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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, 1996.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to_____ .
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, CALIFORNIA 94063
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 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 .
--- ---
There were 36,371,018 shares of the Registrant's Common Stock issued and
outstanding on November 1, 1996.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,090 $ 22,557
Short-term investments 20,524 --
--------- ---------
Cash, cash equivalents and short-term investments 21,614 22,557
Accounts receivable 2,951 2,489
Inventories 3,297 3,336
Other current assets 784 716
--------- ---------
Total current assets 28,646 29,098
Property and equipment, net 1,534 1,945
Investment in Genelabs Biotechnology Ltd. 4,731 4,828
Other assets 139 327
========= =========
$ 35,050 $ 36,198
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 215 $ 3,200
Accounts payable and other accrued liabilities 4,180 5,002
Accrued compensation and related expenses 1,936 2,120
--------- ---------
Total current liabilities 6,331 10,322
Long-term obligations, excluding current portion -- 124
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 126,755 115,002
Accumulated deficit (107,718) (98,932)
--------- ---------
Total shareholders' equity 28,719 25,752
--------- ---------
$ 35,050 $ 36,198
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See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 1995 has been
derived from the audited financial statements at that date but does not include
all the information and footnotes required by generally accepted accounting
principles for complete 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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Product sales $ 2,863 $ 2,663 $ 8,576 $ 7,474
Chiron/Ortho diagnostics alliance -- -- -- 6,000
Contract and other 243 488 772 1,762
-------- -------- -------- --------
Total revenues 3,106 3,151 9,348 15,236
-------- -------- -------- --------
Operating costs and expenses:
Cost of product sales 1,685 1,529 4,681 4,378
Purchased in-process research and development
-- -- -- 949
Research and development 2,407 3,283 7,403 8,795
Selling, general and administrative 2,233 2,237 6,679 6,880
-------- -------- -------- --------
Total operating costs and expenses 6,325 7,049 18,763 21,002
-------- -------- -------- --------
Operating loss (3,219) (3,898) (9,415) (5,766)
Interest income, net 336 250 864 228
Other income/(expense) 70 102 (80) 305
Equity in loss of Genelabs Biotechnology, Ltd. (112) -- (162) --
-------- -------- -------- --------
Net loss $ (2,925) $ (3,546) $ (8,793) $ (5,233)
======== ======== ======== ========
Net loss per share $ (0.08) $ (0.12) $ (0.25) $ (0.20)
======== ======== ======== ========
Weighted average shares outstanding 36,356 28,393 35,438 25,836
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (8,793) $ (5,233)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 626 819
Amortization of unearned contract revenue -- (889)
Purchased in-process research and development -- 949
Equity in loss of Genelabs Biotechnology, Ltd. 162 --
Changes in assets and liabilities:
Receivables (462) (623)
Inventories 39 166
Accounts payable, accrued compensation
and other accrued liabilities (1,006) 444
Other assets/liabilities (68) 331
-------- --------
Net cash used in operating activities (9,502) (4,036)
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale (25,000) --
Proceeds from sale of securities available-for-sale 4,476 1,031
Capital expenditures (411) (395)
Other 319 458
-------- --------
Net cash (used in)/provided by investing activities (20,616) 1,094
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (3,109) (120)
Proceeds from issuance of convertible preferred stock, net -- 9,707
Proceeds from issuance of common stock, net 11,753 19,485
-------- --------
Net cash provided by financing activities 8,644 29,072
-------- --------
Effect of exchange rate change on cash 7 38
-------- --------
Net (decrease)/increase in cash and cash equivalents (21,467) 26,168
Cash and cash equivalents, beginning of the period 22,557 3,562
-------- --------
Cash and cash equivalents, end of the period 1,090 29,730
Short-term investments, end of period 20,524 --
-------- --------
Cash, cash equivalents and short-term investments, end of period $ 21,614 $ 29,730
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See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Genelabs Technologies, Inc. and its wholly-owned subsidiaries
("Genelabs" or "the Company") after elimination of all significant intercompany
accounts and transactions. 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 nine month period ended September 30, 1996 are not necessarily
indicative of the results for the year ending December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K, as
amended by its Form 10-K/A, for the year ended December 31, 1995.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. INVENTORIES
The components of inventory are as follows (in thousands):
September 30, December 31,
1996 1995
---- ----
Finished goods $1,052 $1,260
Work-in-process 317 167
Raw materials 1,928 1,909
------ ------
$3,297 $3,336
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3. EXERCISE OF WARRANTS
In 1995, the Company issued 6.5 million shares of common stock through a private
offering. Each purchaser of these shares was also eligible to receive a warrant
to purchase one-half share of common stock for each share purchased in the
offering and held until a specified date. The Company had the option to call the
warrants if Genelabs' common stock price averaged $5.50 or more over any
consecutive 30 trading day period. In February 1996, this target was met and the
Company exercised its right to call all warrants issuable in connection with
this private offering. During February and March 1996, approximately 3.2 million
additional shares of the Company's common stock were issued at $3.39 per share
as a result of the exercise of the warrants, resulting in net proceeds of
approximately $10.3 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
All statements in Management's Discussion and Analysis of Financial Condition
and Results of Operations that are not historical are forward-looking statements
which involve a number of risks and uncertainties. Among the factors that could
cause actual results of the Company's activities to differ materially are
product non-approval or delays by the U.S. Food and Drug Administration ("FDA")
and foreign regulatory authorities, product development, manufacturing and
market acceptance risks, the impact of competitive products, pricing and
intellectual property rights, the results of current and future licensing and
other collaborative relationships and other factors and risks detailed in the
Company's 1995 Annual Report on Form 10-K, 10-K/A and other filings with the
U.S. Securities and Exchange Commission.
OVERVIEW
Genelabs is an international biopharmaceutical and diagnostics company focused
on gene-regulating drug discovery and viral and immunological disorders. The
Company's mission is to conduct targeted research, exploit new technologies,
develop innovative drugs for diseases such as lupus, and commercialize
diagnostic and biopharmaceutical products.
Using Genelabs' core technologies and expertise in drug and viral discovery, the
Company is engaged in the research and development of potential new therapeutics
and vaccines, both internally and through collaborations with academic
institutions and corporations. The Company's diagnostics business is generating
current revenue and expects to generate future revenue from the sale of viral
and other diagnostic products, although diagnostic product revenues are not
anticipated to offset the Company's total operating expenses.
The Company expects to continue to invest in biopharmaceutical product research
and development. Substantial revenue from the sale of biopharmaceutical products
is not expected until the launch of its first biopharmaceutical products, which
is not expected to occur for several years, if at all. The Company is seeking
collaborations for certain of its technologies with other pharmaceutical
companies to maximize sales of products that may result from those technologies
and to obtain funding for a portion of its research and development expenses.
However, Genelabs expects to continue to incur operating losses for at least the
next several years.
RESULTS OF OPERATIONS
Revenues
Revenues include both diagnostic product sales and contract and other revenue.
Diagnostic product sales were $2.9 million for the three months ended September
30, 1996, compared to $2.7 million for the same period in 1995. For the nine
months ended September 30, 1996, diagnostic product sales were $8.6 million
compared to $7.5 million for the same period in 1995. For both the three and
nine month periods ended September 30, 1996, the most notable increases in
product sales were for the Company's Western Blot products.
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Contract and other revenue includes licensing, royalties, milestone and research
and development payments. Contract and other revenue was $0.2 million and $0.8
million for the three and nine month periods ended September 30, 1996,
respectively, compared to $0.5 million and $1.8 million for the same periods in
1995. The decreases in 1996 compared to the same periods in 1995 were primarily
due to the recognition in 1995 of deferred revenue received in an earlier year
for a collaboration to develop a vaccine for the hepatitis E virus.
For the nine month period ended September 30, 1995, the Company also recognized
revenue of $6.0 million from a collaboration with Chiron Corporation ("Chiron")
and Ortho Diagnostic Systems, Inc. ("Ortho") for development of diagnostic
products for the hepatitis G virus ("HGV"), which was discovered by Genelabs.
Because this revenue represented up-front payments from the signing of an
agreement, there was no comparable revenue in 1996.
Contract and other revenues recognized in the future will be dependent upon the
Company's achieving milestones under current agreements and entering into new
research and development and licensing agreements with corporate collaborators.
There can be no assurance such milestones will be achieved or that the Company
will enter into new collaborations.
Cost of Product Sales
The cost of product sales increased to $1.7 million during the third quarter of
1996, compared to $1.5 million for the same period in 1995 due to the increase
in product sales. The gross margin decreased to 41% in the third quarter of 1996
compared to 43% in the third quarter of 1995 due to differences in the mix of
products sold in each period.
For the first nine months of 1996, cost of product sales was $4.7 million
compared to $4.4 million for the same period in 1995. The increase in cost of
product sales again occurred because of the higher sales levels in 1996. Gross
margins have improved from 41% to 45% due to better production yields and higher
sales levels of more profitable products.
Research and Development Expenses
The Company's research and development expenses were $2.4 million for the three
months ended September 30, 1996 compared to $3.3 million for the three months
ended September 30, 1995. For the nine months ended September 30, 1996, research
and development expenses were $7.4 million compared to $8.8 million for the same
period in 1995. These reductions reflect the Company's concentration of
available funds on certain projects while reducing or eliminating others. The
Company's principal ongoing research and development expenses are directed
toward its priority programs, in particular the clinical development of GL701
(DHEA) for lupus and research activities concerning DNA-binding technology.
In the first quarter of 1995, the Company recorded a nonrecurring, noncash
charge of $0.9 million for purchased in-process research and development for the
fair market value of shares issued in 1995 in connection with the 1993
acquisition of Genelabs Diagnostics (Pte.) Ltd.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.2 million for the each of
the quarters ended September 30, 1996 and 1995. For the nine months ended
September 30, 1996 and 1995, selling, general and administrative expenses were
$6.7 million and $6.9 million, respectively. The decline in these expenses
reflects the Company's continuing efforts to contain operating expenses.
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Interest Income/(Expense), Net
Net interest income increased in 1996 over the comparable periods of 1995 due to
higher average cash and short-term investment balances.
Net Loss
The Company has operated at a loss since its inception and had an accumulated
deficit of $107.7 million as of September 30, 1996. The net loss for the three
months ended September 30, 1996 was $2.9 million, compared to a net loss of $3.5
million for the same period in 1995. The lower net loss is primarily due lower
research and development expenses as the Company continues to concentrate its
efforts on fewer selected projects.
For the nine months ended September 30, 1996, the net loss was $8.8 million,
compared to a net loss of $5.2 million for the same period in 1995. Excluding
the $6.0 million collaboration revenue from Chiron and Ortho recognized in the
first nine months of 1995, the net loss improved by $2.4 million, primarily due
to improved gross margins on the Company's diagnostic product sales, lower
research and development expenses and noncash costs of $0.9 million recognized
in the first quarter of 1995, related to a previous year's acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments totaling $21.6
million at September 30, 1996, compared to $22.6 million at December 31, 1995.
In the first quarter of 1996, the Company received $10.3 million from the
exercise of warrants issued in connection with an August 1995 private placement
and the Company paid $2.8 million upon the maturity of its subordinated
convertible debentures. Excluding these two items, cash, cash equivalents and
short-term investments would have declined by $8.4 million for the nine months
ended September 30, 1996. This decline is attributable primarily to the
Company's operating activities which used $9.5 million during this period,
partially offset by additional proceeds from the issuance of stock unrelated to
the warrants.
The Company has funded its operations since inception primarily through public
and private offerings of its common stock, private offerings of its preferred
stock, contract revenues and product sales. The Company has no bank debt or open
credit lines.
Genelabs expects to incur substantial additional costs, including costs for
clinical trials for products currently under development. The amount of the
additional costs, as well as increased expenditures necessary for working
capital and capital requirements, will depend on numerous factors, including but
not limited to the timing and outcome of any regulatory actions related to the
Company's products. In addition, funding requirements will depend on the
progress of the Company's research and development programs as well as its
ability to establish and maintain collaborations with other pharmaceutical
companies to fund these programs.
The Company anticipates that its current resources, expected revenues from
existing collaborative agreements and continued efforts to minimize expenses
will enable it to maintain its current and planned operations at least through
1997. Thereafter, the Company may need to raise additional funding, for which
the Company is pursuing several options, including collaborative research and
development arrangements with pharmaceutical companies. There can be no
assurance that additional funds will be available on favorable terms, if at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license third
parties the right to commercialize products or technologies that the Company
would otherwise seek to develop itself.
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Certain Business Risks
Genelabs is at an early stage of development. The Company has experienced
significant operating losses since its inception and expects to incur
significant operating losses over the next several years. The development of the
Company's proposed products will require a commitment of substantial funds to
conduct these costly and time-consuming activities. The Company's technologies,
including DNA-binding technology, are in many cases new and still under
development. All of Genelabs' proposed therapeutic products, including GL701 for
the treatment of lupus, are in research or development and will require
substantial additional research and development efforts prior to any commercial
use, including extensive clinical testing as well as potentially lengthy
regulatory approval. Genelabs currently is discussing the possibility of drug
discovery research collaborations using its DNA-binding technology with various
pharmaceutical companies. No assurance can be given as to the ability of the
Company to complete an agreement with such a collaborator on a timely basis or
at all.
The Company currently is conducting Phase III clinical trials for GL701. No
assurance can be given as to the results of these trials, the safety or efficacy
of this drug candidate or, in any event, the ability of Genelabs to obtain
regulatory approval for the commercialization of the drug candidate. The active
ingredient in GL701 is dehydroepiandrosterone ("DHEA"). DHEA is currently being
marketed by others as an over the counter dietary supplement. The Company
believes that DHEA is a drug that is subject to regulation and approval by the
FDA. The Company further believes that in several instances these supplements do
not contain true DHEA, but instead contain related substances that are not
biologically equivalent. However, to date the FDA has taken no action to limit
or regulate the sale of these dietary supplements, and no assurance can be given
as to the willingness or ability of the FDA to do so in the future. In the event
that clinical trials for GL701 are promising and the drug candidate receives FDA
marketing approval, the concurrent sale of these dietary supplements could
adversely affect the market for or selling prices of GL701.
The Company is continuing its research and development efforts related to the
hepatitis G virus. However, Genelabs has recently reduced expenditures on this
program. While the presence of this virus has been detected in blood samples
contained in the U.S., Europe, Japan and elsewhere, the Company and its
collaborators are still seeking to determine the nature and severity of any
diseases specifically caused by HGV. In order to test for HGV generally in the
blood banks, the Company and its licensors are continuing efforts to develop a
serological assay. To date, no such assay has been introduced.
The Company has only limited sales, marketing and distribution capabilities. If
the Company successfully develops any new products, Genelabs must either rely on
large pharmaceutical companies to market such products or must develop a
marketing and sales force with technical expertise and supporting distribution
capability in order to market such products directly. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding protection or patents and proprietary
rights and the possibility of infringement of the proprietary rights of others,
government regulation, and uncertainties regarding health care reform.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
There are no exhibits required to be filed.
(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 1996, the Company filed no Current
Reports on Form 8-K.
SIGNATURE
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 & FINANCIAL OFFICER:
/s/ IRENE A. CHOW
Date: November 6, 1996 _________________________________
IRENE A. CHOW
President and Chief Executive Officer
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