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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2006.
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [x]
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 17,817,649 shares of the Registrant's Common Stock issued and
outstanding on April 21, 2006.
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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 our ability to secure sufficient funds to continue as a going
concern;
o our ability to remain listed on the Nasdaq Capital Market;
o estimates that existing cash resources will be adequate to provide
liquidity for our regular operations only to approximately the
beginning of the fourth quarter of 2006;
o our future cash resources, expenditures and our ability to obtain
additional funding for our business plans; and
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 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 our ability, or our collaborators' ability, to achieve any of the
milestones contained in our agreements;
o further actions or developments relating to Prestara(TM)
(prasterone), our investigational drug for lupus, and its New Drug
Application;
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 U.S. Food and Drug
Administration, or 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)
March 31, December 31,
2006 2005
------------ -------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 7,415 $ 10,061
Restricted cash 150 150
Other current assets 414 539
------------------ -------------------
Total current assets 7,979 10,750
Property and equipment, net 888 951
Long-term investment 960 960
------------------ -------------------
$ 9,827 $ 12,661
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable and other accrued liabilities $ 810 $ 608
Accrued compensation and related expenses 828 789
Accrued manufacturing costs 675 675
Unearned contract revenue 4,120 3,220
------------------ -------------------
Total current liabilities 6,433 5,292
Accrued compensation 94 284
Unearned contract revenue 4,083 4,738
------------------ -------------------
Total liabilities 10,610 10,314
------------------ -------------------
Commitments and contingencies
Shareholders' equity/(deficit):
Common stock 231,317 231,057
Accumulated deficit (232,100) (228,710)
------------------ -------------------
Total shareholders' equity/(deficit) (783) 2,347
------------------ -------------------
$ 9,827 $ 12,661
================== ===================
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
March 31,
---------------------------------------------
2006 2005
------------------- -------------------
Revenue:
Contract $ 1,555 $ 1,555
Royalty 150 167
------------------- -------------------
Total revenue 1,705 1,722
------------------- -------------------
Operating expenses:
Research and development 3,589 3,262
General and administrative 1,597 1,421
------------------- -------------------
Total operating expenses 5,186 4,683
------------------- -------------------
Operating loss (3,481) (2,961)
Interest income, net 91 120
------------------- -------------------
Net loss $ (3,390) $ (2,841)
=================== ===================
Net loss per common share - basic and diluted $ (0.19) $ (0.16)
=================== ===================
Weighted average shares outstanding to calculate basic
and diluted net loss per common share 17,818 17,700
=================== ===================
See notes to condensed consolidated financial statements.
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
For the three months ended
March 31,
---------------------------------------------
2006 2005
------------------- -------------------
Cash flows from operating activities:
Net loss $ (3,390) $ (2,841)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 104 105
Share-based compensation expense 260 6
Changes in assets and liabilities:
Other current assets 125 318
Accounts payable, accrued liabilities and
accrued compensation 51 (1,834)
Unearned contract revenue 245 (655)
------------------- -------------------
Net cash used in operating activities (2,605) (4,901)
Cash flows from investing activities:
Purchase of property and equipment (41) (11)
Cash flows from financing activities:
Proceeds from issuance of common stock, net - 3
------------------- -------------------
Net decrease in cash and cash equivalents (2,646) (4,909)
Cash and cash equivalents, beginning of the period 10,061 26,358
------------------- -------------------
Cash and cash equivalents, end of the period $ 7,415 $ 21,449
=================== ===================
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)
March 31, 2006
1. Significant Accounting Policies
Business Description
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 and advancing preclinical development of compounds from this
hepatitis C virus drug discovery program, while also developing a late-stage
product for lupus.
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Accelerated Clinical
Research Organization, Inc., Genelabs Diagnostic, Inc. and Genelabs Europe B.V.
All intercompany accounts and transactions have been eliminated. Genelabs
operates in one business segment, the discovery and development of
pharmaceutical products.
The Company's consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business for
the foreseeable future. The Company has incurred recurring operating losses and
negative cash flows from operations, including a net loss of $3,390,000 and
cash used in operations of $2,605,000 for the quarter ended March 31, 2006. As
of March 31, 2006, the Company had cash and cash equivalents of $7,415,000,
working capital of $1,546,000 and an accumulated deficit of $232,100,000. The
Company expects its cash and cash equivalents would sustain existing operations
only to approximately the beginning of the fourth quarter of 2006. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The ability of the Company to continue as a going concern is
dependent upon its ability to obtain additional capital from a collaboration,
equity financing or other means. In order to satisfy its projected cash needs
for at least the next twelve months, Genelabs is pursuing various alternatives,
including licensing its non-nucleoside HCV polymerase program, renegotiating
the terms of a collaboration and pursuing investments from third-parties. If
any of these transactions are completed Genelabs expects they would provide
additional cash to the Company, although the amounts are not determinable.
Genelabs may be unable to complete any of these transactions as currently
contemplated or at all, and the outcome of these matters cannot be predicted at
this time. Further, assuming the Company successfully raises additional funds,
the Company may never achieve positive cash flow. If the Company is not able to
secure additional funding the Company will be required to scale back its
research and development programs and general and administrative activities and
may not be able to continue in business. These consolidated financial
statements do not include any adjustments to the specific amounts and
classifications of assets and liabilities, which might be necessary should the
Company be unable to continue in business.
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. Actual amounts may 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 period ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2006. 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, 2005. The comparative balance sheet as of December 31,
2005 has been derived from the audited financial statements at that date.
2. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R), which changes the accounting for share-based
payment awards under our stock option and stock purchase plans, eliminating the
ability to account for awards using the intrinsic value method, which had been
used by the Company through December 31, 2005. Instead, SFAS 123R requires that
awards be accounted for using a fair-value based method, and the Company is now
required to recognize a share-based compensation expense based on estimates of
the value of the awards.
Under SFAS 123R, share-based compensation expense is measured at the
grant date, based on the estimated fair value of the award. The portion of the
expense related to awards that are ultimately expected to vest is recognized on
a straight line basis over the related employees' requisite service periods in
our Condensed Statement of Operations. The Company has no awards with market or
performance conditions.
The Company adopted SFAS 123R effective January 1, 2006 using the
modified prospective transition method. Under the modified prospective
application, prior periods are not restated to reflect the impact of FAS123R
for comparative purposes. The valuation provisions of SFAS 123R apply to new
awards and to awards that are outstanding on the effective date and
subsequently modified or cancelled. Estimated compensation expense for awards
outstanding at the effective date will be recognized over the remaining service
period using the compensation cost calculated for pro forma disclosure purposes
under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
Employee Stock Plans
--------------------
Employee Stock Purchase Plan. Employees who meet certain minimum
requirements are eligible to participate in the Company's Employee Stock
Purchase Plan. Eligible employees are entitled to purchase stock at 85% of the
market value at the beginning or ending of six-month purchase periods,
whichever is lower, and stock may be purchased at the same price for up to four
periods. Employees can contribute up to 15% of total compensation, but
purchases are limited to a maximum of $25,000 per year. At March 31, 2006
408,000 shares were available for future purchases.
Stock Option Plan. The Company's stock option plan provides for the
issuance of incentive stock options and nonqualified stock options to
employees, officers, directors and independent contractors. The number of stock
options granted is determined by the Board of Directors or a committee
designated by the Board of Directors, except for grants to directors, who
receive options based on a formula. Stock options generally are not granted at
prices lower than fair market value on the date of grant and vest over periods
ranging up to four years, with expiration no later than ten years from the date
of grant. At March 31, 2006, 354,000 shares were available for future grants.
Share-Based Compensation Information under FAS 123R (beginning
January 1, 2006)
--------------------------------------------------------------
Under the provisions of SFAS 123R, the Company has elected to continue
using the Black-Scholes option-pricing model (Black-Scholes model) as its
method of valuation for share-based payment awards. Because the Company's
historical data demonstrated different patterns of exercise behavior for
officers as compared to non-officer employees, upon adoption of SFAS 123R the
Company has elected to value its options separately for officers and
non-officers.
The weighted-average estimated fair value of employee stock options
granted during the three months ended March 31, 2006 was $1.51 and $1.44 per
share for officers and non-officers, respectively, using the Black-Scholes
model with the following weighted-average assumptions (annualized percentages)
for the three months ended March 31, 2006:
Employees
who are
not
Officers Officers
--------------------------
Risk-free interest rate 4.5% 4.5%
Dividend yield 0.0% 0.0%
Expected volatility 90.0% 90.0%
Expected term (years) 6.75 5.75
The expected dividend yield, volatility and term above were determined
by the Company based upon the historical behavior of option holders, historical
fluctuations in the market price of the Company's stock over a period similar
to the expected terms of the options, historical dividend payments and the
expectations of Company management regarding these factors. The risk-fee
interest rate assumption is based upon observed interest rates appropriate for
the expected life of the Company's employee stock options.
As share-based compensation expense recognized in the Consolidated
Statement of Operations for the three months ended March 31, 2006 is based on
awards ultimately expected to vest, the share-based compensation expense
related to stock options has been reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Future forfeitures of vested and unvested employee stock options
outstanding are estimated by the Company to be approximately 4.1% and 10.6% per
year for officers and non-officers, respectively.
The estimated fair value of each share expected to be purchased under
our stock purchase plan was $0.74 for the three months ended March 31, 2006
based upon the following assumptions (annualized percentages) for all
participating employees:
Risk-free interest rate 4.5%
Dividend yield 0.0%
Expected volatility 90.0%
Expected term (years) 0.50
All assumptions used in determining the weighted-average estimated
fair value of share-based payment awards and the related share-based
compensation expense for the period presented are subject to substantial change
in the future.
Share-based compensation expense is recognized on a straight-line
basis over the related employee's requisite service periods. Total share-based
compensation expense related to all of the Company's share based awards
recognized for the three months ended March 31, 2006 was included in the
statement of operations as follows:
Research and development $ 202
General and administrative 58
--------------
Total share-based compensation expense $ 260
==============
Effect on net loss per common share, basic and diluted $ (0.01)
==============
Share-based compensation expense for the three months ended March 31,
2006 includes $60,000 related to share-based awards granted during the three
months ended March 31, 2006. As of March 31, 2006, total compensation cost
related to non-vested stock options not yet recognized was $1.4 million, which
will be expensed over a weighted average period of 1.4 years.
Stock Option Activity
---------------------
Stock option transactions for the first quarter of 2006 are summarized
as follows:
Weighted Weighted
Average Average Aggregate
Number Exercise Remaining Intrinsic
of Shares Price Term Value
----------------------------------------------------------
Outstanding at December 31, 2005 1,746 $ 9.73
Granted 542 $ 1.91
Exercised - $ -
Canceled (51) $ 21.41
-----------
Outstanding at March 31, 2006 2,237 $ 7.57 7.6 years $ -
===========
Exercisable at March 31, 2006 1,156 $ 11.86 5.7 years $ -
The fair value of options that vested during the three months ended
March 31, 2006 was $200,000.
Pro-Forma Information under SFAS 123 (for periods prior to January 1,
2006)
--------------------------------------------------------------------
Prior to adopting the provisions of SFAS 123R, the Company applied APB
Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for its
share based payment awards. 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, recognized no compensation expense for awards to
employees. The Company followed the disclosure only provisions of SFAS 123, 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 awards using the fair-value method:
For the
three months
ended March
31, 2005
--------------
Net loss as reported $ (2,841)
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 (374)
--------------
Pro forma net loss $ (3,215)
==============
Net loss per common share as reported,
basic and diluted $ (0.16)
==============
Pro forma net loss per common share,
basic and diluted $ (0.18)
==============
3. Comprehensive Loss
During each of the three months ended March 31, 2006 and 2005, the
Company's comprehensive loss was the same as its 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
March 31, 2006 and 2005 would have included an additional 6,000 and 11,000
shares, respectively, related to the Company's outstanding stock options and
warrants.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical are forward-looking
statements. All estimates for periods later than March 31, 2006 of costs,
expenses, revenue, savings, future amortization periods and other items are
forward-looking statements. Statements regarding possible actions or decisions
in periods ending after March 31, 2006 by Genelabs and other parties, including
collaborators and regulatory authorities, are forward-looking statements.
Actual results may differ from the forward-looking statements due to a number
of risks and uncertainties that are discussed under "Risk Factors" and
elsewhere in this Quarterly Report on Form 10-Q. Shareholders and prospective
investors in the Company should carefully consider these risk factors. We
disclaim any obligation to update these statements for subsequent events.
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.
On April 28, 2006, Genelabs had cash, cash equivalents and restricted
cash of approximately $6.2 million, which we expect would sustain existing
operations only to approximately the beginning of the fourth quarter of 2006.
As a result, there is substantial doubt as to the ability of Genelabs to
continue as a going concern absent a substantial increase in cash from a new
corporate collaboration or sale of equity securities. If we do not increase our
cash or significantly reduce our expenditures by the third quarter of 2006, we
may need to begin the process of ceasing operations, which may result in a
complete loss of value for our shareholders. In addition, Genelabs does not
currently satisfy the listing requirements of the Nasdaq Capital Market,
requiring a minimum shareholder's equity balance of $2.5 million or market
capitalization of at least $35 million, along with a price per share of at
least $1.00, which could result in the delisting of Genelabs from that
exchange. On April 4, 2006, we received notice from Nasdaq that we did not meet
the Nasdaq Capital Market continued listing requirements, after which we
submitted a plan to Nasdaq for our compliance. To date we have not received
further written correspondence from Nasdaq on the matter.
Effective January 1, 2006, Genelabs adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment", or SFAS
123R, which changes the accounting for share-based payment awards under our
employee stock option and purchase plans. Under SFAS 123R the Company is
required to recognize compensation expense based on estimates of the value of
the share-based awards. Genelabs adopted SFAS 123R using the modified
prospective transition method, an adoption method under which prior periods are
not restated to reflect the impact of FAS123R for comparative purposes. Under
SFAS 123R, the total share-based compensation expense recognized for the three
months ended March 31, 2006 was $0.3 million, or approximately $0.01 per share.
Prior to the adoption of SFAS 123R, Genelabs followed the disclosure only
provisions of SFAS 123, as amended by SFAS 148, and accordingly did not
recognize expense for employee stock option and purchase plans in its statement
of operations.
Results of Operations - First Quarter 2006 compared to First Quarter 2005
- -------------------------------------------------------------------------
Summary
Genelabs' net loss was $3.4 million in the first quarter of 2006
compared to a net loss of $2.8 million for the first quarter of 2005. The
higher net loss in the 2006 period compared to the 2005 period is primarily due
to increased hepatitis C virus, or HCV, drug discovery expenses, expenses
related to the adoption of a new accounting standard that requires expensing of
the theoretical value of stock options we issue to employees, and increased
general and administrative expenses, partially offset by lower expenses for the
development of Prestara(TM), our investigational new drug for lupus.
Revenue
Contract revenue was $1.6 million in the first quarter of both 2006
and 2005. Our largest source of revenue in the first quarter of both 2006 and
2005 was a research collaboration and license agreement with Gilead Sciences,
Inc., or Gilead, under which we recognized $1.4 million in each period. The
agreement with Gilead was entered into in 2004 and has an initial term of three
years, with Gilead having an option to extend for one additional year. Upon
entering into the agreement we received an initial upfront payment of $8.0
million, which we have deferred and are recognizing into revenue over the term
of our expected obligations under the agreement, or four years. In addition, we
receive on-going quarterly payments to fund our program continuing work on the
collaboration, which we recognize into revenue as earned.
During the first quarter of both 2006 and 2005, 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 $0.2 million in the first quarter of both 2006 and
2005. 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 new drugs targeting
HCV. The following table shows our research and development expenses by major
project (in thousands):
For the three months ended
March 31,
2006 2005 Change
------------------------------------------------
Drug discovery (HCV) $ 1,914 $ 1,496 +28%
Drug development (Prestara(TM)) 432 892 -52%
Support costs and other research and development 1,243 874 +42%
--------------------------------
Total research and development $ 3,589 $ 3,262 +10%
================================
Research and development expenses increased by $0.3 million in the
first quarter of 2006 compared to the first quarter in 2005. 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 first quarter
of 2006 compared to the first quarter of 2005 due to a greater number of
employees working on our HCV programs as a result of our hiring additional
scientists. In addition, we entered into a contract for process synthesis and
scale-up manufacturing for one of our HCV preclinical candidates in order to be
able to initiate Investigational New Drug Application, or IND, enabling
studies, also increasing costs. Drug development costs for Prestara, our
investigational drug for lupus, were $0.5 million lower in the first quarter of
2006 than in the first quarter of 2005 as a result of our completion of an
open-label follow-on study in 2005 and a significantly lower number of
employees during the 2006 period. Support costs and other research and
development costs were $0.4 million higher in the first quarter of 2006 than in
the first quarter of 2005. These costs are primarily comprised of costs
necessary to maintain a research and development facility, such as rent,
insurance, depreciation, utilities, maintenance, security, support staff, the
company bonus and, for the first quarter of 2006 only, stock-based compensation
expense. These costs are allocated based on the headcount ratio between
research and development and general and administrative employees. These
support costs and other research and development expenses increased in the
first quarter of 2006 compared to the first quarter of 2005 primarily for two
key reasons, the first of which is a charge for stock-based compensation
expense, which we are required to recognize beginning in the first quarter of
2006 due to the adoption of SFAS123R. The second reason for the increase in
costs is due to our employee incentive bonus plan, under which we recorded no
expense in the first quarter of 2006 as compared to a credit in the first
quarter of 2005 following the departure of participants that had been in a
long-term portion of the plan.
Since initiating our first drug discovery program in 1993, Genelabs
has built medicinal chemistry, combinatorial chemistry, computational modeling,
molecular biology, assay development and high-throughput screening, drug
metabolism, pharmacokinetics and toxicology capabilities. Genelabs has incurred
direct drug discovery costs of approximately $47 million through March 31,
2006. Of this amount, $18 million relates to our HCV drug discovery programs
which began in early 2002. During 2006, substantially all of our drug discovery
efforts were directed toward three separate hepatitis C virus research
programs, which are concentrated on identifying a new drug to combat infection
with HCV. Two of these programs target the HCV NS5b RNA-dependent RNA
polymerase (the enzyme directly responsible for replication of the HCV genome),
although through different mechanisms. We refer to one of these mechanisms as
our nucleoside program and we refer to the other as the non-nucleoside program.
Our third HCV drug discovery program targets the HCV NS5a protein, a different
viral enzyme that is also required for viral replication. Part of our drug
discovery process includes continued testing of our preclinical drug candidates
and identification of additional potential lead compounds. Genelabs also began
developing Prestara(TM) for systemic lupus erythematosus in 1993 when we
licensed exclusive rights to patents related to Prestara from Stanford
University. To potentially develop this investigational new drug we have
incurred direct costs of approximately $50 million through March 31, 2006.
Due to the nature of drug discovery research and drug development, 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 and development
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. Going forward, we believe both of our HCV
polymerase-targeted programs, nucleoside and non-nucleoside, are staffed at
appropriate levels to address our objectives. We believe that, as we continue
advancement of the preclinical candidates in the non-nucleoside program, our
external costs will increase as we rely on outside sources to manufacture the
drug material and conduct studies. During 2006, subject to receipt of
additional funding, we also plan to continue work on our newest HCV drug
discovery program, targeting the NS5a protein, and we intend to explore other
drug targets as potential programs if our financial resources allow. However,
the resources available to us, outcomes of current and planned scientific
experiments and outcomes of corporate partnering discussions may cause us to
revise this estimate. Management continually evaluates the status of our drug
discovery research and our drug development programs and expects to continue to
devote resources toward these efforts, while at the same time managing the
level of expenditures to balance limited cash resources and the various drug
discovery and development opportunities.
General and Administrative Expenses
General and administrative expenses were $1.6 million in the first
quarter of 2006 compared to $1.4 million in the first quarter of 2005. 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 first quarter of 2006 compared to the first quarter of 2005 due
to higher legal expenses related to patent filing and prosecution and potential
Company financing and business development activities, as well as stock-based
compensation expense due to the adoption of SFAS 123R in the 2006 period.
Liquidity and Capital Resources
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We assess liquidity primarily by the cash and cash equivalents
available to fund our operations. Genelabs had cash, cash equivalents and
restricted cash balances totaling $7.6 million at March 31, 2006. During the
first three months of 2006, our cash and cash equivalents decreased by $2.6
million due to cash used in operations.
Genelabs presently estimates that our current cash resources would be
adequate to provide liquidity for our existing operations only to approximately
the beginning of the fourth quarter of 2006. As a result, there is substantial
doubt as to the ability of Genelabs to continue as a going concern absent a
substantial increase in cash from a new corporate collaboration or sale of
equity securities. We will require additional capital prior to this time to
carry out our business plans in 2006 and thereafter and expect to continue to
rely on outside sources of financing to meet our capital needs. If we do not
increase our cash or significantly reduce our expenditures by the third quarter
of 2006, we may need to begin the process of ceasing operations or liquidating,
which may result in a complete loss of value for our shareholders.
The ability of the Company to continue as a going concern is dependent
upon its ability to obtain additional capital from a collaboration, equity
financing or other means. In order to satisfy its projected cash needs for at
least the next twelve months, Genelabs is pursuing various alternatives,
including licensing its non-nucleoside HCV polymerase program, renegotiating
the terms of a collaboration and pursuing investments from third-parties. If
any of these transactions are completed we expect they would provide additional
cash to the Company, although the amounts are not determinable. Genelabs may be
unable to complete any of these transactions as currently contemplated or at
all, and the outcome of these matters cannot be predicted at this time.
Further, assuming the Company successfully raises additional funds, the Company
may never achieve positive cash flow. If the Company is not able to secure
additional funding the Company will be required to scale back its research and
development programs and general and administrative activities and may not be
able to continue in business. The accompanying consolidated financial
statements do not include any adjustments to the specific amounts and
classifications of assets and liabilities, which might be necessary should the
Company be unable to continue in business.
Longer-term, if we succeed in securing sufficient capital to allow us
to continue drug discovery research and complete an additional clinical trial
for Prestara, Genelabs' liquidity and capital resources may be materially
impacted by success or failure in reaching milestones under corporate
collaborations, the progress, if any, of the Company's other, unpartnered drug
discovery programs and FDA actions with respect to our New Drug Application for
Prestara.
Since Genelabs' inception, the Company 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. The
amount of additional costs in our business plans will depend on numerous
factors including the progress of our research and development programs and the
actions of corporate collaborators. 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.
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 and are effective in
ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding disclosure
(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(f) 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 1A. 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
Quarterly Report on Form 10-Q.
Risks Related to Genelabs
We will need to raise additional capital within the next few months,
and if we are unable to timely secure adequate funds on acceptable terms, we
will be required to cease our operations and will not be able to continue as a
going concern.
On March 31, 2006, Genelabs had cash, cash equivalents and restricted
cash totaling approximately $7.6 million, which we presently estimate can
sustain our existing operations only to approximately the beginning of the
fourth quarter of 2006. We will need to raise additional capital in order to
execute our business plans, provide adequate working capital to satisfy our
obligations and continue as a going concern. While we are in the process of
seeking additional funds, including entering into a new collaboration for our
hepatitis C virus drug discovery program, selling equity, renegotiating an
existing corporate collaboration, and/or other arrangements, it is possible
that none of these efforts to seek additional funds will be successful. If
these efforts are not successful by the third quarter of 2006, we may need to
begin terminating operations and you may lose your entire investment. If one or
more of these efforts are successful, the amount of funds we raise may still
not be sufficient for us to sustain operations as planned or at all. As of the
date of this filing, there is substantial doubt about the Company's ability to
continue as a going concern due to its historical negative cash flow and
because the Company does not currently have sufficient committed capital to
meet its projected operating needs for at least the next twelve months.
Additionally, our financial condition may lead our vendors and suppliers to
require advance payments or security deposits, further depleting our resources,
and may result in loss of some of our employees who seek employment elsewhere.
If we raise additional funds through the issuance of equity, or
securities convertible into equity, we may be required to do so at a price per
share below then-current trading prices, thereby diluting our current
shareholders. We may not be able to obtain additional funds on acceptable
terms, or at all. Other sources of capital, such as a collaboration or
strategic alliance, may require us to grant third parties rights to our
intellectual property assets, or require us to adversely renegotiate the terms
of one or more of our existing collaborations. We may also need to change our
operating plans. Although we are currently discussing with third parties a
collaboration for our HCV non-nucleoside drug discovery program, we may fail to
enter into any agreement on acceptable terms, if at all. We also may be unable
to find buyers willing to purchase our equity or to license other products or
technology on commercially favorable terms, if at all. If additional funds are
not available we may be required to cease operations, resulting in a complete
loss of investment to our shareholders.
In order to maintain its license to use radioactive research
materials, Genelabs has established a $150,000 standby letter of credit in
favor of the Radiologic Health Branch of the California Department of Health
Services. If we are unable to raise additional funds, the letter of credit may
be terminated and the radioactive materials license may be suspended or
revoked.
Because we do not qualify for listing on the Nasdaq quotation system,
the value of your investment in Genelabs may substantially decrease.
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 March 31, 2006 was a deficit of $0.8 million and
as of May 10, 2006 the Company's market value was approximately $16 million. We
currently do not comply with the minimum shareholder's equity or market
capitalization requirements, and will not be able to comply with these
requirements unless we are able to increase our shareholders' equity through a
financing or other means or our stock price significantly increases. We have
received a notice of non-compliance from Nasdaq and have submitted a plan for
compliance but have not received any further written correspondence from Nasdaq
on the matter.
To remain listed on the Nasdaq Capital Market the closing bid price of
our stock must be at least $1.00 per share. As of May 10, 2006, our closing bid
price was approximately $0.89 per share. If our stock price does not increase
above $1.00 per share, Nasdaq will issue a separate notice of non-compliance to
us.
If Genelabs is unable to meet or maintain compliance with all of the
Nasdaq listing requirements, it will be delisted from the Nasdaq Capital
Market. Delisting from the Nasdaq Capital Market would adversely affect the
trading price of our common stock, significantly limit the liquidity of our
common stock and impair our ability to raise additional funds.
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 $232 million in net losses through March 31, 2006,
including a net loss of $3.4 million for the quarter ended March 31, 2006. 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 only to approximately the beginning of the fourth
quarter of 2006. We will 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 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 or maintain compliance with the Nasdaq's
listing requirements, 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; and
o discussions with the Food and Drug Administration have indicated that
the Company will need to conduct at least one 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.
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 thus 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.
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 lumbar spine. Because both our and
Genovate's clinical trials did not meet their primary endpoints, the FDA will
not 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 Gilead, GlaxoSmithKline, or
GSK, Watson, Tanabe and other companies and we may enter into future
collaborations with these 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, and GSK may choose not to continue developing the
hepatitis E vaccine which it has been developing under a license from us. 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. If we are
unable to obtain the funds to ensure the continuance of our business or fail to
perform all of our obligations, our collaborators may withhold further funding,
seek to seize control over our intellectual property and other assets, and/or
assert claims for damages against us. 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 may need to retain more 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 staff is
intense. We may not be able to continue to attract or retain such people on
acceptable terms, given the competition for those with similar qualifications
among biotechnology, pharmaceutical and healthcare companies, universities and
nonprofit research institutions. Furthermore, the negative results from the
most recent clinical trials of Prestara(TM) 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,
substantially all of our clinical development staff have 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. We
depend on Gilead for nucleoside compounds for treatment of hepatitis C
infections, and on GSK for the 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 most 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 suppliers 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 has exceeded its initial expiration date, 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;
o complications in the scale-up or large-scale manufacturing of our
hepatitis C compounds; and
o our lack of cash resources.
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. Although the specific polymorphic form of DHEA we
have used may be patentable, we do not believe it is possible to obtain patent
protection for the base 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 2012 and 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.
The lease for our facilities expires in November and we may not have
the facilities to continue our operations.
The lease for the facilities housing nearly all of our operations
expires in November 2006. We may be unable to obtain an extension or renewal of
the lease on acceptable terms, or at all. If we are unable to remain on our
current premises, we may be unable to obtain alternative facilities due to our
financial condition or for other reasons, and we may be unable to fully
relocate our operations before termination of our current lease, thereby
incurring a significant interruption in our business operations. Any relocation
would result in substantial disruption of our operations and diversion of
management and staff away from our core business activities. The terms for the
existing or any new premises may require higher rent, advance payments,
deposits or other terms disadvantageous to us. We sublease a portion of our
premises to Genitope Corp. for approximately $150,000 per year and there is no
assurance that the sublease will continue on favorable terms, or at all, or
that we would be able to remove the space from any extension of our lease.
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 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, 2005 and December 31, 2005,
the price of our common stock fluctuated between $6.15 and $1.70 per share, as
adjusted for the reverse-split. Between January 1, 2006 and May 10, 2006, the
price of our common stock fluctuated between $2.30 and $0.70 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 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: May 15, 2006 -------------------------------------
James A.D. Smith
President and Chief Executive Officer
Principal Financial and Chief
Accounting Officer:
/s/ MATTHEW M. LOAR
Date: May 15, 2006 -------------------------------------
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.