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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- ----- Quarterly report pursuant to Section 13 or 15(d) of the Securities
| X | Exchange Act of 1934 for the quarterly period ended September 30, 2005.
- ----
or
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
| | Exchange Act of 1934 for the transition period from ______________ to
- ---- _____________.
Commission File No. 0-19222
GENELABS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
California 94-3010150
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
505 Penobscot Drive, 94063
Redwood City, California (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 369-9500
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
There were 88,868,865 shares of the Registrant's Common Stock issued and
outstanding on October 31, 2005.
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FORWARD LOOKING STATEMENTS
- --------------------------
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, referred to as the Exchange Act, which are subject to the
"safe harbor" created therein, including those statements which use any of the
words "may," "will," "anticipates," "estimates," "intends," "believes,"
"expects," "plans," "potential," "seeks," "goal," "objective," and similar
expressions. These forward-looking statements include, among others, statements
regarding:
o plans, programs, progress, and potential success regarding our
research efforts, including our ability to identify compounds for
preclinical development and the success of any such preclinical
development efforts in our hepatitis C and other research programs;
o estimates that cash resources will be adequate to provide liquidity
into the third quarter of 2006;
o our ability to achieve any milestones in our agreements with Gilead
Sciences, Inc. or other collaborators;
o plans, programs, progress, and potential success regarding our
collaborators and licensees, including Gilead Sciences, Inc. for
nucleoside compounds against hepatitis C virus, GlaxoSmithKline for
hepatitis E vaccine, and, for Prestara, Watson Pharmaceuticals, Inc.,
Genovate Biotechnology Co., Ltd., and Tanabe Seiyaku Co., Ltd.;
o further actions or developments relating to Prestara(TM)
(prasterone), our investigational drug, its recent Phase III clinical
trial in the United States and its follow-on open label clinical
trial;
o possible actions, if any, we or the U.S. Food and Drug
Administration, or FDA, may take relating to our New Drug
Application, or NDA, for Prestara(TM), filed with the FDA;
o our future cash resources, expenditures and our ability to obtain
additional funding for our business plans; and
o the securing and defense of intellectual property rights important to
our business.
All statements in this quarterly report on Form 10-Q that are not
historical are forward-looking statements and are subject to risks and
uncertainties, including those set forth in the Risk Factors section at the end
of Item 2. Among these are the risks that we may not be able to raise
sufficient funds to continue operations, that we may be delisted from the
Nasdaq Capital Market, that problems with our manufacturers or collaborators
may negatively impact their or our research, clinical trials or product
manufacture, development or marketing, that our research programs may fail,
that our attempts to license our technologies to others may fail and that
clinical trials of Prestara(TM) or similar formulations of prasterone are
abandoned, delayed, or have results that are negative, inconclusive or not
usable to support regulatory approval, that the FDA and foreign authorities may
delay or deny approval of Prestara(TM). These as well as other factors may also
cause actual results to differ materially from those projected and expressed or
implied in these statements. We assume no obligation to update any such
forward-looking statement for subsequent events. The risks and uncertainties
under the captions "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein, among other
things, should be considered in evaluating our prospects and future financial
performance. All forward-looking statements included in this quarterly report
on Form 10-Q are made as of the date hereof.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2005 2004
-------------- -----------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 14,271 $ 26,358
Restricted cash 150 150
Other current assets 622 824
-------------- ------------
Total current assets 15,043 27,332
Property and equipment, net 1,002 1,091
Long-term investment 960 960
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$ 17,005 $ 29,383
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 1,116 $ 1,702
Accrued compensation and related expenses 835 1,811
Accrued manufacturing costs 675 700
Unearned contract revenue 4,120 4,120
-------------- -------------
Total current liabilities 6,746 8,333
Accrued compensation 318 745
Unearned contract revenue 5,393 7,358
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Total liabilities 12,457 16,436
-------------- -------------
Shareholders' equity:
Common stock 230,987 230,815
Accumulated deficit (226,439) (217,868)
--------------- -------------
Total shareholders' equity 4,548 12,947
--------------- -------------
$ 17,005 $ 29,383
=============== =============
See notes to condensed consolidated financial statements.
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- --------------- ----------------
Revenue:
Contract $ 1,556 $ 222 $ 4,664 $ 1,281
Royalty 142 177 466 474
-------------- ------------- -------------- -------------
Total revenue 1,698 399 5,130 1,755
-------------- ------------- -------------- -------------
Operating expenses:
Research and development 2,944 3,284 9,425 11,411
General and administrative 1,720 1,545 4,640 4,797
-------------- ------------- -------------- -------------
Total operating expenses 4,664 4,829 14,065 16,208
-------------- ------------- -------------- -------------
Operating loss (2,966) (4,430) (8,935) (14,453)
Interest income, net 121 59 364 163
-------------- ------------- -------------- -------------
Loss from continuing operations (2,845) (4,371) (8,571) (14,290)
Discontinued operations:
Income from diagnostics business - - - 262
Gain on sale of diagnostics business - - - 2,020
-------------- ------------- -------------- -------------
Net loss $ (2,845) $ (4,371) $ (8,571) $ (12,008)
============== ============= ============== =============
Loss per common share from
continuing operations
- basic and diluted $ (0.03) $ (0.05) $ (0.10) $ (0.16)
============== ============= ============== =============
Net loss per common share
- basic and diluted $ (0.03) $ (0.05) $ (0.10) $ (0.14)
============== ============= =============== =============
Weighted average shares outstanding
to calculate basic and diluted
net loss per common share 88,869 88,313 88,626 88,007
============== ============= ============== =============
See notes to condensed consolidated financial statements.
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
For the nine months ended
September 30,
---------------------------------
2005 2004
--------------- -------------
Cash flows from operating activities:
Net loss $ (8,571) $ (12,008)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 319 302
Income from discontinued diagnostics business - (262)
Gain on sale of discontinued diagnostics business - (2,020)
Non-employee equity awards 6 35
Changes in assets and liabilities:
Other current assets 202 25
Accounts payable, accrued liabilities
and accrued compensation (2,014) (140)
Unearned contract revenue (1,965) 974
------------ --------------
Net cash used in operating activities (12,023) (13,094)
------------ --------------
Cash flows from investing activities:
Cash received from sale of discontinued diagnostics business - 2,989
Purchase of property and equipment (230) (336)
------------ --------------
Net cash (used in)/provided by investing activities (230) 2,653
------------ --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 166 3,413
------------ --------------
Net decrease in cash and cash equivalents (12,087) (7,028)
Cash and cash equivalents, beginning of the period 26,358 26,530
------------ --------------
Cash and cash equivalents, end of the period $ 14,271 $ 19,502
============ ==============
See notes to condensed consolidated financial statements.
GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share data)
(Unaudited)
September 30, 2005
1. Significant Accounting Policies
Basis of Presentation
Genelabs Technologies, Inc., referred to with its subsidiaries
collectively as Genelabs or the Company, is a biopharmaceutical company focused
on the discovery and development of pharmaceutical products to improve human
health. The Company has built drug discovery capabilities that can support
various research and development projects. The Company is currently
concentrating these capabilities on discovering novel compounds that
selectively inhibit replication of the hepatitis C virus and advancing
preclinical development of compounds from this hepatitis C virus drug discovery
program, while also exploring options for development of a late-stage product
for lupus.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Genelabs Technologies, Inc. and its wholly owned
subsidiaries, Accelerated Clinical Research Organization, Inc. and Genelabs
Europe B.V. All intercompany accounts and transactions have been eliminated.
The Company operates in one business segment, the discovery and development of
pharmaceutical products.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. It is possible that actual amounts will differ from
those estimates.
These financial statements have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 2005 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. These unaudited condensed consolidated financial
statements are meant to be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. The comparative
balance sheet as of December 31, 2004 has been derived from the audited
financial statements at that date.
2. Stock-Based Compensation
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for its employees stock based compensation plans. The
Company grants employee stock options at an exercise price equal to the fair
market value of the shares at the date of grant and, accordingly, recognizes no
compensation expense for stock options granted to employees. The Company
follows the disclosure only provisions of statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS
No. 148. The following table presents information showing the effects to the
reported net loss and net loss per share if Genelabs had accounted for employee
stock-based compensation using the fair-value method:
For the three months For the nine months
ended September 30, ended September 30,
2005 2004 2005 2004
-------------- ---------- ------------- ----------
Net loss as reported $ (2,845) $ (4,371) $ (8,571) $ (12,008)
Stock-based employee compensation cost:
Included in net loss as reported - - - -
Amount that would have been included in
net loss if we had accounted for all stock-
based employee compensation at its
theoretical fair value (172) (340) (829) (1,124)
------------- ------------ ----------- ------------
Pro forma net loss $ (3,017) $ (4,711) $ (9,400) $ (13,132)
============= ============ =========== ============
Net loss per common share as reported,
basic and diluted $ (0.03) $ (0.05) $ (0.10) $ (0.14)
============= ============ =========== ===========
Pro forma net loss per common share,
basic and diluted $ (0.03) $ (0.05) $ (0.11) $ (0.15)
============= ============ =========== ===========
3. Comprehensive Loss
During each of the three months and nine months ended September 30,
2005 and 2004, the Company's comprehensive loss was the same as the net loss.
4. Net Loss per Share
Net loss per share has been computed using the weighted average number
of shares of common stock outstanding during the period. Had the Company been
in a net income position, diluted earnings per share for the three months ended
September 30, 2005 and 2004 would have included an additional 18,000 and
2,366,000 shares, respectively, and for the nine months ended September 30,
2005 and 2004 would have included an additional 14,000 and 2,846,000 shares,
respectively, related to the Company's outstanding stock options and warrants.
Net earnings per common share, basic and diluted, from discontinued operations
were $0.00 and $0.03 for the three months and nine months ended September 30,
2004, respectively.
5. Recent Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 123 (revised 2004), "Share-Based
Payment" (SFAS 123R), which Genelabs is currently required to implement
effective January 1, 2006. SFAS 123R addresses the accounting for stock options
issued to employees, and eliminates the ability to account for employee stock
options using the intrinsic value method currently used by the Company.
Instead, SFAS 123R requires that these options be accounted for using a
fair-value based method, and the Company will be required to recognize an
expense based on estimates of the value of the stock options. Genelabs expects
to adopt SFAS 123R using the modified-prospective transition method and is
currently evaluating option valuation methodologies and assumptions. Current
estimates of option values using the Black-Scholes method (as shown in Note 2
above) may not be indicative of results from valuation methodologies permitted
under SFAS 123R. When SFAS 123R is adopted, the Company's operating expenses
will increase by the estimated fair value of the stock options issued to
employees, which is expected to have a material impact on the statement of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Genelabs Technologies, Inc., referred to as Genelabs or the Company,
is a biopharmaceutical company focused on the discovery and development of
pharmaceutical products to improve human health. The Company has built drug
discovery capabilities that can support various research and development
projects. The Company is currently concentrating these capabilities on
discovering novel compounds that selectively inhibit replication of the
hepatitis C virus, or HCV, and advancing preclinical development of compounds
from this hepatitis C virus drug discovery program, while also exploring
options for development of a late-stage product for lupus.
A number of events have impacted the business of Genelabs during the
third quarter of 2005 and to date. Beginning with drug discovery, we continued
to expand our research capacity and capability by hiring additional scientists.
We have focused on our HCV polymerase non-nucleoside drug discovery program, to
which Genelabs retains all rights, as well as a separate effort focused on a
target encoded by the NS5a region of the HCV genome. In addition, we are
continuing our work on the HCV nucleoside program in collaboration with Gilead
Sciences, Inc., or Gilead. We have completed one and seven day toxicology
studies in two rodent species on two non-nucleoside compounds that function by
targeting the HCV polymerase. The two compounds are from separate chemical
families. Based on the results of these studies, we intend to contract with an
outside manufacturer to perform scale-up synthesis and production of additional
quantities of the compounds. These quantities would enable further toxicology
and other studies necessary to file an Investigational New Drug, or IND,
application in the United States or similar application in a foreign country to
commence clinical trials in humans. Depending on resource constraints, the
Company may proceed with scale-up manufacturing of one or both of the
preclinical compounds. If the manufacturing proceeds smoothly and the requisite
tests are conducted efficiently with positive results, the Company believes
that it may file an IND or similar application by early 2007. There can be no
assurance that manufacturing and testing will be successful or that the Company
will file an IND within such time frame.
In drug development, we are focused on defining possible paths forward
for our investigational drug for women with lupus, Prestara(TM). Patients who
completed our phase III clinical trial, designated Study GL02-01, were eligible
to enroll in a 12-month open-label continuation study which has been designated
Study GL03-01. This follow-on trial assessed the effect of Prestara on bone
mineral density of women with lupus over an additional 12 months. Preliminary
results of Study GL03-01 demonstrated that patients who received 200 mg of
Prestara per day increased their bone mineral density, or BMD, at the lumbar
spine by approximately 0.9% during the 12 months they were enrolled in Study
GL03-01. Results of Study GL03-01 also demonstrated that patients who received
a lower dose of Prestara, 100 mg per day, did not increase their BMD during the
clinical trial, and in fact lost a measurable amount of bone mineral density at
the lumbar spine over the 12-month period of Study GL03-01. The patients who
had previously received 200 mg per day of Prestara in the earlier Study GL02-01
and who were then randomized to continue receiving 200 mg of Prestara in Study
GL03-01 experienced an increase in BMD at the lumbar spine over each successive
6-month interval in the 18-month duration of the combined studies. The safety
profile for Prestara in this study was consistent with that seen in previous
clinical studies. We currently have a meeting scheduled with the FDA for the
purpose of determining the future development path for Prestara. However,
because the meeting dates previously scheduled have been postponed at the
request of the FDA, there can be no assurance that the meeting will take place
this year, or at all. Although we believe that the Prestara clinical trials
have provided evidence of its benefits with an acceptable safety profile, we
also believe that it is unlikely that the FDA will approve Prestara without
requiring additional positive phase III clinical trial data. Since unblinding
Study GL02-01 in October 2004, our expenditures on Prestara and our clinical
development capabilities have been substantially reduced. We presently do not
have the resources to conduct another phase III clinical trial, and we may
decide to discontinue further development of Prestara.
On October 13, 2005 the Company's common stock ceased trading on The
Nasdaq National Market and began trading on the Nasdaq Capital Market, formerly
known as the Nasdaq SmallCap Market. The Company currently does not comply with
Nasdaq's $1.00 minimum closing bid price requirement, and has a grace period
until March 16, 2006 to regain compliance with the minimum closing bid price
requirement. At our 2005 annual meeting of shareholders our shareholders
approved a 1-for-5 reverse split of our common stock that may be implemented at
the discretion of our board of directors anytime before the 2006 annual meeting
of shareholders.
Results of Operations - Third Quarter 2005 compared to Third Quarter 2004
- -------------------------------------------------------------------------
Summary
Genelabs' net loss was $2.8 million in the third quarter of 2005
compared to a net loss of $4.4 million for the third quarter of 2004. The lower
net loss in the 2005 period compared to the 2004 period is primarily due to
increased contract revenue from a research collaboration and license agreement
with Gilead Sciences, Inc., or Gilead, that was not in place during the 2004
period, combined with lower research and development expenses, partially offset
by higher general and administrative expenses.
Revenue
Contract revenue was $1.6 million in the third quarter of 2005
compared to $0.2 million in the third quarter of 2004. Our largest source of
revenue in the third quarter of 2005 was a research collaboration and license
agreement with Gilead, under which we recognized $1.4 million. Because this
collaboration was not in place during the third quarter of 2004, there is no
comparable revenue for the 2004 period. During the third quarter of both 2005
and 2004, we recognized $0.2 million in revenue from our two collaborations for
development and commercialization of our investigational new drug for lupus,
Prestara(TM). The collaborations are with Watson Pharmaceuticals, Inc., or
Watson, for North America and Tanabe Seiyaku Co., Ltd., or Tanabe, for Japan,
and the revenue that we recognize under these agreements represents previously
received up-front payments which we deferred and are recognizing over the term
of our expected obligations, which we presently estimate extend through
December 31, 2008.
Royalty revenue was $0.1 million in the third quarter of 2005 compared
to $0.2 million in the third quarter of 2004. Our largest source of royalty
revenue in both quarters was from licenses we have granted to sell certain HCV
diagnostic products.
Research and Development Expenses
Because we are in the business of drug discovery and development and
have not developed any products that have been approved for sale, the majority
of our resources are devoted to these discovery and development efforts and
accordingly most of our costs are classified as research and development and
are expensed as incurred. Research and development expenses include related
salaries and benefits, clinical trial and related clinical manufacturing costs,
contract and outside service fees, supplies and chemicals used in laboratories
and allocated facilities and overhead costs. The majority of Genelabs' research
and development is directed toward two major projects - developing Prestara(TM)
as an investigational new drug for lupus and discovery of entirely new drugs.
The following table breaks down our research and development expenses by major
project (in thousands):
For the three months ended
September 30,
2005 2004 Change
-----------------------------------------
Drug discovery $ 1,486 $ 1,086 +37%
Drug development (Prestara(TM)) 558 1,211 -54%
Support costs and other R&D 900 987 -9%
-----------------------------
Total research and development $ 2,944 $ 3,284 -10%
=============================
Research and development expenses decreased by $0.3 million in the
third quarter of 2005 compared to the third quarter in 2004. Expenses for drug
discovery comprise the largest single category of our research and development
expenses. Drug discovery costs increased by $0.4 million in the third quarter
of 2005 compared to the third quarter of 2004 due to the expansion of our drug
discovery efforts, primarily the hiring of additional scientists. The
additional scientists we hired are mainly focused on discovering new drugs
targeting the HCV polymerase using non-nucleoside compounds and targeting other
sites for potential new drugs, including HCV NS5a. The increase in expenses for
our drug discovery efforts during the third quarter of 2005 compared to the
third quarter of 2004 were more than offset by lower costs in other categories
of research and development. Drug development costs for Prestara, our
investigational drug for lupus, were $0.7 million lower in the third quarter of
2005 than in the third quarter of 2004. The decrease in costs occurred
primarily because we completed a double-blind Phase III clinical trial in women
with lupus in August of 2004 and accordingly did not have costs for this
clinical trial during 2005. During the 2005 period we completed an open-label
follow-on study, but the costs for this trial were substantially lower than for
the double-blind Phase III study that completed in August 2004. Support costs
and other R&D costs were also lower in the third quarter of 2005 and are
primarily comprised of costs necessary to maintain a research and development
facility, such as rent, insurance, depreciation, utilities, maintenance,
security, support staff and the company bonus, all allocated based on the
headcount ratio between research and development and general and administrative
employees. These support costs and other R&D expenses decreased in the third
quarter of 2005 compared to the third quarter of 2004 primarily because of a
lower provision for employee incentive bonuses.
Genelabs' current drug discovery efforts have evolved from a program
that started in 1993 and initially focused on DNA as a target for drug
intervention. Since initiating this drug discovery program, Genelabs has built
medicinal chemistry, combinatorial chemistry, computational modeling, molecular
biology, assay development and high-throughput screening, drug metabolism and
pharmacokinetics capabilities. Genelabs has incurred direct drug discovery
costs for these efforts through September 30, 2005 of approximately $43
million, which, in addition to building these drug discovery capabilities,
includes the Company's earlier DNA-binding drug discovery efforts. Our current
drug discovery efforts are directed towards our hepatitis C virus research
programs, which are concentrated on identifying new drugs to combat infections
with HCV.
Due to the nature of drug discovery research, we cannot reliably
estimate the outcome of scientific experiments, many of which will impact the
design and conduct of subsequent scientific experiments, and all of which
provide additional information on both the direction of the research program
and likelihood of its success. As such, the potential timing for key future
events that may occur in our drug discovery programs cannot reliably be
estimated and we cannot estimate whether a compound will advance to a later
stage of development or when we may determine that a program is no longer
viable for potentially producing a drug candidate. We also cannot reasonably
predict the costs to reach these stages, and cannot predict whether any of our
compounds will result in commercial products or lead to revenue for the
Company.
Genelabs began developing Prestara(TM) for systemic lupus
erythematosus in 1993 when Genelabs licensed exclusive rights to patents
related to Prestara from Stanford University. To develop this investigational
new drug, we built internal clinical development capabilities including
clinical trial design, monitoring, analysis and reporting, regulatory affairs
and quality control and assurance. Direct costs incurred to build these
capabilities and advance Prestara to its current stage of development have been
approximately $49 million through September 30, 2005. Future development plans
for Prestara for lupus and the costs we incur will depend on a number of
factors. These include discussions with and actions by the FDA, actions
involving regulatory authorities in Europe and other countries and actions by
our Prestara collaborators.
General and Administrative Expenses
General and administrative expenses were $1.7 million in the third
quarter of 2005 compared to $1.5 million in the third quarter of 2004. Our
general and administrative expenses consist primarily of personnel costs for
executive management, finance, marketing, business development, human resources
and legal departments, as well as professional expenses, such as legal and
audit, and facilities costs such as rent and insurance. These expenses were
higher in the third quarter of 2005 compared to the third quarter of 2004,
primarily due to higher legal and finance expenses associated with operating as
a public company and increased business development costs.
Results of Operations - First Nine Months of 2005 compared to First Nine
Months of 2004
- ------------------------------------------------------------------------
Summary
Genelabs' net loss was $8.6 million for the first nine months of 2005,
compared to a net loss of $12.0 million for the first nine months of 2004. The
decrease in our net loss is mainly due to higher contract revenue from a
research collaboration and license agreement with Gilead that was not in place
for the 2004 period and lower research and development expenses following
completion of a double-blind clinical trial for the Company's investigational
new drug for lupus, partially offset by a gain on the sale of a discontinued
operation in 2004.
Revenue
Contract revenue was $4.7 million in the first nine months of 2005
compared to $1.3 million in the first nine months of 2004. Our largest source
of revenue in the first nine months of 2005 was a research collaboration and
license agreement with Gilead, under which we recognized $4.2 million. Because
this collaboration was not in place during the first nine months of 2004, there
is no comparable revenue for the same period in 2004. Also during the first
nine months of 2005, we recognized $0.5 million in revenue from our two
collaborations for development and commercialization of our investigational new
drug for lupus, Prestara(TM). The revenue we recognized related to Prestara
from our North American collaborator, Watson, decreased in the first nine
months of 2005 compared to the first nine months of 2004 due to our extension
of the amortization period for the up-front payment following the results of
our phase III clinical trial which did not reach its primary endpoint. This
extension of the amortization period was effective beginning in the third
quarter of 2004, and we extended the amortization period to December 31, 2008.
Royalty revenue was $0.5 million in the first nine months of both 2005
and 2004. Our largest source of royalty revenue in both quarters was from
licenses we have granted to sell certain HCV diagnostic products.
Research and Development Expenses
The following table breaks down our research and development expenses
by major project (in thousands):
For the nine months ended
September 30,
2005 2004 Change
----------------- --------------------------
Drug discovery $ 4,526 $ 3,446 +31%
Drug development (Prestara(TM)) 2,161 4,475 -52%
Support costs and other R&D 2,738 3,490 -22%
-----------------------------
Total research and development $ 9,425 $ 11,411 -17%
=============================
Research and development expenses decreased by $2.0 million in the
first nine months of 2005 compared to the first nine months of 2004. In 2005,
drug discovery costs comprised the largest portion of our research and
development expenses. Expenses for drug discovery increased by $1.1 million in
the first nine months of 2005 compared to the first nine months of 2004 due to
the expansion of our drug discovery efforts, primarily the hiring of additional
scientists. The additional scientists we hired are mainly focused on
discovering new drugs targeting the HCV polymerase using non-nucleoside
compounds and targeting other sites for potential new drugs, including HCV
NS5a. The increase in expenses for our drug discovery efforts during the first
nine months of 2005 compared to the first nine months of 2004 were more than
offset by lower costs elsewhere in research and development. Drug development
costs for Prestara, our investigational drug for lupus, were $2.3 million lower
in the first nine months of 2005 than in the first nine months of 2004. The
decrease in costs occurred primarily because in 2004 we were conducting a Phase
III clinical trial. During the 2005 period we completed an open-label follow-on
study, but the costs for this trial were substantially lower than for the Phase
III study that completed in 2004. Support costs and other R&D costs were also
lower by $0.8 million in the first nine months of 2005 compared to the first
nine months of 2004 primarily because of a lower provision for employee
incentive bonuses.
General and Administrative Expenses
General and administrative expenses were $4.6 million in the first
nine months of 2005 compared to $4.8 million in the first nine months of 2004.
Our general and administrative expenses consist primarily of personnel costs
for executive management, finance, marketing, business development, human
resources and legal departments, as well as professional expenses, such as
legal and audit, and facilities costs such as rent and insurance. These
expenses were lower in the first nine months of 2005 compared to the first nine
months of 2004, primarily due to lower marketing expenses which were partially
offset by higher legal and finance expenses associated with operating as a
public company.
Discontinued Operations
During the first nine months of 2004, we recorded $0.3 million in
income from our discontinued diagnostics business and a gain of $2.0 million on
its sale. There were no such transactions in the first nine months of 2005.
Liquidity and Capital Resources
- -------------------------------
We assess liquidity primarily by the funds available for our
operations. Genelabs had cash, cash equivalents and restricted cash balances
totaling $14.4 million at September 30, 2005. During the first nine months of
2005, our cash and cash equivalents decreased by $12.1 million primarily due to
cash used in operations. The cash used in operations during the first nine
months of 2005 funded our research on discovery of new treatments for hepatitis
C virus infection and our development of Prestara for lupus.
Since our inception, Genelabs has operated at a loss and has funded
operations primarily through public and private offerings of equity securities
and, to a lesser extent, contract revenues. We expect to incur substantial
additional costs, including research costs for drug discovery and possibly
further development costs for Prestara. The amount of additional costs in our
business plans will depend on numerous factors including clinical trial
results, any FDA actions, the progress of our research and development programs
and the actions of corporate collaborators.
Genelabs presently estimates that current cash resources will be
adequate to provide liquidity into approximately the third quarter of 2006.
However, we plan to seek additional funds prior to this time in order to carry
out our business plans and we expect to continue to rely on outside sources of
financing to meet our capital needs. We are considering entering into
additional research collaborations, such as for our hepatitis C virus drug
discovery program which is separate from our collaboration with Gilead, and are
exploring other potential sources of funding. We may be unable to complete any
of these transactions as currently contemplated or at all.
To meet our capital needs we will require additional funding, but
additional funds may not be available on acceptable terms, if at all. The
unavailability of additional funds could delay or prevent the development,
approval or marketing of some or all of our products and technologies, which
would have a material adverse effect on our business, financial condition and
results of operations. If we cannot raise needed funds on acceptable terms, we
may not be able to execute our business plan or to continue as a going concern.
If we are unable to raise capital prior to the issuance of our next annual
report, our ability to operate as a going concern will be in doubt and our
auditors will include a going concern qualification in their audit report on
our 2005 consolidated financial statements.
Our future contractual obligations have not changed significantly from
the amounts reported in our Annual Report on Form 10-K for the year ended
December 31, 2004. Our most significant future contractual obligations are
operating leases with third parties for our principal research, clinical
development and office facilities, which remain the same as disclosed in the
Annual Report on Form 10-K for the year ended December 31, 2004.
Risk Factors
- ------------
There are a number of risk factors that should be considered by
Genelabs' shareholders and prospective investors. It is not possible to
comprehensively address all risks that exist, but the following risks in
particular should be considered, in addition to other information in this
Report on Form 10-Q.
Risks Related to Genelabs
We will need to raise additional capital in the near future, and if we are
unable to timely secure adequate funds on acceptable terms, we will be unable
to execute our business plan or to continue as a going concern.
During the next 12 months, we will need to raise additional capital to
execute our business plan to provide adequate working capital to satisfy our
business objectives and requirements and to continue as a going concern. If we
raise additional funds through the issuance of equity or convertible debt
securities, we may be required to do so at a price per share below then-current
trading prices thereby diluting our current stockholders. We may not be able to
obtain additional funds on acceptable terms, or at all. This potential
inability to raise funds on acceptable terms could seriously harm our business.
If we cannot raise needed funds on acceptable terms, we may not be able to
execute our business plan or to continue as a going concern. If we are unable
to raise capital prior to the issuance of our next annual report, our ability
to operate as a going concern will be in doubt and our auditors will include a
going concern qualification in their audit report on our 2005 consolidated
financial statements.
We may not be profitable in the near future or at all and in order to carry out
our business plans we will require additional funds which may not be available.
We have incurred losses each year since our inception and have
accumulated approximately $226 million in net losses through September 30,
2005, including net losses of $13.5 million for the year ended December 31,
2004 and $8.6 million for the nine months ended September 30, 2005. We may
never be profitable and our revenues may never be sufficient to fund
operations.
We presently estimate that our current cash resources are adequate to
fund our current operations into approximately the third quarter of 2006.
However, we will still require additional capital to carry out our business
plans. The following are illustrations of potential impediments to our ability
to successfully secure sufficient additional funds:
o the current trading price of our stock will materially and adversely
affect our ability to raise funds through the issuance of stock;
o unless we implement a reverse stock split, the number of shares of
common stock that we are currently authorized to issue is limited,
and when combined with the low trading price of our stock, will
materially and adversely affect our ability to raise funds through
the issuance of stock;
o the amount of stock we may sell and capital we may raise privately
without a shareholder vote is limited, and we may be unable to secure
capital on a timely basis with acceptable terms if we must submit
such a transaction to our shareholders for approval;
o the listing of our stock on the Nasdaq Capital Market may materially
and adversely affect our ability to raise funds through the issuance
of stock because of factors such as reduced liquidity and the
requirement to comply with state securities laws;
o if we are unable to regain compliance with the Nasdaq's listing
requirements in a timely matter, our ability to successfully obtain
additional equity financing will be negatively impacted;
o since our research programs are in an early stage, there are fewer
opportunities to enter into collaborations with other companies and
up-front payments for early-stage pharmaceutical research
collaborations are generally smaller for projects that are further
from potential marketability;
o biotechnology research and development projects have a high risk of
failure and the failure of our research-stage drug candidates or
those of other companies could discourage funding sources from
providing us with financing;
o two of the latest Phase III clinical trials for our investigational
lupus drug, Prestara or its active ingredient, did not meet their
primary and secondary endpoints; and
o Discussions with the Food and Drug Administration have indicated that
the Company will need to conduct an additional Phase III clinical
trial of Prestara in order to qualify for approval, and the Company
does not have the funds to conduct the trial.
Additional funds for our research and development activities may not
be available on acceptable terms, if at all. The unavailability of additional
funds could delay or prevent the development of some or all of our products and
technologies, which would have a material adverse effect on our business,
financial condition and results of operations.
Because we may not continue to qualify for listing on the Nasdaq quotation
system, the value of your investment in Genelabs may substantially decrease.
On October 13, 2005 the Company's common stock ceased trading on The
Nasdaq National Market and began trading on the Nasdaq Capital Market, formerly
known as the Nasdaq SmallCap Market. The downlisting of the Company's common
stock to the Nasdaq Capital Market may decrease the stock price, reduce the
liquidity of the stock and make it more difficult for the Company to raise
additional funds through the issuance of stock and/or warrants. To maintain its
listing on the Nasdaq Capital Market, Genelabs is required, among other things,
to either maintain stockholders' equity of at least $2.5 million or a market
value of at least $35 million, as well as to maintain a closing bid price of at
least $1.00 per share of common stock.
During most of 2005 our closing bid price has been below $1.00. The
Company has until March 16, 2006 to achieve compliance with the $1.00 closing
bid price requirement. At the Company's annual meeting on June 14, 2005, our
shareholders authorized the Company's Board of Directors to implement a
one-for-five reverse stock split. However, even if the reverse split is
implemented, there can be no assurance that the closing bid price of our stock
thereafter will comply with Nasdaq's requirements.
In addition to the closing bid price requirement, to remain listed on
the Nasdaq Capital Market we must have at least $2.5 million in shareholders'
equity or a market value of at least $35 million. Our shareholders' equity as
of September 30, 2005 was $4.5 million and as of October 31, 2005 the Company's
market value was approximately $43 million. We may not be able to maintain
compliance with the Nasdaq Capital Market continued listing requirements
through 2006, including satisfaction of the $2.5 million shareholder equity
requirement unless we are able to increase our shareholders' equity through a
financing or other means.
If Genelabs is unable to meet or maintain compliance with all of the
Nasdaq listing requirements, it may be delisted from the Nasdaq Capital Market.
If delisted from the Nasdaq Capital Market, Genelabs might apply for listing on
the American Stock Exchange. Genelabs may fail to meet the requirements for
initial listing or may fail to maintain compliance with the continued listing
requirements of the American Stock Exchange. Delisting from the Nasdaq Capital
Market would adversely affect the trading price of our common stock and
significantly limit the liquidity of our common stock.
The results of our clinical trial of Prestara(TM), Genelabs' drug candidate for
systemic lupus erythematosus, were not positive, substantially decreasing the
probability that Prestara will ever be approved for marketing and diminishing
our business prospects.
In order to satisfy conditions set by the U.S. Food and Drug
Administration, or FDA, we conducted a Phase III clinical trial of Prestara on
women with lupus taking glucocorticoids using bone mineral density as the
trial's primary endpoint. Prestara is a pharmaceutical formulation containing
highly purified prasterone, the synthetic equivalent of dehydroepiandrosterone
or DHEA, a naturally occurring hormone. This clinical trial did not demonstrate
a statistically significant difference between the bone mineral density of the
group of patients taking Prestara and the group taking placebo. Additionally,
the trial was not powered to demonstrate, and in fact did not demonstrate, a
statistically significant benefit in secondary endpoints such as amelioration
of lupus symptoms. While we believe we have identified most probable causes for
the failure of this study to reach its primary endpoint, we may never know with
certainty what the cause or causes of this failure were.
A clinical trial of prasterone (the active ingredient in Prestara) was
conducted by Genovate Biotechnology Co., Ltd., or Genovate, a Taiwan-based
company that has a license from us for Prestara in most Asian countries. In
April 2005 we announced that this clinical trial did not meet its primary
endpoint, bone mineral density at the spine. Because both our and Genovate's
clinical trials did not meet their primary endpoints, it is extremely unlikely
that the FDA will approve Prestara without another Phase III clinical trial. It
may not be possible to design and implement a trial that would successfully
provide results sufficient to obtain FDA approval for Prestara, and Genelabs
currently does not have the funds to conduct such a trial.
Our research programs are in an early stage and may not successfully produce
commercial products.
Pharmaceutical discovery research is inherently high-risk because of
the high failure rate of projects. To date, our pharmaceutical research has
been focused on a limited number of targets for which no or few commercial
drugs have been successfully developed. Our projects may fail if, among other
reasons, the compounds being developed fail to meet criteria for potency,
toxicity, pharmacokinetics, manufacturability, intellectual property protection
and freedom from infringement, or other criteria; if others develop competing
therapies; or if we fail to make progress due to lack of resources or access to
enabling technologies. Genelabs' product candidates, other than Prestara, are
in an early stage of research. All of our research projects may fail to produce
commercial products.
If Genelabs discovers compounds that have the potential to be drugs,
public information about our research success may lead other companies with
greater resources to focus more efforts in areas similar to ours. Genelabs has
limited human and financial resources. Creation of the type of compounds we
seek to discover requires sophisticated and expensive lab equipment and
facilities, a team of scientists with advanced scientific knowledge in many
disciplines such as chemistry, biochemistry and biology, and time and effort.
Large pharmaceutical companies have access to the latest equipment and have
many more personnel available to focus on solving particular research problems,
including those that Genelabs is investigating. Therefore, even if our research
programs are successful, we may have a competitive disadvantage.
Our collaborations may fail.
We have entered into collaborations with Watson, Gilead,
GlaxoSmithKline, or GSK, and other companies and we may enter into future
collaborations with Watson, Gilead, GSK or other companies. Our collaborators
may breach their contracts, or our collaborators may not diligently and
successfully develop and commercialize the results of the research.
Alternatively, our collaborators may elect not to extend or augment the
collaborations. In this regard, Gilead may not continue to fund our research
beyond its obligation in the research contract. We are dependent on our
collaborators to successfully carry out preclinical and clinical development,
to obtain regulatory approvals, and/or to market and sell any products arising
from the research and/or development conducted by the company or the
collaborator. Factors which may cause our collaborators to fail in these
efforts include: problems with toxicity, bioavailability or efficacy of the
product candidate, difficulties in manufacture, problems in satisfying
regulatory requirements, emergence of competitive product candidates developed
by the collaborator or by others, insufficient commercial opportunity, problems
the collaborators may have with their own contractors, lack of patent
protection for our product candidate or claims by others that it infringes
their patents or other intellectual property rights. Collaboration on a project
also may result in disputes with the collaborator over the efforts of the
Company and/or the collaborator or rights to intellectual property. In the
course of the collaboration our collaborator may obtain know-how which enables
it to compete with us in the same area of research and/or development. Because
research and development results are unpredictable, we and our collaborators
may not achieve any of the milestones in the collaboration agreements.
We do not have the resources to conduct preclinical development.
We do not have the personnel or facilities to conduct the formal
preclinical development of our hepatitis C compounds as necessary to file an
application to conduct clinical trials in humans. Our experience in conducting
preclinical development, including formal toxicology studies, is limited. We
will need to outsource this activity and retain experienced personnel.
Outsourcing is expensive, time-consuming and requires reliance on the
performance of third parties. Because of our financial condition, stock
performance and setbacks in our Prestara(TM) program, we may have difficulty
hiring specialized personnel.
We may be unable to attract or retain key personnel.
Our ability to develop our business depends in part upon our
attracting and retaining qualified management and scientific personnel. As the
number of qualified personnel is limited, competition for such personnel is
intense. We may not be able to continue to attract or retain such people on
acceptable terms, given the competition for such personnel among biotechnology,
pharmaceutical and healthcare companies, universities and nonprofit research
institutions. Furthermore, the negative results from the clinical trials of
Prestara(TM) or the similar formulation used in Taiwan and the ensuing drop in
our stock price, as well as the Company's declining cash position, have
significantly diminished our future business prospects, thus making it more
difficult to retain existing employees and to recruit new employees. Since the
announcement of the results of our Phase III trial of Prestara in October 2004,
the majority of our clinical development staff has left the Company. The loss
of our key personnel or the failure to recruit additional key personnel could
significantly impede attainment of our objectives and harm our financial
condition and operating results. Additionally, recent and proposed laws, rules
and regulations increasing the liability of directors and officers may make it
more difficult to retain incumbents and to recruit for these positions.
If third parties on whom we rely do not perform as contractually required or
expected, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
As part of our process of conducting drug discovery research and
clinical trials we rely on third parties such as medical institutions,
pre-clinical and clinical investigators, contract laboratories and contract
research organizations to participate in the conduct of our clinical trials.
Additionally, the Taiwan clinical trials were conducted by another company,
Genovate, and we did not have control over the conduct of such trials. We
depend on Gilead for nucleoside compounds for treatment of hepatitis C
infections, and GSK for hepatitis E vaccine, to conduct preclinical and
clinical development, to obtain regulatory approval and to manufacture and
commercialize. If these third parties do not successfully carry out their
contractual duties or regulatory obligations or meet expected deadlines, if the
third parties need to be replaced or if the quality or accuracy of the data
they obtain is compromised due to their failure to adhere to our clinical
protocols or regulatory requirements or for other reasons, our preclinical
development activities or clinical trials may be extended, delayed, suspended
or terminated, and we may not be able to obtain regulatory approval for or
successfully commercialize our product candidates.
If our Japanese marketing partner for Prestara(TM) does not obtain approval to
market Prestara in Japan, our business prospects will suffer because we do not
have capabilities to develop Prestara for Japan ourselves and we would lose a
significant source of potential revenue.
Our licensee in Japan, Tanabe, has not conducted clinical trials for
Prestara in Japan. Given the recent negative results in the clinical trials of
Prestara and the similar formulation used in Taiwan, Tanabe may not proceed
with clinical trials, or if it does, the results from such trials may not be
positive.
Our outside supplies and manufacturers for Prestara(TM) and our hepatitis C
compounds are subject to regulation, including by the FDA, and if they do not
meet their commitments, we would have to find substitute suppliers or
manufacturers which could delay supply of product to the market.
Regulatory requirements applicable to pharmaceutical products tend to
make the substitution of suppliers and manufacturers costly and time consuming.
We rely on a single supplier of prasterone, the active ingredient in Prestara,
and we rely on a single finished product manufacturer, Patheon Inc., for
production of Prestara capsules and for packaging. We rely on another
manufacturer for the scale up and production of our hepatitis C compounds. The
disqualification of these suppliers and manufacturers through their failure to
comply with regulatory requirements could negatively impact our business
because of delays and costs in obtaining and qualifying alternate suppliers. We
have no internal manufacturing capabilities for pharmaceutical products and are
entirely dependent on contract manufacturers and suppliers for the manufacture
of our drug candidates. Genelabs and our North American collaborator, Watson,
previously arranged for the manufacture of quantities of Prestara and its
active ingredient in anticipation of possible marketing approval. This
inventory will exceed its expiration date before any possible commercial
launch, although the expiration date of the active ingredient may be extended
if it successfully passes re-testing.
The following could harm our ability to manufacture Prestara or our
hepatitis C compounds:
o the unavailability at reasonable prices of adequate quantities of the
active ingredient or intermediates;
o the loss of a supplier's or manufacturer's regulatory approval;
o the failure of a supplier or manufacturer to meet regulatory agency
pre-approval inspection requirements;
o the failure of a supplier or manufacturer to maintain compliance with
ongoing regulatory agency requirements;
o the inability to develop alternative sources in a timely manner or at
all;
o inability or refusal of the manufacturers to meet our needs for any
reason, such as loss or damage to facilities or labor disputes;
o manufacture of product that is defective in any manner;
o competing demands on the contract manufacturer's capacity, for
example, shifting manufacturing priorities to their own products or
more profitable products for other customers; and
o complications in the scale-up or large-scale manufacturing of our
hepatitis C compounds.
We may be unable to obtain patents or protect our intellectual property rights,
or others could assert their patents against us.
Agency or court proceedings could invalidate our current patents, or
patents that issue on pending applications. Our business would suffer if we do
not successfully defend or enforce our patents, which would result in loss of
proprietary protection for our technologies and products. Patent litigation may
be necessary to enforce patents to determine the scope and validity of our
proprietary rights or the proprietary rights of another.
The active ingredient in Prestara is prasterone, more commonly known
as dehydroepiandrosterone, or DHEA. DHEA is a compound that has been in the
public domain for many years. We do not believe it is possible to obtain patent
protection for the chemical compound anywhere in the world. Genelabs licensed
two United States patents covering uses of DHEA in treating lupus from Stanford
University in 1993. The Stanford patents expire in 2013 and the license expires
when the patents expire. In addition, we have filed patent applications
covering additional uses for Prestara and various pharmaceutical formulations
and intend to file additional applications as appropriate. We have filed patent
applications covering compounds from our HCV drug discovery programs; however,
no patents are currently issued. A number of patents have issued to Genelabs
covering our drug discovery technologies and methods related to selective
regulation of gene expression and the control of viral infections. A number of
patent applications are pending.
If another company successfully brings legal action against us
claiming our activities violate, or infringe, their patents, a court may
require us to pay significant damages and prevent us from using or selling
products or technologies covered by those patents. Others could independently
develop the same or similar discoveries and may have priority over any patent
applications Genelabs has filed on these discoveries. Prosecuting patent
priority proceedings and defending litigation claims can be very expensive and
time-consuming for management. In addition, intellectual property that is
important for advancing our drug discovery efforts or for uses for the active
ingredient in Prestara owned by others might exist now or in the future. We
might not be able to obtain licenses to a necessary product or technology on
commercially reasonable terms, or at all, and therefore, we may not pursue
research, development or commercialization of promising products.
Our facilities in California are located near an earthquake fault, and an
earthquake could disrupt our operations and adversely effect results.
Almost all of our operations are conducted in a single facility built
on landfill in an area of California near active geologic faults which
historically have caused major earthquakes from time to time. The office park
where the facility is located is approximately at sea level behind levees
sheltering the buildings from the San Francisco Bay. In the event of a
significant earthquake, we could experience significant damage and business
interruption. The Company currently has insurance coverage for earthquake and
flood damage, including business interruption coverage due to those events,
with limits of $5 million and subject to a deductible which currently is
approximately $1.6 million. There is no assurance that earthquake or flood
insurance will continue to be available at a cost that is acceptable to the
Company or that such insurance will be adequate to reimburse our losses.
Industry Risks
Our activities involve hazardous materials and improper handling of these
materials by our employees or agents could expose us to significant legal and
financial penalties.
Our research and development activities involve the controlled use of
hazardous materials, including infectious agents, chemicals and various
radioactive compounds. Our organic chemists use solvents, such as chloroform,
isopropyl alcohol and ethanol, corrosives such as hydrochloric acid and other
highly flammable materials, some of which are pressurized, such as hydrogen. We
use radioactive compounds in small quantities under license from the State of
California, including Carbon(14), Cesium(137), Chromium(51), Hydrogen(3),
Iodine(125), Phosphorus(32), Phosphorus(33) and Sulfur(35). Our biologists use
biohazardous materials, such as bacteria, fungi, parasites, viruses and blood
and tissue products. We also handle chemical, medical and radioactive waste,
byproducts of our research, through licensed contractors. As a consequence, we
are subject to numerous environmental and safety laws and regulations,
including those governing laboratory procedures, exposure to blood-borne
pathogens and the handling of biohazardous materials. Federal, state and local
governments may adopt additional laws and regulations affecting us in the
future. We may incur substantial costs to comply with, and substantial fines or
penalties if we violate, current or future laws or regulations.
Although we believe that our safety procedures for using, handling,
storing and disposing of hazardous materials comply with the standards
prescribed by state and federal regulations, we cannot eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident, state or federal authorities may curtail our use of these materials
and we could be liable for any civil damages that result, the cost of which
could be substantial. Further, any failure by us to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous chemicals or hazardous, infectious or toxic
substances could subject us to significant liabilities, including joint and
several liability under state or federal statutes. We do not specifically
insure against environmental liabilities or risks regarding our handling of
hazardous materials. Additionally, an accident could damage, or force us to
shut down, our research facilities and operations.
We may not be able to obtain or maintain sufficient insurance on commercially
reasonable terms or with adequate coverage against potential liabilities in
order to protect ourselves against product liability claims.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products. We may become subject to product liability claims if someone alleges
that the use of our products, such as Prestara for lupus, if approved, injured
subjects or patients. This risk exists for products tested in human clinical
trials as well as products that are sold commercially. Although we currently
have insurance coverage in amounts that we believe are customary for companies
of our size and in our industry and sufficient for risks we typically face,
including general liability insurance of $6 million, we may not be able to
maintain this type of insurance in a sufficient amount. We currently maintain
$5 million of product liability insurance for claims arising from the use of
our products in clinical trials. In addition, product liability insurance is
becoming increasingly expensive. As a result, we may not be able to obtain or
maintain product liability insurance in the future on acceptable terms or with
adequate coverage against potential liabilities which could harm our business
by requiring us to use our resources to pay potential claims.
Market Risks
Because our stock is volatile, the value of your investment in Genelabs may
substantially decrease.
The market price of our common stock, like the stock prices of many
publicly traded biopharmaceutical companies, has been and will probably
continue to be highly volatile. Between January 1, 2004 and December 31, 2004,
the price of our common stock fluctuated between $0.48 and $3.25 per share.
Between January 1, 2005 and October 31, 2005, the price of our common stock
fluctuated between $0.36 and $1.23 per share. In addition to the factors
discussed in this Risk Factors section, a variety of events can impact the
stock price, including the low percentage of institutional ownership of our
stock, which contributes to lack of stability for the stock price. The
availability of a large block of stock for sale in relation to our normal
trading volume could also result in a decline in the market price of our common
stock. In the event we do not obtain the capital necessary to continue as a
going concern, we may be required to discontinue operations, which could result
in the complete loss of investment to our shareholders.
In addition, numerous events occurring outside of our control may also
impact the price of our common stock, including general market conditions or
those related to the biopharmaceutical industry. Other companies have defended
themselves against securities class action lawsuits following periods of
volatility in the market price of their common stock. If a party brings this
type of lawsuit against us, it could result in substantial costs and diversion
of management's time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Genelabs' exposure to market risk for changes in foreign currency
exchange rates relates primarily to the Company's investment in a Taiwan-based
biopharmaceutical company, Genovate Biotechnology Co., Ltd., which is accounted
for at cost, based on the lower of cost or market value method. This investment
is the only item included in the balance sheet caption "Long-term investments."
Genelabs may attempt to divest a portion of this investment, in which case
changes in foreign currency exchange rates would impact the proceeds received
upon sale of these shares. Because the book value of Genelabs' ownership
percentage of Genovate is greater than our carrying cost, we currently do not
believe that any foreign currency exchange rate changes would impact the value
of this investment as reported in the financial statements unless the value of
a Taiwan dollar depreciates by greater than 60% compared to the U.S. dollar,
which, depending on other circumstances, might require Genelabs to record a
non-cash charge to write-down the long-term investment.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as
of the end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have
not been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act)
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II -- OTHER INFORMATION
Item 6. Exhibits
Exhibit
Number Description
- ------ ---------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENELABS TECHNOLOGIES, INC.
(Registrant)
Principal Executive Officer:
/s/ JAMES A.D. SMITH
Date: November 8, 2005 ---------------------------------
James A.D. Smith
President and Chief Executive Officer
Principal Financial and Chief
Accounting Officer:
/s/ MATTHEW M. LOAR
Date: November 8, 2005 ----------------------------------
Matthew M. Loar
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ----------- ---------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.