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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
X Act of 1934 for the quarterly period ended March 31, 2001.
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or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
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COMMISSION FILE NO. 0-19222
GENELABS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3010150
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
505 PENOBSCOT DRIVE, REDWOOD CITY, 94063
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 369-9500
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 X No .
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There were 49,482,876 shares of the Registrant's Common Stock issued and
outstanding on May 7, 2001.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2001 2000
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(Unaudited)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 7,319 $ 11,646
Short-term investments 23,568 23,025
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Total cash, cash equivalents and short-term investments 30,887 34,671
Other current assets 221 478
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Total current assets 31,108 35,149
Property and equipment, net 1,561 1,459
Long-term investments 960 986
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$ 33,629 $ 37,594
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 1,684 $ 1,587
Accrued compensation and related expenses 946 1,387
Unearned contract revenue 3,000 3,417
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Total current liabilities 5,630 6,391
Accrued compensation 578 578
Unearned contract revenue 5,875 6,625
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Total liabilities 12,083 13,594
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Shareholders' equity:
Common stock 179,860 179,600
Accumulated deficit (158,461) (155,600)
Accumulated other comprehensive income 147 --
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Total shareholders' equity 21,546 24,000
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$ 33,629 $ 37,594
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See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
For the three months ended
March 31,
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2001 2000
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Contract revenue $ 1,504 $ 1,982
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Operating expenses:
Research and development 3,411 3,687
General and administrative 1,534 1,199
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Total operating expenses 4,945 4,886
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Operating loss (3,441) (2,904)
Interest income, net 580 72
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Net loss $ (2,861) $ (2,832)
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Net loss per share $ (0.06) $ (0.07)
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Weighted average shares outstanding 49,446 40,558
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See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
For the three months ended
March 31,
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2001 2000
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Cash flows from operating activities:
Net loss $ (2,861) $(2,832)
Adjustments to reconcile net loss to net cash
used in operating activities:
Other comprehensive income:
Unrealized gains on available-for-sale securities 147 --
Depreciation and amortization expense 166 135
Gains on sales of long-term investments (20) --
Non-employee equity awards 56 --
Changes in assets and liabilities:
Other current assets 257 193
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (344) (789)
Unearned contract revenue (1,167) (228)
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Net cash used in operating activities (3,766) (3,521)
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Cash flows from investing activities:
Purchases of short-term investments (6,140) --
Proceeds from sales and maturities of short-term investments 5,597 1,685
Capital expenditures (268) (196)
Other 46 51
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Net cash (used in) / provided by investing activities (765) 1,540
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Cash flows from financing activities:
Payments on short-term borrowings -- (1,000)
Proceeds from issuance of common stock, net 204 2,110
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Net cash provided by financing activities 204 1,110
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Net decrease in cash and cash equivalents (4,327) (871)
Cash and cash equivalents, beginning of the period 11,646 2,534
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Cash and cash equivalents, end of the period 7,319 1,663
Short-term investments, end of the period 23,568 3,880
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Cash, cash equivalents and short-term investments,
end of the period $ 30,887 $ 5,543
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See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Genelabs Technologies, Inc. and its subsidiaries
("Genelabs" or the "Company") after elimination of all significant intercompany
accounts and transactions. Genelabs is a biopharmaceutical company focused on
discovering and developing pharmaceutical products. We have a near-term drug
candidate, Aslera(TM), for which the U.S. Food and Drug Administration, referred
to as the FDA, is reviewing our marketing application. Aslera is a potential new
treatment for systemic lupus erythematosus ("SLE" or "lupus"), a disease for
which current therapies are not adequate. Longer term, our DNA-binding drug
discovery program has the potential to create an entirely new class of
pharmaceutical products that directly target DNA.
These financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
These unaudited condensed consolidated financial statements are meant
to be read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
2. COMPREHENSIVE INCOME
During the three months ended March 31, 2001 and 2000, the Company's
comprehensive loss amounted to ($2,714) and ($2,832), respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning regulatory approval, clinical trials, progress of
drug discovery programs, the Genelabs' business plans, anticipated expenditures
and the timing and need for additional funds. Forward-looking statements may be
identified by terminology such as "may," "will," "expects," "anticipates,"
"intends," "plans," "believes," "potential," "goal" and similar expressions.
Some of the factors that could cause material differences in actual results of
Genelabs' activities are uncertainty of regulatory approval, the outcome of drug
discovery and product development efforts, manufacturing risks, intellectual
property risks and other factors and risks detailed under the caption "Risk
Factors" in the Company's 2000 Annual Report on Form 10-K and other filings with
the U.S. Securities and Exchange Commission. Shareholders and prospective
investors in Genelabs should carefully consider these risk factors. Genelabs
disclaims any obligation to update these statements for subsequent events.
Genelabs Technologies, Inc., referred to as Genelabs or the Company, is
a biopharmaceutical company focused on discovering and developing pharmaceutical
products. We have a near-term drug candidate, Aslera(TM), for which the U.S.
Food and Drug Administration, referred to as the FDA, is reviewing our marketing
application. Aslera is a potential new treatment for systemic lupus
erythematosus ("SLE" or "lupus"), a disease for which current therapies are not
adequate. Longer term, our DNA-binding drug discovery program has the potential
to create an entirely new class of pharmaceutical products that directly target
DNA.
In 2000, Genelabs submitted a New Drug Application for Aslera(TM) as a
treatment for lupus to the FDA. Lupus is a life-long autoimmune disease that
causes the immune system to attack the body's own tissues and organs. According
to various industry sources, there are approximately 200,000 lupus patients in
the United States and Genelabs believes there are over one million worldwide. If
approved by the FDA, Aslera will be the first new drug approved in the U.S. for
this debilitating disease in more than 40 years. Genelabs expects to receive a
decision from the FDA on approval status by mid-year 2001. In November 2000,
Genelabs entered into a collaboration and license agreement with Watson
Pharmaceuticals, Inc., referred to as Watson, under which Watson plans to market
Aslera in the United States, if the product is approved by the FDA.
Genelabs believes it is well positioned in the biopharmaceutical
industry with both a near-term product opportunity and a proprietary,
potentially revolutionary approach to drug discovery. Genelabs intends to fund
the discovery and development of future products from royalties received on
sales of Aslera, if approved by the FDA.
RESULTS OF OPERATIONS - FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000
Net loss was $2.9 million for the three months ended March 31, 2001
compared to a loss of $2.8 million for the same period in 2000.
The Company recorded contract revenues of $1.5 million in the 2001
first quarter versus $2.0 million for the first quarter of 2000. The decrease in
contract revenue was primarily due to lower revenues recorded after the
completion, as expected, of the U.S. Defense Advanced Research Projects Agency
("DARPA") grant in early February 2001. Partially offsetting this decrease is an
increase of $0.8 million of revenue recognized from the collaboration and
license agreement made with Watson. Contract revenues include grant, licensing,
milestone, and research and development payments. Contract revenues recognized
in the future will be dependent upon the continuation of existing corporate
collaborations,
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achievement of milestones under these collaborations, and establishment of new
research, development and/or licensing agreements.
Operating expenses were $4.9 million in both the first quarter of 2001
and the first quarter of 2000. Research and development expenses represented 69%
of operating expenses in the 2001 period compared to 75% of operating expenses
for the same period in 2000. Research and development expenses decreased to $3.4
million for the three months ended March 31, 2001 versus $3.7 million for the
three months ended March 31, 2000. The decrease in research and development was
primarily attributable to lower costs in the Company's DNA-targeted drug
discovery research program subsequent to the planned expiration of the DARPA
grant. Research and development costs for the Company's near term product
opportunity, Aslera, increased as Genelabs prepared for an FDA Advisory
Committee meeting held in April, 2001. General and administrative expenses were
$1.5 million in the first quarter of 2001, an increase from $1.2 million in the
first quarter of 2000. This increase is the result of preparation costs for the
potential commercial introduction of Aslera.
Interest income increased to $0.6 million in the three months ended
March 31, 2001 versus $0.1 million for the same period in 2000 as a result of a
higher average balance of short-term investments during the current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment
balances totaling $30.9 million at March 31, 2001 compared to $34.7 million at
December 31, 2000. The $3.8 million decrease in cash, cash equivalents and
short-term investments was primarily attributable to cash used in operations. In
addition, Genelabs has $21.9 million available under an equity facility with
Acqua Wellington North American Equities Fund that allows Genelabs to sell stock
at a 3.5% to 6% discount to market when Genelabs' stock price is $4.00 per share
or higher.
The collaboration and license agreement with Watson provides a
milestone payment of up to $45 million to Genelabs in the event of FDA approval
of Aslera for SLE. Genelabs estimates that if Aslera is approved by the FDA,
this milestone payment combined with the existing cash and short-term
investments of Genelabs will be sufficient to fund the Company's operations for
more than two years, prior to consideration of any royalty revenues on sales of
Aslera. If Aslera is not approved by the FDA and the milestone is not received
from Watson, Genelabs estimates that its cash and short-term investments will be
sufficient to fund its operations into early 2003.
Since Genelabs' inception, the Company has operated at a loss and has
funded operations primarily through public and private offerings of equity
securities and, to a lesser extent, contract revenues. Regardless of the FDA's
decision on Aslera, we expect to incur substantial additional costs, including
research costs for the Company's drug discovery technologies and development
costs for Aslera. The amount of additional costs will depend on numerous factors
including the actions of regulatory agencies, progress of our research and
development programs and the status of corporate partnership agreements.
CERTAIN BUSINESS RISKS
The following discussion summarizes certain business risks which
management believes are particularly relevant at this time. It is not possible
to comprehensively address all risks that exist, but there is more detailed
information about these risks and additional risks under the caption "Risk
Factors" in the Company's 2000 Annual Report on Form 10-K, which shareholders
and prospective investors are encouraged to review.
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IF THE FDA DOES NOT APPROVE ASLERA(TM), GENELABS' DRUG CANDIDATE FOR SYSTEMIC
LUPUS ERYTHEMATOSUS, FOR MARKETING IN THE UNITED STATES, OUR BUSINESS PROSPECTS
WILL SUFFER BECAUSE WE HAVE NO OTHER NEAR-TERM SOURCE OF POTENTIAL REVENUE.
Genelabs has focused its development efforts to date on conducting
clinical trials for an investigational new drug, Aslera, formerly referred to as
GL701, for the treatment of women with systemic lupus erythematosus, or lupus.
Lupus is a severe, chronic and debilitating autoimmune disease that can affect
the lungs, heart, kidneys, skin, joints and nervous system. Aslera is a
pharmaceutical formulation containing highly purified prasterone, the synthetic
equivalent of dehydroepiandrosterone or DHEA, a naturally occurring hormone.
Before our North American partner Watson Pharmaceuticals, Inc. can
market Aslera in the United States, the FDA must review and approve a new drug
application submitted by Genelabs. Genelabs has submitted this application to
the FDA, and Genelabs' business plans depend on FDA approval of Aslera in the
United States. If the FDA does not approve the new drug application in a timely
manner, our business would suffer because we have no other near-term source of
potential revenue.
OUR OUTSIDE SUPPLIERS AND MANUFACTURERS FOR ASLERA ARE SUBJECT TO REGULATION,
INCLUDING BY THE FDA, AND IF THEY DO NOT MEET THEIR COMMITMENTS, WE WOULD HAVE
TO FIND SUBSTITUTE SUPPLIERS OR MANUFACTURERS WHICH COULD DELAY SUPPLY OF
PRODUCT TO THE MARKET.
Regulatory requirements applicable to pharmaceutical products tend to
make the substitution of suppliers and manufacturers costly and time consuming.
We rely on suppliers of prasterone, the active ingredient in Aslera, for
production of Aslera. The disqualification of these suppliers through their
failure to comply with regulatory requirements could negatively impact our
business because of delays and costs in obtaining and qualifying alternate
suppliers. In addition, currently we have a single manufacturer, Schering
Plough, to supply Aslera capsules and packaging for clinical trials and
commercial sales. We have no internal manufacturing capabilities for
pharmaceutical products and are entirely dependent on Schering Plough to
manufacture Aslera. If Schering Plough does not meet FDA requirements or fails
to manufacture Aslera capsules and packaging as required for our needs, we may
not be able to ship product in a timely manner, if at all. This failure could
negatively impact our relationships with customers and would harm sales of
Aslera. The following could harm our ability to manufacture and market Aslera:
o the unavailability of adequate quantities of the active
ingredient for commercial sale;
o the loss of a supplier's or manufacturer's regulatory approval;
o the inability to develop alternative sources in a timely manner
or at all;
o an interruption in supply of finished product; and
o competing demands on the contract manufacturer's capacity, for
example, shifting manufacturing priorities to their own products
or more profitable products for other customers.
GENELABS' RESEARCH PROGRAMS ARE IN AN EARLY STAGE AND MAY NOT SUCCESSFULLY
PRODUCE COMMERCIAL PRODUCTS.
Genelabs' research is in an early stage. Our research focuses on the
discovery of pharmaceutical products that bind to DNA and function as drugs,
including products that selectively regulate gene expression and products that
treat fungal, bacterial and viral infections. Gene expression controls the
functions of all cells, tissues and organs. Selective regulation of gene
expression using a DNA-binding drug means specifically "turning on" or "turning
off" a gene, affecting its function. To date, Genelabs' research programs have
not produced a compound that has progressed into clinical trials. Genelabs'
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product candidates, other than Aslera, are in an early stage of research. The
goal of the research is to discover novel chemical compounds that bind directly
to DNA or RNA, the fundamental matter in genes, and develop them into drugs.
Genelabs, or others working in this area, may never achieve this goal.
If Genelabs discovers compounds that have the potential to be drugs,
public information about this research breakthrough may lead other companies
with greater resources to focus more efforts on these types of compounds.
Genelabs has limited human and financial resources. Creation of the type of
compounds Genelabs seeks to discover requires sophisticated and expensive lab
equipment and facilities, a team of scientists with advanced scientific
knowledge in many disciplines such as chemistry, biochemistry and biology, and
time and effort. Large pharmaceutical companies have access to the latest
equipment and have many more personnel available to focus on solving particular
research problems, including those that Genelabs is investigating. Therefore,
even if our research programs are successful, we have a competitive
disadvantage.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Genelabs' exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments. Genelabs considers the risk
minimal as the Company has maintained financial instruments with average
maturities of less than two years, to date has not used derivative instruments,
and has placed its investments with high quality debt issuers.
Genelabs' exposure to market risk for changes in foreign currency
exchange rates relates primarily to the Company's investment in a Taiwan-based
biopharmaceutical company, Genelabs Biotechnology Co., Ltd. This investment is
the only item included in the balance sheet caption "Long-term investments."
Genelabs may attempt to divest a portion of this investment, in which case
changes in foreign currency exchange rates would impact the proceeds received
upon sale of these shares. The Company does not believe that such foreign
currency exchange rate changes will materially impact the value reported in the
financial statements, even if the changes are significant.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.01 Amended and Restated Articles of Incorporation of Genelabs
Technologies, Inc.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended March
31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENELABS TECHNOLOGIES, INC.
(Registrant)
Principal Executive Officer:
/s/ IRENE A. CHOW
Date: May 14, 2001 -----------------------------------
IRENE A. CHOW
Chairman and Chief Executive Officer
Principal Financial and Accounting
Officer:
/s/ MATTHEW M. LOAR
Date: May 14, 2001 ------------------------------------
MATTHEW M. LOAR
Vice President, Finance
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EXHIBIT INDEX
Exhibit No. Description
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3.01 Amended and Restated Articles of Incorporation of Genelabs
Technologies, Inc.