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 AND EXCHANGE ACT OF 1934
For Quarter Ended: November 27, 1999
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 BEAVER STREET
WALTHAM, MASSACHUSETTS 02453
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(Address of principal (ZIP Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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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 (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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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock 19,516,056
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$.10 Par Value Outstanding January 5, 2000
Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
Page
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Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of 3
November 27, 1999 and August 31, 1999
Consolidated Condensed Statements of Operations 4
for the 13 week periods ended November 27, 1999
and November 28, 1998
Consolidated Statements of Cash Flows for the 5
13 week periods ended November 27, 1999
and November 28, 1998
Notes to Consolidated Condensed Financial 6-12
Statements for the 13 week periods ended
November 27, 1999 and November 28, 1998
Management's Discussion and Analysis of Financial 13-17
Conditions and Results of Operations
Part II
Other Information:
Other Information 18
Signature 19
2
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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November 27, August 31,
1999 1999
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $23,091,486 $12,802,162
Marketable securities 7,017,740 12,060,230
Interest receivable 746,809 448,192
Unbilled costs and fees 92,103 35,328
Prepaid expenses and other current assets 749,990 324,211
Note receivable from officer 120,000 120,000
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Total current assets 31,818,128 25,790,123
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 17,843,653 15,844,262
Leasehold improvements 8,217,451 8,205,701
Equipment and furniture 1,353,953 1,344,703
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27,415,057 25,394,666
Less accumulated depreciation
and amortization 13,129,739 12,173,500
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14,285,318 13,221,166
Restricted cash 200,000 200,000
Other assets 265,083 273,708
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Total assets $46,568,529 $39,484,997
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $2,457,047 $987,958
Accrued expenses 2,570,044 2,322,780
Deferred revenue 4,907,543 2,903,534
Current maturities of long-term obligations 4,064,376 3,934,547
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Total current liabilities 13,999,010 10,148,819
Long-term obligations, net of current maturities 5,353,830 5,925,086
Shareholders' equity 27,215,689 23,411,092
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Total liabilities and shareholders' equity $46,568,529 $39,484,997
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See Notes to Consolidated Condensed Financial Statements.
3
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen Weeks Ended
November 27, November 28,
1999 1998
(Unaudited)
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Revenues:
Contract research, licenses, and subscription fees $6,035,002 $5,110,257
Costs and Expenses:
Research and development 5,341,305 6,813,002
Selling, general and administrative 969,645 910,552
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Total cost and expenses 6,310,950 7,723,554
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Interest income 363,671 412,000
Interest expense (209,326) (270,345)
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Net interest income 154,345 141,655
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Net loss $(121,603) $(2,471,642)
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Net Loss per Common Share:
Basic and diluted $(0.01) $(0.13)
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Weighted Average Common Equivalent Shares Outstanding:
Basic and diluted 18,947,684 18,317,843
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See Notes to Consolidated Condensed Financial Statements.
4
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Thirteen Weeks Ended
November 27, November 28,
1999 1998
(Unaudited)
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Cash Flows from Operating Activities:
Net loss $(121,603) $(2,471,642)
Adjustments to reconcile net loss to net
cash povided by operating activities:
Depreciation and amortization 960,624 1,013,122
Deferred compensation 95,208 40,762
Changes in assets and liabilities:
Interest receivable (298,617) 98,421
Unbilled costs and fees (56,775) (61,688)
Prepaid expenses and other current assets (425,779) 122,983
Accounts payable 1,469,089 (58,510)
Accrued expenses 247,264 210,365
Deferred revenue 2,004,009 1,808,601
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Total adjustments 3,995,023 3,174,056
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Net cash provided by operating activities 3,873,420 702,414
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Cash Flows from Investing Activities:
Purchases of marketable securities (5,353,510) (5,657,554)
Proceeds from sale of marketable securities 10,396,000 8,290,000
Purchases of equipment and leasehold improvements (1,652,777) (55,222)
Decrease in other assets 8,625 7,085
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Net cash provided by investing activities 3,398,338 2,584,309
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options 98,877 64,167
Proceeds from sale of common stock 3,732,115 --
Payments on long-term obligations (813,426) (1,327,717)
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Net cash provided by (used in) financing activities 3,017,566 (1,263,550)
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Net Increase in Cash and Cash Equivalents 10,289,324 2,023,173
Cash and Cash Equivalents, at beginning of period 12,802,162 10,978,176
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Cash and Cash Equivalents, at end of period $23,091,486 $13,001,349
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Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $4,800 $7,200
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Interest paid during period $209,326 $270,345
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Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital lease obligations $372,000 $592,987
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See Notes to Consolidated Condensed Financial Statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
unaudited consolidated condensed financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results of operations for the 13 week period ended November 27, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's Form 10-K, which was filed with the Securities
and Exchange Commission on November 24, 1999.
2. REVENUE RECOGNITION
Revenues are from contract research and licenses derived from collaborative
agreements with pharmaceutical companies and from government grants and
contracts. Revenues from research and development and collaborative agreements
are recognized ratably over their respective contract periods. Subscription fees
from the PathoGenome-TM- database are recognized ratably over the life of the
subscription. Milestone payments from collaborative research and development
agreements are recognized when they are achieved. Royalties from the Company's
pro licensed technologies are recognized as earned.
Unbilled costs and fees represent revenue recognized prior to billing.
Deferred revenue represents amounts received prior to revenue recognition.
3. NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (SFAS)
No.128, EARNINGS PER SHARE. This statement established standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. Basic earnings per share was determined
by dividing net loss by the weighted average common shares outstanding during
the period. Diluted earnings per share was determined by dividing net loss by
diluted weighted average shares outstanding. Diluted loss per share is the same
as basic loss per share for the periods ended November 27, 1999 and November 28,
1998 as the effect of the potential common stock equivalents is antidilutive.
Potential common stock equivalents of 3,385,715 and 3,631,756 were excluded from
diluted loss per share at November 27, 1999 and November 28, 1998, respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. At November 27, 1999 and August 31, 1999, the Company's
cash equivalents and marketable securities are classified as held-to-maturity,
as the Company has the positive intent and ability to hold these securities to
maturity. Cash equivalents are short-term, highly liquid
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investments with original maturities of less than three months. Marketable
securities are investment securities with original maturities of greater than
three months. Cash equivalents are carried at cost, which approximates market
value, and consist of money market funds, repurchase agreements and debt
securities. Marketable securities are recorded at amortized cost, which
approximates market value. The Company has not recorded any realized gains or
losses on its marketable securities. Marketable securities consist of commercial
paper and U.S. government debt securities. The Company has $200,000 in
restricted cash at August 31, 1999 and November 27, 1999 in connection with
certain long-term obligations (see Note 7).
5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6. COMPREHENSIVE INCOME
The Company applies SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No.
130 requires disclosure of all components of comprehensive income on an annual
and interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company's total comprehensive net loss
for the thirteen week periods ended November 27, 1999 and November 28, 1998 were
the same as reported net loss for those periods.
7. LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment lease line of
credit under which it financed $6,000,000 of laboratory, computer and office
equipment. The lease is payable in 48 monthly installments from the point of
takedown, at a variable interest rate of LIBOR (5.375% as of November 27, 1999)
plus 2%. On March 9, 1998, the Company increased the equipment lease line of
credit by $4,300,000 to $10,300,000. The additional borrowings under the
equipment lease line of credit will be utilized to finance laboratory, computer
and office equipment. Borrowings under the new credit line are payable in 15
quarterly installments commencing March 31, 1999, at a variable rate of LIBOR
plus 1.75%. At any time during the term of this agreement, the Company may elect
to convert to a fixed rate loan at the prevailing interest rate. The Company is
required to maintain certain restricted cash balances, as defined (see Note 4).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage. The Company had approximately $1,953,000 available under the modified
line of credit at November 27, 1999.
On July 31, 1997, the Company entered into a financing arrangement under
which it financed $6,000,000 of laboratory and office renovations at its
primary Street facility. The principal amount of the loan will be repaid over
48 consecutive months commencing on July 1, 1998. The interest rates range
from 7.19% to 8.16%. The Company is required to maintain certain financial
ratios pertaining to minimum cash balances, debt to net worth and tangible
net worth. The Company has no additional availability under this financing
arrangement at November 27, 1999.
The Company has entered into other capital lease line arrangements under
which it financed approximately $9,725,000 of certain laboratory, computer and
office equipment. These leases are
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payable in 36 monthly installments. The interest rates range from 7.52% to
10.29%. The Company is required to maintain certain financial ratios pertaining
to minimum cash balances, tangible net worth, debt to tangible net worth and
debt service coverage. The Company has no borrowing capacity under these capital
lease agreements at November 27, 1999.
8. COLLABORATIVE AGREEMENTS
(a) ASTRA
In 1995, the Company entered into a collaboration agreement with
AstraZeneca PLC ("Astra"), formerly Astra Hassle AB, to develop
pharmaceutical, vaccine, and diagnostic products effective against
gastrointestinal infections or any other disease caused by H. PYLORI. The
Company granted Astra exclusive access to the Company's H. PYLORI genomic
sequence database and exclusive worldwide rights to make, use and sell
products based on the Company's expertise working with H. PYLORI. The
agreement provided for a four-year research collaboration to further develop
and annotate the Company's H. PYLORI genomic sequence database, with the
objective of identifying therapeutic and vaccine targets and developing
appropriate biological assays. In August 1999, GTC's portion of the research
collaboration concluded and the program transitioned to Astra. The research
collaboration resulted in the identification and validation of a number of
targets by GTC. These targets, as well as screening assays, were delivered to
Astra for high-throughput drug candidate screening. The Company is entitled
to future milestone payments and royalties based upon successful development
of any products arising from the research collaboration.
Under this agreement, Astra agreed to pay the Company subject to the
achievement of certain product development milestones, up to approximately $23
million (and possibly a greater amount if more than one product is developed
under the agreement) in license fees, expense allowances, research funding and
milestone payments. The Company received approximately $13.5 million in license
fees, expense allowances, milestone payments and research funding under the
Astra agreement through November 27, 1999. Of such fees, $500,000 is creditable
against any future royalties payable to the Company by Astra under the
agreement.
The Company will also be entitled to receive royalties on Astra's sale of
products (i) protected by the claims of patents licensed exclusively to Astra by
the Company pursuant to the agreement, or (ii) the discovery of which was
enabled in a significant manner by the genomic database licensed to Astra by the
Company. The Company has the right, under certain circumstances, to convert
Astra's license to a nonexclusive license in the event Astra is not actively
pursuing commercialization of the technology.
For the 13 week periods ended November 27, 1999 and November 28, 1998, the
Company recorded revenue of $13,000 and $251,000, respectively, under this
agreement, which consisted of sponsored research funding.
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd. (collectively
"Schering-Plough") providing for the use by Schering-Plough of the genomic
sequence of STAPHYLOCOCCUS AUREUS to identify new gene targets for development
of antibiotics effective against drug-resistant infectious organisms. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's
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proprietary S. AUREUS genomic sequence database. The Company also granted
Schering-Plough a nonexclusive license to use the Company's bioinformatics
systems for Schering-Plough's internal use in connection with the genomic
databases licensed to Schering-Plough under the agreement and other genomic
databases Schering-Plough develops or acquires. The Company also agreed to
undertake certain research efforts to identify bacteria-specific genes essential
to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and fund a research program for a minimum of two-and-a-half years with an option
to extend. On March 4, 1998, Schering-Plough elected to extend the research
program to the full term of the agreement which expires on March 31, 2000. Under
the agreement as extended, Schering-Plough has agreed to pay the Company a
minimum of $18.5 million in an up-front license fee, research funding and
milestone payments. Subject to the achievement of additional product development
milestones, Schering-Plough has agreed to pay the Company up to an additional
$24 million in milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds that are targeted against,
as their primary indication, the pathogen that is the principal subject of the
Company's agreement with Schering-Plough. The Company will be entitled to
receive royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, the Company retained the rights to make, use and sell diagnostic
products developed based on the Company's genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
For the 13 week periods ended November 27, 1999 and November 28, 1998, the
Company recorded revenue of $587,000 and $711,000, respectively, under this
agreement, which consisted of sponsored research funding.
In December 1996, the Company entered into its second research collaboration
and license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third-party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In July 1998, Schering-Plough amended the original agreement in order to
accelerate the research effort being undertaken. In addition, upon completion of
certain scientific developments, Schering-Plough will make milestone payments to
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the Company, as well as pay royalties to the Company based on sales of
therapeutics products developed from this collaboration. If all milestones are
met and the research program continues for its full term, total payments to the
Company will approximate $68 million, excluding royalties. Of the total
potential payments, approximately $23.5 million represents license fees and
research payments, and $44.5 million represents milestone payments based on
achievement of research and product development milestones.
Under this second agreement, the Company has recognized $1,439,000 and
$1,944,000 in revenue for the 13 week periods ended November 27, 1999 and
November 28, 1998, respectively, which consisted of a sponsored research funding
and subcontract activity.
On September 24, 1997, the Company entered into a third research
collaboration and license agreement with Schering-Plough to use genomics to
discover and develop new pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the collaboration related to two fungal pathogens, CANDIDA ALBICANS
and ASPERGILLUS FUMIGATUS. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed in the
course of the research program. In return, Schering-Plough has agreed to fund a
research program for two-and-a-half years with an option to extend. In December
1999, Schering-Plough elected to extend the research program to the full term of
the agreement which expires on September 23, 2001. Subject to the achievement of
certain scientific milestones, total payments to the Company will approximate
$34 million, excluding royalties. Of the total potential payments, approximately
$11 million represents license fees and research payments and $23 million
represents milestone payments based on achievement of research and product
development milestones. Additionally, the Company entered into a subscription
agreement with Schering-Plough to provide Schering-Plough with nonexclusive
access to the Company's PathoGenome-TM- database (see Note 9).
For the 13 week period ended November 27, 1999, the Company recorded revenue
of $1,654,000 under this third agreement, which consisted of sponsored research
funding and a milestone payment. For the 13 week period ended November 28, 1998,
the Company recorded revenue of $689,000 under this agreement, which consisted
of sponsored research funding.
(c) NATIONAL HUMAN GENOME RESEARCH INSTITUTE
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company will
participate in an international consortium in a full scale effort to sequence
the human genome. The Company is entitled to receive research and development
funding from the National Human Genome Research Institute ("NHGRI") of up to
$15.6 million over a three year period of which $5 million will be received over
the initial 12 months as the Company performs research under the project. For
the 13 week period ended November 27, 1999, the Company recorded revenue of
$912,000 in connection with the international Human Genome Project.
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(d) MOUSE GENOME SEQUENCING NETWORK
In October 1999, the NHGRI named the Company as a pilot center to the Mouse
Genome Sequencing Network. The Mouse Genome Sequencing Network will be composed
of several facilities that will be responsible for deciphering the genetic
makeup of the mouse. The Company is entitled to receive $12.9 million in funding
over the next three years with respect to this agreement of which the Company
will receive $2.4 million during the first fiscal period, which ends April 30,
2000 as the Company performs research under the project. For the 13 week period
ended November 27, 1999, the Company recorded revenue of $51,000 in connection
with the Mouse Genome Project.
(e) bioMerieux ALLIANCE
In September 1999, the Company entered into a strategic alliance with
bioMerieux to develop, manufacture and sell IN VITRO diagnostic products for
human clinical and industrial applications. As part of the alliance,
bioMerieux purchased a subscription to the Company's PathoGenome-TM-
database, agreed to fund a research program for at least four years and pay
royalties on future products. In addition, bioMerieux purchased $3.75 million
of the Company's common stock at $5.53 per share. The total amount of
guaranteed research and development funding and PathoGenome-TM- database
subscription for the first year, and the proceeds from the sale of the common
stock, approximates $6.2 million. The research and development funding will
be recognized ratably over the four year term of the agreement. For the 13
week period ended November 27, 1999, the Company recorded revenue of $89,000
under this agreement.
(9) DATABASE SUBSCRIPTIONS
The Company has entered into PathoGenome-TM- database subscriptions with
Bayer AG, Bristol-Meyers Squibbs, Scriptgen Pharmaceuticals, Inc.,
Schering-Plough, Hoechst Marion Roussel and bioMerieux. The
database subscription provides nonexclusive access to the Company's genome
sequence database, PathoGenome-TM- and associated information relating to
microbial organisms. The subscription agreement calls for the Company to provide
periodic data updates, analysis tools and software support. Under the
subscription agreements, the customer has agreed to pay an annual subscription
fee and royalties on any molecules developed as a result of access to the
information provided by PathoGenome-TM- database. The Company retains all rights
associated with protein therapeutic, diagnostic and vaccine use of bacterial
genes or gene products.
The Company has recognized $1,063,000 and $1,242,000 in revenue under these
subscription agreements for the 13 week periods ended November 27, 1999 and
November 28, 1998, respectively.
(10) SUBSEQUENT EVENT
In December 1999, the Company entered into a strategic alliance with
Wyeth-Ayerst Laboratories to develop novel therapeutics for the prevention and
treatment of osteoporosis. The alliance will focus on developing therapeutics
utilizing targets based on the characterization of a gene associated with a
unique high bone mass trait.
The agreement calls for the Company to employ its established capabilities
in positional cloning, bioinformatics and functional genomics in conjunction
with Wyeth-Ayrst's drug discovery capabilities and its expertise in bone biology
and the osteoporotic disease process to develop new
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pharmaceuticals. Under the terms of the agreement, Wyeth-Ayerst will pay the
Company an up-front license fee, fund a multi-year research program, make
milestone payments and pay royalties on sales of therapeutics products developed
from this collaboration. If the research program continues for its full term and
substantially all of the milestone payments are met, total payments to the
Company, excluding royalties, would exceed $118 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the field
of genomics-based drug target discovery -- the identification and functional
characterization of genes associated with infectious and human diseases. The
Company has over ten years of experience in genomic research. Having served as
one of the initial research institutions under genome programs sponsored by the
United States government, GTC has developed numerous techniques and tools that
are widely used in the field of genomics. GTC's commercial strategy capitalizes
on its pioneering work in genomics by applying its integrated platform
technologies of high-throughput sequencing, bioinformatics, disease gene
identification, and functional genomics to identify and validate novel drug
targets. The two areas of scientific focus are the discovery and
characterization of novel targets in (i) pathogens that are responsible for many
serious diseases and (ii) human diseases. The Company believes that its genomic
discoveries will lead to the development of novel therapeutics, vaccines, and
diagnostic products by it and its strategic partners. The Company has several
corporate collaborations in connection with its infectious disease and human
disease gene discovery programs.
The Company does not anticipate revenues on a sustained basis until such
time that therapeutic, vaccine and diagnostic products based on the Company's
research efforts are commercialized, if at all. The Company's product
development strategy is to form collaborations with pharmaceutical and
biotechnology companies accessing drug discovery and clinical development
capabilities that currently do not exist at the Company. In the pharmaceutical
alliances, the Company generates revenues from license fees, sponsored research
and milestone payments during the term of the collaboration. Once a product
resulting from the research collaboration is commercialized, the Company is
entitled to receive royalty payments based upon product revenues. Additionally,
the Company sells non-exclusive licenses to access its proprietary
PathoGenome-TM- database. The sale of this database generates subscription
revenue over the term of the subscription with the potential for royalty
payments to the Company from future product sales. The expectations of these
collaborations are to result in the discovery and commercialization of novel
therapeutics, vaccines, and diagnostics. In order for a product to be
commercialized based on the Company's research, it will be necessary for the
collaborators to conduct preclinical tests and clinical trials, obtain
regulatory clearances, manufacture, sell, and distribute the product.
Accordingly, the Company does not expect to receive royalties based upon product
revenues for many years. Additionally, the Company sells, as a contract service
business, its core competency in providing high quality genomic sequencing
information to pharmaceutical companies, governmental agencies, and academic
institutions.
The Company's primary sources of revenue are collaborative agreements
with pharmaceutical company partners, subscription agreements to the
Company's PathoGenome-TM- database and government research grants and
contracts. As of January 2000, the Company has six collaborative research
agreements and has sold six subscriptions to its PathoGenome-TM- database.
The Company entered into a corporate collaboration with AstraZeneca PLC,
formerly Astra Hassle AB, ("Astra") to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infections or any
other disease caused by H. PYLORI. In August 1999, the Company's portion of
the research collaboration concluded and the program transitioned to Astra.
The Company is entitled to receive additional milestone payments and
royalties based upon the development by Astra of any products from the
research collaboration. The
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Company entered into a corporate collaboration with Schering Corporation and
Schering-Plough, Ltd. (collectively, "Schering-Plough") in December 1995
providing for the use by Schering-Plough of the Company's S. AUREUS genomic
database to identify new gene targets for the development of novel antibiotics.
In December 1996, the Company entered into its second research collaboration
with Schering-Plough to identify genes and associated proteins that can be
utilized by Schering-Plough to develop new pharmaceuticals for treating asthma.
In September 1997, the Company established its third research collaboration with
Schering-Plough to use genomics to discover and develop new pharmaceutical
products to treat fungal infections. In September 1999, the Company entered into
a strategic alliance with bioMerieux to develop, manufacture and sell IN VITRO
pathogen diagnostic products for human clinical and industrial applications. As
part of the collaboration, bioMerieux has purchased a subscription to the
Company's PathoGenome-TM- database and made an equity investment. In December
1999, the Company entered into strategic alliance with Wyeth-Ayerst Laboratories
to develop, novel therapeutics for the prevention and treatment of osteoporosis.
The alliance will focus on developing therapeutics utilizing targets based on
the characterization of a gene associated with a unique high bone mass trait.
In May 1997, the Company introduced its proprietary PathoGenome-TM- database
and sold its first subscription. Since that date, the Company has sold five
additional subscriptions. Under these agreements, the subscribers received a
non-exclusive license to access the Company's PathoGenome-TM- database and
associated information relating to microbial organisms.
Since 1989, the Company has been awarded a number of research grants and
contracts by various agencies of the United States government related to the
government genomics programs. The scope of the research covered by grants and
contracts encompasses technology development, sequencing production, technology
automation, and disease gene identification. These programs strengthen the
Company's genomics technology base and enhance the expertise of its scientific
personnel. In July 1999, the Company was named as one of the nationally funded
DNA sequencing centers of the international Human Genome Project. The Company
will participate in an international consortium in a full-scale effort to
sequence the human genome. The Company will receive funding from the National
Human Genome Research Institute (NHGRI) of up to $15.6 million over a three-year
period of which $5 million is guaranteed over the initial twelve months. In
October 1999, the Company was named as one of the pilot centers in the Mouse
Genome Sequencing Network. The Company will participate in deciphering the
genetic makeup of the mouse. The Company will receive funding from the NHGRI of
up to $12.9 million over a three-year period of which $2.4 million is guaranteed
over the initial seven months. These programs are subject to annual
appropriations by the government based upon the availability of government funds
and the achievement by the Company of certain scientific milestones.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $66,819,000 at November 27, 1999. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new collaborative agreements and government research
grants and contracts. The Company is subject to risks common to companies in its
industry including unproven technology and business strategy, availability of,
and competition for, family resources, reliance upon collaborative partners and
others, history of operating losses, need for future capital, competition,
patent and proprietary rights, dependence on key personnel, uncertainty of
regulatory approval, uncertainty of pharmaceutical pricing, healthcare reform
and related matters, product liability exposure, and volatility of the Company's
stock price.
14
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 27, 1999 AND NOVEMBER 28 , 1998
REVENUE
Contract research, licenses, and subscription fees increased 18% to
$6,035,000 for the 13 week period ended November 27, 1999 from $5,110,000 for
the 13 week period ended November 28, 1998 due primarily to revenue earned
under the Company's government research grant with the National Human Genome
Research Institute (NHGRI) to participate in the international Human Genome
Project, as well as a milestone payment received this quarter under the
Company's antifungal collaboration with Schering-Plough.
COSTS AND EXPENSES
Total costs and expenses decreased 18% to $6,311,000 for the 13 week
period ended November 27, 1999 from $7,724,000 for the 13 week period ended
November 28, 1998. Research and development expense, which includes
company-sponsored research and development, and research funded pursuant to
arrangements with the Company's corporate collaborators and government
agencies, decreased by 22% to $5,341,000 for the 13 week period ended
November 27, 1999 from $6,813,000 for the 13 week period ended November 28,
1998. The reduction in research and development expenses was primarily
attributable to the Company's decision to focus its investment in selected
internally funded programs, specifically in the area of microbial genetics
and pharmacogenomics. The reduction consisted primarily of decreases in
payroll and related expenses, laboratory supplies and overhead expenses.
Selling, general and administrative expenses increased by 6% to $970,000
for the 13 week period ended November 27, 1999 from $911,000 for the 13 week
period ended November 28, 1998. The increase in selling, general and
administrative expenses was primarily due to an increase in compensation
expense associated with the Company's restricted stock plan.
INTEREST INCOME AND EXPENSE
Interest income decreased 12% to $364,000 for the 13 week period ended
November 27, 1999 from $412,000 for the 13 week period ended November 28, 1998
reflecting a decrease in funds available for investment during as a result of
cash being utilized to fund the Company's operations.
Interest expense decreased 23% to $209,000 for the 13 week period ended
November 27, 1999 from $270,000 for the 13 week period ended November 28, 1998.
The decrease in interest expense was attributable to the decrease in the
Company's outstanding balances under long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash have been revenue from collaborative
research
15
agreements and subscription fees, revenue from government grants and contract,
borrowings under equipment lending facilities and capital leases and proceeds
from sale of equity securities.
As of November 27, 1999, the Company had cash, cash equivalents,
restricted cash and long and short-term marketable securities of
approximately $30,309,000. The Company has various arrangements under which
it can finance certain office and laboratory equipment and leasehold
improvements. At November 27, 1999, the Company had approximately $1,953,000
available under these arrangements for future borrowings. At November 27,
1999, the Company had an aggregate of approximately $9,418,000 outstanding
under its borrowing arrangements which is repayable over the next 36 months,
of which $4,064,000 is repayable within the next 12 months. Under these
arrangements, the Company is required to maintain certain financial ratios,
including minimum levels of tangible net worth, total indebtedness to
tangible net worth, minimum cash level, debt service coverage and minimum
restricted cash balances.
The Company's operating activities provided cash of approximately
$3,873,000 for the 13 week periods ended November 27, 1999 due to an increase
in deferred revenue, accounts payable and accrued expenses. The increase in
accounts payable reflects the purchase of laboratory equipment which will
eventually be financed through the Company's existing or new equipment
financing arrangements. The increase in deferred revenue represents cash
received under the bioMerieux alliance prior to revenue recognition. The
Company's operating activities provided cash of approximately $702,000 for
the 13 week periods ended November 28, 1998, due to an increase in deferred
revenue and accrued expenses, partially offset by cash used to fund the
Company's operations.
For the 13 week periods ending November 27, 1999 and November 28, 1998, the
Company's investing activities provided cash of approximately $3,398,000 and
$2,584,000, respectively, through the conversion of its marketable securities to
cash and cash equivalents, partially offset by the purchase of laboratory and
computer equipment.
Capital expenditures, including property and equipment acquired under capital
leases, totaled $2,025,000 for the 13 week period ended November 27, 1999
consisting primarily of laboratory, and computer equipment. The Company
currently estimates that it will acquire an additional $1,300,000 in capital
equipment in fiscal 2000 consisting primarily of computer and laboratory
equipment which it intends to finance under existing and new equipment financing
arrangements, yet to be negotiated. The Company is currently in discussions with
several potential sources of equipment financing.
The Company's financing activities provided cash of approximately
$3,018,000 for the 13 week period ended November 27, 1999 primarily from the
sale of equity securities, exercise of stock options, net of payments of
long-term obligations. Financing activities used cash of approximately
$1,264,000 for the 13 week period ended November 28, 1998 primarily for
payments of long-term obligations.
At August 31, 1999, the Company had net operating loss and tax credits
(investment and research) carryforwards of approximately $63,785,000 and
$3,137,000, respectively, available to reduce federal taxable income and federal
income taxes, respectively, if any. Net operating loss carryforwards and credits
are subject to review and possible adjustment by the Internal Revenue Service
and may be limited in the event of certain cumulative changes in ownership
interests of significant shareholders over a three-year period in excess of
50%. Additionally, certain of these losses are expiring due to the limitation
of the carryforward period.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for approximately two years under its current rate of
investment in research and
16
development. There is no assurance, however, that changes in the Company's plans
or events affecting the Company's operations will not result in accelerated or
unexpected expenditures.
The Company may seek additional funding through public or private financing
and expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issue, issuer, and type of instrument. The Company does not expect any material
loss with respect to its investment portfolio.
IMPACT OF YEAR 2000
Many currently installed computer systems and software applications are
designed to accept only two-digit entries in the date code field used to
identify years. These date code fields require modification to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with the
Year 2000 requirements. There is some uncertainty concerning the potential
effects of failure to comply with all such requirements.
The Company had performed an extensive inventory and testing of its
electronic equipment, computer systems, software applications, and genomic
database storage and retrieval systems used both internally and sold to its
customers, to identify which systems may be impacted by Year 2000. The Company
formed a Y2K Task Force with coordinators from every department, which
identified the Company's mission-critical systems. The Company completed its
assessment and developed a comprehensive compliance program, using internal and
external resources to address Year 2000 issues. The compliance program
incorporated best practices from such sources as the General Services
Administration and the Government Accounting Office (see www.y2k.gov). The
program included an evaluation and testing of its internally developed operating
systems and internally used financial and administration systems. Externally,
the program had solicited compliance certificates from third-party software and
equipment vendors as well as statements of readiness from major suppliers. The
Company had developed a contingency plan for critical aspects for its systems
and operations to address problems that may arise despite our Year 2000
compliance efforts.
As of January 7, 2000, the Company had not detected any system failures
or issues related to the Year 2000 changeover. The Company will continue to
monitor the performance of its electronic systems as well as its major
suppliers to ensure that its operations will not be impacted by Year 2000
issues. The Company has incurred approximately $475,000 to date on the year
2000 initiative, which consists of $450,000 in fiscal 1999 and $25,000 in
fiscal 2000. The Company anticipates no further expenditures related to Y2K
unless significant problems occur.
Statements in this Form 10K that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment.
17
PART II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
10.47 Collaboration and License Agreement between the Company and
bioMerieux, Incorporated, dated September 30, 1999*
b) REPORTS ON FORM 8-K
None.
- ---------------------
* Confidential treatment requested with respect to a portion of this exhibit.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Philip V. Holberton
---------------------------
Philip V. Holberton
(Principal Financial Officer)
Date: January 11, 1999
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