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 March 31, 2002 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 March 31,
2002 was 128,421,029.
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001.......................................... 3
Consolidated Balance Sheets at March 31, 2002 and December 31, 2001.......... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001.......................................... 5
Notes to Consolidated Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 9
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
March 31,
---------------------------------------
2002 2001
------------------ ----------------
(dollars in thousands, except share and
per share amounts)
Revenue - research and development collaborative contracts:
Third parties................................................... $ - $ 4,625
Related parties................................................. 642 642
------------------ ----------------
Total revenue.......................................... 642 5,267
------------------ ----------------
Costs and expenses:
Research and development..................................... 45,587 32,096
General and administrative................................... 10,799 8,283
------------------ ----------------
Total costs and expenses............................... 56,386 40,379
------------------ ----------------
Income (loss) from operations...................................... (55,744) (35,112)
Interest income.................................................... 23,407 28,625
Interest expense................................................... (5,951) (6,520)
------------------ ----------------
(38,288) (13,007)
Income (loss) before taxes.........................................
Provision for income taxes......................................... - -
------------------ ----------------
Net income (loss).................................................. $ (38,288) $ (13,007)
================== ================
Net income (loss) per share, basic and diluted..................... $ (0.30) $ (0.10)
================== ================
Weighted average shares outstanding,
basic and diluted.............................................. 128,355,422 125,394,401
================== ================
See accompanying notes to consolidated financial statements.
3
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------- ---------------
ASSETS (dollars in thousands)
- ------
Current assets:
Cash and cash equivalents ........................................................ $ 87,449 $ 88,319
Short-term investments............................................................ 1,374,830 1,456,091
Prepaid expenses and other current assets......................................... 11,012 3,988
------------- ---------------
Total current assets........................................................ 1,473,291 1,548,398
Long-term investments................................................................... 33,858 43,824
Property, plant and equipment (net of accumulated depreciation and amortization) ....... 111,077 101,282
Restricted investments.................................................................. 145,252 144,901
Other assets............................................................................ 25,463 26,599
------------- ---------------
TOTAL ASSETS................................................................ $1,788,941 $1,865,004
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt................................................. $ 444 $ 444
Current portion of capital lease obligation....................................... 237 241
Accounts payable and accrued expenses............................................. 23,679 32,915
Accrued payroll and related taxes................................................. 5,933 5,600
Deferred revenues................................................................. 2,568 2,568
------------- ---------------
Total current liabilities................................................... 32,861 41,768
Long-term debt, net of current portion.................................................. 503,468 503,468
Capital lease obligation, net of current portion........................................ 447 502
Deferred revenues....................................................................... 12,197 12,839
Other liabilities....................................................................... 1,754 1,964
------------- ---------------
Total liabilities........................................................... 550,727 560,541
------------- ---------------
Stockholders' Equity:
Preferred stock................................................................... - -
Common stock...................................................................... 1,284 1,283
Additional paid-in capital........................................................ 1,754,394 1,753,235
Unearned portion of compensatory stock options.................................... (278) (294)
Accumulated other comprehensive income (loss)..................................... 2,933 32,070
Retained deficit.................................................................. (520,119) (481,831)
------------- ---------------
Total stockholders' equity.................................................. 1,238,214 1,304,463
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $1,788,941 $1,865,004
============= ===============
See accompanying notes to consolidated financial statements.
4
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2002 2001
------------------ ---------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................. $ (38,288) $ (13,007)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Accrued interest on short-term and restricted investments..................... 7,055 1,238
Depreciation and amortization................................................. 4,028 3,032
Loss (gain) on disposal of fixed assets....................................... 5 46
Compensation expense related to stock options................................. 16 66
Changes in operating assets and liabilities:
Prepaid expenses and other current assets................................ (7,024) (5,977)
Other assets............................................................. 576 1,018
Accounts payable and accrued expenses.................................... (1,495) (585)
Accrued payroll and related taxes........................................ 333 86
Deferred revenues........................................................ (642) (5,267)
Other liabilities........................................................ (210) (79)
------------------ ---------------
Net cash provided by (used in) operating activities........................... (35,646) (19,429)
------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment............................... (21,009) (8,730)
Purchase of short-term investments and marketable securities....................... (216,891) (512,309)
Proceeds from sales and maturities of investments and marketable securities........ 273,143 290,750
------------------ ---------------
Net cash provided by (used in) investing activities........................... 35,243 (230,289)
------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt........................................................ - (68)
Restricted investments............................................................. (1,568) (162)
Payments on capital lease.......................................................... (59) -
Proceeds from issuance of common stock (net of expenses)........................... 1,160 3,123
------------------ ---------------
Net cash provided by (used in) financing activities........................... (467) 2,893
------------------ ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (870) (246,825)
Cash and cash equivalents - beginning of period......................................... 88,319 493,867
------------------ ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD............................................... $ 87,449 $247,042
================== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 10,739 $ 11,515
Income taxes.................................................................. - 25
See accompanying notes to consolidated financial statements.
5
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS):
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.
See accompanying notes to consolidated financial statements.
6
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2002
(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 month periods ended March 31,
2002 and 2001, the Company's financial position at March 31, 2002, and the
cash flows for the three month periods ended March 31, 2002 and 2001. These
adjustments are of a normal recurring nature.
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 2001 Annual Report on Form 10-K.
The results of operations for the three month period ended March 31, 2002 are
not necessarily indicative of future financial results.
NOTE 2. 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 month periods ended March 31, 2002 and 2001, total
comprehensive income (loss) amounted to:
Three months ended March 31,
------------------------------------------
2002 2001
------------------ ------------------
Net income (loss).................................... $(38,288) $(13,007)
Net unrealized gains (losses):
Short-term investments............................. (17,954) 14,789
Long-term investments.............................. (9,966) (47,045)
Restricted investments............................. (1,217) -
------------------ ------------------
Total comprehensive income (loss).................... $(67,425) $(45,263)
================== ==================
Realized gains and losses, which are included in the Company's net income
(loss) for the three month periods ended March 31, 2002 and 2001, and their
respective net proceeds were as follows:
Three months ended March 31,
--------------------------------------
2002 2001
--------------- ----------------
Realized gains....................................... $ 3,595 $ 1,132
Realized losses...................................... (343) (142)
Net proceeds......................................... 227,047 230,099
7
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2002
(In thousands, except share and per share data)
NOTE 3 - COMMITMENTS AND OTHER MATTERS
During 2001, the Company entered into two seven-year lease agreements (the
"October 2001 lease" and the "November 2001 lease") relating to research,
manufacturing, and administrative space the Company either acquired or has
under construction by two trusts established solely for that purpose. The
total financed cost of the facilities anticipated to be covered under the
October 2001 lease and the November 2001 lease is approximately $76,000 and
$450,000, respectively. Rent obligations for the October 2001 lease began in
2001, while rent obligations for the November 2001 lease do not begin until
the end of the construction period, which is currently anticipated as 2004.
The Company's rent obligations will approximate the lessor's debt service
costs. With respect to the Company's rent for the October 2001 lease, in 2001
the trust had fixed the interest rate on $56,000 at approximately 4.5%. The
remaining $20,000 is floating based primarily on the seven-day LIBOR rate,
which was approximately 2.05%, as of March 31, 2002.
Under these lease agreements, which the Company has accounted for as operating
leases, the Company has the option to purchase the properties, during or at
the end of the lease terms, at an aggregate amount of approximately $526,000.
Alternatively, the Company can cause the properties to be sold to third
parties. The Company is contingently liable for the residual value guarantee
associated with each property up to an aggregate amount of $459,430, assuming
the full amount of the leases is used for construction activities.
With respect to these leases, the Company has a residual value guarantee of
85.0% of the total financed cost at lease termination relating to the October
2001 lease and a residual value guarantee of 89.9% during the construction
period and 87.74% of the total financed cost at lease termination relating to
the November 2001 lease. The Company's residual value guarantees for the
October 2001 and November 2001 leases were $47.6 million and $28.6 million,
respectively, as of March 31, 2002. In addition, both of these leases, along
with the Company's long-term leases for its existing process development and
manufacturing facility, require the Company to maintain minimum levels of
collateral, in the form of restricted investments, for the duration of the
leases. The restricted investments relating to these leases aggregated $145.3
million and $144.9 million as of March 31, 2002 and December 31, 2001,
respectively.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
OVERVIEW
We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based
on the identification and study of genes. We focus our internal product
development efforts on therapeutic proteins, antibodies, peptides and fusion
proteins and we use collaborations for the development of gene therapy
products and small molecule drugs. We have discovered a large number of genes
through our genomics capabilities and have developed a rapidly evolving
product pipeline based on our discoveries.
We have eight products, including three therapeutic proteins, two
antibodies and three albumin fusion products that have entered or are ready to
enter human clinical trials; a ninth product, a gene therapy product based on
a gene we discovered, has been licensed to Vascular Genetics, Inc. (VGI) and
has entered human clinical trials being conducted by VGI; a tenth product, a
compound that lowers levels of the enzyme lipoprotein-associated phospholipase
A2 (Lp-PLA(2)), was discovered by GlaxoSmithKline (GSK) as part of our
collaboration with GSK and also has entered human clinical trials being
conducted by GSK. We have a number of additional products in preclinical
development. We recently announced the discontinuation of development of
mirostipen, a therapeutic protein, which previously had entered human clinical
trials.
We have not received any product sales revenue or royalties from product
sales and do not anticipate revenues from product sales or from royalties on
product sales in the next several years. The GlaxoSmithKline collaboration
agreement and many of our other collaboration agreements expired in 2001 and
will only generate additional milestone and royalty payments if our
collaborators successfully develop drugs based on our technology. We may not
receive any of these payments and may not be able to enter into additional
collaboration agreements.
We expect that our revenue sources for at least the next several years
may be limited to interest income, payments under various collaboration
agreements to the extent milestones are met, payments from the sale of product
rights and other payments from other collaborators and licensees under
existing or future arrangements, to the extent that we enter into any future
arrangements. 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, antibody and fusion protein
product candidates. As a result, we expect to incur continued and increasing
losses over the next several years unless we are able to realize additional
revenues under existing or new collaboration agreements. The timing and
amounts of such revenues, if any, cannot be predicted with certainty and will
likely fluctuate sharply. Results of operations for any period may be
unrelated to the results of operations for any other period. In addition,
historical results should not be viewed as indicative of future operating
results.
RESULTS OF OPERATIONS
Revenues. Revenues were $0.6 million for the three months ended March
31, 2002 compared to revenues of $5.3 million for the three months ended March
31, 2001. Revenues for the three months ended March 31, 2002 represent revenue
recognized from Transgene, S.A. Revenues for the three months ended March 31,
2001 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, and $0.6 million
recognized in revenue from Transgene, S.A. Related party revenues represent
revenues from Transgene in which we hold a minority interest.
We expect that our revenues may be limited to 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.
9
RESULTS OF OPERATIONS, CONTINUED
Expenses. Research and development expenses were $45.6 million for the
three months ended March 31, 2002 compared to $32.1 million for the three
months ended March 31, 2001. We track our research and development
expenditures by type of cost incurred - preclinical, clinical and
manufacturing costs.
Preclinical expenses increased to $23.8 million for the three months
ended March 31, 2002 compared to $18.3 million for the three months ended
March 31, 2001. The increase in our preclinical expenses is due primarily to
expanded activities, including toxicology studies, needed to support our
investigational new drug filings that were made or will be made in the future,
expanded activities in the area of antibody development, including the cost of
a milestone met during the first quarter of 2002 along with additional rent
expense attributable to the leasing of a 240,000 square foot research and
development complex in May 2001.
Clinical expenses increased to $7.9 million for the three months ended
March 31, 2002 compared to $5.4 million for the three months ended March 31,
2001. The increase in our clinical expenses is due primarily to the cost of
continuing ongoing trials from 2001 along with the cost of filing, initiating
and sustaining new trials that began in 2002. We had seven drugs in human
clinical development as of March 31, 2002 excluding mirostipen, a therapeutic
protein for which we recently discontinued development, compared to four drugs
in human clinical development ongoing as of March 31, 2001.
Manufacturing expenses increased to $13.9 million for the three months
ended March 31, 2002 compared to $8.4 million for the three months ended March
31, 2001. Our manufacturing costs increased due to the increased production
activities within our process development and manufacturing facilities needed
to support our increased clinical activities.
General and administrative expenses increased to $10.8 million for the
three months ended March 31, 2002 from $8.3 million for the three months ended
March 31, 2001. The increase for the three month period ended March 31, 2002
resulted primarily from higher legal expenses associated with filing and
prosecuting a larger number of patent applications relating to genes and
proteins we discovered.
Interest income decreased for the three month period ended March 31,
2002 compared to the three month period ended March 31, 2001 due to lower cash
balances as a result of our net losses in 2002 and 2001, our capital
expenditures during this period as well as a reduced yield on our investments.
Interest expense decreased for the three month period due primarily to a
reduction in the average debt balance for 2002 compared to 2001 as a result of
the conversion to equity of $28.6 million of convertible subordinated notes
during 2001.
Net Income. We recorded a net loss of $38.3 million, or $0.30 per share,
for the three months ended March 31, 2002 compared to a net loss of $13.0
million, or $0.10 per share, for the three months ended March 31, 2001. The
increased loss for the three month period of 2002 reflects increased
investment in the development of preclinical and clinical drug candidates,
increased manufacturing operations, reduced revenue and net interest income,
as well as increased general and administrative activities.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $1.44 billion and $1.51 billion at March 31,
2002 and December 31, 2001, respectively. The reduction in our working capital
for the three months ended March 31, 2002 is primarily due to our net loss and
our capital expenditures during this period.
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.
10
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The amounts of expenditures that will be needed to carry out our
business plans are subject to numerous uncertainties, which may adversely
affect our liquidity and capital resources. We are proceeding with numerous
clinical trials, including one multi-year repifermin trial involving over 500
patients. We have several Phase I and Phase II trials underway and expect to
initiate additional trials each year. Completion of these trials may extend
several years or more, but the length of time generally varies considerably
according to the type, complexity, novelty and intended use of the drug
candidate. We estimate that the completion periods for our Phase I, Phase II
and Phase III trials could span one year, one to two years and two to four
years, respectively. The duration and cost of our clinical trials are a
function of numerous factors such as the number of patients to be enrolled in
the trial, the amount of time it takes to enroll them and the number of
clinical sites to be engaged in the trial.
Based upon the results from our trials, we may elect to discontinue
clinical trials for certain indications or certain drugs in order to
concentrate our resources on more promising drug candidates. For example, in
April 2002, we announced that the results from our two chemotherapy-induced
neutropenia trials showed that our drug candidate, mirostipen, was safe and
well-tolerated, but not shown to have sufficient biological activity to meet
our criteria for continued development of mirostipen as a single, stand-alone
agent for chemotherapy-induced neutropenia. At that same time, we announced a
new initiative to treat chemotherapy-induced neutropenia using a new drug,
Albugranin(TM).
We are advancing many drug candidates, including therapeutic proteins,
antibodies and fusion proteins, in part, to diversify the risks associated
with our research and development spending. In addition, our manufacturing
plants have been designed to enable multi-product manufacturing capability.
Accordingly, we believe our future financial commitments, including
preclinical, clinical or manufacturing, are not substantially dependent on any
single drug candidate. Should we be unable to sustain a multi-product drug
pipeline, our dependence on the success of one or a few drug candidates would
increase.
We must receive FDA approval to advance each of our products through
each phase of clinical testing. Moreover, we must receive FDA regulatory
approval to commercially launch any of our products. In order to receive such
approval, the FDA must conclude that our clinical data establish safety and
efficacy. We cannot be certain that we will establish sufficient safety and
efficacy data to receive regulatory approval for any of our drugs.
Our future liquidity and capital resources will be affected by our
contractual obligations, including two seven-year lease agreements we entered
into in 2001 (the "October 2001 lease" and the "November 2001 lease") relating
to research, manufacturing and administrative space either acquired or under
construction by two trusts controlled by third parties established solely for
that purpose. As part of these agreements, we are required to maintain
collateral, in the form of restricted investments, in amounts equal to 100% of
the financed project cost for the duration of the leases. Our restricted
investments for these two leases, along with our restricted investments
associated with the leases for our existing process development and
manufacturing facility aggregated $145.3 million as of March 31, 2002 compared
to $144.9 million as of December 31, 2001.
Under these lease agreements, which we have accounted for as operating
leases, we have the option to purchase the properties, during and at the end
of the lease terms, at an aggregate amount of approximately $526.0 million.
Alternatively, we can cause the properties to be sold to third parties. We are
contingently liable for the residual value guarantee associated with each
property in the event the net sale proceeds are less than the original
financed costs of the facilities. The residual value guarantee for the October
2001 lease and the November 2001 lease is approximately $64.6 million and
$394.8 million, respectively, assuming the full amount of the financings is
used for construction activities. Based upon the amount financed as of March
31, 2002, our residual value guarantee for the October 2001 lease and the
November 2001 lease is approximately $47.6 million and $28.6 million,
respectively. As of December 31, 2001, our residual value guarantee for the
October 2001 lease and the November 2001 lease was approximately $47.6 million
and $15.0 million, respectively, based upon the amount financed as of that
date.
The rent under the October 2001 lease is currently based on a floating
interest rate, but the trust can lock in a fixed interest rate at any time at
our request. To the extent the trust does not lock in a fixed interest rate,
if interest rates increase, our rent obligations would also increase. If
interest rates decrease, our rent obligations would decrease. As of March 31,
2002, the trust had fixed the interest rate on $56.0 million at approximately
4.5%. The remaining $20.0 million is floating based primarily on the seven-day
LIBOR rate, which was approximately 2.05%, as of March 31, 2002.
11
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The November 2001 lease relates to the construction of our research and
development and administrative main campus and a large-scale manufacturing
facility. We will lease these properties for approximately five years,
following an estimated two-year construction period, from a trust controlled
by third parties established solely for this purpose. The rent under this
lease is currently based on a floating interest rate, but the trust can lock
in a fixed interest rate at any time at our request. To the extent the trust
does not lock in a fixed interest rate, if interest rates increase, our rent
obligations would also increase. If interest rates decrease, our rent
obligations would decrease. At March 31, 2002, the floating interest rate
based primarily on short-term commercial paper was approximately 1.92%.
Our funds may be invested in U.S. Treasuries, government agency
obligations, high grade debt securities and various money market instruments
rated "A" or better. 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 eighteen months, 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 1.57% of the aggregate fair value of $1.61 billion, at March 31,
2002. 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 March 31, 2002. We believe that any market change related to our U.S.
securities held as of March 31, 2002 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 March 31, 2002, the carrying values of our equity investments in
Transgene, Cambridge Antibody Technology (CAT) and Ciphergen Biosystems were
approximately $4.4 million, $28.2 million and $1.3 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.
The facility leases we entered into during 2001 require us to maintain
minimum levels of restricted investments as collateral for these facilities.
By 2004, we expect our restricted investments for these leases to be
approximately $526.0 million. We are also required to maintain approximately
$15.0 million in restricted investments with respect to our process
development and manufacturing facility leases. Although the market value for
these investments may rise or fall as a result of changes in interest rates,
we will be required to maintain this level of restricted investments in both a
rising or declining interest rate environment.
The rent under certain of these facility leases is based on a floating
interest rate. We can direct the trusts which own the facilities and lease
them to us to lock in a fixed interest rate. As of March 31, 2002, such a
fixed rate for seven years would be approximately 5.8% compared to the
floating rate as of March 31, 2002 of approximately 2.0%. If interest rates
increase, our rent obligations would also increase, which would adversely
affect our operating expenses.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
-----------------------
(b) Reports on Form 8-K
None
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: May 13, 2002