

 
| **ý**                                            | **Quarterly report pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**                                                                                              |
|-------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                                                                                                           |
| **For the  quarterly period ended June 30, 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       ** |

 

**CommissionFile Number:  000-31145**

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**VERSICORINC.**

(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) |

 

**34790ARDENTECH COURT, FREMONT, CALIFORNIA 94555**

(Address of principal executive offices) (ZipCode)

**(510)739-3000**

(Registrant’s telephone number, including areacode)

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such report(s)and (2) has been subject to such filing requirements for the past90 days. Yes ý   No  o.

On July 25, 2002, there were 26,327,226 commonshares outstanding of the registrant’s only class of common stock.

The Exhibit Index begins on page 28.

 

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** **

**VERSICOR INC.**

**Quarterly Report on Form 10-Q**

**For the Three Months Ended June 30, 2002**

 

**INDEX**

 

** **
| **PART I.**  | **FINANCIAL INFORMATION**                                                                        |
|--------------|--------------------------------------------------------------------------------------------------|
|         |                                                                                             |
| **Item 1.**  | **Condensed Financial  Statements**                                                              |
|         |                                                                                             |
|         | Condensed  Balance Sheets as of June 30, 2002 and December 31, 2001 (Unaudited)                  |
|         |                                                                                             |
|         | Statements  of Operations for the Three and Six Months Ended June 30, 2002 and 2001  (Unaudited) |
|         |                                                                                             |
|         | Statements  of Cash Flows for the Six Months Ended June 30, 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 and Use of Proceeds**                                                   |
|         |                                                                                             |
| **Item 3.**  | **Defaults upon Senior  Securities**                                                             |
|         |                                                                                             |
| **Item 4.**  | **Submission  of Matters to a Vote of Security Holders**                                         |
|         |                                                                                             |
| **Item 5.**  | **Other Information**                                                                            |
|         |                                                                                             |
| **Item 6.**  | **Exhibits and Reports  on Form 8-K**                                                            |
|         |                                                                                             |
|         | **Signatures**                                                                                   |
|         |                                                                                             |
|         | **Exhibit Index**                                                                                |
|         |                                                                                             |

 

2

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**PART I****— FINANCIAL INFORMATION**

 

**ITEM 1****.  CONDENSEDFINANCIAL STATEMENTS**

 

**VERSICOR INC.**

**CONDENSEDBALANCE SHEETS**

(unaudited)

(inthousands)

 
|                                       |   | **June 30,  2002** |   | **December  31,  2001** |   |
|--------------------------------------------|--------|--------------------|--------|-------------------------|--------|
| **ASSETS**                                 |   |               |   |                    |   |
| Current assets:                            |   |               |   |                    |   |
| Cash and cash equivalents                  |   | $                  | 61,873 |                    | $      | 31,349 |   |
| Marketable securities                      |   | 23,277             |   | 32,419                  |   |
| Employee notes receivable                  |   | —             |   | 13                      |   |
| Prepaid expenses and other current assets  |   | 764                |   | 1,624                   |   |
| Total current assets                       |   | 85,914             |   | 65,405                  |   |
| Property and equipment, net                |   | 5,085              |   | 5,197                   |   |
| Other assets                               |   | 103                |   | 95                      |   |
| Total assets                               |   | $                  | 91,102 |                    | $      | 70,697 |   |
|                                       |   |               |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**   |   |               |   |                    |   |
| Current liabilities:                       |   |               |   |                    |   |
| Accounts payable                           |   | $                  | 4,162  |                    | $      | 4,335 |   |
| Accrued liabilities                        |   | 6,870              |   | 6,278                   |   |
| Current portion of term loan payable       |   | 3,715              |   | 3,950                   |   |
| Deferred revenue                           |   | 884                |   | 1,561                   |   |
| Total current liabilities                  |   | 15,631             |   | 16,124                  |   |
| Term loan payable                          |   | 1,047              |   | 1,004                   |   |
| Deferred revenue                           |   | 500                |   | 500                     |   |
| Other long-term liabilities                |   | 229                |   | 175                     |   |
| Total liabilities                          |   | 17,407             |   | 17,803                  |   |
|                                       |   |               |   |                    |   |
| Stockholders' equity:                      |   |               |   |                    |   |
| Common stock                               |   | 26                 |   | 23                      |   |
| Additional paid-in capital                 |   | 202,421            |   | 160,163                 |   |
| Deferred stock compensation                |   | (2,328             | )      | (3,567                  | )      |
| Accumulated other comprehensive income     |   | 42                 |   | 98                      |   |
| Accumulated deficit                        |   | (126,466           | )      | (103,823                | )      |
| Total stockholders' equity                 |   | 73,695             |   | 52,894                  |   |
| Total liabilities and stockholders' equity |   | $                  | 91,102 |                    | $      | 70,697 |   |

 

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

 

3

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**VERSICOR INC.**

## **STATEMENTS OF OPERATIONS**

(unaudited)

(inthousands, except per share amounts)

 
|                                                                |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|---------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                                                |   | **June 30,  2002**      |    | **June 30,  2001**    |   | **June 30,  2002** |   | **June 30,  2001** |   |
| Revenues:                                                           |   |                    |    |                  |   |   |   |   |   |
| Collaborative research and development and contract services        |   | $                       | 1,490   |                  | $      | 1,554 |   | $ | 3,044 |   | $ | 3,040 |   |
| License fees and milestones                                         |   | —                  |    | 259                   |   | 258 |   | 267 |   |
| Total revenues                                                      |   | 1,490                   |    | 1,813                 |   | 3,302 |   | 3,307 |   |
|                                                                |   |                    |    |                  |   |   |   |   |   |
| Operating expenses:                                                 |   |                    |    |                  |   |   |   |   |   |
| Research and development—non-cash stock compensation expense   |   | 178                     |    | 682                   |   | 419 |   | 1,195 |   |
| Research and development—other                                 |   | 11,890                  |    | 8,146                 |   | 21,646 |   | 12,959 |   |
| Total research and development                                      |   | 12,068                  |    | 8,828                 |   | 22,065 |   | 14,154 |   |
| General and administrative—non-cash stock compensation expense |   | 417                     |    | 893                   |   | 872 |   | 2,109 |   |
| General and administrative—other                               |   | 1,619                   |    | 1,565                 |   | 3,665 |   | 2,804 |   |
| Total general and administrative                                    |   | 2,036                   |    | 2,458                 |   | 4,537 |   | 4,913 |   |
| Total operating expenses                                            |   | 14,104                  |    | 11,286                |   | 26,602 |   | 19,067 |   |
|                                                                |   |                    |    |                  |   |   |   |   |   |
| Loss from operations                                                |   | (12,614                 | )       | (9,473                | )      | (23,300 | ) | (15,760 | ) |
|                                                                |   |                    |    |                  |   |   |   |   |   |
| Other income (expense):                                             |   |                    |    |                  |   |   |   |   |   |
| Interest income                                                     |   | 436                     |    | 913                   |   | 781 |   | 2,132 |   |
| Interest expense                                                    |   | (62                     | )       | (82                   | )      | (124 | ) | (180 | ) |
| Net loss                                                            |   | $                       | (12,240 | )                     | $      | (8,642 | ) | $ | (22,643 | ) | $ | (13,808 | ) |
|                                                                |   |                    |    |                  |   |   |   |   |   |
| Net loss per share:                                                 |   |                    |    |                  |   |   |   |   |   |
| Basic and diluted                                                   |   | $                       | (0.47   | )                     | $      | (0.37 | ) | $ | (0.92 | ) | $ | (0.60 | ) |
|                                                                |   |                    |    |                  |   |   |   |   |   |
| Weighted average shares                                             |   | 26,008                  |    | 23,054                |   | 24,642 |   | 23,048 |   |

 

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

 

4

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**VERSICOR INC.**

**STATEMENTSOF CASH FLOWS**

(unaudited)

(inthousands)

 
|                                                                         |   | **Six Months  Ended** |    |
|------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                         |   | **June 30,  2002**    |    | **June 30,  2001** |   |
|                                                                         |   |                  |    |   |   |
| **Cash flows from operating activities:**                                    |   |                  |    |   |   |
| Net loss                                                                     |   | $                     | (22,643 | ) | $ | (13,808 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                  |    |   |   |
| Depreciation                                                                 |   | 628                   |    | 497 |   |
| Non-cash stock compensation expense                                          |   | 1,291                 |    | 3,304 |   |
| Changes in operating assets and liabilities:                                 |   |                  |    |   |   |
| Employee notes receivable                                                    |   | 13                    |    | 51 |   |
| Prepaid expenses and other current assets                                    |   | 860                   |    | (210 | ) |
| Other assets                                                                 |   | (8                    | )       | (16 | ) |
| Accounts payable                                                             |   | (173                  | )       | (361 | ) |
| Accrued liabilities                                                          |   | 592                   |    | 590 |   |
| Related party payable                                                        |   | —                |    | (12 | ) |
| Deferred revenue                                                             |   | (677                  | )       | 937 |   |
| Other long-term liabilities                                                  |   | 54                    |    | (957 | ) |
| Net cash used in operating activities                                        |   | (20,063               | )       | (9,985 | ) |
|                                                                         |   |                  |    |   |   |
| **Cash flows from investing activities:**                                    |   |                  |    |   |   |
| Purchases of marketable securities                                           |   | (15,091               | )       | (24,904 | ) |
| Sales/maturities of marketable securities                                    |   | 24,177                |    | 19,714 |   |
| Additions to property and equipment                                          |   | (516                  | )       | (1,245 | ) |
| Net cash provided by (used in) investing activities                          |   | 8,570                 |    | (6,435 | ) |
|                                                                         |   |                  |    |   |   |
| **Cash flows from financing activities:**                                    |   |                  |    |   |   |
| Proceeds from issuance of common stock                                       |   | 42,209                |    | 15 |   |
| Proceeds from long-term debt                                                 |   | 491                   |    | — |   |
| Repayments of long-term debt                                                 |   | (683                  | )       | (431 | ) |
| Net cash provided by (used in) financing activities                          |   | 42,017                |    | (416 | ) |
|                                                                         |   |                  |    |   |   |
| Net change in cash and cash equivalents                                      |   | 30,524                |    | (16,836 | ) |
| Cash and cash equivalents at beginning of period                             |   | 31,349                |    | 67,989 |   |
| Cash and cash equivalents at end of period                                   |   | $                     | 61,873  |   | $ | 51,153 |   |
|                                                                         |   |                  |    |   |   |
| **Supplemental cash flow information:**                                      |   |                  |    |   |   |
| Cash paid during the period for interest                                     |   | $                     | 125     |   | $ | 180 |   |

 

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

 

5

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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 of America.  Theinterim financial 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 June 30, 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 andDiluted 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):

 

|                                                  |   | **June 30,** |   |
|-------------------------------------------------------|--------|--------------|--------|
|                                                  |   | **2002**     |   | **2001** |   |
|                                                  |   |         |   |   |   |
| Common shares issuable upon exercise of stock options |   | 3,516        |   | 2,805 |   |
| Common shares issuable upon exercise of warrants      |   | 344          |   | 421 |   |
| Common shares subject to repurchase                   |   | 3            |   | 12 |   |
|                                                  |   | 3,863        |   | 3,238 |   |

 

**3.****             ****Subsequent Events**

 

On July 30, 2002, we entered into anagreement under which we will acquire all of the outstanding shares ofBiosearch Italia S.p.A., a publicly listed company in Italy. The board ofdirectors of each company has approved the transaction which is subject to theapproval of each company’s shareholders, certain regulatory approvals in Italyand certain other conditions set forth in the merger agreement. We will issue1.77 shares of our common stock for each outstanding share of Biosearch stock,or approximately 21.5 million shares. The merger is expected to close early inthe first quarter of 2003.

 

6

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**ITEM 2****. ****MANAGEMENT’S DISCUSSION ANDANALYSIS 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 and uncertainties.  The words “believe,” “expect,” “anticipate”,“may,” “will,” or “could” and similar expressions or the negatives of thesewords and phrases are intended to identify forward-looking statements.  As a result of many factors, such as thoseset forth under “Risk Factors” and elsewhere in this document, our actualresults may differ significantly from those anticipated in theseforward-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 our common stock to selected institutionalinvestors at a purchase price of $15 per share.  We received net proceeds from the private placement of approximately$41.9 million.

 

On July 30, 2002, we entered into an agreement and plan of merger withBiosearch Italia S.p.A., a publicly listed company in Italy (NuovoMercato:  BI0.MI), wherein it iscontemplated that Biosearch will merge with and into Versicor in astock-for-stock exchange.  The agreementand plan of merger, which has been approved by the boards of directors of bothcompanies, provides that Biosearch shareholders will receive 1.77 shares ofnewly issued Versicor common stock in exchange for each Biosearch ordinaryshare.  Consummation of the proposedmerger is subject to satisfaction of certain conditions set forth in theagreement and plan of merger, including, without limitation, (i) the favorablevote of the holders of a majority of our outstanding common stock and approvalof the majority of the votes cast in person or by proxy at the meeting of ourstockholders convened to consider the merger and the transactions contemplatedin the agreement and plan of merger, and (ii) the favorable vote of the holdersof at least two-thirds of the Biosearch ordinary shares present at theBiosearch shareholders’ meeting, provided that the quorum required for theBiosearch shareholders’ meeting shall consist of more than one-half of theoutstanding Biosearch ordinary shares as of the relevant record date during thefirst call, more than one-third of the outstanding Biosearch ordinary shares asof the relevant record date during the second call, and more than one-fifth ofthe outstanding Biosearch ordinary shares as of the relevant record date duringthe third call, and (iii) certain regulatory approvals in Italy.  Subject to the foregoing, we expect thatthis transaction will close early in the first quarter of 2003.

 

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 IIclinical trials.  We also have severallead compounds in preclinical studies.

 

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,

 

7

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regulatory approval and successfulcommercialization of our products, we will generate revenues from sales of ourproducts and from receipt of 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, continue to expand our research and developmentoperations and, assuming the consummation of the proposed merger of BiosearchItalia with and into Versicor,integrate our operations.  In addition, our expenses will increase as a result ofprofessional fees incurred in connection with the proposed merger whether ornot the proposed merger is consummated. In addition, we expect to incur salesand marketing expenses in the future when we establish our sales and marketingorganization.

 

Since our inception, we have incurredsignificant losses. As of June 30, 2002, we had an accumulated deficit of$126.5 million. We anticipate incurring additional losses, which may increase,for the foreseeable future, including at least through December 31, 2003.

 

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 alicense agreement 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 pay 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.  If the merger with Biosearch is consummated, then wewill not be required to pay Biosearch any fees or royalties after the merger.

 

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.  In connection withthe collaboration, Pharmacia made an equity investment in us of $3.8 millionand paid us research support and license fee payments.  Under the terms of the agreement and inconsideration for our research obligations, we are entitled to receive fundingfrom Pharmacia to support certain of our full-time researchers.  If specified milestones are achieved,Pharmacia is obligated to pay us additional payments for each compound, aportion of which may be credited against future royalty payments to which weare entitled on the worldwide sales of any drug developed and commercialized fromthe collaboration.  In October 2000,Pharmacia increased its funding for this collaboration by 30%, and in June2001, we received a milestone payment for the initiation of clinicaldevelopment of one of the compounds.  Asa result of progress achieved by the collaboration, in July 2002, we agreedwith Pharmacia by amendment to extend the collaboration by an additional threeyears, through March 2005.

 

In March 1999, we entered into a collaborationagreement with Novartis Pharma AG pursuant to which we are collaborating todiscover and develop novel deformylase inhibitors.  In connection with the collaboration, Novartis made an initialequity investment in us of $3.0 million and provides us with funding to supportcertain of our full-time researchers. We have also received a number of milestone payments from Novartis andare entitled to receive additional payments upon the achievement of specifiedmilestones, a portion of which may be credited against future royalty paymentsto which we are entitled on the worldwide sales of any drug developed andcommercialized from this collaboration. As a result of progress achieved by the collaboration, in July 2002 weagreed with Novartis by amendment to extend the collaboration by an additionalyear, through March 2003.

 

8

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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 may be terminated by either party upon 12-months prior written noticeat the end of the fourth year following the date on which the productcontaining anidulafungin is made by us.

# ** **

# **Deferred StockCompensation**

 

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 stock compensation of $52,000 and $1.4million in the six months ended June 30, 2002 and 2001, respectively.  These amounts were recorded as a componentof stockholders’ equity and are being amortized as charges to operations overthe vesting periods of the options.  Werecorded amortization of deferred stock compensation of $1.3 million and $3.3million in the six months ended June 30, 2002 and 2001, respectively.

 

 

**Results ofOperations**

 

###### ***Three Months ended June 30, 2002 Compared toThree Months Ended June 30, 2001***

 

# **Revenues**

 

Revenues were$1.5 million and $1.8 million in the three months ended June 30, 2002 and June30, 2001, respectively.  Revenues inboth quarters consisted of collaborative research and development fees fromPharmacia and Novartis.  The higherrevenues in 2001 are due to the receipt of a milestone payment from Novartis.

 

9

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# **Research and Development Expenses**

 

Research anddevelopment expenses were $12.1 million and $8.8 million in the three monthsended June 30, 2002 and 2001, respectively.  The increase is primarily due to increased clinical expenditure of$2.3 million for the development of anidulafungin and dalbavancin.  In the last year, we have started an additionalPhase III clinical trial for anidulafungin and two Phase II clinical trials fordalbavancin.  We have also increased ourdevelopment team headcount resulting in an increased expenditure of $1.0million.

 

# **General andAdministrative Expenses**

 

General and administrative expenses were $2.0million and $2.5 million in the three months ended June 30, 2002 and 2001,respectively.  General andadministrative expenses include amortization of non-cash stock compensationexpense of $417,000 and $893,000 in the three months ended June 30, 2002 and 2001,respectively.  Excluding these charges,general and administrative expenses increased by only $54,000.

 

**Other Income(Expense)**

 

Net interest income was $374,000 and $831,000in the three months ended June 30, 2002 and 2001, respectively.  This decrease is due to a significantdecrease in interest rates during the last 12 months.

 

###### ***Six Months ended June 30, 2002 Compared to SixMonths Ended June 30, 2001***

 

# **Revenues**

 

Revenues were$3.3 million in both the six months ended June 30, 2002 and June 30, 2001.  Revenues in both quarters consisted of collaborativeresearch and development, contract service and license fees from PharmaciaCorporation and collaborative research and development fees and milestonepayments from Novartis.

 

# **Research andDevelopment Expenses**

 

Research anddevelopment expenses were $22.1 million and $14.2 million in the six monthsended June 30, 2002 and 2001, respectively. The increase is primarily due to increased clinical expenditure of $5.9million for the development of anidulafungin and dalbavancin.  In the last year, we have started anadditional Phase III clinical trial for anidulafungin and two Phase II clinicaltrials for dalbavancin.  We have alsoincreased our development team headcount resulting in an increased expenditureof $2.0 million.

 

# **General andAdministrative Expenses**

 

General and administrative expenses were $4.5million and $4.9 million in the six months ended June 30, 2002 and 2001,respectively.  General andadministrative expenses include amortization of non-cash stock compensationexpense of $872,000 and $2.1 million in the six months ended June 30, 2002 and2001, respectively.  Excluding thesecharges, general and administrative expenses increased by $861,000 primarilydue to business development activities.

 

**Other Income (Expense)**

 

Net interestincome was $657,000 and $2.0 million in the six months ended June 30, 2002 and2001, respectively.  The 2001 periodreflects greater interest income as a result of higher average cash andinvestment balances during the six months and also higher interest rates duringthat period.

 

# **Liquidity andCapital 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 our 

 

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initial public offering received in August andSeptember 2000.  In addition, on April9, 2002, we completed a private placement of 2,993,800 shares of common stockto selected institutional investors at a purchase price of $15 per share, fromwhich we received net proceeds of approximately $41.9 million.

 

As of June 30,2002, we have also received approximately $24.2 million in payments forcollaborative research, contract services and milestone payments, as well aslicense fees from our collaborators, including Sepracor. Of these payments,$1.4 million constitutes deferred revenue as of June 30, 2002.

 

Inaddition, we have a $6.0 million term loan and $2.0 million equipment note witha commercial bank.  As of June 30, 2002,there was an outstanding loan balance of $3.0 million and an outstanding notebalance of $1.8 million.  Proceeds fromthe loan were used to repay Sepracor for leasehold improvements to our facilitiesand for general corporate purposes.  Proceeds from drawdowns on the equipment note are being used tofinance capital expenditure.  The finalloan balance is payable on December 31, 2002 and the final note balance ispayable on December 31, 2004.

 

Cashused in operations was $20.1 million and $10.0 million in the six months endedJune 30, 2002 and 2001, respectively. The net loss of $22.6 million in the first six months of 2002 wasreduced by non-cash charges for depreciation and non-cash stock compensationexpense of $1.9 million.  In the firstsix months of 2001, the net loss of $13.8 million was reduced by non-cashcharges for depreciation and non-cash stock compensation expense of $3.8million.

 

Cash from investing activities was $8.6million and $(6.4 million) in the six months ended June 30, 2002 and 2001,respectively.  In the first six monthsof 2002, the principal source of cash resulted from the net sale of marketablesecurities of $9.1 million.  In the firstsix months of 2001, the principal use of cash resulted from the net purchase ofmarketable securities of $5.2 million.

 

Cash from financing activities was $42.0million and $(416,000) in the six months ended June 30, 2002 and 2001,respectively.  The principal source ofcash in the first six months of 2002 resulted from net proceeds of $41.9million received from the private placement of 2,993,800 shares of common stockto selected institutional investors in April 2002. In the first six months of2001, the net cash outflow principally related to repayments on our term loansof $431,000.

 

At June 30, 2002, our cash, cash equivalentsand marketable securities totaled $85.2 million compared to $63.8 million atDecember 31, 2001.

 

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 clinical development, additions to personnel, production andcommercialization efforts and the integration of our operations with those ofBiosearch Italia.  Our future capitalrequirements will depend on a number of factors, including our success indeveloping markets for our products, payments received or made undercollaboration agreements, the timing and outcome of regulatory approvals, theneed to acquire licenses to new products or compounds, the status ofcompetitive products, the availability of other financing and whether theproposed merger of Biosearch Italia with and into Versicor is consummated. Webelieve our existing cash and cash equivalents and marketable securities willbe sufficient to fund our operating expenses, debt repayments and capitalrequirements for at least the next two years.

 

 

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# **Risk Factors That Might Affect Our Future OperatingResults**

 

*ThisQuarterly Report on Form 10-Q contains forward-looking statements as explainedabove. Important factors that could cause our actual results to differmaterially from the results expressed or implied by our forward-lookingstatements include the following:*

 

**RisksRelated to Our Business**

 

**If we are unable to develop and successfullycommercialize our product candidates, we may never generate significantrevenues or become profitable.**

 

You must evaluate us in light of the uncertainties and complexitiespresent in a biopharmaceutical company. Most of our product candidates are inthe early stages of development, and two are in clinical trials. We do not knowwhether any of our clinical trials will result in marketable products.Preclinical testing and clinical trials are long, expensive and uncertainprocesses. It may take us or our collaborators several years to complete thistesting, and failure can occur at any stage of the process. Success inpreclinical testing and early clinical trials does not ensure that laterclinical trials will be successful. To date, we have not commercialized anyproducts or recognized any revenue from product sales. To do so will requiresignificant additional investment in research and development, preclinicaltesting and clinical trials, regulatory approval, and sales and marketingactivities. Furthermore, our potential drug candidates will be subject to therisks of failure inherent in the development of pharmaceutical products basedon 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 product candidates are successfullydeveloped, they may not generate sufficient or sustainable revenues to enableus to become profitable.

 

**We expect to incur losses for the foreseeablefuture and may never achieve profitability.**

 

We have incurred net losses since our inception in 1995.Before deemed dividends and accretion to redemption value of our preferredstock, our net losses were approximately $1.1 million in 1995, $4.8 million in1996, $6.3 million in 1997, $12.6 million in 1998, $29.2 million in 1999, $15.3million in 2000, $32.8 million in 2001 and $22.6 million in the first sixmonths of 2002.  As of June 30, 2002,our accumulated deficit was approximately $126.5 million. Our losses to datehave 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 incur substantial and increasing losses for theforeseeable future as a result of increases in our research and developmentcosts, including costs associated with conducting preclinical testing andclinical trials, and charges related to purchases of technology or otherassets.  We also expect that our generaland

 

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administrative expenses will increase as we add personnel andintegrate our operations and, assuming the consummation of the proposed mergerof Biosearch Italia with and into Versicor. We expect that the amount of operating losses will fluctuatesignificantly from quarter to quarter as a result of increases or decreases inour research and development efforts, the execution or termination of collaborativearrangements, the initiation, success or failure of clinical trials, or otherfactors. Our chances for achieving profitability will depend on numerousfactors, including success in:

 

•                  developingand testing new product candidates;

•                  receivingregulatory approvals;

•                  manufacturingproducts;

•                  marketingproducts; and

•                  competingwith products from other companies.

Many of these factors will depend on circumstances beyond ourcontrol. We cannot assure you that we will ever become profitable.

 

**Our revenues will be subject to significantfluctuations, which will make it difficult to compare our operating results toprior periods.**

 

We expect that substantially all of our revenues for theforeseeable future will result from payments under collaborative arrangements.To date, these payments have been in the form of up-front payments,reimbursement for research and development expenses and milestone payments. Wemay not be able to generate additional revenues under existing or futurecollaborative agreements. Furthermore, payments to us under our existing andany future collaborative arrangements will be subject to significantfluctuation in both timing and amount, and may never be achieved or payable. Inaddition, we may not be able to generate revenues from future product sales.Our revenues may not be indicative of our future performance or of our abilityto continue to achieve additional milestones. Our revenues and results ofoperations for any period may also not be comparable to the revenues or resultsof operations for any other period.

 

**If we cannot enter into new licensingarrangements, our future product portfolio and potential profitability could beharmed.**

 

An important component of our business strategy isin-licensing drug compounds developed by other pharmaceutical and biotechnologycompanies or academic research laboratories. Competition for promisingcompounds can be intense. If we are not able to identify future licensingopportunities and enter into future licensing arrangements on acceptable terms,our future product portfolio and potential profitability could be harmed.

 

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

 

We have entered into collaborative arrangements with thirdparties to develop certain product candidates. These collaborations arenecessary in order for us to fund our research and development activities andthird-party manufacturing arrangements, seek and obtain regulatory approvalsand successfully commercialize our existing and future product candidates. Onlya limited number of product candidates have been generated pursuant to ourcollaborations. We cannot assure you that any of these product candidates willresult in commercially successful products. Current or future collaborativearrangements may not be successful. If we fail to maintain our existingcollaborative arrangements or fail to enter into additional collaborativearrangements, the number of product candidates from which we could receivefuture revenues would decline.

 

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Our dependence on collaborative arrangements with thirdparties subjects us to a number of risks. These collaborative arrangements maynot be on terms favorable to us. Agreements with collaborators typically allowthe collaborators significant discretion in electing whether to pursue any ofthe planned activities. We cannot control the amount and timing of resourcesour collaborators may devote to the product candidates or their prioritization ofthe product candidates, and our collaborators may choose to pursue alternativeproducts. Our collaborators may also not perform their obligations as expected.Business combinations or significant changes in a collaborator’s businessstrategy may adversely affect a collaborator’s willingness or ability tocomplete its obligations to us. Moreover, we could become involved in disputeswith our collaborators which could lead to delays in, or the termination of,our development programs with them, as well as time-consuming and expensivelitigation or arbitration. Even if we fulfill our obligations under acollaborative agreement, our collaborators can generally terminate theagreements under certain circumstances. If any collaborator was to terminate orbreach our agreement with it, or otherwise fail to complete its obligations ina timely manner, our chances of successfully commercializing products could beharmed.

 

**If clinical trials for our products areunsuccessful or delayed, we will be unable to meet our anticipated developmentand commercialization timelines, which could harm our business and cause ourstock price to decline.**

 

Before obtaining regulatory approvals for the commercial saleof any products we develop, we must demonstrate through preclinical testing andclinical trials that our product candidates are safe and effective for use inhumans. Conducting preclinical testing and clinical trials is a lengthy,time-consuming and expensive process. Completion of clinical trials may takeseveral years or more. Our commencement and rate of completion of clinicaltrials 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 from preclinical testing and early clinicaltrials are often not predictive of results obtained in later clinical trials.In general, a number of new drugs have shown promising results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacydata to obtain necessary regulatory approvals. Data obtained from preclinicaland clinical activities are susceptible to varying interpretations, which maydelay, limit or prevent regulatory approval. In addition, regulatory delays orrejections may be encountered as a result of many factors, including perceiveddefects in the design of clinical trials and changes in regulatory policyduring the period of product development.

 

As of June 30, 2002, two of our product candidates,anidulafungin and dalbavancin, were in clinical trials. Patient follow-up forthese clinical trials has been limited and more trials will be required beforewe will be able to apply for regulatory approvals. Clinical trials conducted byus or by third parties on our behalf may not demonstrate sufficient safety andefficacy to obtain the requisite regulatory approvals for anidulafungin anddalbavancin or any other potential product candidates. This failure may delaydevelopment of other product candidates and hinder our ability to conductrelated preclinical testing and clinical trials. Regulatory authorities may notpermit us to undertake any additional clinical trials for our productcandidates. Our other product candidates are in preclinical development, and wehave not submitted investigational new drug applications, or INDs, to commenceclinical trials involving these compounds. Our preclinical development effortsmay not be successfully completed and we may not file further INDs. 

 

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Any delays in, or termination of, our clinical trials willharm our development and commercialization timelines, which would cause ourstock price to decline. Any of these events would also seriously impede ourability to obtain additional financing.

** **

**If our third-party clinical trial managersdo not perform, clinical trials for our product candidates may be delayed orunsuccessful.**

 

We have limited experience in conducting and managingclinical trials, and currently have only 21 full-time clinical developmentemployees. We rely on third parties, including our collaborators, clinicalresearch organizations and outside consultants, to assist us in managing andmonitoring clinical trials. If these third parties fail to performsatisfactorily under the terms of our agreements with them, clinical trials forour product candidates may be delayed or unsuccessful. Furthermore, the Foodand Drug Administration, or the FDA, may inspect some of our clinicalinvestigational sites, our collaborators’ records and our facility and files todetermine if the clinical trials were conducted according to good clinicalpractices. If the FDA determines that the trials were not in compliance, we maybe required to repeat the clinical trials.

 

**If our future products are not accepted bythe market, we are not likely to generate significant revenues or becomeprofitable.**

 

Even if we obtain regulatory approval to market products inthe future, they may not gain market acceptance among physicians, patients,healthcare payors and the medical community. The degree of market acceptance ofany pharmaceutical product that we 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 not recommend therapies using our productsuntil clinical data or other factors demonstrate their safety and efficacy ascompared to other drugs or treatments. Even if the clinical safety and efficacyof therapies using our products is established, physicians may elect not torecommend the therapies for a number of other reasons, including whether themode of administration of our products is effective for certain indications.For example, many antibiotic or antifungal products are typically administeredby infusion or injection, which requires substantial cost and inconvenience topatients. Our product candidates, if successfully developed, will compete witha number of drugs and therapies manufactured and marketed by majorpharmaceutical and other biotechnology companies. Our products may also competewith new products currently under development or developed by others in thefuture. Physicians, patients, third-party payors and the medical community maynot accept and utilize any product candidates that we or our collaboratorsdevelop. If our products do not achieve significant market acceptance, we arenot likely to generate significant revenues or become profitable.

 

**If we are unable to attract and retain keyemployees and consultants, we will be unable to develop and commercialize ourproducts.**

 

We are highly dependent on the principal members of ourscientific and management staff. In addition, we have depended to date on thirdparties to perform significant management functions. In order to pursue ourproduct development, marketing and commercialization plans, we may need to hireadditional personnel with experience in clinical testing, governmentregulation, manufacturing, marketing and finance. We may

 

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not be able to attract and retain personnel on acceptableterms given 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 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 on members of our scientific andclinical advisory boards and other consultants to assist us in formulating ourresearch and development strategy. All of our consultants and the members ofour scientific and clinical advisory boards are employed by other entities, andthey may have commitments to, or advisory or consulting agreements with, otherentities that may limit their availability to us. If we lose the services ofthese advisors, the achievement of our development objectives may be impeded,and our business, financial condition and results of operations may be harmed.In addition, except for work performed specifically for and at our direction,the inventions or processes discovered by our scientific and clinical advisoryboard members and other consultants will not become our intellectual property,but will be the intellectual property of the individuals or their institutions.If we desire access to these inventions, we will be required to obtainappropriate licenses from the owners. We cannot assure you that we will be ableto obtain such licenses on favorable terms 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 own manufacturing facilities to produceour product candidates and anticipate that we will continue to rely on thirdparties to manufacture our product candidates and our products. Our contractmanufacturers have a limited number of facilities in which our productcandidates can be produced. These manufacturers have limited experience inmanufacturing anidulafungin and dalbavancin in quantities sufficient forconducting clinical trials or for commercialization.

 

Contract manufacturers often encounter difficulties inscaling up production, including problems involving production yields, qualitycontrol and assurance, shortage of qualified personnel, compliance with FDA andother regulations, production costs, and development of advanced manufacturingtechniques and process controls. Our contract manufacturers may not perform asagreed or may not remain in the contract manufacturing business for the timerequired by us to successfully produce and market our product candidates. Ifour contract manufacturers fail to perform satisfactorily under our agreementswith them, including failing to deliver the required quantities of our productcandidates for clinical use on a timely basis and at commercially reasonableprices, and if we fail to find a replacement manufacturer or develop our ownmanufacturing capabilities, clinical trials involving our product candidates,or commercialization of our products, could be delayed.

 

**If we fail to establish successful marketingand sales capabilities or fail to enter into successful marketing arrangementswith third parties, we would not be able to commercialize our products and wewould not become profitable.**

 

We intend to sell a portion of our products through our ownsales force. We currently have no sales and marketing infrastructure and haveno experience in direct marketing, sales and distribution. Our futureprofitability will depend in part on our ability to develop a direct sales andmarketing force to sell our future products to our customers. We may not beable to attract and retain qualified salespeople or be able to build anefficient and effective sales and marketing force. To the extent that we enterinto marketing and sales arrangements with other companies, our revenues willdepend on the efforts of others. These efforts may not be successful. If we areunable to enter into third-party arrangements, then we must substantiallyexpand our marketing and sales force in order to achieve commercial success forcertain products, and compete with other companies that have experienced andwell-funded marketing and sales operations.

 

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**If circumstances require us to obtainadditional funding, we may be forced to delay or curtail the development of ourproduct candidates.**

 

We expect to incur increasing research and development andgeneral and administrative expenses over the next several years. Ourrequirements for additional capital may be substantial and will depend on manyfactors, some of which are beyond our control, including:

 

•                  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 capital resources are insufficient to meetfuture capital requirements, we will have to raise additional funds to continuethe development of our product candidates. Other than with respect to ourexisting line of credit for equipment financing, we have no committed sourcesof additional capital. We cannot assure you that funds will be available to uson favorable terms, if at all. To the extent that additional capital is raisedthrough the sale of equity or convertible debt securities, the securities couldbe sold at a discount to prevailing market price and the issuance of thosesecurities could result in dilution to our stockholders. Moreover, theincurrence of debt financing could result in a substantial portion of ouroperating cash flow being dedicated to the payment of principal and interest onsuch indebtedness, and we may be subject to restrictive covenants as a resultof such debt financing. This could render us more vulnerable to competitivepressures and economic downturns and could impose restrictions on ouroperations. If adequate funds are not available, we may be required to delay,reduce the scope of, or eliminate one or more of our research and development programsor otherwise significantly curtail operations, obtain funds by entering intoarrangements with collaborators on unattractive terms or relinquish rights tocertain technologies or drug candidates that we would not otherwise relinquishin order to continue independent operations. Our inability to raise capitalwould harm our business, financial condition and results of operations.

 

**If we consummate any acquisitions, such asthe proposed merger with Biosearch, we will incur a variety of costs and may neverrealize the anticipated benefits.**

 

Ifappropriate opportunities become available, we may attempt to acquire products,product candidates or businesses that we believe are a strategic fit with ourbusiness. We have recently entered intoan agreement and plan of merger with Biosearch whereby it is contemplated thatBiosearch will merge with and into Versicor. The process of negotiatingthe proposed merger withBiosearch and, assuming the consummation of the merger, integrating Biosearch’s products, product candidates or business has and may continue to result in operating difficulties and transaction costs and requiresignificant management attention that would otherwise be available for ongoingdevelopment of our business. Some ofthese transaction costs include financial advisors, printing, distribution,legal and accounting fees and severance payments, certain of which will beincurred whether or not the proposed merger is consummated. Similar risks mayarise in connection with other acquisitions that we may pursue in thefuture.  We may never realize theanticipated benefits of any theproposed merger with Biosearch or any other acquisition. Futureacquisitions could result in potentially dilutive issuances of equitysecurities, as in the case with the proposedmerger with Biosearch, the incurrence of debt, contingent liabilitiesand/or impairment expenses related to goodwill and impairment or amortizationexpenses related to other intangible assets, which could harm our business,financial condition and results of operations.

 

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**If the proposed merger with Biosearch does not occur, we mayincur payment obligations to Biosearch.**

 

If theagreement and plan of merger with Biosearch is terminated under certain circumstances,we may be required to pay Biosearch a $6 million break-up fee.  If the agreement and plan of merger isterminated in certain other circumstances, we may be obligated to payBiosearch’s expenses incurred in connection with the proposed merger, which maybe substantial.

 

**If our use of hazardous materials results incontamination or injury, we could suffer significant financial loss.**

 

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

** **

**Risks Related to Operating in Our Industry**

 

**If 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 candidates under development are subject toextensive and rigorous domestic government regulation. The FDA regulates, amongother things, the development, testing, manufacture, safety, efficacy,record-keeping, labeling, storage, approval, advertising, promotion, sale anddistribution of pharmaceutical products. If our products are marketed abroad,they will also be subject to extensive regulation by foreign governments. Wemust provide the FDA and foreign regulatory authorities with clinical data thatdemonstrate our products’ safety and efficacy in humans before they can beapproved for commercial sale. None of our product candidates has been approvedfor sale in the United States or any foreign market, and we cannot predictwhether regulatory clearance will be obtained for any product that we aredeveloping or hope to develop. The regulatory review and approval process takesmany years, is dependent upon the type, complexity and novelty of the product,requires the expenditure of substantial resources, involves post-marketingsurveillance, and may involve ongoing requirements for post-marketing studies.Delays in obtaining regulatory approvals 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 applicable FDA and other regulatoryrequirements at any stage during the regulatory process, we may be subject tosanctions, 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

 

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•                  fines,civil penalties and criminal prosecutions.

We expect to file INDs and generally direct the regulatoryapproval process for proprietary products we develop, and we expect to rely onour collaborators to generally direct the regulatory approval process for ourcollaboration products. Our collaborators may not be able to conduct clinicaltesting or obtain necessary approvals from the FDA or other regulatoryauthorities for any product candidates. In addition, 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 contract manufacturers also are required to complywith the applicable FDA current Good Manufacturing Practice regulations. GoodManufacturing Practice regulations include requirements relating to qualitycontrol and quality assurance as well as the corresponding maintenance ofrecords and documentation. Manufacturing facilities are subject to inspectionby the FDA. These facilities must be approved before we can use them incommercial manufacturing of our products. We or our contract manufacturers maynot be able to comply with the applicable Good Manufacturing Practicerequirements and other FDA regulatory requirements. If we or our contractmanufacturers fail to comply, we could be subject to fines or other sanctions,or be precluded from marketing our products.

 

Outside the United States, the ability to market a product iscontingent upon receiving a marketing authorization from the appropriateregulatory authorities. This foreign regulatory approval process typicallyincludes all of the risks associated with FDA clearance described above and mayinclude additional risks.

 

**If we do not compete successfully in thedevelopment and commercialization of products and keep pace with rapidtechnological change, we will be unable to capture and sustain a meaningfulmarket position.**

 

The biotechnology and pharmaceutical industries are highlycompetitive and subject to significant and rapid technological change asresearchers learn more about diseases and develop new technologies fortreatment. Our competitors in the United States and elsewhere are numerous andinclude, among others, major multinational pharmaceutical and chemicalcompanies, specialized biotechnology firms and universities and other researchinstitutions. 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 companies are addressing the same diseases anddisease indications as we, or our collaborators, are addressing. Many of thesecompanies and institutions, either alone or together with their collaborators,have substantially greater financial resources and larger research anddevelopment staffs than we do. In addition, many of these competitors, eitheralone or together with their collaborators, have significantly greaterexperience than we do in developing, manufacturing and marketing products.Developments by others may render our product candidates or technologiesobsolete or noncompetitive. We face and will continue to face intensecompetition from other companies for collaborative arrangements with pharmaceuticaland biotechnology companies for establishing relationships with academic andresearch institutions, and for licenses of proprietary technology. Thesecompetitors, either alone or with their collaborators, may succeed indeveloping technologies or products that are more effective, less expensive,have fewer side effects or are easier to administer than ours. In addition,some of our competitors have greater experience than us in conductingpreclinical and human clinical trials and obtaining FDA and other regulatoryapprovals. Accordingly, our competitors may succeed in obtaining

 

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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 collaborators, will obtain regulatory approval in the United States orelsewhere or will be able to compete successfully with our competitors’existing products or products under development.

 

**If our intellectual property rights do notadequately protect our product candidates, others could compete against us moredirectly, which would hurt our business.**

 

Our success depends in part 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 protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietaryrights are covered by valid and enforceable patents or are effectivelymaintained as trade secrets. The patent position of biopharmaceutical companiesinvolves complex legal and factual questions, and, therefore, we cannot predictwith certainty whether they will be enforceable. Patents, if issued, may bechallenged, invalidated or circumvented. Thus, any patents that we own orlicense from third parties may not provide any protection against competitors.Our pending patent applications, those we may file in the future, or those wemay license from third parties, may not result in patents being issued. Also,patent rights may not provide us with adequate proprietary protection orcompetitive advantages against competitors with similar technologies. The lawsof certain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

In addition to patents, we rely on trade secrets andproprietary know-how. We seek protection, in part, through confidentiality andproprietary information agreements. These agreements may not provide meaningfulprotection or adequate remedies for our technology in the event of unauthorizeduse or disclosure of confidential and proprietary information. Failure toprotect our proprietary rights could seriously impair our competitive positionand harm our business.

 

**If third parties claim we are infringingtheir intellectual property rights, we could suffer significant litigation orlicensing expenses or be prevented from marketing our products.**

 

Research has been conducted for many years in the areas inwhich we have focused our research and development efforts. This has resultedin a substantial number of issued patents and an even larger number ofstill-pending patent applications. Patent applications in the United Statesare, in most cases, maintained in secrecy until patents are issued. Thepublication of discoveries in the scientific or patent literature frequentlyoccurs substantially later than the date on which the underlying discoverieswere made. Our commercial success depends significantly on our ability tooperate without infringing the patents and other proprietary rights of thirdparties. Our technologies may infringe the patents or violate other proprietaryrights of third parties. In the event an infringement claim is brought againstus, we may be required to pay legal and other expenses to defend such claimand, if we are unsuccessful, we and our collaborators may be prevented frompursuing product development and commercialization and may be subject to damageawards.

 

The biotechnology and pharmaceutical industries have beencharacterized by extensive litigation regarding patents and other intellectualproperty rights. The defense and prosecution of intellectual property suits,

 

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United States Patent and Trademark Office interferenceproceedings and related legal and administrative proceedings in the UnitedStates and internationally involve complex legal and factual questions. As aresult, such proceedings are costly and time-consuming to pursue and theiroutcome is uncertain. Litigation may be necessary to:

 

•                  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 in any litigation, interference orother administrative proceedings, we will incur substantial expense and theefforts of our technical and management personnel will be significantlydiverted. An adverse determination may subject us to loss of our proprietaryposition or to significant liabilities, or require us to seek licenses that maynot be available from third parties. We may be restricted or prevented frommanufacturing and selling our products, if any, in the event of an adversedetermination in a judicial or administrative proceeding or if we fail toobtain necessary licenses. Costs associated with these arrangements may besubstantial and may include ongoing royalties. Furthermore, we may not be ableto obtain the necessary licenses on satisfactory terms, if at all.

 

**If the government and third-party payorsfail to provide adequate coverage and reimbursement rates for our productcandidates, our revenues and prospects for profitability will be harmed.**

 

In both domestic and foreign markets, sales of our productcandidates will depend in part upon the availability of reimbursement fromthird-party payors. Such third-party payors include government healthadministration authorities, managed care providers, private health insurers andother organizations. These third-party payors are increasingly challenging theprice, and examining the cost effectiveness, of medical products and services.In addition, significant uncertainty exists as to the reimbursement status ofnewly approved healthcare products. We may need to conduct post-marketingstudies in order to demonstrate the cost-effectiveness of our products. Suchstudies may require us to commit a significant amount of management time andfinancial and other resources. Our product candidates may not ultimately beconsidered cost-effective. Adequate third-party reimbursement may not beavailable to enable us to maintain price levels sufficient to realize anappropriate return on our investment in product development. Domestic andforeign governments continue to propose and pass legislation designed to reducethe cost of healthcare. For example, in some foreign markets, the governmentcontrols prescription pharmaceuticals’ pricing and profitability. In the UnitedStates, we expect that there will continue to be federal and state proposals toimplement similar governmental control. In addition, increasing emphasis onmanaged care in the United States will continue to put pressure onpharmaceutical product pricing. Cost control initiatives could decrease theprice that we would receive for any products in the future, which would limitour revenues and profitability. Accordingly, legislation and regulationsaffecting the pricing of pharmaceuticals may change before our proposedproducts are approved for marketing. Adoption of such legislation could furtherlimit 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 our product candidates in clinical trials,and the sale of any approved products, may expose us to product liabilityclaims. We have obtained limited product liability insurance coverage for ourclinical trials. Our product liability insurance coverage limits are $10million per occurrence and $10 million in the aggregate. Such insurancecoverage may not protect us against all of the claims to which we may becomesubject. We may not be able to maintain adequate insurance coverage at areasonable cost or in sufficient amounts or scope to protect us againstpotential losses. In the event a claim is brought against us, we may berequired to pay legal and other expenses to defend the claim, as well asuncovered damage awards resulting from a claim brought successfully against us.Furthermore, whether or not we are ultimately successful in defending any suchclaims, we may be required to direct financial and managerial resources to suchdefense and adverse publicity could result, all of which could harm our business.

 

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**RisksRelated to Ownership of Our Stock**

** **

**Ourstock price has been and is likely to continue to be volatile, and yourinvestment could suffer a decline in value.**

 

The trading price of our common stock is likely to be highlyvolatile and could be subject to wide fluctuations in price in response tovarious factors, many of which are beyond our 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 stock market in general, and the NasdaqNational Market and the market for biotechnology stocks in particular, haveexperienced significant price and volume fluctuations. Volatility in the marketprice for particular companies has often been unrelated or disproportionate tothe operating performance of those companies. Further, there has beenparticular volatility in the market prices of securities of biotechnology andpharmaceutical companies. These broad market and industry factors may seriouslyharm the market price of our common stock, regardless of our operatingperformance. In addition, securities class action litigation has often beeninitiated following periods of volatility in the market price of a company’ssecurities. A securities class action suit against us could result insubstantial costs, potential liabilities and the diversion of management’sattention 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 restated certificate of incorporation andour amended and restated bylaws could make it more difficult for a third-partyto acquire us, even if doing so would be beneficial to our stockholders. Theseprovisions 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 ashareholder rights plan in which preferred stock purchase rights weredistributed to our common stockholders as a dividend. These provisions may makeit more difficult for stockholders to take corporate actions and may have theeffect of delaying or preventing a change in control. We are also subject tothe anti-takeover provisions of Section 203 of the Delaware General CorporationLaw. Subject to specified exceptions, this section provides that a corporationmay not engage in any business combination with any interested stockholderduring the three-year period following the time that such stockholder becomesan interested stockholder. This provision could have the effect of delaying orpreventing a change in our control. The foregoing factors could also limit theprice that investors or an acquirer might be willing to pay in the future forshares 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 our available cash resources will besufficient to fund our operating losses for at least the next two years.  In the future, we may not have any bankcredit facility or other working capital credit line under which we may borrowfunds for working capital or other general corporate purposes.  If our plans or assumptions change or areinaccurate, we may need to seek capital sooner than anticipated.  We may seek to raise any funds we needthrough public or private debt or equity offerings.  Additional equity financing may be dilutive to the holders of ourcommon stock.  If we obtain fundsthrough a bank credit facility or through issuance of debt securities orpreferred shares, this indebtedness or preferred shares would have rightssenior to the rights of holders of our common stock, and their terms couldimpose significant restrictions on our operations.  If we need to raise additional funds, we may not be able to do soon favorable terms, or at all.  If wecannot obtain adequate funds on acceptable terms, we may not be able to carryout our business strategy.

 

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

 

Our stockholders hold a substantial number ofshares of our common stock which they are able to sell in the public markettoday.  Sales of shares of our commonstock, or the perception that these sales could occur, could materially andadversely affect the market price of our common stock and impair our ability toraise capital through the sale of additional equity securities.

 

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**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT 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 |   | $        | 61,873 |     | $      | — |   |
| Average interest rate     |   | 1.86     | %      | —   |   |
|                      |   |     |   |     |   |
| Marketable securities     |   | $        | 14,837 |     | $      | 8,398 |   |
| Average interest rate     |   | 2.22     | %      | 2.51     | %      |

 

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 financialinstruments.

 

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****.  LEGAL PROCEEDINGS**

 

We are not a party to any significant legalproceedings.

 

# **ITEM 2.** CHANGES IN SECURITIES AND USEOF PROCEEDS

 

On August 8, 2000 we sold 4,600,000 shares ofcommon stock at $11 per share in an initial public offering and on September 7,2000, the underwriters executed an overallotment option and purchased anadditional 690,000 shares of common stock at $11.  We received net proceeds from the initial public offering and theoverallotment of approximately $52.7 million. The net proceeds are being used for the clinical development of our twoproduct candidates, anidulafungin and dalbavancin, as well as for generalcorporate and working capital purposes.

 

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 Section 4(2) of, andRule 506 of Regulation D under, the Securities Act.  We subsequently registered the resale of those shares with theSEC.

 

**ITEM 3.**** DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

# **ITEM 4**. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

On June 16,2002, we held our Annual Meeting of Stockholders for the purpose of voting on:

 

1.               The re-electionof James H. Cavanaugh, Ph.D. to the Board of Directors; and

2.               Ratification ofthe appointment of PricewaterhouseCoopers LLP as independent accountants for2002.

 

The stockholders approved both matters, with the following votes castwith respect to each proposal:

 

1.               Election of James H. Cavanaugh, Ph.D. to theBoard of Directors:

 

| **Shares Voted For** |   | **Shares  Voted Against** |   | **Shares  Withheld and  Broker Non-Votes** |   |
|----------------------|--------|---------------------------|--------|--------------------------------------------|--------|
| 15,757,415           |   | —                    |   | 218,224                                    |   |

 

2.               Ratification of the appointment of PricewaterhouseCoopersLLP as independent accountants for 2002:

 

| **Shares Voted For** |   | **Shares  Voted Against** |   | **Shares  Withheld and  Broker Non-Votes** |   |
|----------------------|--------|---------------------------|--------|--------------------------------------------|--------|
| 15,936,459           |   | 39,180                    |   | —                                     |   |

 

The following directors'terms are continuing:

 

David V. Milligan, Ph.D.

George F. Horner III

Christopher T. Walsh, Ph.D.

Mark Leschly

Timothy J. Barberich

 

The Merger Agreement contemplates that certain directors will resignjust prior to the closing.

# ** **

# **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 byreference in this Quarterly Report.

 

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*Reports on Form 8-K*

 

On April 10, 2002, we filed a Form 8-K dated April 3, 2002 reportingunder Item 5, “Other Events”, our completion of a private placement of2,993,800 shares of our common stock to selected institutional investors forgross proceeds of $44.9 million and the resignation of Lori F. Rafield, Ph.D.,a representative of a group of our venture investors, from our Board ofDirectors.

 

 

 

 

 

 

 

 

 

 

 

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 
|                | **VERSICOR  INC.**                                                                                |
|---------------------|---------------------------------------------------------------------------------------------------|
|                |                                                                                              |
| Date: July 31, 2002 | /s/ GEORGE F. HORNER III                                                                          |
|                | George F. Horner III                                                                              |
|                | President and  Chief Executive Officer(Principal Executive Officer)                               |
|                |
|                |                                                                                              |
| Date: July 31, 2002 | /s/ DOV A. GOLDSTEIN, M.D.                                                                        |
|                | Dov A. Goldstein, M.D.                                                                            |
|                | Vice President, Finance and  Chief FinancialOfficer (Principal  Financial and Accounting Officer) |
|                |

 

 

 

**CERTIFICATION UNDER SECTION 906OF THE SARBANES-OXLEY ACT OF 2002**

 

 

Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersignedcertifies that this periodic report fully complies with the requirements ofsection 13(a) or 15(d) of the Securities Exchange Act of 1934 and thatinformation contained in this periodic report fairly presents, in all materialrespects, the financial condition and results of operations of Versicor Inc.

 
|   | /s/ GEORGE F. HORNER III                            |
|--------|-----------------------------------------------------|
|   | George F. Horner III                                |
|   | President and  Chief Executive Officer              |
|   |
|   |                                                |
|   | /s/ DOV A. GOLDSTEIN, M.D.                          |
|   | Dov A. Goldstein, M.D.                              |
|   | Vice President, Finance and  Chief FinancialOfficer |
|   |

 

 

 

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**EXHIBITINDEX**

 

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

 

Thefollowing exhibits are part of this Quarterly Report on Form 10-Q (and arenumbered in accordance with Item 601 of Regulation 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)                                                              |
| 4.6     |   | Registration Rights Agreement dated as of April 8,  2002(3)                                                            |

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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.

(3)                                  Previously filed as anexhibit to the Company’s current report on Form 8-K filed with the SEC on April10, 2002, and incorporated herein by reference.

 

 

 

 

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