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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: FEBRUARY 28, 1998
Commission File No: 0-10824
GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK 18,276,212
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$.10 PAR VALUE Outstanding April 13, 1998
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Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
Page
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Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of 3
August 31, 1997 and February 28, 1998
Consolidated Condensed Statements of Operations 4
for the 26 week period ended March 1, 1997
and February 28,1998
Consolidated Statements of Cash Flows for the 5
26 week period ended March 1, 1997
and February 28,1998
Notes to Consolidated Condensed Financial 6-12
Statements for the 26 week period ended
March 1, 1997 and February 28,1998
Management's Discussion and Analysis of Financial 13-19
Conditions and Results of Operations
Part II
Other Information:
Other Information 20
Signature 21
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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August 31, February 28,
1997 1998
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $ 8,602,698 $12,849,230
Marketable securities 34,814,601 24,319,140
Interest receivable 1,280,611 1,131,367
Accounts receivable 55,142 177,549
Unbilled costs and fees 140,320 184,399
Note receivable from officer 160,000 160,000
Prepaid expenses and other current assets 408,240 453,455
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Total current assets 45,461,612 39,275,140
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 11,855,630 13,539,653
Leasehold improvements 1,964,981 2,392,929
Equipment and furniture 792,342 1,327,439
Construction-in-progress 1,111,526 4,603,661
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15,724,479 21,863,682
Less accumulated depreciation
and amortization 5,352,999 6,844,266
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10,371,480 15,019,416
Restricted cash 301,500 301,500
Long-term marketable securities 4,124,798 3,872,658
Other assets 428,989 450,861
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Total assets $60,688,379 $58,919,575
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,288,391 $ 1,207,849
Accrued expenses 2,373,788 2,624,111
Deferred revenue 2,335,695 4,068,301
Current maturities of long-term obligations 3,595,120 4,850,790
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Total current liabilities 9,592,994 12,751,051
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Long-term obligations, net of current maturities 7,149,188 9,269,701
Shareholders' equity 43,946,197 36,898,823
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Total liabilities and shareholders' equity $60,688,379 $58,919,575
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen Weeks Ended Twenty-six Weeks Ended
March 1, February 28, March 1, February 28,
1997 1998 1997 1998
(Unaudited) (Unaudited)
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Revenues:
Collaborative research, licenses, subscription fees and royalties $ 4,787,798 $ 3,861,532 $ 6,828,835 $ 7,857,474
Government research 1,336,153 202,232 3,310,563 463,603
Interest income 756,678 649,495 1,529,758 1,328,986
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Total revenues 6,880,629 4,713,259 11,669,156 9,650,063
----------- ----------- ----------- -----------
Costs and Expenses:
Research and development 4,660,664 7,840,057 8,538,954 14,470,972
Cost of government research 1,429,670 202,232 3,277,316 463,603
General, selling and administrative 859,026 1,112,809 1,590,057 2,134,946
Interest expense 145,553 289,376 271,479 538,987
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Total costs and expenses 7,094,913 9,444,474 13,677,806 17,608,508
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Net loss ($214,284) ($4,731,215) ($2,008,650) ($7,958,445)
=========== =========== =========== ===========
Basic/diluted net loss per common share ($0.01) ($0.26) ($0.11) ($0.44)
=========== =========== =========== ===========
Basic/diluted weighted average number of common and common
equivalent shares outstanding: 17,566,018 18,215,285 17,521,094 18,135,581
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Twenty-six Weeks Ended
March 1, February 28,
1997 1998
(Unaudited)
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Cash Flows from Operating Activities:
Net loss ($2,008,650) ($7,958,445)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 981,286 1,582,412
Loss on disposal of fixed assets 0 94,309
Deferred compensation 37,050 58,220
Changes in assets and liabilities:
Interest receivable 65,402 149,244
Accounts receivable 902,541 (122,407)
Unbilled costs and fees (182,823) (44,079)
Prepaid expenses and other current assets 150,847 (45,215)
Accounts payable (429,694) (80,542)
Accrued expenses (79,143) 250,323
Deferred contract revenue 1,424,434 1,732,606
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Total adjustments 2,869,900 3,574,871
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Net cash provided by (used in) operating activities 861,250 (4,383,574)
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Cash Flows from Investing Activities:
Purchases of marketable securities (8,105,018) (14,528,524)
Proceeds from sale of marketable securities 13,349,000 25,276,125
Increase in restricted cash (200,000) 0
Purchases of equipment and leasehold improvements (409,128) (4,553,714)
Increase in other assets (56,064) (21,872)
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Net cash provided by investing activities 4,578,790 6,172,015
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options and warrants 592,339 852,851
Proceeds from long-term obligations 0 3,500,000
Payments on long-term obligations (1,345,943) (1,894,760)
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Net cash provided by (used in) financing activities (753,604) 2,458,091
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Net Increase in Cash and Cash Equivalents 4,686,436 4,246,532
Cash and Cash Equivalents, at beginning of period 10,679,287 8,602,698
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Cash and Cash Equivalents, at end of period $15,365,723 $ 12,849,230
=========== ============
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 23,798 $ 13,500
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Interest paid during period $ 271,479 $ 538,988
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Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital leases $ 3,725,508 $ 1,770,943
=========== ============
See Notes to Consolidated Condensed Financial Statements.
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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 adjustments) 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 26 week period ended February 28, 1998 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 28, 1997.
2. REVENUE RECOGNITION
Research and contract revenues are derived from collaborative agreements with
pharmaceutical companies, as well as government grants and contract
arrangements. Research revenues are recognized as earned under government
grants, which consist of cost-plus-fixed-fee contracts and fixed-price
contracts. Revenues are recognized under collaborative agreements as earned.
Milestone payments from collaborative research and development arrangements are
recognized when they are achieved. License fees are recognized as earned.
Unbilled costs and fees represent revenue recognized prior to billing. Deferred
revenue represents cash amounts received prior to revenue recognition.
Subscription fee revenues from the PathoGenome(TM) database are recognized
ratably over the access period of the subscription agreement.
3. NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" which establishes new standards for calculating
and presenting earnings per share. This standard is effective for financial
statements for periods ending after December 15, 1997, with earlier application
not permitted. These condensed financial statements have been prepared and
presented based on the new standard. Prior period amounts have been restated to
conform to the current year presentation. Basic net loss per share is computed
by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share for the periods
presented is the same as basic net loss per share as the inclusion of the
potential common stock equivalents would be antidilutive.
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4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At February 28, 1998, 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 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 holding gains or losses on its marketable securities. Marketable
securities consist of commercial paper and U.S. Government debt securities. The
Company has $301,500 in restricted cash at August 31, 1997 and February 28, 1998
in connection with certain long-term obligations (See Note 6).
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. LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment line of credit under
which it can finance up to $6,000,000 of laboratory, computer and office
equipment. Borrowings are payable in 48 monthly installments at a variable
interest rate of prime (8.5% as of February 28, 1998) plus one-quarter of one
percent. At any time during the term of this agreement, the Company may elect to
convert to a fixed rate loan at the prevailing interest rate. The Company is
required to maintain certain restricted cash balances, as defined (see Note 4).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage. The Company has approximately $1,149,000 available under this
equipment line of credit at February 28, 1998.
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On March 9, 1998, subsequent to quarter-end, the company modified the above
financing arrangement by increasing the equipment line of credit by $4,300,000
from $6,000,000 to $10,300,000. The new equipment line of credit will be
utilized to finance laboratory, computer and office equipment over the next
thirteen months. Borrowings are payable in 15 quarterly installments commencing
March 31, 1999. All other terms and conditions remained the same. Including the
amendment, the Company has 5,449,000 available under the line of credit.
On July 31, 1997, the Company entered into a financing arrangement under which
it can finance up to $6,000,000 of laboratory and office renovations at its
Beaver Street facility. The principal amount of the loan will be repaid over 48
consecutive months commencing July 1, 1998 at the prevailing 12 month Eurodollar
rate (12-month Eurodollar rate was 6.125% as of February 28, 1998) plus one and
a half percent. The Company is required to maintain certain financial ratios
pertaining to minimum cash balances, debt to net worth and tangible net worth.
At February 28, 1998, the Company borrowed the full amount under this
arrangement; of which approximately $599,000 has not been utilized to finance
the Company's purchases, and is included in cash and cash equivalents. The
Company is required to maintain certain restricted cash balances, upon the
occurrence of certain events, as defined.
The Company had entered into other capital lease arrangements under which it
financed approximately $9,725,000 of certain laboratory, computer and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 7.52% to 11.42%. 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, debt to tangible net worth and debt service
coverage. The Company has approximately $511,000 available under one of these
capital lease agreements at February 28, 1998.
7. COLLABORATIVE AGREEMENTS
SCHERING-PLOUGH
In December 1995, the Company entered into a collaboration and license agreement
with Schering Corporation and Schering-Plough Ltd. (collectively,
"Schering-Plough") providing for the use by Schering-Plough of the Company's
Staph. aureus genomic database. The Company is sequencing to identify new gene
targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic sequence
databases. 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
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screening natural product and compound libraries to identify antibiotics with
new mechanisms of action.
Under the agreement, Schering-Plough agreed to pay the Company a minimum of
$13.3 million for an up-front payment, research funding and milestone payments.
Subject to the achievement of additional product development milestones and
Schering-Plough's election to extend the research collaboration, Schering-Plough
has agreed to pay the Company up to an additional $30.2 million in research
funding and milestone payments. On January 26, 1998 Schering-Plough elected to
extend the research program to the full term of the agreement which ends on
March 31, 2000.
The agreement grants Schering-Plough exclusive worldwide rights to make, use and
sell pharmaceutical and vaccine products based on the genomic sequence databases
licensed to Schering-Plough by the Company and on the technology developed in
the course of the research program. The Company has also granted Schering-Plough
a right of first negotiation if during the term of the research plan the Company
desires to enter into a collaboration with a third party with respect to the
development or sale of any compounds that are targeted against, as their primary
indication, Staph. aureus, which is the principal subject of the Company's
agreement with Schering-Plough. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, the Company retained the rights to make, use and sell diagnostic
products developed based on the Company's genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
For the 13 week periods ended February 28, 1998 and March 1, 1997, the Company
recorded revenue of $575,000 and $934,000, respectively, under this agreement,
which consisted of sponsored research funding.
For the 26 week period ended February 28, 1998, the Company recorded revenue of
$1,912,000 under this agreement, which consisted of sponsored research funding
and milestone payments . For the 26 week period ended March 1, 1997, the Company
recorded revenue of $1,751,000 under this agreement, which consisted of
sponsored research funding. The Company recorded $356,000 and $18,000 as
deferred revenue at February 28, 1998 and August 31, 1997, respectively.
In December 1996, the Company entered into its second research collaboration and
license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products
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based on the rights to develop and commercialize diagnostic products that may
result from this collaboration.
Under the agreement, Schering-Plough has agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In 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 product developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will be approximately $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development milestones.
For the 13 week period ended February 28, 1998, the Company recorded revenue of
$1,799,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 13 week period ended
March 1, 1997, the Company recorded revenue of $2,818,000 under this agreement,
which consisted of sponsored research funding, license fee, expense allowance
and subcontract activity.
For the 26 week period ended February 28, 1998, the Company recorded revenue of
$2,951,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 26 week period ended
March 1, 1997, the Company recorded revenue of $2,818,000 under this agreement,
which consisted of sponsored research funding, license fee, expense allowance
and subcontract activity. The Company recorded $1,040,000 and $1,400,000 as
deferred revenue at February 28, 1998 and August 31, 1997, respectively.
In September 1997, the Company entered into its third research collaboration and
license agreement with Schering-Plough to use genomics to discover and develop
new pharmaceutical products for treating 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
collaboration related to two fungal pathogens, Candida albicans and Aspergillus
fumigatus . Schering-Plough will also receive exclusive worldwide right to make,
use and sell products based on the technology developed in the course of the
research program. In return, Schering-Plough has agreed to fund a research
program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $30.7 million, excluding royalties. Of
the total potential payment, approximately $7.7 million represents license fees
and research
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payments and $23 million represents milestone payments based on achievement of
research and product development milestones. Additionally, the Company entered
into a database subscription agreement with Schering-Plough (See Database
Subscriptions).
For the 13 and 26 week periods ended February 28, 1998, the Company recorded
revenue of $570,000 and $1,007,000, respectively, under this agreement, which
consisted of sponsored research funding. The Company recorded $752,000 as
deferred revenue at February 28, 1998.
ASTRA AB
In August 1995, the Company entered into a collaboration agreement with Astra
Hassle AB ("Astra") to develop pharmaceutical, vaccine and diagnostic products
effective against gastrointestinal infection 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 also
provides for a four-year research collaboration to further develop and annotate
the Company's H. pylori genomic sequence database, identify therapeutic and
vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representative from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of approximately
$11 million and, subject to the achievement of certain product development
milestones, up to approximately $22 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. Of such fees, $500,000 is
credited against any future royalties payable to the Company by Astra under the
agreement. Astra is obligated to provide funding for the research program for a
minimum of two and one-half years. On July 21, 1997, Astra elected to extend the
research program to at least September 1998.
The Company will also be entitled to receive royalties on Astra's sale of any
products (i) protected by claims of patents licensed exclusively to Astra by the
Company pursuant to the agreement, or (ii) the discovery of which was enabled in
a significant manner by the genomic database licensed to Astra by the Company.
The Company has the right, under certain circumstances, to convert Astra's
license to a nonexclusive license in the event Astra is not actively pursuing
commercialization of the technology.
For the 13 week period ended February 28, 1998, the Company recorded revenue of
$359,000 under this agreement, which consisted of sponsored research funding.
For the 13 week period ended March 1, 1997, the Company recorded revenue of
$1,035,000 under this agreement, which consisted of sponsored research funding
and a milestone payment.
For the 26 week period ended February 28, 1998, the Company recorded revenue of
$1,069,000 under this agreement, which consisted of sponsored research funding
and a
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milestone payment. For the 26 week period ended March 1, 1997, the Company
recorded revenue of $1,642,000 under this agreement, which consisted of
sponsored research funding and a milestone payment. The Company recorded
$501,000 and $503,000 as deferred revenue at February 28, 1998 and August 31,
1997, respectively.
8. DATABASE SUBSCRIPTIONS
In May 1997, the Company entered into a license agreement with Bayer AG,
("Bayer") to provide Bayer with a nonexclusive access to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated information
relating to microbial organisms. The subscription agreement calls for the
Company to provide Bayer with periodic data updates, analysis tools and software
support. Under the agreement, Bayer has agreed to pay a license fee, annual
subscription fees and royalties on any molecules developed as a result of access
to the information provided by the PathoGenome(TM) database. The Company retains
all rights associated with protein therapeutic, diagnostic and vaccine use of
bacterial genes or gene products.
In September 1997, the Company entered into license agreements with
Bristol-Myers Squibb and Schering-Plough to provide both companies with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenome(TM) and associated information relating to microbial organisms. The
subscription agreements call for the Company to provide both Bristol-Myers
Squibb and Schering-Plough with periodic data updates, analysis tools and
software support. Under the agreements, Bristol-Myers Squibb and Schering-Plough
have agreed to pay annual subscription fees and royalties on any molecules
developed as a result of access to the information provided by the
PathoGenome(TM) database. The Company retains all rights associated with protein
therapeutic, diagnostic and vaccine use of bacterial genes or gene products.
For the 13 and 26 week periods ended February 28, 1998, the Company recognized
revenue of $543,000 and $918,000, respectively, under these agreements which
consisted of subscription fees. The Company recorded deferred revenue of
$1,417,000 under these agreements at February 28, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("the Company") is a leader in the field of
genomics-based drug discovery--the identification and functional
characterization of genes. The Company has over ten years of experience in
positional cloning, having served as one of the primary researchers under genome
programs sponsored by the United States government, and has developed numerous
techniques and tools that are widely used in this field. The Company's
commercial gene discovery strategy capitalizes on its pioneering work in
genomics by applying its high-throughput sequencing technology and positional
cloning, its experience and skills in functional genomics and its bioinformatics
capabilities. The two areas of focus are: the discovery and characterization of
(i) genes of pathogens that are responsible for many serious diseases and (ii)
human disease genes. The Company believes that its genomic discoveries may lead
to the development of novel therapeutics, vaccines, and diagnostic products by
it and its strategic partners. The Company has entered into several corporate
collaborations in connection with its pathogen and human gene discovery
programs.
The Company does not anticipate revenues from product sales on a sustained basis
until such time that products based on the Company's research efforts are
commercialized, if any. The Company's product development strategy is to form
collaborations with pharmaceutical and biotechnology companies generating
revenues from licensing fees, sponsored research and milestone payments.
Additionally, the Company will sell nonexclusive access to its proprietary
genome sequence database, PathoGenome(TM). These collaborations are expected to
result in the discovery and commercialization of novel therapeutics, vaccines
and diagnostics, generating royalty payments to the Company from product sales
downstream. In order for a product to be commercialized based on the Company's
research, it will be necessary for the collaborators to conduct preclinical
tests and clinical trials, obtain regulatory clearances and make manufacturing,
distribution and marketing arrangements. Accordingly, the Company does not
expect to receive royalties based upon product revenues for many years.
For the past several years, the Company's primary sources of revenue have been
government research grants and contracts and collaborative agreements with
pharmaceutical company partners. As of February 28, 1998, the Company had signed
four collaborative agreements. The Company entered into corporate collaborations
with Astra Hassle AB ("Astra") relating to H. Pylori in August 1995 and with
Schering Corporation and Schering-Plough, Ltd. (collectively, "Schering-Plough")
in December 1995 providing for the use by Schering-Plough of the Company's
Staph. aureus genomic database to identify new gene targets for the development
of novel antibiotics. In December 1996, the Company entered into its second
research collaboration with Schering-Plough to identify genes and associated
proteins that can be utilized by Schering-Plough to develop new pharmaceuticals
for treating asthma. In September
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1997, the Company entered into its third research collaboration with
Schering-Plough to use genomics to discover and develop new pharmaceutical
products for treating fungal infections.
In May 1997, the Company introduced its proprietary genome sequence database,
PathoGenome(TM) and sold its first subscription to Bayer AG ("Bayer"). Under the
agreement, Bayer will receive nonexclusive access to the Company's
PathoGenome(TM) database and associated information relating to microbial
organisms. In September 1997, the Company sold two additional subscriptions to
its PathoGenome(TM) database to Bristol-Myers Squibb and Schering-Plough.
As of February 28, 1998, the Company had outstanding approximately $2,147,000 of
government research grants and contracts under which services were yet to be
performed. These grants and contracts call for services to be performed over the
next 24 months. The Company's government research grants and contracts are
typically funded annually and are subject to appropriation by the United States
Congress each year. Funding may be discontinued or reduced at any time by
Congress. As of February 28, 1998, the funded portion of these grants and
contracts was $1,997,000. For the 26 week periods ended March 1, 1997 and
February 28, 1998, revenue recognized pursuant to United States government
research grants and research contracts accounted for approximately 28% and 5%,
respectively, of the Company's total revenues.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $52,514,000 at February 28, 1998. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new collaborative agreements and government research
grants and contracts. The Company is subject to risks common to companies in its
industry including unproven technology and business strategy, availability of,
and competition for, family resources, reliance upon collaborative partners and
others, history of operating losses, need for future capital, competition,
patent and proprietary rights, dependence on key personnel, uncertainty of
regulatory approval, uncertainty of pharmaceutical pricing, health care reform
and related matters, product liability exposure, and volatility of the Company's
stock price.
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RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MARCH 1, 1997 AND FEBRUARY 28, 1998
REVENUE
Total revenues decreased 31% from $6,881,000 for the 13 week period ended March
1, 1997 to $4,713,000 for the 13 week period ended February 28, 1998.
Collaborative research, licenses, subscription fees and royalties decreased 19%
from $4,788,000 for the 13 week period ended March 1, 1997 to $3,862,000 for the
13 week period ended February 28, 1998. The decrease in collaborative research,
licenses, subscription fees and royalties was primarily attributable to a
license fee received in the prior year under the Company's collaboration
agreement with Schering-Plough for treating asthma which began in December 1996.
The decrease in collaborative research, licenses, subscription fees and
royalties was partially offset by an increase in sponsored research revenue
received this year under the Company's collaboration research agreements with
Schering-Plough for treating both asthma and fungal infections. Additionally,
the decrease was partially offset by subscription fee revenue earned this year
under the Company's license agreements with Bayer, Bristol-Myers Squibb and
Schering-Plough providing each company with nonexclusive access to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated information
relating to microbial organisms.
Government research revenue decreased 85% from $1,336,000 for the 13 week period
ended March 1, 1997 to $202,000 for the 13 week period ended February 28, 1998.
The decrease in government research revenue was primarily attributable to a
shift in personnel from government research programs to company-sponsored
research and development programs, in particular, the microbial genetic database
program, PathoGenome(TM). Revenue derived from government research grants and
contracts is generally based upon direct cost such as labor, laboratory
supplies, as well as an allocation for reimbursement of a portion of overhead
expenses.
Interest income decreased 14% from $757,000 for the 13 week period ended
March 1, 1997 to $649,000 for the 13 week period ended February 28, 1998
reflecting a decrease in funds available for investment.
COST AND EXPENSES
Total cost and expenses increased 33% from $7,095,000 for the 13 week period
ended March 1, 1997 to $9,444,000 for the 13 week period ended February 28,
1998. Research and development expenses, which include company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators, increased 68% from $4,661,000 for the 13 week
period ended March 1, 1997 to $7,840,000 for the 13 week period ended
February 28, 1998. The increase in research and development expenses was
primarily attributable to increases in
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both personnel and laboratory expenses associated with the Company's expansion
of its pathogen, microbial genetic database, human gene discovery and functional
genomics research programs. The increase consisted primarily of increases in
payroll and related expenses, laboratory supplies and overhead expenses.
The cost of government research decreased 86% from $1,430,000 for the 13 week
period ended March 1, 1997 to $202,000 for the 13 week period ended February 28,
1998. The decrease in cost of government research was primarily attributable to
the decrease in government research revenues. Cost of government research, as a
percentage of government research revenue, was 107% and 100% for the 13 week
periods ended March 1, 1997 and February 28, 1998, respectively.
Selling, general and administrative expenses increased 30% from $859,000 for the
13 week period ended March 1, 1997 to $1,113,000 for the 13 week period ended
February 28, 1998. The increase in selling, general and administrative expenses
was primarily due to increases in payroll and related expenses and consulting
fees.
Interest expense increased 99% from $146,000 for the 13 week period ended
March 1, 1997 to $289,000 for the 13 week period ended February 28, 1998. The
increase in interest expense was attributable to increases in the Company's
outstanding balance under its long-term obligations.
TWENTY-SIX WEEK PERIOD ENDED MARCH 1, 1997 AND FEBRUARY 28, 1998
REVENUE
Total revenues decreased 17% from $11,669,000 for the 26 week period ended
March 1, 1997 to $9,650,000 for the 26 week period ended February 28, 1998.
Collaborative research, licenses, subscription fees and royalties increased 15%
from $6,829,000 for the 26 week period ended March 1, 1997 to $7,857,000 for the
26 week period ended February 28, 1998. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to higher
milestone payments and sponsored research revenues received this year under the
Company's collaboration research agreements with Astra and Schering-Plough, as
well as subscription fee revenue earned this year under the Company's license
agreements with Bayer, Bristol-Myers Squibb and Schering-Plough providing each
company with nonexclusive access to the Company's proprietary genome sequence
database, PathoGenome(TM) and associated information relating to microbial
organisms.
Government research revenue decreased 86% from $3,311,000 for the 26 week period
ended March 1, 1997 to $464,000 for the 26 week period ended February 28, 1998.
The decrease in government research revenue was primarily attributable to a
shift in personnel from government research programs to company-sponsored
research and development programs, in particular, the microbial genetic database
program, PathoGenome(TM).
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Interest income decreased 13% from $1,530,000 for the 26 week period ended
March 1, 1997 to $1,329,000 for the 26 week period ended February 28, 1998
reflecting a decrease in funds available for investment.
COST AND EXPENSES
Total cost and expenses increased 29% from $13,678,000 for the 26 week period
ended March 1, 1997 to $17,609,000 for the 26 week period ended February 28,
1998. Research and development expenses, which include company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators, increased 69% from $8,539,000 for the 26 week
period ended March 1, 1997 to $14,471,000 for the 26 week period ended
February 28, 1998. The increase in research and development expenses was
primarily attributable to increases in both personnel and laboratory expenses
associated with the Company's expansion of its pathogen, microbial genetic
database, human gene discovery and functional genomics research programs. The
increase consisted primarily of increases in payroll and related expenses,
laboratory supplies and overhead expenses.
The cost of government research decreased 86% from $3,277,000 for the 26 week
period ended March 1, 1997 to $464,000 for the 26 week period ended February 28,
1998. The decrease in cost of government research was primarily attributable to
the decrease in government research revenues. Cost of government research, as a
percentage of government research revenue, was 99% and 100% for the 26 week
periods ended March 1, 1997 and February 28, 1998, respectively.
Selling, general and administrative expenses increased 34% from $1,590,000 for
the 26 week period ended March 1, 1997 to $2,135,000 for the 26 week period
ended February 28, 1998. The increase in selling, general and administrative
expenses was primarily due to increases in payroll and related expenses and
consulting fees.
Interest expense increased 99% from $271,000 for the 26 week period ended
March 1, 1998 to $539,000 for the 26 week period ended February 28, 1998. The
increase in interest expense for was attributable to increases in the Company's
outstanding balance under its long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been revenue
from government research grants and contracts, revenue from collaborative
research agreements, borrowings under equipment lending facilities and capital
leases and proceeds from sale of equity securities.
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In fiscal 1995, the Company received net proceeds of approximately $2,403,000
from the private sale of common stock and warrants and the exercise of stock
options. In fiscal 1996, the Company closed a public offering of 3,000,000
shares of its common stock at $13.00 per share, resulting in proceeds of
approximately $36,007,000, net of issuance costs. The Company also sold an
additional 450,000 shares of its common stock in the underwriter's
over-allotment, resulting in proceeds of $5,515,000, net of issuance costs.
As of February 28, 1998, the Company had cash, cash equivalents, restricted cash
and long and short-term marketable securities of approximately $41,343,000. The
Company has various arrangements under which it can finance certain office and
laboratory equipment and leasehold improvements. Under these arrangements, the
Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, debt service coverage and minimum restricted cash balances. On March 9,
1998, subsequent to quarter-end, the Company modified one of the finance
arrangements to make available an additional $4,300,000 in order to finance
certain laboratory, computer and office equipment. Borrowings are payable in 15
quarterly installments commencing March 31, 1999. All other terms and conditions
remained the same. Including the amendment, the Company had $5,960,000 available
under these arrangements for future borrowings. Additionally, the Company
received a $6,000,000 advance to finance office and laboratory renovations at
its Beaver Street facility of which approximately $599,000 had not been expended
at February 28, 1998.
The Company's operating activities provided cash of approximately $861,000 for
the 26 week period ended March 1, 1997. The Company's operating activities used
cash of approximately $4,384,000 for the 26 week period ended February 28, 1998
primarily to fund operating losses.
For the 26 week periods ended March 1, 1997 and February 28, 1998, the Company's
investing activities provided cash of approximately $4,579,000 and $6,172,000,
respectively, from the sale of marketable securities, partially offset by
purchases of marketable securities, and property and equipment.
Financing activities used cash of approximately $754,000 for the 26 week period
ended March 1, 1997 primarily for payments of capital lease obligations,
partially offset by the exercise of stock options. Financing activities provided
cash of approximately $2,458,000 for the 26 week period ended February 28, 1998
primarily from proceeds from long-term obligations and exercise of stock
options, net of payments of long-term obligations.
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Capital expenditures totaled $1,771,000 for the 26 week period ended
February 28, 1998 consisting of laboratory, computer and office equipment. The
Company currently estimates that it will acquire an additional $3,229,000 in
capital equipment in fiscal 1998 consisting of primarily computer and laboratory
equipment which it intends to finance under existing and new financing
arrangements. The Company is also in the process of consolidating its operations
at its Beaver Street facility at an estimated cost of $6,700,000 which consists
of office and laboratory renovations. As of February 28, 1998, the Company had
incurred approximately $5,401,000 of capital improvements consisting of $847,000
during fiscal 1997 and $4,554,000 during the 26 week period ended
February 28,1998. The Company plans to spend an additional $1,299,000 during
fiscal 1998 on this renovation project. The Company plans to utilize existing
and new capital lease and equipment financing arrangements to finance
substantially all of these capital improvements.
At August 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 and $1,128,000, respectively. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax 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%. The Company does not believe it has experienced a cumulative
ownership change in excess of 50%. However, there can be no assurance that
ownership changes will not occur in future periods which will limit the
Company's ability to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing and
expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10-Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment, described more fully in the Company's
Annual Report on Forms 10-K for the year ended August 31, 1997, filed with the
Securities and Exchange Commission.
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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
See Insert A
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
10.41 Collaboration and License Agreement between the Company and
Schering Corporation, dated as of September 22, 1997.(25)*
10.42 Collaboration and License Agreement between the Company and
Schering-Plough Ltd., dated as of September 22, 1997.(25)*
* Confidential treatment requested with respect to a portion of this
Exhibit.
(25) Filed within.
b) REPORTS ON FORM 8-K
None.
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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/ Fenel M. Eloi
-----------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: April 14, 1998
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INSERT A
The Company's Special Meeting in lieu of an Annual Meeting was held on
January 26, 1998. At the meeting, shareholders took the following actions:
1) Election of Directors
Shares Voted
Name Of Nominee For Withhold Authority
--------------- ------------ ------------------
Robert J. Hennessey 15,885,902 203,803
Philip J. Leder 15,885,942 203,763
Lawrence Levy 15,820,040 269,665
Donald J. McCarren 15,829,782 259,923
Steven M. Rauscher 15,887,192 202,513
2) To approve the Company's 1997 Stock Option Plan.
For Against Abstain No Voting
--------- ------- ------- ---------
8,239,127 941,520 136,815 6,772,243
3) To approve of the Company's 1997 Directors' Deferred Stock Plan.
For Against Abstain No Voting
--------- ------- ------- ---------
8,715,412 439,757 162,293 6,772,243
4) To ratify the selection of Arthur Andersen LLP as the Company's auditors for
the fiscal year ending August 31, 1998.
For Against Abstain No Voting
---------- ------- ------- ---------
15,962,185 71,859 55,661 0
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