FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2001 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. Employer Identification Number)
9410 Key West Avenue, Rockville, Maryland 20850-3331
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrant's telephone Number)
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
--------
The number of shares of the registrant's common stock outstanding on September
30, 2001 was 127,802,272.
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three and nine months
ended September 30, 2001 and 2000......................................... 3
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000......... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000......................................... 5
Notes to Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 14
Signatures...................................................................... 15
2
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------ ------------- -------------
(dollars in thousands, except share and per share amounts)
Revenue - research and development collaborative contracts:
Third parties ............................................... $ 1,000 $ 5,625 $ 10,250 $ 14,875
Related parties ............................................. 642 642 1,926 1,926
------------- ------------- ------------- -------------
Total revenue ...................................... 1,642 6,267 12,176 16,801
------------- ------------- ------------- -------------
Costs and expenses:
Research and development .................................... 37,407 23,471 105,963 64,709
Purchased In-Process R&D .................................... -0- 134,050 -0- 134,050
General and administrative .................................. 9,212 6,274 27,198 18,794
------------- ------------- ------------- -------------
Total costs and expenses ........................... 46,619 163,795 133,161 217,553
------------- ------------- ------------- -------------
Income (loss) from operations .................................. (44,977) (157,528) (120,985) (200,752)
Interest income ................................................ 26,267 14,954 81,893 37,969
Interest expense ............................................... (6,150) (6,335) (18,924) (15,724)
Debt conversion expenses ....................................... (19) -0- (3,894) (50,818)
------------- ------------- ------------- -------------
Income (loss) before taxes and cumulative effect of change in
accounting principle ....................................... (24,879) (148,909) (61,910) (229,325)
Provision for income taxes ..................................... -0- -0- -0- 225
------------- ------------- ------------- -------------
Income (loss) before cumulative effect of change in accounting
principle .................................................. (24,879) (148,909) (61,910) (229,550)
Cumulative effect of change in accounting principle ............ -0- -0- -0- (8,250)
------------- ------------- ------------- -------------
Net income (loss) .............................................. $ (24,879) $ (148,909) $ (61,910) $ (237,800)
============= ============= ============= =============
Net income (loss) per share, basic and diluted:
Net income (loss) per share, before cumulative effect of change
in accounting principle .................................... $ (0.19) $ (1.35) $ (0.49) $ (2.13)
Cumulative effect of change in accounting principle ............ -0- -0- -0- (0.08)
------------- ------------- ------------- -------------
Net income (loss) per share, basic and diluted ................. $ (0.19) $ (1.35) $ (0.49) $ (2.21)
============= ============= ============= =============
Weighted average shares outstanding,
basic and diluted .......................................... 127,670,980 110,646,143 126,626,604 107,665,837
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
3
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------ ------------
ASSETS (dollars in thousands)
------
Current assets:
Cash and cash equivalents .................................. $ 62,851 $ 493,867
Short-term investments ..................................... 1,596,596 1,268,441
Prepaid expenses and other current assets .................. 8,084 9,290
----------- -----------
Total current assets ................................. 1,667,531 1,771,598
Long-term investments ............................................ 32,824 93,337
Property, plant and equipment (net of accumulated depreciation) .. 83,744 38,567
Restricted investments ........................................... 69,457 12,332
Other assets ..................................................... 28,005 32,691
----------- -----------
TOTAL ASSETS ......................................... $ 1,881,561 $ 1,948,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt .......................... $ 444 $ 729
Accounts payable and accrued expenses ...................... 23,464 18,317
Accrued payroll and related taxes .......................... 6,722 3,820
Deferred revenues .......................................... 2,568 11,818
----------- -----------
Total current liabilities ............................ 33,198 34,684
Long-term debt, net of current portion ........................... 503,912 533,146
Deferred revenues ................................................ 13,481 15,407
Other liabilities ................................................ 2,071 2,333
----------- -----------
Total liabilities .................................... 552,662 585,570
----------- -----------
Stockholders' Equity:
Preferred stock ............................................ -0- -0-
Common stock ............................................... 1,278 1,252
Additional paid-in capital ................................. 1,747,950 1,698,384
Unearned portion of compensatory stock options ............. -0- (192)
Accumulated other comprehensive income (loss) .............. 6,261 28,190
Retained earnings (deficit) ................................ (426,590) (364,679)
----------- -----------
Total stockholders' equity ........................... 1,328,899 1,362,955
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 1,881,561 $ 1,948,525
=========== ===========
See accompanying notes to consolidated financial statements.
4
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2001 2000
----------- ------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ (61,910) $ (237,800)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Accrued interest on short-term investments .............................. 3,801 (5,974)
Depreciation and amortization ........................................... 9,507 7,617
Purchased In-Process Research and Development ........................... -0- 134,050
Inducement costs paid in the form of common stock ....................... 3,875 19,433
Cumulative effect of change in accounting principle ..................... -0- 8,250
Loss (gain) on disposal of fixed assets ................................. 367 9
Compensation expense related to stock options ........................... 192 150
Changes in operating assets and liabilities:
Prepaid expenses and other current assets .......................... 354 (7,039)
Other assets ....................................................... 2,184 (16,902)
Accounts payable and accrued expenses .............................. 6,572 4,093
Accrued payroll and related taxes .................................. 2,902 4,119
Deferred revenues .................................................. (11,176) (1,926)
Other liabilities .................................................. (262) 13
----------- -----------
Net cash provided by (used in) operating activities ..................... (43,594) (91,907)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment ......................... (54,267) (12,364)
Purchase of short-term investments and marketable securities ................. (1,141,391) (563,965)
Purchase of long-term investment ............................................. -0- (54,766)
Acquisition, net of acquired cash ............................................ -0- 875
Proceeds from sales and maturities of investments and marketable securities .. 848,870 143,509
----------- -----------
Net cash provided by (used in) investing activities ..................... (346,788) (486,711)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .................................................. (924) -0-
Restricted investments ....................................................... (57,125) (507)
Proceeds from issuance of long term debt (net of expenses) ................... -0- 508,584
Proceeds from issuance of common stock (net of expenses) ..................... 17,415 19,113
----------- -----------
Net cash provided by (used in) financing activities ..................... (40,634) 527,190
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. (431,016) (51,428)
Cash and cash equivalents - beginning of period ................................... 493,867 180,839
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD ......................................... $ 62,851 $ 129,411
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 11,700 $ 41,717
Income taxes 75 200
See accompanying notes to consolidated financial statements.
5
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS):
In July 2001, the Company converted $400 of 5 1/2% Convertible Subordinated
Notes Due 2006 to common stock. The Company incurred $19 in inducement costs
paid in the form of cash as an inducement to convert these notes and paid $1 in
accrued interest in the form of cash.
In June 2001, the Company converted $25,000 of 5% Convertible Subordinated Notes
Due 2007 to common stock. The Company incurred $3,875 in inducement costs paid
in the form of common stock as an inducement to convert these notes and paid
$458 in accrued interest in the form of common stock. In connection with this
conversion, the Company reclassified $673 of unamortized debt financing costs
associated with these notes to stockholders' equity as part of the conversion.
In May 2001, the Company converted $500 of 5 1/2% Convertible Subordinated Notes
Due 2006 to common stock. In connection with this conversion, the Company
reclassified $4 of unamortized debt financing costs associated with these notes
to stockholders' equity as part of the conversion.
In February 2001, the Company converted $2,694 of 5 1/2% Convertible
Subordinated Notes Due 2006 to common stock. In connection with this conversion,
the Company reclassified $65 of unamortized debt financing costs associated with
these notes to stockholders' equity as part of the conversion.
In March 2000, the Company converted $200,000 of 5% Convertible Subordinated
Notes Due 2006 to common stock. In connection with this conversion, the Company
made a $30,000 cash "make-whole" payment. In addition, the Company reclassified
$6,000 of unamortized debt financing costs associated with these notes to
stockholders' equity as part of the conversion.
In January 2000, the Company converted $118,285 of 5 1/2% Convertible
Subordinated Notes Due 2006 to common stock and incurred $19,433 in inducement
costs paid in the form of common stock as an inducement to convert. In addition,
the Company reclassified $3,470 of unamortized debt financing costs associated
with these notes to stockholders' equity as part of the conversion.
See accompanying notes to consolidated financial statements.
6
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(In thousands, except share and per share data)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Human Genome
Sciences, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information. In the opinion of the Company's management, the
consolidated financial statements reflect all adjustments necessary to
present fairly the results of operations for the three and nine month
periods ended September 30, 2001 and 2000, the Company's financial position
at September 30, 2001, and the cash flows for the nine month periods ended
September 30, 2001 and 2000. These adjustments are of a normal recurring
nature.
The results of operations, cash flows and comprehensive income for the three
and nine month periods ended September 30, 2000 have been restated to
reflect the implementation of SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") in 2000,
retroactive to January 1, 2000.
Certain notes and other information have been condensed or omitted from the
interim consolidated financial statements presented in this Quarterly Report
on Form 10-Q. Therefore, these financial statements should be read in
conjunction with the Company's 2000 Annual Report on Form 10-K and the
Company's March 31, 2001 and June 30, 2001 Quarterly Reports on Form 10-Q.
The results of operations for the three and nine month periods ended
September 30, 2001 are not necessarily indicative of future financial
results.
NOTE 2. ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION
On September 8, 2000, the Company acquired all of the outstanding shares of
capital stock of Principia Pharmaceutical Corporation ("Principia") from its
shareholders. The cost of the acquisition was $135,071, including fees and
expenses. The purchase price was paid with 1,582,204 shares of the Company's
Common Stock. The consolidated financial statements include the results of
operations of Principia since the date of acquisition.
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated as follows:
<Table>
Net assets and liabilities acquired at their
estimated fair value as of the date of acquisition $ 521
Assembled Workforce 500
Purchased In-Process Research and Development 134,050
------------
Total $ 135,071
============
</Table>
During the first quarter of 2001, the Company announced its decision to
relocate Principia's operations from Norristown, Pennsylvania to the
Company's Rockville, Maryland location. As a result, the Company recorded a
one-time charge in the first quarter of 2001 of approximately $1,900,
representing unit relocation costs and the write off of the remaining book
value of Principia's Assembled Workforce.
The balance of the unit relocation reserve was approximately $1,500 as of
September 30, 2001. In addition, the Company expects to incur approximately
$505 in personnel relocation costs and stay bonuses over the fourth quarter
of 2001 and the first quarter of 2002.
7
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(In thousands, except share and per share data)
NOTE 3. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", requires unrealized gains or losses on the Company's
available-for-sale securities and on the Company's investments in Transgene
S.A., Cambridge Antibody Technology and Ciphergen Biosystems to be included
in other comprehensive income.
During the three and nine month periods ended September 30, 2001 and 2000,
total comprehensive income (loss) amounted to:
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
2001 2000 2001 2000
----------- ---------- ----------- -------------
Net income (loss) $ (24,879) $(148,909) $ (61,910) $(237,800)
Net unrealized gains (losses):
Short-term investments 25,293 3,198 38,583 3,381
Long-term investments (13,789) 19,730 (60,513) 54,474
--------- --------- --------- ---------
Total comprehensive income (loss) $ (13,375) $(125,981) $ (83,840) $(179,945)
========= ========= ========= =========
Realized gains and losses, which are included in the Company's net income
(loss) for the three and nine months ended September 30, 2001, and their
respective net proceeds were as follows:
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Realized gains $ 2,261 $ 4,720
Realized losses (0) (146)
Net proceeds 129,765 550,521
Realized gains and losses on investments and their respective net proceeds
were immaterial for the three and nine months ended September 30, 2000.
NOTE 4. RECENT SEC INTERPRETATIONS
During the fourth quarter of 2000, the Company implemented SAB 101. SAB 101
provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 requires revenues to be
recognized ratably over the life of a contract period whereas, previously,
the Company generally recognized revenue as non-refundable cash payments
were made assuming no significant obligations remained. SAB 101 requires
companies to report any changes in revenue recognition as a cumulative
effect of a change in accounting principle at the time of implementation in
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes".
Historically, the Company has recognized non-refundable license fees,
research payments, additional payments and milestone payments in connection
with collaboration agreements when the revenue is earned in accordance with
the applicable performance requirements and/or contractual terms. This
revenue
8
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(In thousands, except share and per share data)
NOTE 4. RECENT SEC INTERPRETATIONS, CONTINUED
recognition policy was applicable to certain multi-year agreements the
Company entered into with Schering-Plough, Sanofi-Synthelabo and Merck KgaA
during 1996 (the "1996 Agreements"). The Company recognized revenue under
these agreements when it had performed all significant obligations and the
customer was obligated to pay. The Company generally considered any
remaining performance obligation, such as maintaining access to its genomic
databases, as insignificant. However, SAB 101 provides guidance that
indicates revenue recognition over the collaboration term is generally the
required treatment for all fees, regardless of the significance of remaining
performance obligations.
As a result of the implementation of SAB 101, the Company recorded a charge
to earnings in 2000 in the form of a cumulative effect of a change in
accounting principle and additional deferred revenue in the amount of
$8,250. The Company has recognized this deferred amount as revenue during
both the first and second quarters of 2001 in the amount of $4,125 per
quarter.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
RESULTS OF OPERATIONS
Revenues. Revenues were $1.6 million for the three months ended September 30,
2001 compared to revenues of $6.3 million for the three months ended September
30, 2000. Revenues for the three months ended September 30, 2001 include a $1.0
million milestone payment earned and received from GlaxoSmithKline and $0.6
million in revenue recognized from Transgene, S.A. As a result of our
implementation of SAB 101 last year, our third quarter revenues for 2000 have
been restated. Revenues for the three months ended September 30, 2000
represented $1.9 million in revenue recognized from Schering Corporation and
Schering Plough Ltd., $1.7 million in revenue recognized from Merck KGaA, $1.1
million in revenue recognized from Synthelabo, $1.0 million in revenue from
MedImmune and $0.6 million recognized in revenue from Transgene, S.A.
Revenues for the nine months ended September 30, 2001 were $12.2 million
including $3.8 million in revenue recognized from Schering Corporation and
Schering Plough Ltd., $3.3 million in revenue recognized from Merck KGaA, $2.2
million in revenue recognized from Synthelabo, $1.9 million recognized in
revenue from Transgene, S.A., and $1.0 million in revenue from GlaxoSmithKline.
As a result of our implementation of SAB 101 last year, revenues for the nine
months ended September 30, 2000 have been restated. Revenues for the nine months
ended September 30, 2000 were $16.8 million including $5.6 million in revenue
recognized from Schering Corporation and Schering Plough Ltd., $4.9 million in
revenue recognized from Merck KGaA, $3.4 million in revenue recognized from
Synthelabo, $1.9 million recognized in revenue from Transgene, S.A. and $1.0
million in revenue from MedImmune.
Related party revenues include revenues from Transgene in which we hold a
minority interest.
We expect that our revenues may be limited to already charged payments under
existing collaboration agreements which are contingent on meeting certain
product milestones, license fees, proceeds from the sale of rights and other
payments from other collaborators and licensees under existing or future
arrangements, to the extent that we enter into any such further arrangements. On
June 30, 2001, the exclusivity period, or initial research term, relating to our
consortium with GlaxoSmithKline, Schering, Takeda Chemical Industries,
Synthelabo and Merck concluded. All payments required during the initial
research term have been received and recognized as revenue. While none of the
consortium members chose to renew the initial research term, work already
initiated by the members can continue if evidence of continued diligence is
provided. We will be entitled to certain milestone payments on such work and
royalty payments on any drugs that are commercialized. In addition, for drugs
developed by GlaxoSmithKline, we will be entitled to certain co-promotion
rights. We can provide no assurance that any of these drugs can be
successfully commercialized.
Expenses. Research and development expenses were $37.4 million for the three
months ended September 30, 2001 compared to $23.5 million for the three months
ended September 30, 2000. Research and development expenses were $104.0 million
for the nine months ended September 30, 2001 compared to $64.7 million for the
nine months ended September 30, 2000. The increase for both the three and nine
month periods resulted primarily from increased manufacturing operations costs
as well as increased expenditures in preclinical research and clinical trial
research. In addition, research and development expenses for the nine months
ended September 30, 2001 include $1.9 million in unit relocation costs and asset
write-downs relating to the relocation of Principia's operations to our
Rockville, Maryland location as discussed in Note 2 to the Consolidated
Financial Statements.
Purchased In-Process R&D expenses of $134.1 million for the three and nine
months ended September 30, 2000 relate to the acquisition of Principia
Pharmaceutical Corporation on September 8, 2000. This amount represents that
portion of the $135.1 million purchase price allocated to in-process research
and development. See Note 2 of the Notes to the Consolidated Financial
Statements for additional discussion.
10
RESULTS OF OPERATIONS, CONTINUED
General and administrative expenses increased to $9.2 million for the three
months ended September 30, 2001 from $6.3 million for the three months ended
September 30, 2000. General and administrative expenses increased to $27.2
million for the nine months ended September 30, 2001 from $18.8 million for the
nine months ended September 30, 2000. The increase for both the three and nine
month periods ended September 30, 2001 resulted primarily from increased market
research costs in connection with our expanding clinical activities and higher
legal expenses associated with filing and prosecuting a larger number of patent
applications relating to genes and proteins we discovered, along with increased
business and product development expenses in support of our expanding
activities.
Interest income increased for both the three and nine month periods ended
September 30, 2001 compared to the three and nine month periods ended September
30, 2000 due to higher cash balances arising primarily from our public offering
of common stock during the fourth quarter of 2000 that raised net proceeds of
approximately $912.7 million. Interest expense decreased for the three month
period due primarily to a reduction in the average debt balance for 2001
compared to 2000 as a result of the conversion to equity of $318.3 million of
convertible subordinated debt during the first quarter of 2000. Interest expense
increased for the nine month period ended September 30, 2001 compared to the
nine month period ended September 30, 2000 due primarily to an increase of
$525.0 million in convertible subordinated debt during the first quarter of
fiscal 2000, partially offset by the convertible subordinated note conversions
discussed herein.
Debt conversion expenses of $19.0 thousand for the three months ended
September 30, 2001 and $3.9 million for the nine months ended September 30, 2001
relate primarily to the second quarter of 2001 conversion of $25.5 million
aggregate principal amount of convertible subordinated notes into equity. During
the second quarter of 2001, we converted $25.0 million of our outstanding $224.9
million aggregate principal amount of 5% Notes Due 2007 into common stock at a
cost of $3.9 million, substantially all of which was paid in the form of common
stock and we also converted $0.5 million of our 5 1/2% Notes Due 2006 into
common stock. Debt conversion expenses of $50.8 million for the nine months
ended September 30, 2000 relate to the first quarter of fiscal 2000 conversion
costs of $318.3 million aggregate principal amount of convertible subordinated
notes into equity. We converted $118.3 million of our 5 1/2% Notes Due 2006 into
common stock at a cost of $20.8 million, substantially all of which was paid in
the form of common stock. In addition, we converted all of our $200.0 million
aggregate principal amount of 5% Notes Due 2006 into common stock at a cost of
$30.0 million, all of which was paid in cash.
Cumulative effect of a change in accounting principle of $8.3 million for the
nine months ended September 30, 2000 relates to our implementation of Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). As a result of the
implementation of SAB 101, we recorded a charge of $8.3 million as a cumulative
effect of a change in accounting principle, retroactive to January 1, 2000.
Net Income. We recorded a net loss of $24.9 million, or $0.19 per share, for
the three months ended September 30, 2001 compared to a net loss of $148.9
million, or $1.35 per share, for the three months ended September 30, 2000. The
decreased loss for the three month period of 2001 reflects the absence of
Purchased In-Process R&D of $134.1 million, or $1.21 per share, the reduction in
debt conversion expenses and an increase in net interest income, partially
offset by the increase in manufacturing operations, increased investment in the
development of preclinical and clinical drug candidates and increased general
and administrative activities. Excluding the debt conversion charge incurred
during the three months ended September 30, 2001 and the charge for Purchased
In-Process R&D incurred during the three months ended September 30, 2000, our
net loss would have been $24.9 million, or $0.19 per share compared to $14.9
million, or $0.14 per share, for the three months ended September 30, 2001 and
2000, respectively.
We recorded a net loss of $61.9 million, or $0.49 per share, for the nine
months ended September 30, 2001 compared to a net loss of $237.8 million, or
$2.21 per share, for the nine months ended September 30, 2000. The decreased
loss for the nine month period reflects the reduction of debt conversion
expenses and the absence of both Purchased In-Process R&D and the cumulative
effect of a change in accounting principle incurred in 2000, the increase in net
interest income in 2001, partially offset by the increase in manufacturing
operations,
11
RESULTS OF OPERATIONS, CONTINUED
increased investment in the development of preclinical and clinical drug
candidates, and increased general and administrative activities. Excluding the
charges for debt conversion expenses for both fiscal year 2001 and 2000 and the
Purchased In-Process R&D and the cumulative effect of a change in accounting
principle incurred in the nine months ended September 30, 2000, our net loss for
the nine months ended September 30, 2001 would have been $58.0 million, or $0.46
per share, compared to $44.7 million, or $0.41 per share for the nine months
ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $1.6 billion and $1.7 billion at September 30,
2001 and December 31, 2000, respectively. No significant transactions have
occurred in the nine months ended September 30, 2001 that have affected our
working capital. Our restricted investments increased during the second quarter
of 2001 primarily due to a transfer of $55 million of investments into a
restricted account as part of a long-term facility lease we entered into during
that quarter.
We expect to continue to incur substantial expenses relating to our
research and development efforts, which are expected to increase relative to
historical levels as we focus on preclinical and clinical trials required for
the development of therapeutic protein and antibody product candidates.
We expect that our existing funds and interest income will be sufficient
to fund our operations for the foreseeable future. Our future capital
requirements and the adequacy of our available funds will depend on many
factors, including scientific progress in our research and development programs,
the magnitude of those programs, the success of the consortium members
developing and commercializing drugs from existing programs, our ability to
establish additional collaborative and licensing arrangements, the cost involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
competing technological and market developments.
Our funds may be invested in U.S. Treasuries, government agency
obligations, high grade debt securities and various money market instruments.
Such investments reflect our policy regarding the investment of liquid assets,
which is to seek a reasonable rate of return consistent with an emphasis on
safety, liquidity and preservation of capital.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements are based on our current intent, belief and
expectations. These statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict. Actual
results may differ materially from these forward-looking statements because of
our unproven business model, dependence on new technologies, uncertainty and
timing of clinical trials, ability to develop and commercialize products,
dependence on collaborators for services and revenue, substantial indebtedness,
intense competition, uncertainty of patent and intellectual property protection,
dependence on key management, uncertainty of regulation of products, dependence
on key suppliers, the impact of future alliances or transactions and other risks
that may be described in our filings with the Securities and Exchange
Commission. Existing and prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of today's
date. We undertake no obligation to update or revise the information contained
in this announcement whether as a result of new information, future events or
circumstances or otherwise.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. Our investment portfolio can be comprised of low-risk U.S.
Treasuries, government agency obligations, high-grade debt having a rating of at
least an A rating and various money market instruments. The short-term nature of
these securities, which have an average term of approximately one year,
significantly decreases the risk of a material loss caused by a market change.
We believe that a hypothetical 100 basis point adverse move (increase) in
interest rates along the entire interest rate yield curve would adversely affect
the net fair value of our cash, cash equivalents and short-term and restricted
investments by approximately $25.2 million, or approximately 1.5% of the
aggregate fair value of $1.73 billion, at September 30, 2001. For these reasons,
and because these securities are almost always held to maturity, we believe we
do not have significant exposure to market risks associated with changes in
interest rates related to our debt securities held as of September 30, 2001. We
believe that any market change related to our U.S. securities held as of
September 30, 2001 is not material to our consolidated financial statements.
However, given the short-term nature of these securities, a general decline in
interest rates would adversely affect the interest income from our portfolio as
securities mature and are replaced with securities having a lower interest rate.
As of September 30, 2001, the carrying values of our equity investments in
Transgene, Cambridge Antibody Technology (CAT) and Ciphergen Biosystems were
approximately $3.9 million, $28.3 million and $0.7 million, respectively. Our
investments in Transgene and Ciphergen Biosystems are subject to equity market
risk. Our investment in CAT is denominated in pounds sterling and is subject to
both foreign currency risk as well as equity market risk.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
-------------------
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on July 6, 2001,
announcing that the exclusivity period for our human gene
therapeutic consortium expired on June 30, 2001, a period
described as the initial research term. None of the
consortium members chose to extend the initial research
term.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC.
BY: /s/ William A. Haseltine, Ph.D.
-------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer
BY: /s/ Steven C. Mayer
-------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: November 5, 2001