SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: MAY 27, 2000
Commission File No: 0-10824
GENOME THERAPEUTICS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
100 BEAVER STREET;
WALTHAM, MASSACHUSETTS 02453
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 22,215,784
$.10 PAR VALUE Outstanding July 10, 2000
Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
Page
Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of 3
August 31, 1999 and May 27, 2000
Consolidated Condensed Statements of Operations 4
for the thirty-nine week periods ended
May 29, 1999 and May 27, 2000
Consolidated Statements of Cash Flows for the 5
thirty-nine week periods ended May 29, 1999
and May 27, 2000
Notes to Consolidated Condensed Financial 6-12
Statements for the thirty-nine week periods ended
May 29, 1999 and May 27, 2000
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
- ------------------------------------------------------------------------------------------------
August 31, May 27,
1999 2000
(Unaudited)
- ------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $12,802,162 $19,197,602
Marketable securities 12,060,230 11,156,620
Interest receivable 448,192 555,429
Accounts receivable 41,236 405,498
Unbilled costs and fees 35,328 20,401
Prepaid expenses and other current assets 282,975 702,705
Note receivable from officer 120,000 120,000
-------------- --------------
Total current assets 25,790,123 32,158,255
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 15,844,262 18,211,391
Leasehold improvements 8,205,701 8,284,123
Equipment and furniture 1,344,703 1,108,867
-------------- --------------
25,394,666 27,604,381
Less accumulated depreciation
and amortization 12,173,500 14,022,477
-------------- --------------
13,221,166 13,581,904
Restricted cash 200,000 200,000
Long-term marketable securities - 1,112,972
Other assets 273,708 741,477
-------------- --------------
Total assets $39,484,997 $47,794,608
============== ==============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $987,958 $1,178,428
Accrued expenses 2,322,780 3,164,206
Deferred revenue 2,903,534 3,637,983
Current maturities of long-term obligations 3,934,547 4,517,267
-------------- --------------
Total current liabilities 10,148,819 12,497,884
Long-term obligations, net of current maturities 5,925,086 4,781,003
Shareholders' equity 23,411,092 30,515,721
-------------- --------------
Total liabilities and shareholders' equity $39,484,997 $47,794,608
============== ==============
See Notes to Consolidated Condensed Financial Statements.
3
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
May 29, May 27, May 29, May 27,
1999 2000 1999 2000
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------
Revenues:
Contract research, licenses,
subscription fees and royalties $6,302,475 $6,477,526 $17,815,475 $20,317,699
Costs and Expenses:
Research and development 6,828,850 6,293,820 20,314,517 18,043,366
Selling, general and 1,219,241 1,322,611 3,281,664 4,010,560
administrative
------------ ------------ ----------- ------------
Total costs and expenses 8,048,091 7,616,431 23,596,181 22,053,926
------------ ------------ ----------- ------------
Loss from Operations ($1,745,616) ($1,138,905) ($5,780,706) ($1,736,227)
------------ ------------ ----------- ------------
Interest income 379,217 470,037 1,253,622 1,269,304
Interest expense (261,299) (220,188) (790,359) (616,639)
------------ ------------ ----------- ------------
Net interest income 117,918 249,849 463,263 652,665
------------ ------------ ----------- ------------
Net loss ($1,627,698) ($889,056) ($5,317,443) ($1,083,562)
============ ============ =========== ============
Net Loss per Common Share:
Basic and diluted ($0.09) ($0.04) ($0.29) ($0.05)
============ ============ =========== ============
Weighted average common shares
outstanding:
Basic and diluted 18,367,746 20,606,918 18,345,954 19,799,349
============ ============ =========== ============
See Notes to Consolidated Condensed Financial Statements.
4
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------
Thirty-nine Weeks Ended
May 29, May 27,
1999 2000
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss ($5,317,443) ($1,083,562)
Adjustments to reconcile net loss to net
cash povided by (used in) operating activities:
Depreciation and amortization 3,076,236 2,969,060
Deferred compensation 113,472 696,569
Changes in assets and liabilities:
Interest receivable 270,739 (107,237)
Accounts receivable 6,096 (364,262)
Unbilled costs and fees 64,529 14,927
Prepaid expenses and other current assets 239,540 (419,730)
Accounts payable 150,983 190,470
Accrued expenses 390,735 841,426
Deferred revenue 570,338 734,449
------------ ------------
Total adjustments 4,882,668 4,555,672
------------ ------------
Net cash provided by (used in) operating activities (434,775) 3,472,110
------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities (13,848,683) (34,286,912)
Maturities of marketable securities 22,973,000 34,077,550
Purchases of equipment and leasehold improvements (395,866) (685,644)
Decrease in other assets 127,934 (467,769)
------------ ------------
Net cash provided by (used in) investing activities 8,856,385 (1,362,775)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock - 3,732,115
Proceeds from exercise of stock options 181,581 3,759,507
Payments on long-term obligations (4,380,952) (3,205,517)
------------ ------------
Net cash provided by (used in) financing activities (4,199,371) 4,286,105
------------ ------------
Net Increase in Cash and Cash Equivalents 4,222,239 6,395,440
Cash and Cash Equivalents, at beginning of period 10,978,176 12,802,162
------------ ------------
Cash and Cash Equivalents, at end of period $15,200,415 $19,197,602
------------ ------------
Supplemental Disclosure of Cash Flow Information:
Interest paid during period $790,360 $616,639
------------ ------------
Income taxes paid during period $20,250 $10,800
------------ ------------
Supplemental Disclosure of Non-cash Investing and Financing
Activities:
Equipment acquired under capital lease obligations $1,347,956 $2,664,154
------------ ------------
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 thirty-nine week period ended May 27, 2000 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 alliances
with pharmaceutical companies and from government grants and contracts.
Up-front license fees are recognized as earned, generally over the life of
the contract research period. Revenues from research and development
alliances are recognized over their respective contract periods. Subscription
fees from the PathoGenome-TM- Database are recognized ratably over the life
of the subscription. Milestone payments from research and development
alliances are recognized when they are achieved. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was
issued in December 1999. SAB 101 will require companies to recognize certain
up-front non-refundable fees and milestone payments over the life of the
related alliances when such fees are received in conjunction with alliances
which have multiple elements. We are required to adopt this new accounting
principle through a cumulative charge to our statement of operations, in
accordance with Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING
CHANGES, no later than the fourth quarter of fiscal 2001. The historical
financial statements include payments of approximately $19.0 million received
and recognized as revenue in fiscal years 1995 through May 27, 2000. Based on
guidance currently available, upon the adoption of SAB 101, we may be
required to record these fees as revenue over the life of the related
agreements that extend beyond the current fiscal period.
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. Basic and diluted earnings per share were
determined by dividing net loss by the weighted average common shares
outstanding during the period. Diluted loss per share is the same as basic loss
per share for the periods ended May 27, 2000 and May 29, 1999 as the effect of
the potential common stock equivalents is antidilutive. Potential common stock
equivalents of 2,516,293 and 3,543,573 were excluded from diluted loss per share
at May 27, 2000 and May 29, 1999, respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. At May 27, 2000 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 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
6
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 May 27, 2000 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 thirty-nine week periods ended May 27, 2000 and May 29, 1999 were the
same as reported net loss for those periods.
7. LONG-TERM OBLIGATIONS
On February 23, 2000, the Company entered into an equipment lease line of
credit under which it can finance up to $4,000,000 of laboratory, computer and
office equipment. The Company, at its discretion, can enter into either an
operating or capital lease. Borrowings under operating leases are payable in
twenty-four monthly installments and capital leases are payable in thirty-six
monthly installments. As of May 27, 2000, the Company borrowed $2,272,000 as a
capital lease which interest is payable at the prevailing three-year treasury
rate plus 2.75%-3.66%, as defined. The Company had approximately $1,728,000
available under this line at May 27, 2000.
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 fixed rate of 8.95%. On March 9, 1998, the
7
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 were 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 fixed rate of 8.78%. 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. On December 31, 1999, the line of credit had expired, at which time
the Company had utilized a total of $8,347,000 of the $10,300,000 available
under this line of credit.
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
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 entered into other capital lease line arrangements under
which it financed approximately $750,000 of certain laboratory and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 9.15% to 10.28%.
8. ALLIANCES
(A) ASTRAZENECA
In August 1995, the Company entered into a strategic alliance with
AstraZeneca ("Astra"), formerly Astra Hassle AB, to develop drugs, vaccines
and diagnostic products effective against peptic ulcers 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 H. PYLORI technology.
The agreement provided for a four-year research alliance to further develop
and annotate the Company's H. PYLORI genomic sequence database, identify
therapeutic and vaccine targets and develop appropriate biological assays. In
August 1999, the Company successfully concluded its portion of the research
alliance and transitioned the program into AstraZeneca's pipeline for
pre-clinical testing.
Under this agreement, Astra agreed to pay the Company subject to the
achievement of certain product development milestones, up to approximately $23.3
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 May 27, 2000. 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.
The Company recorded no revenue for the thirteen week period ended May 27,
2000 and revenue of approximately $201,000 for the same period ended May 29,
1999, under this agreement, which consisted of sponsored research funding.
For the thirty-nine week periods ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $22,000 and $624,000, respectively, under this
agreement, which consisted of sponsored research funding.
8
(B) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance 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 STAPH.AUREUS to identify and validate new gene targets for
development of drugs to target STAPH.AUREUS and other pathogens that have become
resistant to current antibiotics. As part of this agreement, the Company granted
Schering-Plough exclusive access to the Company's proprietary STAPH.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. In June 2000, Schering-Plough elected to extend the
research program for the second time through at least September 2001. Under
the agreement as extended, Schering-Plough agreed to pay the Company a
minimum of $21.4 million in an up-front license fee, research funding and
milestone payments. Subject to the achievement of additional product
development milestones, Schering-Plough 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 an alliance 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. A total of $19.3 million has
been received through May 27, 2000.
For the thirteen week periods ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $462,000 and $570,000, respectively, under this
agreement, which consisted of sponsored research funding.
For the thirty-nine week period ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $1,581,000 and $1,902,000 under this agreement,
which consisted of sponsored research funding.
In December 1996, the Company entered into its second strategic alliance
and license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new pharmaceutical products for treating asthma. As part of
the agreement, the Company will employ its high-throughput disease gene
identification, bioinformatics, and genomics sequencing capabilities to identify
genes and associated proteins that can be utilized by Schering-Plough to develop
pharmaceuticals and vaccines for treating asthma. 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 alliance.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough was required to
fund a research program for a
9
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 May 2000, Schering-Plough extended this
research alliance through at least December 2001. In addition, upon
completion of certain scientific developments, Schering-Plough will make
milestone payments to 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 $75.9 million, excluding
royalties. Of the total potential payments, approximately $31.4 million
represents license fees and research payments, and $44.5 million represents
milestone payments based on achievement of research and product development
milestones. A total of $26.8 million has been received through May 27,
2000.
For the thirteen week periods ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $1,177,000 and $2,280,000, respectively, under this
agreement, which consisted primarily of sponsored research funding.
For the thirty-nine week periods ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $4,934,000 and $7,065,000, respectively, under this
agreement, which consisted of sponsored research funding, subcontract activity
and milestone payments.
On September 1997, the Company entered into a third strategic alliance and
license agreement with Schering-Plough to use genomics to discover and develop
new pharmaceutical products to treat fungal infections.
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 alliance 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
agreed to fund a research program for a minimum number of years with an
option to extend. In December 1999, Schering-Plough extended this alliance
through September 2001. If all milestones are met and the research program
continues for its full term, total payments to the Company will approximate
$32 million, excluding royalties. Of the total potential payments,
approximately $9 million represents sponsored research payments and $23
million represents milestone payments based on achievement of research and
product development milestones. A total of $10.0 million has been received
through May 27, 2000. Additionally, the Company entered into a
subscription agreement with Schering-Plough to provide Schering-Plough with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenome-TM- and associated information relating to microbial organisms
(see Note 9).
For the thirteen week period ended May 27, 2000, the Company recorded
revenue of $577,000 under this agreement, which consisted of sponsored research
funding. For the thirteen week period ended May 29, 1999, the Company recorded
revenue of $1,872,000 under this agreement, which consisted of sponsored
research funding and a milestone payment.
For the thirty-nine week periods ended May 27, 2000 and May 29, 1999, the
Company recorded revenue of $2,852,000 and $3,897,000 under this agreement,
which consisted of sponsored research funding and milestone payments.
Under certain circumstances, the Company may have an obligation to give
Schering-Plough a right of first negotiation to develop with the Company certain
of its asthma and infectious disease related discoveries if it decides to seek a
third party collaborator to develop such discovery.
(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 is
participating 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
10
up to $15.6 million over a three year period of which $5 million is expected
to be received over the initial 12 months as the Company performs research
under the project. For the thirteen and thirty-nine week periods ended May
27, 2000, the Company recognized revenue of approximately $1,753,000 and
$4,402,000, respectively, in connection with the international Human Genome
Project. Funding under our government grants and research contracts is
subject to appropriation each year by the United States Congress and can be
discontinued or reduced at any time. In addition, we cannot be certain that
we will receive additional grants or contracts in the future. The
government's failure to fund our research in this area not only would end the
Company's participation in the program, but might adversely affect the
industry-wide perception of genomics and the utility of genomic information.
(D) 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
(see Note 9), 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. The total amount of guaranteed
research and development funding and the proceeds from the sale of the common
stock, approximates $6.0 million. The research and development funding will
be recognized ratably over the four year term of the agreement. For the
thirteen and thirty-nine week periods ended May 27, 2000, the Company
recorded revenue of $430,000 and $949,000, respectively, which consists of
research funding and the amortization of the up-front license fees. A total
of $1.7 million has been received through May 27, 2000.
(E) 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 is expected to receive $4.2 million through December 2000 as the
Company performs research under the project. For the thirteen and thirty-nine
weeks ended May 27, 2000, the Company recognized revenue of approximately
$205,000 and $711,000, respectively, with respect to this agreement. Funding
under our government grants and research contracts is subject to
appropriation each year by the United States Congress and can be discontinued
or reduced at any time. In addition, we cannot be certain that we will
receive additional grants or contracts in the future. The government's
failure to fund our research in this area not only would end the Company's
participation in the program, but might adversely affect the industry-wide
perception of genomics and the utility of genomic information.
(F) WYETH-AYERST LABORATORIES
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-Ayerst's drug discovery capabilities and its expertise
in bone biology and the osteroporotic disease process to develop new
pharmaceuticals. Under the terms of the agreement, Wyeth-Ayerst paid the
Company an up-front license fee, fund a multi-year research program, will
make milestone payments and pay royalties on sales of therapeutics products
developed from this alliance. 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. For the
thirteen and thirty-nine weeks ended May 27, 2000, the Company recognized
revenue of approximately $375,000 and $625,000, respectively, which consists
of research funding and the amortization of the up-front license fee. A total
of $1.5 million has been received through May 27, 2000.
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9. PATHOGENOME-TM- DATABASE
The Company has entered into PathoGenome-TM- Database subscriptions with
Bayer AG, Bristol-Myers Squibbs, Scriptgen Pharmaceuticals, Inc.,
Schering-Plough (see Note 8), Aventis, formerly Hoechst Marion Roussel, and
bioMerieux (Note 8). The database subscription provides nonexclusive access
to the Company's proprietary genome sequence database, PathoGenome-TM-
Database and associated information relating to microbial organisms. These
agreements call for the Company to provide periodic data updates, analysis
tools and software support. Under the subscription agreements, the customer
pays an annual subscription fee and will pay 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.
In April 2000, the Company entered into a collaboration with Compugen
Inc. to establish internet-based access to the Company's PathoGenome-TM-
Database. The collaboration will provide scientists worldwide with access to
the Company's PathoGenome-TM- Database through Compugen's LabOnWeb.com. Under
the terms of the agreement, Compugen will have exclusive rights to make the
Company's PathoGenome-TM- Database available over the internet. The Company
and Compugen will share revenue generated by customers who use
PathoGenome-TM- Database data from LabOnWeb.com.
The Company has recognized $1,004,000 and $1,230,000 in revenue under these
agreements for the thirteen week periods ended May 27, 2000 and May 29, 1999,
respectively.
The Company has recognized $3,229,000 and $3,784,000 in revenue under these
agreements for the thirty-nine week periods ended May 27, 2000 and May 29, 1999,
respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
On February 28, 2000, the Company adopted an Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings toward
the semi-annual purchase of the Company's common stock. The employees purchase
price will be 85% of the fair market value of the common stock at (a) the time
at grant of option or (b) the time at which the option is deemed exercised,
whichever is less. No compensation expense will be recorded in connection with
the plan.
11. SUBSEQUENT EVENT
Subsequent to May 27, 2000, the Company sold 1,500,000 shares of its
common stock in a series of transactions through the Nasdaq National Market
at an average price of $31.01 per share resulting in proceeds of
approximately $44.7 million, net of issuance costs. Through May 27, 2000, the
Company incurred approximately $500,000 in issuance costs associated with
these transactions, which is included in Other Assets in the accompanying
Condensed Consolidated Balance Sheets.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("GTC", "we", or "our") is a leader in the
commercialization of genomics-based drug discovery. We have over ten years of
experience in genomics research and have been one of the original recipients of
funding from the United States government under its genome programs. Our
commercial strategy is to use our genomics and related proprietary technologies
to identify and validate novel drug targets for commercialization through
alliances with pharmaceutical companies. Our two areas of scientific focus are
the discovery and characterization of novel targets for human diseases and
serious infectious diseases. We also commercialize our sequencing capabilities
through the GTC Sequencing Center, which we established in July 1999 to provide
high quality, industrial scale sequencing to pharmaceutical and biotechnology
companies on a contract basis. In May 1997, we introduced a non-exclusive
genetic database, the PathoGenome-TM- Database, which provides subscribers with
genetic information to identify gene targets. We believe that our genomic
discoveries and information from our database will lead to the development of
novel therapeutics, vaccines, and diagnostic products by us and our strategic
partners.
We receive payments from our strategic partners based on license fees,
sponsored research and milestone payments during the term of the alliance. In
addition, subscribers to our PathoGenome-TM- Database pay access fees for the
information they obtain. Once a product resulting from a research alliance or
a subscriber's use of the PathoGenome-TM- Database is commercialized, we are
entitled to receive royalty payments based upon product revenues. We
anticipate that our alliances will result in the discovery and
commercialization of novel pharmaceutical, vaccine and diagnostic products.
In order for a product to be commercialized based on our research, it will be
necessary for the strategic partners to conduct preclinical tests and
clinical trials, obtain regulatory clearances, manufacture, sell, and
distribute the product. Accordingly, we do not expect to receive royalties
based upon product revenues for many years, if at all. Additionally, we sell,
as a contract service business, high quality genomic sequencing information
to third parties, including pharmaceutical companies, biotechnology
companies, governmental agencies, and academic institutions.
Our primary sources of revenue are from alliance agreements with
pharmaceutical company partners, subscription agreements to our
PathoGenome-TM-Database and government research grants and contracts. As of
May 2000, we had six strategic research alliances. In August 1995, we entered
into an alliance with AstraZeneca to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infections or any
other disease caused by H. PYLORI. In August 1999, the sponsored research
under the alliance concluded and the program transitioned into AstraZeneca's
pipeline. We are entitled to receive additional milestone payments and
royalties based upon the development by AstraZeneca of any products from the
research alliance. We entered into an alliance with Schering-Plough in
December 1995. Under this alliance, Schering-Plough can use our STAPH. AUREUS
genomic database to identify new gene targets for the development of novel
antibiotics. In December 1996, we entered into our second research alliance
with Schering-Plough to identify genes and associated proteins that
Schering-Plough can utilize to develop new pharmaceuticals for treating
asthma. In September 1997, we established our third research alliance with
Schering-Plough for the development of new pharmaceutical products to treat
fungal infections. In September 1999, we 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
strategic alliance, bioMerieux has purchased a subscription to our
PathoGenome-TM- Database and has made an equity investment. In December 1999,
we entered into a strategic alliance with Wyeth-Ayerst to develop drugs based
on our genetic research to treat osteoporosis. For the thirty-nine week
periods ended May 29, 1999 and May 27, 2000, revenue recognized under our
strategic alliance agreements with Schering-Plough accounted for
approximately 76% and 48%, respectively, of our total revenues.
In May 1997, we introduced our PathoGenome-TM- Database and sold our first
subscription. Since that date, we have continued to contract with subscribers on
a non-exclusive basis, and, as of May 2000, we had a total of seven subscribers.
Under our agreements, the subscribers receive non-exclusive access to
13
information relating to microbial organisms in our PathoGenome-TM- Database.
Subscriptions to the database generate revenue over the term of the subscription
with the potential for royalty payments to us from future product sales.
In April 2000, the Company entered into collaboration with Compugen Inc. to
establish internet-based access to the Company's PathoGenome-TM- Database. The
collaboration will provide scientists worldwide with access to the Company's
PathoGenome-TM- Database through Compugen's LabOnWeb.com. Under the terms of the
agreement, Compugen will have exclusive rights to make the Company's
PathoGenome-TM- Database available over the internet. The Company and Compugen
will share revenue generated by customers who use PathoGenome-TM- Database data
from LabOnWeb.com.
Since 1989, the United States government has awarded us a number of
research grants and contracts related to 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 our genomics technology base and
enhance the expertise of our scientific personnel. In July 1999, the
government named us as one of the nationally funded DNA sequencing centers of
the international Human Genome Project. We are participating in an
international consortium in a full-scale effort to sequence the human genome.
We will receive funding from the National Human Genome Research Institute
(NHGRI) under the Human Genome Project of up to $15.6 million over a
three-year period, of which $5.0 million is guaranteed over the initial
twelve months. In October 1999, NHGRI appointed us as one of the initial
centers in the Mouse Genome Sequencing Network. We will participate in
deciphering the genetic makeup of the mouse. We will receive funding from the
NHGRI under this program of up to $12.9 million over a three-year period, of
which $4.2 million is guaranteed through December 2000. These programs are
subject to annual appropriations by the government based upon the
availability of government funds and the achievement by us of certain
milestones. Government grants as a percentage of total revenues will increase
due to these grants from NHGRI.
We have incurred significant operating losses since our inception. As of
May 27, 2000, we had an accumulated deficit of approximately $67.8 million.
Our losses are primarily from costs associated with prior operating
businesses and research and development expenses. These costs have often
exceeded our revenues generated by our alliances, subscription agreements and
government contracts and grants. Our results of operations have fluctuated
from period to period and may continue to fluctuate in the future based upon
the timing, amount and type of funding. We expect to incur additional
operating losses in the future.
We are subject to risks common to companies in our industry including
unproven technology and business strategy, reliance upon collaborative partners
and others, rapid technological change, 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, availability of, and competition
for, unique family resources, and volatility of our stock price.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MAY 29, 1999 AND MAY 27, 2000
REVENUES
Revenues increased 3% from $6,302,000 for the thirteen week period ended
May 29, 1999 to $6,478,000 for the thirteen week period ended May 27, 2000,
resulting from an increase in revenue recognized under our government
research grants with the National Human Genome Research Institute to
participate in the international Human Genome Project and Mouse Genome
Sequencing projects, partially offset by a decline in sponsored research
funding.
COSTS AND EXPENSES
Total costs and expenses decreased 5% from $8,048,000 for the thirteen week
period ended May 29, 1999 to $7,616,000 for the thirteen week period ended May
27, 2000. Research and development expense, which includes internal research and
development and research funded pursuant to
14
arrangements with our strategic alliances and U.S. government, decreased from
$6,829,000 in the thirteen week period ended May 29, 1999 to $6,294,000 for the
thirteen week period ended May 27, 2000. The reduction was primarily
attributable to our decision to focus on fewer internally funded programs. The
reduction in these expenses consisted of decreases in payroll and related
expenses, laboratory supplies and overhead expenses.
Selling, general and administrative expenses increased 8% from
$1,219,000 for the thirteen week period ended May 29, 1999 to $1,323,000 for
the thirteen week period ended May 27, 2000. This increase was due to an
increase in compensation expense related to issuance of stock options and
restricted stock.
INTEREST INCOME AND EXPENSE
Interest income increased 24% from $379,000 for the thirteen week period
ended May 29, 1999 to $470,000 for the same period ended May 27, 2000,
reflecting an increase in funds available for investment as a result of the sale
of equity securities to bioMerieux and proceeds received from the exercise of
stock options.
Interest expense decreased 16% from $261,000 for the thirteen week period
ended May 29, 1999 to $220,000 for the same period ended May 27, 2000 due
primarily to a decrease in outstanding balances under our long-term obligations.
THIRTY-NINE WEEK PERIOD ENDED MAY 29, 1999 AND MAY 27, 2000
REVENUES
Revenues increased 14% from $17,815,000 for the thirty-nine week period
ended May 29, 1999 to $20,318,000 for the thirty-nine week period ended May
27, 2000. This increase was the result of an increase in revenue recognized
under our government research grants with the National Human Genome Research
Institute to participate in the international Human Genome and Mouse Genome
sequencing projects, partially offset by a decline in sponsored research
funding.
COSTS AND EXPENSES
Total costs and expenses decreased 7% from $23,596,000 for the thirty-nine
week period ended May 29, 1999 to $22,054,000 for the thirty-nine week period
ended May 27, 2000. Research and development expense, which includes internal
research and development and research funded pursuant to arrangements with our
strategic alliances and U.S. government, decreased 11% from $20,315,000 for the
thirty-nine week period ended May 29, 1999 to $18,043,000 for the thirty-nine
week period ended May 27, 2000. The reduction was primarily attributable to our
decision to focus on fewer internally funded programs. The reduction in these
expenses consisted of decreases in payroll and related expenses, laboratory
supplies and overhead expenses.
Selling, general and administrative expenses increased 22% from
$3,282,000 for the thirty-nine week period ended May 29, 1999 to $4,011,000
for the thirty-nine week period ended May 27, 2000. This increase was due to
an increase in expenses related to being a public company, as well as
compensation expense related to issuance of stock options and restricted
stock.
INTEREST INCOME AND EXPENSE
Interest income remained relatively constant from $1,254,000 for the
thirty-nine week period ended May 29, 1999 to $1,269,000 for the same period
ended May 27, 2000.
Interest expense decreased 22% from $790,000 for the thirty-nine week
period ended May 29, 1999 to $617,000 for the same period ended May 27, 2000 due
primarily to a decrease in outstanding balances under our long-term obligations.
15
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have been payments received from strategic
alliances, subscription fees, government grants and contracts, borrowings
under equipment lending facilities and capital leases and proceeds from sale
of equity securities.
As of May 27, 2000, we had cash, cash equivalents, restricted cash, and
short-term and long-term marketable securities of approximately $31,667,000.
Subsequent to May 27, 2000, we sold 1,500,000 shares of common stock in a
series of transactions through the Nasdaq National Market at an average price
of $31.01 per share, resulting in proceeds of approximately $44.7 million,
net of issuance costs.
We have various arrangements under which we finance certain office and
laboratory equipment and leasehold improvements. At May 27, 2000, we had an
aggregate of approximately $9,298,000 outstanding under its borrowing
arrangements which is repayable over the next 36 months, of which $4,517,000 is
repayable within the next 12 months. Under these arrangements, we are 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. At May 27, 2000, we had
approximately $1,728,000 available under one of these arrangements for future
borrowings.
Our operating activities used cash of approximately $435,000 and
provided cash of approximately $3,472,000 for the thirty-nine week periods
ended May 29, 1999 and May 27, 2000, respectively. For the thirty-nine week
period ended May 27, 2000, our increase in cash provided by operations
resulted from a decrease in net loss and an increase in deferred revenue,
accounts payable and accrued liabilities, partially offset by an increase in
other current assets. The increase in deferred revenue represents cash
received under the bioMerieux and Wyeth-Ayerst alliances prior to revenue
recognition. The increase in accrued liabilities reflects an increase in
payroll related expenses including withholdings associated with our newly
adopted Employee Stock Purchase Plan.
Our investing activities provided cash of approximately $8,856,000 for
the thirty-nine week periods ended May 29, 1999 and used cash of
approximately $1,363,000 for the same period ended May 27, 2000. For the
thirty-nine week ended May 27, 2000, cash used in investing activities
represents an increase in Other Assets, purchases of marketable securities,
and purchases of capital equipment, which will be financed under capital
leases. The increase in Other Assets reflects issuance costs incurred by the
Company related to the above mentioned sale of equity securities.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $3,350,000 for the thirty-nine week period ended May
27, 2000. Purchases consisted of laboratory and computer equipment. We
currently estimate that we will acquire an additional $1,200,000 in capital
equipment in fiscal 2000 consisting primarily of computer and laboratory
equipment of which we intend to finance the majority under existing equipment
financing arrangements and the remaining from existing cash resources.
Our financing activities used cash of approximately $4,199,000 for the
thirty-nine week period ended May 29, 1999 primarily for payments of long-term
obligations. Our financing activities provided cash of approximately $4,286,000
for the thirty-nine week period ended May 27, 2000 from the sale of equity
securities to bioMerieux, exercise of stock options, net of payments of
long-term obligations.
As of August 31, 1999, we 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.
We believe that our existing capital resources, including the capital
raised subsequent to May 27, 2000, are adequate to meet our cash requirements
for the foreseeable future under our current rate of investment in research
and development. There is no assurance,
16
however, that changes in our plans or events affecting our operations will not
result in accelerated or unexpected expenditures.
We may seek additional funding in the future through public or private
financing. Additional financing may not be available when needed, or if
available, it may not be on terms acceptable to us. To the extent that we raise
additional capital by issuing equity or convertible debt securities, ownership
dilution to stockholders will result.
We do not currently use derivative financial instruments. We generally
place our marketable security investments in high quality credit instruments, as
specified in our investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue, issuer, and type of instrument. We do not
expect any material loss from our marketable security investments and therefore
believe that our potential interest rate exposure is limited.
This Form 10-Q and documents we have filed with the Securities and
Exchange Commission contain forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements represent our management's judgment
regarding future events. Forward-looking statements typically are identified
by use of terms such as "may," "will," "should," "plan," "expect," "intend,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. All forward-looking statements, other
than statements of historical fact, included in this report regarding our
financial position, business strategy and plans or objectives for future
operations are forward-looking statements. We cannot guarantee the accuracy
of the forward-looking statements, nor do we plan to update these
forward-looking statements. You should be aware that our actual results could
differ materially from those contained in the forward-looking statements due
to a number of risks affecting our business, including the ability of the
Company and its alliance partners to (i) successfully develop products based
on the Company's genomic information, (ii) obtain the necessary governmental
approvals, (iii) effectively commercialize any products developed before its
competitors and (iv) obtain and enforce intellectual property rights, as well
as the risk factors set forth in the Company's Annual Report on Form 10-K for
the year ended August 31, 1999 and those set forth in other filings that we
may make with the Securities and Exchange Commission from time to time.
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, was
issued in December 1999. SAB 101 will require companies to recognize certain
up-front non-refundable fees and milestone payments over the life of the
related alliances when such fees are received in conjunction with alliances
which have multiple elements. We are required to adopt this new accounting
principle through a cumulative charge to our statement of operations, in
accordance with Accounting Principles Board Opinion (APB) No. 20, Accounting
Changes, no later than the fourth quarter of fiscal 2001. The historical
financial statements include payments of approximately $19.0 million received
and recognized as revenue in fiscal years 1995 through May 27, 2000. Based on
guidance currently available, upon the adoption of SAB 101, we may be
required to record these fees as revenue over the life of the related
agreements that extend beyond the current fiscal period.
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
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27 Financial Data Schedule
b) Reports on Form 8-K
Report on Form 8-K filed on March 8, 2000 to file the Company's
collaboration and license agreement with American Home Products
Corporation.
Report on Form 8-K filed on April 4, 2000 to file the Company's
press release reporting the collaboration with Compugen Inc.
Report on Form 8-K/A filed on April 10, 2000 to file portions of
the Company's collaboration and license agreement with American Home
Products Corporation.
Report on Form 8-K filed on April 18, 2000 to file the Company's
decision to cancel its follow-on public offering and convert its
registration statement into a shelf registration statement.
Report on Form 8-K filed on May 5, 2000 to file the Company's
extension of its asthma alliance with Schering-Plough.
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: July 11, 2000