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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: May 30, 1998
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK 18,306,839
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$.10 PAR VALUE Outstanding July 10, 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
August 31, 1997 and May 30, 1998 3
Consolidated Condensed Statements of Operations
for the 39 week period ended May 31, 1997
and May 30, 1998 4
Consolidated Statements of Cash Flows for the
39 week period ended May 31, 1997
and May 30,1998 5
Notes to Consolidated Condensed Financial
Statements for the 39 week period ended
May 31, 1997 and May 30, 1998 6-12
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 13-19
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, May 30,
1997 1998
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $ 8,602,698 $11,936,574
Marketable securities 34,814,601 23,475,214
Interest receivable 1,280,611 753,848
Accounts receivable 55,142 34,305
Unbilled costs and fees 140,320 831,952
Note receivable from officer 160,000 0
Prepaid expenses and other current assets 408,240 525,976
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Total current assets 45,461,612 37,557,869
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 11,855,630 14,405,616
Leasehold improvements 1,964,981 7,621,123
Office Equipment and furniture 792,342 1,378,793
Construction-in-progress 1,111,526 271,506
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15,724,479 23,677,038
Less accumulated depreciation
and amortization 5,352,999 7,846,828
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10,371,480 15,830,210
Restricted cash 301,500 301,500
Long-term marketable securities 4,124,798 3,523,878
Note receivable from officer 0 160,000
Other assets 428,989 439,125
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Total assets $60,688,379 $57,812,582
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $1,288,391 $1,120,902
Accrued expenses 2,373,788 3,037,944
Deferred revenue 2,335,695 6,280,642
Current maturities of long-term obligations 3,595,120 5,507,578
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Total current liabilities 9,592,994 15,947,066
Long-term obligations, net of current maturities 7,149,188 9,233,038
Shareholders' equity 43,946,197 32,632,478
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Total liabilities and shareholders' equity $60,688,379 $57,812,582
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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 Thirty-nine Weeks Ended
May 31, May 30, May 31, May 30,
1997 1998 1997 1998
(Unaudited) (Unaudited)
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Revenues:
Collaborative research, licenses, subscription
fees and royalties $ 2,987,210 $ 4,658,417 $ 9,816,045 $ 12,515,891
Government research 918,999 351,896 4,229,562 815,499
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Total revenues 3,906,209 5,010,313 14,045,607 13,331,390
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Costs and Expenses:
Research and development 5,977,861 8,090,097 14,483,568 22,561,069
Cost of government research 918,999 351,896 4,229,562 815,499
Selling, general and administrative 997,021 1,178,187 2,587,078 3,313,133
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Total costs and expenses 7,893,881 9,620,180 21,300,208 26,689,701
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Loss from operations (3,987,672) (4,609,867) (7,254,601) (13,358,311)
Interest income 741,152 552,037 2,270,910 1,881,023
Interest expense (159,066) (307,068) (430,545) (846,055)
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Net loss $(3,405,586) $(4,364,898) $(5,414,236) $(12,323,343)
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Basic/diluted net loss per common share $ (0.19) $ (0.24) $ (0.31) $ (0.68)
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Basic/diluted weighted average number of common
shares outstanding 17,666,731 18,274,085 17,569,640 18,181,749
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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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Thirty-nine Weeks ended
May 31, May 30,
1997 1998
(Unaudited)
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Cash Flows from Operating Activities:
Net loss $ (5,414,236) $(12,323,343)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,554,338 2,674,487
Loss on disposal of fixed assets 0 103,821
Deferred compensation 57,683 94,814
Changes in assets and liabilities:
Interest receivable 2,925 526,763
Accounts receivable (561,438) 20,837
Unbilled costs and fees 93,710 (691,632)
Prepaid expenses and other current assets (31,070) (117,736)
Accounts payable (171,485) (167,489)
Accrued expenses 455,468 664,156
Deferred contract revenue 1,896,899 3,944,947
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Total adjustments 3,297,030 7,052,968
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Net cash used in operating activities (2,117,206) (5,270,375)
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Cash Flows from Investing Activities:
Purchases of marketable securities (18,236,804) (28,873,818)
Proceeds from sale of marketable securities 19,174,000 40,814,125
Increase in restricted cash (200,000) 0
Purchases of equipment and leasehold improvements (643,716) (5,317,164)
Increase in other assets (88,189) (10,136)
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Net cash provided by investing activities 5,291 6,613,007
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options 681,265 914,810
Proceeds from long-term obligations 0 4,011,000
Payments on long-term obligations (2,122,960) (2,934,566)
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Net cash provided by (used in) financing activities (1,441,695) 1,991,244
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Net Increase (Decrease) in Cash and Cash Equivalents (3,553,610) 3,333,876
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 $ 7,125,677 $ 11,936,574
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Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 29,142 $ 20,250
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Interest paid during period $ 430,545 $ 846,055
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Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital leases $ 4,629,267 $ 2,919,874
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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 39 week period ended May 30, 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 revenues from collaborative research and development arrangements are
recognized when the milestones 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 early 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. At May 30, 1998 and May 31, 1997, the Company
had
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potential common stock of approximately 4,298,000 and 4,593,000, respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At May 30, 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 May 30, 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 May 30, 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.
On March 9, 1998, the Company increased the equipment line of credit described
above by $4,300,000 to $10,300,000. The additional borrowings under the
equipment line of credit will be utilized to finance laboratory, computer and
office equipment over the next ten months. Borrowings under the new credit line
are payable in 15 quarterly installments commencing March 31, 1999. All other
terms and conditions remained the same. The Company had $4,300,000 available
under the modified line of credit at May 30, 1998.
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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 5.93% as of May 30, 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 May 30, 1998, the Company had no additional borrowing capacity under this
arrangement, however, approximately $539,000 of the amounts received have 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 has 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 no additional borrowing capacity under these capital
lease agreements at May 30, 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 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 March 4, 1998, Schering-Plough elected to
extend the research program to the full term of the agreement which expires on
March 31, 2000.
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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 May 30, 1998 and May 31, 1997, the Company
recorded revenue of $733,000 and $1,024,000, respectively, under this agreement,
which consisted of sponsored research funding.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$2,645,000 under this agreement, which consisted of sponsored research funding
and milestone payments . For the 39 week period ended May 31, 1997, the Company
recorded revenue of $2,774,000 under this agreement, which consisted of
sponsored research funding.
In December 1996, the Company entered into its second research collaboration and
license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under 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
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million represents milestone payments based on achievement of research and
product development milestones.
For the 13 week period ended May 30, 1998, the Company recorded revenue of
$2,212,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 13 week period ended May
31, 1997, the Company recorded revenue of $663,000 under this agreement, which
consisted of sponsored research funding and subcontract activity.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$5,164,000 under this agreement, which consisted of sponsored research funding,
subcontract activity and a milestone payment. For the 39 week period ended May
31, 1997, the Company recorded revenue of $3,481,000 under this agreement, which
consisted of sponsored research funding, license fee, expense allowance and
subcontract activity.
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 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 39 week periods ended May 30, 1998, the Company recorded revenue
of $613,000 and $1,619,000, respectively, under this agreement, which consisted
of sponsored research funding.
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
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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
representatives 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 with an option to extend. On June 15, 1998,
subsequent to quarter-end, Astra elected to extend the research program for a
second time which will carry the alliance through at least August 1999.
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 May 30, 1998, the Company recorded revenue of
$336,000 under this agreement, which consisted of sponsored research funding.
For the 13 week period ended May 31, 1997, the Company recorded revenue of
$775,000 under this agreement, which consisted of sponsored research funding and
a milestone payment.
For the 39 week period ended May 30, 1998, the Company recorded revenue of
$1,405,000 under this agreement, which consisted of sponsored research funding
and a milestone payment. For the 39 week period ended May 31, 1997, the Company
recorded revenue of $2,416,000 under this agreement, which consisted of
sponsored research funding and a milestone payment.
8. DATABASE SUBSCRIPTIONS
In May 1997, the Company introduced its proprietary genome sequence database,
PathoGenome(TM) and sold its first subscription to Bayer AG, ("Bayer") providing
Bayer with nonexclusive access to the Company's PathoGenome(TM) database and
associated information relating to microbial organisms. In September 1997, the
Company sold subscriptions to its PathoGenome(TM) database to Bristol-Myers
Squibb and Schering-Plough. In May 1998, the Company sold its fourth
subscription to its PathoGenome(TM) database to Scriptgen Pharmaceuticals, Inc.
("Scriptgen"). The subscription agreements call for the Company to provide each
subscriber with periodic data updates, analysis tools and software support.
Under the agreements, Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen
have agreed to pay annual subscription fees, milestone payments,
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when applicable, 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 39 week periods ended May 30, 1998, the Company recognized
subscription fee revenue of $750,000 and $1,668,000, respectively, under these
agreements.
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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.
The Company's primary sources of revenue are collaborative agreements with
pharmaceutical company partners, subscription agreements to the Company's
proprietary genome sequence database, PathoGenomeTM and government research
grants and contracts. As of May 30, 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 1997, the Company entered into its
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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"). In
September 1997, the Company sold subscriptions to Bristol-Myers Squibb and
Schering-Plough. In May 1998, the Company sold a subscription to Scriptgen
Pharmaceuticals, Inc ("Scriptgen"). Under the agreements, the subscribers will
receive nonexclusive access to the Company's PathoGenome(TM) database and
associated information relating to microbial organisms.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $56,879,000 at May 30, 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.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998
REVENUE
Total revenues increased 28% from $3,906,000 for the 13 week period ended May
31, 1997 to $5,010,000 for the 13 week period ended May 30, 1998. Collaborative
research, licenses, subscription fees and royalties increased 56% from
$2,987,000 for the 13 week period ended May 31, 1997 to $4,658,000 for the 13
week period ended May 30, 1998. The increase in collaborative research,
licenses, subscription fees and royalties was primarily attributable to 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. The increase was also due to subscription fee revenue
earned this year under the Company's license agreements with Bayer,
Bristol-Myers Squibb, Schering-Plough and Scriptgen 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 62% from $919,000 for the 13 week period
ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 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
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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.
COST AND EXPENSES
Total cost and expenses increased 22% from $7,894,000 for the 13 week period
ended May 31, 1997 to $9,620,000 for the 13 week period ended May 30, 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 35% from $5,978,000 for the 13 week period
ended May 31, 1997 to $8,090,000 for the 13 week period ended May 30, 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 62% from $919,000 for the 13 week
period ended May 31, 1997 to $352,000 for the 13 week period ended May 30, 1998.
The decrease in cost of government research was primarily attributable to the
decrease in government research revenues.
Selling, general and administrative expenses increased 18% from $997,000 for the
13 week period ended May 31, 1997 to $1,178,000 for the 13 week period ended May
30, 1998. The increase in selling, general and administrative expenses was
primarily due to increases in payroll and related expenses as a result of hiring
additional administrative personnel.
INTEREST INCOME AND EXPENSE
Interest income decreased 26% from $741,000 for the 13 week period ended May 31,
1997 to $552,000 for the 13 week period ended May 30, 1998 reflecting a decrease
in funds available for investment.
Interest expense increased 93% from $159,000 for the 13 week period ended May
31, 1997 to $307,000 for the 13 week period ended May 30, 1998. The increase in
interest expense was attributable to increases in the Company's average
outstanding balance under its long-term obligations.
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THIRTY-NINE WEEK PERIOD ENDED MAY 31, 1997 AND MAY 30, 1998
REVENUE
Total revenues decreased 5% from $14,046,000 for the 39 week period ended May
31, 1997 to $13,331,000 for the 39 week period ended May 30, 1998. Collaborative
research, licenses, subscription fees and royalties increased 28% from
$9,816,000 for the 39 week period ended May 31, 1997 to $12,516,000 for the 39
week period ended May 30, 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 Schering-Plough for treating
both asthma and fungal infections. The increase was also due to subscription fee
revenue earned this year under the Company's license agreements with Bayer,
Bristol-Myers Squibb, Schering-Plough and Scriptgen providing each company with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenomeTM and associated information relating to microbial organisms.
Government research revenue decreased 81% from $4,230,000 for the 39 week period
ended May 31, 1997 to $816,000 for the 39 week period ended May 30, 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).
COST AND EXPENSES
Total cost and expenses increased 25% from $21,300,000 for the 39 week period
ended May 31, 1997 to $26,690,000 for the 39 week period ended May 30, 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 56% from $14,484,000 for the 39 week period
ended May 31, 1997 to $22,561,000 for the 39 week period ended May 30, 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 81% from $4,230,000 for the 39 week
period ended May 31, 1997 to $815,000 for the 39 week period ended May 30, 1998.
The decrease in cost of government research was primarily attributable to the
decrease in government research revenues.
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Selling, general and administrative expenses increased 28% from $2,587,000 for
the 39 week period ended May 31, 1997 to $3,313,000 for the 39 week period ended
May 30, 1998. The increase in selling, general and administrative expenses was
primarily due to increases in payroll and related expenses as a result of hiring
additional administrative personnel.
INTEREST INCOME AND EXPENSE
Interest income decreased 17% from $2,271,000 for the 39 week period ended May
31, 1997 to $1,881,000 for the 39 week period ended May 30, 1998 reflecting a
decrease in funds available for investment.
Interest expense increased 96% from $431,000 for the 39 week period ended May
31, 1997 to $846,000 for the 39 week period ended May 30, 1998. The increase in
interest expense for was attributable to increases in the Company's average
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 collaborative research agreements, revenue from subscription agreements,
revenue from government research grants and contracts, borrowings under
equipment lending facilities and capital leases and proceeds from sale of equity
securities.
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 May 30, 1998, the Company had cash, cash equivalents, restricted cash and
long and short-term marketable securities of approximately $39,237,000. 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, the Company amended one of the finance arrangements to increase the
facility by $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. The Company
had $4,300,000 available under these arrangements for future borrowings at May
30, 1998. The Company also received a $6,000,000 advance to finance office and
laboratory renovations at its Beaver Street facility of which approximately
$539,000 had not been expended at May 30, 1998.
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For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's
operating activities used cash of approximately $2,117,000 and $5,270,000,
respectively, primarily to fund operating losses.
For the 39 week periods ended May 31, 1997 and May 30, 1998, the Company's
investing activities provided cash of approximately $5,000 and $6,613,000,
respectively, from the sale of marketable securities, partially offset by
purchases of marketable securities, and property and equipment.
Financing activities used cash of approximately $1,443,000 for the 39 week
period ended May 31, 1997 primarily for payments of capital lease obligations,
partially offset by proceeds from the exercise of stock options. Financing
activities provided cash of approximately $1,991,000 for the 39 week period
ended May 30, 1998 primarily from proceeds from long-term obligations and
exercise of stock options, net of payments of long-term obligations.
Capital expenditures totaled $2,781,000 for the 39 week period ended May 30,
1998 consisting of laboratory, computer and office equipment. The Company
estimates that it will acquire an additional $1,200,000 in capital equipment in
fiscal 1998 consisting of primarily computer and laboratory equipment which it
intends to finance under existing financing arrangements. Additionally, the
Company is in the process of consolidating its operations at its Beaver Street
facility at an estimated cost of $6,852,000 which consists of office and
laboratory renovations. As of May 30, 1998, the Company had incurred
approximately $6,303,000 of capital improvements consisting of $847,000 during
fiscal 1997 and $5,456,000 during the 39 week period ended May 30,1998. The
Company plans to spend an additional $549,000 on this renovation project and
expects the renovations to be completed by September 30, 1998. The Company plans
to utilize existing capital lease 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.
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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 10Q 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
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
10.43 Credit modification agreement between the Company and Fleet
National Bank, dated March 9, 1998. (26)
(26) 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: July 10, 1998
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