BIOCRYST PHARMACEUTICALS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004

|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from _______ to _______.

Commission File Number 000-23186

BIOCRYST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE		62-1413174
(State of other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

2190 Parkway Lake Drive; Birmingham, Alabama 35244
(Address of principal executive offices)

(205) 444-4600
(Registrant’s telephone number, including area code)

NONE
(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 21,727,564 shares of the Company’s Common Stock, $.01 par value, were outstanding as of October 31, 2004.

BIOCRYST PHARMACEUTICALS, INC.

INDEX

	Part I. Financial Information	Page No.

Item 1.	Financial Statements:
	Condensed Balance Sheets – September 30, 2004 and December 31, 2003	2
	Condensed Statements of Operations - Three and Nine Months Ended September 30, 2004 and 2003	3
	Condensed Statements of Cash Flows – Nine Months Ended September 30, 2004 and 2003	4
	Notes to Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	21
	Part II. Other Information
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
	Signatures	24

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIOCRYST PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
September 30, 2004 and December 31, 2003
(In thousands, except per share data)

			2004 (Unaudited)			2003 (Note 1)


Assets
Cash and cash equivalents			$	13,809		$	11,941
Securities held-to-maturity				9,144			8,087
Prepaid expenses and other current assets				571			676

		Total current assets		23,524			20,704
Securities held-to-maturity				11,171			5,704
Furniture and equipment, net				2,948			3,508
Patents				242			179

		Total assets	$	37,885		$	30,095


Liabilities and Stockholders’ Equity
Accounts payable			$	2,024		$	640
Accrued expenses				1,244			708

		Total current liabilities		3,268			1,348
Deferred revenue				300			300
Stockholders’ equity:
	Preferred stock: shares authorized – 5,000
		Series A Convertible Preferred stock, $.01 par value; shares authorized – 1,800; shares issued and outstanding – none
		Series B Junior Participating Preferred Stock, $.001 par value; shares authorized – 21.5; shares issued and outstanding - none
	Common stock, $.01 par value; shares authorized - 45,000; shares issued and outstanding - 21,728 in 2004 and 17,871 in 2003			217			179
	Additional paid-in capital			154,575			132,928
	Accumulated deficit			(120,475	)		(104,660	)

		Total stockholders’ equity		34,317			28,447

		Total liabilities and stockholders’ equity	$	37,885		$	30,095

See accompanying notes to condensed financial statements.

BIOCRYST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Periods Ended September 30, 2004 and 2003
(In thousands, except per share)
(Unaudited)

		Three Months						Nine Months
		2004			2003			2004			2003

Revenues:
Collaborative and other research and development		$	116		$	0		$	159		$	0
Interest and other			154			222			509			796

	Total revenues		270			222			668			796


Expenses:
Research and development			4,838			3,105			14,168			8,559
General and administrative			728			526			2,315			1,687

	Total expenses		5,566			3,631			16,483			10,246


Net loss		$	(5,296	)	$	(3,409	)	$	(15,815	)	$	(9,450	)


Amounts per common share:
Net loss (Note 2)		$	(.24	)	$	(.19	)	$	(.75	)	$	(.53	)


Weighted average shares outstanding (Note 2)			21,706			17,685			20,973			17,671

See accompanying notes to condensed financial statements.

BIOCRYST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(In thousands)
(Unaudited)

		2004			2003

Operating activities:
Net loss		$	(15,815	)	$	(9,450	)
Depreciation and amortization			726			853
Non-monetary compensation			329			91
Changes in operating assets and liabilities, net			2,025			16

	Net cash used in operating activities		(12,735	)		(8,490	)


Investing activities:
Purchases of furniture and equipment			(166	)		(33	)
Purchases of patents and licenses			(63	)		(18	)
Purchases of marketable securities			(15,223	)		(11,574	)
Maturities of marketable securities			8,699			17,081

	Net cash (used in) provided by investing activities		(6,753	)		5,456


Financing activities:
Proceeds from sale of common stock			21,356			39

	Net cash provided by financing activities		21,356			39


Increase (decrease) in cash and cash equivalents			1,868			(2,995	)
Cash and cash equivalents at beginning of period			11,941			13,824

Cash and cash equivalents at end of period		$	13,809		$	10,829

See accompanying notes to condensed financial statements.

BIOCRYST PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Preparation

The condensed balance sheet as of September 30, 2004, the condensed statements of operations for the three months and nine months ended September 30, 2004 and 2003, and the statements of cash flows for the nine months ended September 30, 2004 and 2003 have been prepared by the Company in accordance with accounting principles generally accepted in the United States and have not been audited. Such financial statements reflect all adjustments that are, in management’s opinion, necessary to present fairly, in all material respects, the financial position at September 30, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003. There were no adjustments other than normal recurring adjustments. Preparing financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Examples include accrued clinical and preclinical expenses. Actual results may differ from these estimates.

These condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2003 and the notes thereto included in the Company’s 2003 Annual Report on Form 10-K. Interim operating results are not necessarily indicative of operating results for the full year. The condensed balance sheet as of December 31, 2003 has been derived from the audited financial statements included in the previously mentioned Annual Report.

Note 2. Net Loss Per Share

The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted loss per share includes common equivalent shares from unexercised stock options and common shares expected to be issued under the Company’s employee stock purchase plan. For all periods presented, diluted loss per share does not include the impact of potential common shares outstanding, as the impact of those shares is anti-dilutive.

Note 3. Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, the Company’s stock option and employee stock purchase plans qualify as non-compensatory plans. Under Financial Accounting Standards Board Interpretation 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25, outside directors are considered employees for purposes of applying APB No. 25, if they are elected by the stockholders. Consequently, no compensation expense for employees and directors is recognized unless there has been a modification to their grants as was the case for the directors in May 2004, resulting in a recognized expense of $290,000 in the quarter ending June 30, 2004. Stock issued to non-employees is compensatory and compensation expense is recognized under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“Statement No. 148”).

The following table illustrates the pro forma effect on net loss and net loss per share had the Company applied the fair value recognition provisions of Statement No. 123 for the three and nine month periods ended September 30, 2004 and 2003.

	Three Months Ended September 30						Nine Months Ended September 30

	2004			2003			2004			2003

Net loss as reported	$	(5,296	)	$	(3,409	)	$	(15,815	)	$	(9,450	)
Add: Stock-based employee compensation expense included in reported net loss		1			1			292			2
Stock-based employee compensation expense determined under Statement No. 123		(462	)		(440	)		(1,045	)		(191	)

Pro forma net loss	$	(5,757	)	$	(3,848	)	$	(16,568	)	$	(9,639	)


Amounts per common share:
Net loss per share, as reported	$	(.24	)	$	(.19	)	$	(.75	)	$	(.53	)
Pro forma net loss per share	$	(.27	)	$	(.22	)	$	(.79	)	$	(.55	)

On March 31, 2004, the FASB issued an Exposure Draft (“ED”), Share-Based Payment - An Amendment of FASB Statements No. 123 and 95. The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB No. 25, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined in the ED, and would be effective for public companies for fiscal years beginning after June 15, 2005. We are currently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

Note 4. Stockholders’ Equity

On February 4, 2004, the Company entered into a Placement Agency Agreement with Leerink Swann & Company in connection with a registered direct offering of 3,571,667 shares of its common stock at an offering price of $6.00 per share. The common stock was issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission pursuant to Rule 424(b)(2) of the Securities Act of 1933, as amended, in connection with a shelf takedown from the Company’s registration statement on Form S-3 (333-111226), filed on December 16, 2003, and which became effective on January 5, 2004.

On February 17, 2004, the Company entered into a Stock Purchase Agreement with Caduceus Private Investments II, LP, Caduceus Private Investments II (QP), LP and UBS Juniper Crossover Fund, L.L.C. As part of this agreement, Registrant has granted these investors the right to appoint a member to its board of directors effective as of the closing of the offering. On February 18, 2004, the Company announced it had completed a $21.4 million registered direct offering of 3,571,667 shares of its common stock to a group of institutional investors.

In addition to the 3,571,667 shares issued in the registered direct offering in February 2004, the Company issued an additional 45,641 shares during the three months ended September 30, 2004 as a result of exercises related to the Company’s stock option plan and employee stock purchase plan. For the nine months ended September 30, 2004, a total of 284,608 additional shares have been issued for both the stock option plan and the employee stock purchase plan.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Such statements are only predictions and the actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below as well as those discussed in other filings made by the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K.

Overview

Since our inception in 1986, we have been engaged in research and development activities and organizational efforts, including:

	•	identification and licensing of enzyme targets;

	•	drug discovery;

	•	structure-based design of drug candidates;

	•	small-scale synthesis of compounds;

	•	conducting preclinical studies and clinical trials;

	•	recruiting our scientific and management personnel;

	•	establishing laboratory facilities; and

	•	raising capital.

Our revenues have generally been limited to license fees, milestone payments, interest income, and collaboration research and development fees. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB No. 104. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. The Company has not received any revenues or royalties from the sale of licensed pharmaceutical products. It could be several years, if ever, before we will recognize significant revenue from royalties received pursuant to our license agreements or revenue directly from product sales. Future revenues, if any, are likely to fluctuate substantially from quarter to quarter.

We have incurred operating losses since our inception. Our accumulated deficit at September 30, 2004 was $120.5 million. We will require substantial expenditures relating to the development of our current and future drug candidates. During the three years ended December 31, 2003, we spent 34