GUILFORD PHARMACEUTICALS INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2005

Commission file number: 0-23736

GUILFORD PHARMACEUTICALS INC.

(Exact name of Registrant as specified in its charter)


Delaware		52-1841960
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

6611 Tributary Street Baltimore, Maryland (Address of principal executive offices)		21224 (Zip Code)

(410) 631-6300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding May 2, 2005


Common Stock, $0.01 par value		46,512,873

TABLE OF CONTENTS


			Page

PART I
	Item 1 Financial Statements			4
		Consolidated Balance Sheets		5
		Consolidated Statements of Operations		6
		Consolidated Statements of Cash Flows		7
		Consolidated Statement of Changes in Stockholders’ Equity (Deficit)		8
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
	Item 3 Quantitative and Qualitative Disclosure About Market Risk			29
	Item 4 Controls and Procedures			30

PART II
	Item 1 Legal Proceedings			31
	Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			31
	Item 3 Defaults Upon Senior Securities			31
	Item 4 Submission of Matters to a Vote of Security Holders			31
	Item 5 Other Information			31
	Item 6 Exhibits			51
	Signatures			52

FORWARD LOOKING STATEMENTS

From time to time in this interim quarterly report we may make statements that reflect our current expectations regarding our future results of operations, economic performance, and financial condition, as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as “anticipate,” “believe,” “expect,” estimate,” and similar expressions.

All of these items involve significant risks and uncertainties. These and any of the other statements we make in this quarterly report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in the forward-looking statements.

We discuss some factors that could cause or contribute to such differences in the “Risk Factors” section of this quarterly report. In addition, any forward-looking statements we make in this document speak only as of the date of this document, and we do not intend to update any such forward-looking statements to reflect events or circumstances that occur after that date.

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements.*

The consolidated financial statements included in this report have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and the related notes included in our annual report on Form 10-K for the year ended December 31, 2004.

In the opinion of our management, any adjustments contained in the accompanying unaudited consolidated financial statements as of and for the quarter ended March 31, 2005 (or Unaudited Consolidated Financial Statements) are of a normal recurring nature, necessary to present fairly our financial position, results of operations, cash flows and changes in stockholders’ equity. Interim results are not necessarily indicative of results for the full fiscal year.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)


			March 31,			December 31,
			2005			2004

			(Unaudited)
ASSETS
Cash and cash equivalents			$	40,068		$	61,889
Marketable securities				28,416			27,705
Investments — held by Symphony Neuro Development Company				26,934			32,062
Accounts receivable, net				4,752			4,666
Inventories				2,775			2,373
Prepaid expenses and other current assets				4,123			4,744

	Total current assets			107,068			133,439
Investments — restricted				2,587			19,899
Property and equipment, net				1,643			1,758
Intangibles, net				43,204			75,943
Other assets				5,642			6,096

	Total assets		$	160,144		$	237,135


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable			$	10,042		$	15,333
Current portion of long-term debt				1,917			2,916
Accrued payroll related costs				3,721			2,932
Accrued contracted services				6,227			3,929
Accrued expenses and other current liabilities				4,980			6,355

	Total current liabilities			26,887			31,465
Long-term debt, excluding current portion				70,856			87,393
Revenue interest obligation				45,406			44,932
Other liabilities				8,171			8,320

	Total liabilities			151,320			172,110

Minority interest				24,873			28,132
Commitments and contingencies				—			—
Stockholders’ equity (deficit):
	Preferred stock, par value $0.01 per share; authorized 4,700,000 shares, none issued			—			—
	Series A junior participating preferred stock, par value $0.01 per share; authorized 300,000 shares, none issued			—			—
	Common stock, par value $0.01 per share; authorized 125,000,000 shares, 46,638,788 and 46,638,788 issued			466			466
	Additional paid-in capital			435,841			435,130
	Accumulated deficit			(445,960	)		(391,416	)
	Accumulated other comprehensive loss			(1,580	)		(2,130	)
	Unearned compensation			(3,870	)		(3,653	)
	Treasury stock, at cost; 191,081 and 304,336 shares			(946	)		(1,504	)

		Total stockholders’ equity (deficit)		(16,049	)		36,893

	Total liabilities and stockholders’ equity (deficit)		$	160,144		$	237,135

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands, except per share data)


			Quarter Ended March 31,

			2005			2004

Revenue:
	Net product revenue		$	10,503		$	8,727
	Revenue from license fees, milestones and other			233			201

		Total revenue		10,736			8,928

Costs and expenses:
	Cost of sales			985			991
	Research and development			16,025			9,373
	Selling, general and administrative			14,861			11,747
	Intangible amortization			1,713			1,722
	Impairment of long-lived assets			31,025			—

		Total costs and expenses		64,609			23,833

Operating loss				(53,873	)		(14,905	)
Other income/(expenses):
		Investment and other income		120			478
		Revenue interest expense		(2,096	)		(2,335	)
		Interest expense		(1,233	)		(1,306	)

Loss before minority interest				(57,082	)		(18,068	)
	Minority interest			2,538			—

Net loss			$	(54,544	)	$	(18,068	)

Basic and diluted loss per common share			$	(1.19	)	$	(0.53	)

Weighted-average shares used to calculate basic and diluted loss per share				45,930			33,921

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)


				Quarter Ended March 31,

				2005			2004

Cash Flows From Operating Activities:
	Net loss			$	(54,544	)	$	(18,068	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Impairment of long-lived assets			31,025			—
		Depreciation and amortization			2,357			3,282
		Minority interest			(2,538	)		—
		Non-cash imputed revenue interest expense			428			729
		Non-cash compensation expense			733			85
		Loss on termination of swap agreement			524			—
		Loss on sale of marketable securities			255			19
	Changes in assets and liabilities:
		Accounts receivable			(86	)		(993	)
		Prepaid expenses and other current assets and other assets			716			(581	)
		Inventories			(402	)		(320	)
		Accounts payable and other liabilities			(3,919	)		(4,037	)

			Net cash used in operating activities		(25,451	)		(19,884	)

Cash Flows From Investing Activities:
	Proceeds from sale of investments held by SNDC				5,128			—
	Proceeds from maturities and sales of available-for-sale securities				20,494			14,165
	Purchases of available-for-sale securities				(4,060	)		(11,684	)

			Net cash flows from investing activities		21,562			2,481

Cash Flows From Financing Activities:
	Principal payments on debt and revenue interest obligation				(17,629	)		(795	)
	Payment to terminate swap agreement				(622	)		—
	Proceeds from sale of treasury stock				319			159
	Net proceeds from issuances of common stock				—			171

			Net cash flows used in financing activities		(17,932	)		(465	)

Net decrease in cash and cash equivalents					(21,821	)		(17,868	)
Cash and cash equivalents at the beginning of year					61,889			29,939

Cash and cash equivalents at the end of year				$	40,068		$	12,071

Supplemental cash flow data:
	Net interest paid			$	3,441		$	3,665
	Stock distributed to 401(k) and ESP plans				439			159
	Non-cash investing and financing activities:
		Capital lease obligations			93			150

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

($ in thousands, except share data)

(unaudited)


														Accumulated
				Common Stock										Other									Total
								Additional						Comprehensive						Treasury			Stockholders’
				Number of				Paid-In			Accumulated			Income			Unearned			Stock, at			Equity
				Shares		Amount		Capital			Deficit			(Loss)			Compensation			Cost			(Deficit)

Balance, December 31, 2004					46,638,788	$	466	$	435,130		$	(391,416	)	$	(2,130	)	$	(3,653	)	$	(1,504	)	$	36,893
Comprehensive gain (loss):
	Net loss											(54,544	)											(54,544	)
	Other comprehensive gain:
		Recognition of loss on termination of swap agreement													524									524
		Unrealized gain on interest rate swap agreements													10									10
		Unrealized gain on available-for-sale securities													16									16

			Total other comprehensive gain																					550

Total comprehensive loss																								(53,994	)

Amortization of unearned compensation																		560						560
Exercise of stock options (10,402 shares)									(13	)											51			38
Issuance of restricted stock units									777									(777	)					—
Distribution of 31,053 shares to 401(k) plan									5												153			158
Distribution of 68,697 shares to ESP plan									(58	)											339			281
Distribution of 3,103 shares to consultant																					15			15

Balance, March 31, 2005 (unaudited)					46,638,788	$	466	$	435,841		$	(445,960	)	$	(1,580	)	$	(3,870	)	$	(946	)	$	(16,049	)

See accompanying notes to consolidated financial statements.

GUILFORD PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Description of Business

Guilford Pharmaceuticals Inc. (together with its subsidiaries, Guilford or the Company) is a pharmaceutical company located in Baltimore, Maryland, engaged in the research, development and commercialization of proprietary pharmaceutical products that target the hospital and neurology markets.


2.	Summary of Significant Accounting Policies and Practices

Basis of Presentation

The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and to disclose contingent assets and liabilities as of the dates of such financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Interest Obligation

The Company has entered into a Revenue Interest Assignment Agreement (or Revenue Agreement) with Paul Royalty Fund, L.P. and certain of its affiliated entities (collectively, PRF), pursuant to which PRF is entitled to receive revenue interest payments based on our sales of certain of the Company’s existing and future products. The Company recorded its revenue interest obligation as debt due to the Company’s significant continuing involvement in the generation of cash flows due to PRF. The Company amortizes the revenue interest obligation under the effective interest method and utilizes an imputed interest rate equivalent to PRF’s projected internal rate of return based on estimated future revenue interest obligation payments. Revenue interest obligation payments made to PRF reduce the future obligation.

Revenue Recognition

Revenue from sales of GLIADEL® Wafer (or Gliadel) and AGGRASTAT® Injection (or Aggrastat) is recognized when all four of the following criteria are met:


	•	the Company has persuasive evidence that an arrangement exists;

	•	price is fixed and determinable;

	•	title has passed; and

	•	collection is reasonably assured.

The Company records its revenue net of provisions for returns, chargebacks and discounts, which are established at the time of sale. The Company’s credit and exchange policy includes provisions for return of any product that has expired or was damaged in shipment. The Company’s historical return rate is applied to its unit sales to provide an allowance for future product returns. The product return rate is periodically updated to reflect actual experience.

Product demand by distributors and wholesalers during a given period may not correlate with prescription demand for the product in the period. As a result, the Company periodically evaluates the specialty distributor’s and wholesalers’ inventory positions. If such evaluation causes the Company to believe that these

levels are too high based on prescription demand, then until these levels are reduced to acceptable levels the Company will:


	•	not accept purchase orders from the distributor or not ship additional products, and

	•	defer recognition of revenue if the Company determines there is excess channel inventory for the product.

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Principals Board Opinion No. 25 (or APB 25) and recognizes compensation costs attributable to stock option and similar plans based on any excess of the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock.

Statement of Financial Accounting Standards (or SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (or SFAS 148), which amended SFAS 123, “Accounting for Stock-Based Compensation,” (or SFAS 123) requires companies to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS 148 have been incorporated herein.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:


		Quarter Ended March 31,

		2005			2004
($ in thousands, except per share data)
Net loss, as reported		$	(54,544	)	$	(18,068	)
	Add: Stock-based employee compensation expense included in reported net loss		560