This filing is made pursuant to rule
424(b)(3) under the Securities Act of
1933, as amended, in connection with
Registration No. 333-85500
PROSPECTUS
2,962,500 Shares
Genome Therapeutics Corp.
Common Stock
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These shares, which are issuable upon the conversion or exercise of certain
convertible notes and warrants issued by the Company in a private placement
transaction on March 5, 2002, are being offered for sale by the selling
stockholders listed on page 13. The selling stockholders may sell the common
stock at prices and on terms determined by the market, in negotiated
transactions or through underwriters. The selling stockholders may also sell
the common stock under Rule 144 of the Securities Act of 1933. See "Plan of
Distribution" beginning on page 14.
The common stock is traded on the Nasdaq National Market under the symbol
"GENE". On April 17, 2002, the reported closing price of the common stock was
$4.75 per share.
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An investment in the shares offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 2 of this prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is April 19, 2002.
TABLE OF CONTENTS
Page
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THE COMPANY.......................................................... 2
RISK FACTORS......................................................... 2
USE OF PROCEEDS...................................................... 12
SELLING STOCKHOLDERS................................................. 13
PLAN OF DISTRIBUTION................................................. 14
LEGAL MATTERS........................................................ 15
EXPERTS.............................................................. 15
AVAILABLE INFORMATION................................................ 15
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................... 16
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 16
THE COMPANY
We are a biopharmaceutical company focused on the discovery and development
of pharmaceutical and diagnostic products. We have eight established product
development programs. Our lead product candidate, Ramoplanin, is in Phase III
clinical trials for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE). We have six alliances with
pharmaceutical companies including Schering-Plough, AstraZeneca, Wyeth-Ayerst
and bioMerieux, and a joint venture with ArQule. In addition to these eight
projects, we have a portfolio of earlier stage internal drug discovery
programs. We also maintain an active service business, GenomeVisionTM Services,
providing drug discovery services to pharmaceutical and biotechnology companies
and to the National Human Genome Research Institute.
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks described below before you decide to buy our common stock. The risks
and uncertainties described below are not the only ones facing us. Additional
risks not presently known to us or that we currently deem immaterial may also
impair our business operations. If any of the following risks were to occur,
our business, financial condition or results of operations would likely suffer.
In that event, the trading price of our common stock could decline, and you
could lose all or part of your investment.
We have a history of significant operating losses and expect these losses to
continue in the future.
We have experienced significant operating losses each year since our
inception and expect these losses to continue for the foreseeable future. We
had a net loss of approximately $10,090,000 for the fiscal year ended December
31, 2001, and, as of December 31, 2001, we had an accumulated net loss of
approximately $82,054,000. The losses have resulted primarily from costs
incurred in research and development and from general and administrative costs
associated with our operations. These costs have exceeded our revenues which to
date have been generated principally from collaborations, government grants and
sequencing services. We anticipate incurring additional losses this year and in
future years and cannot predict when, if ever, we will achieve profitability.
These losses may increase in the near future as we expand our research and
development and clinical trial activities. In addition, our partners' product
development efforts which utilize our products are at an early stage and,
accordingly, we do not expect our losses to be substantially mitigated by
revenues from milestone payments or royalties under those agreements for a
number of years, if ever.
Use of genomic information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Our business strategy is based on the assumption that
identifying and characterizing genes and sequencing select human genes and the
genomes of select pathogens may help scientists better understand complex
disease processes and develop drugs to treat these diseases. There is limited
understanding of the roles of genes in diseases. Few therapeutic vaccine or
diagnostic products based on genomic information have been developed and
commercialized. To date, no one has developed or commercialized any
pharmaceutical, diagnostic or vaccine products based on our technologies. If we
fail to identify genes useful for the discovery and development of such
products, or if partners are unable to use the genomic information that we
provide to them to develop such products, our current and potential customers
may lose confidence in our products or their value for drug discovery, and our
business may suffer as a result.
We rely heavily upon existing and prospective alliance partners and licensees,
and a significant portion of our revenue has been derived from one alliance
partner.
Our strategy for developing and commercializing therapeutic, vaccine and
diagnostic products depends, in part, on strategic alliances and licensing
arrangements with pharmaceutical and biotechnology partners. We currently have
alliances with AstraZeneca, bioMerieux, Schering-Plough and Wyeth-Ayerst. We
have received a
2
substantial portion of our revenue from these alliances, and we expect to
continue to do so. Under these arrangements, we are entitled to receive
payments and royalties based on the achievement by us and our partners of
certain development milestones and the successful development of products
arising from the collaborations. Although we have achieved many of the
scientific milestones under our agreements, we cannot assure you that we will
continue these achievements in the future or that milestones dependent on our
partners' development and commercialization activities will be attained.
In addition, we cannot assure that we will maintain our current
collaborations or establish additional collaborations. Competition among
genomics companies for collaborations with pharmaceutical companies is intense.
This competition is enhanced by the trend towards consolidation among large
pharmaceutical companies. Consequently, we cannot be sure that we will be able
to enter into new collaborations or maintain our existing ones, and any new or
renewed collaborations may be on terms less favorable to us than past
collaborations. Our failure to maintain existing collaborations or to enter
into additional collaborations would have a material adverse effect on our
business. In particular, if funding from partners were to become unavailable or
were to be reduced, we would need to devote additional internal resources to
our research programs or possibly scale back or terminate some programs.
Since 1996, we have received a significant amount of revenues based on
payments under our alliances with Schering-Plough. We have two infectious
disease alliances with Schering-Plough and a third collaboration with
Schering-Plough that relates to asthma genetics. The funded research phase
under these agreements have been extended and is scheduled to end on March 31,
2002 (with respect to the infectious disease alliances) and December 31, 2002
(with respect to the asthma alliance). For the fiscal years ended December 31,
1999, 2000 and 2001, revenues from Schering-Plough accounted for approximately
71%, 35% and 31%, respectively, of our total revenue. If Schering-Plough fails
to continue to extend one or more of these agreements, we would lose research
funding, which could have a material adverse effect on us.
Our strategy includes entering into multiple, concurrent alliances. We
cannot assure that we will be able to manage multiple alliances successfully.
The risks we face in managing multiple alliances include maintaining
confidentiality among partners, avoiding conflicts between partners and
avoiding conflicts between us and our partners. If we fail to manage our
alliances effectively, or if any of the problems described above arise, one or
more of the following could occur which could have a material adverse effect on
our business:
. use of significant resources to resolve conflicts,
. delay in research effects,
. legal claims involving significant time,
. expense,
. loss of reputation,
. termination of one or more alliances, or
. loss of capital and loss of revenues.
If our partners develop products using our genomic information, we will rely
on these partners for product development, regulatory approval, manufacturing
and marketing of those products before we can receive some of the milestone
payments, royalties and other payments to which we may be entitled under the
terms of some of our alliance agreements. Our agreements with our partners
typically allow the partners significant discretion in electing whether to
pursue any of these activities. We cannot control the amount and timing of
resources our partners may devote to our programs or potential products. As a
result, we cannot assure that our partners will perform their obligations as
expected. In addition, if a partner is involved in a business combination, such
as a merger or acquisition, or changes its business focus, its performance
under our agreement may suffer and, as a result, we may not generate any
revenues from the royalty, milestone and similar payment provisions of our
collaboration agreement with that partner.
3
Development of therapeutic, diagnostic and vaccine products based on our
discoveries will be subject to the high risks of failure inherent in the
development or commercialization of health care products. These risks include
the possibility that any such products will be found to be toxic, be found to
be ineffective, fail to receive necessary regulatory approvals, be difficult or
impossible to manufacture on a large scale, be uneconomical to market, fail to
be developed prior to the successful marketing of similar products by
competitors or infringe on proprietary rights of third parties.
Our alliance partners may not be successful in developing or commercializing
therapeutic, diagnostic or vaccine products under our agreements with them.
We derive a substantial portion of our revenues from fees paid by
pharmaceutical companies for our information, products and services. We expect
that pharmaceutical and biotechnology companies will be one of our primary
source of revenues for the foreseeable future. As a result, we are subject to
risks and uncertainties that affect the pharmaceutical and biotechnology
industries and to reductions and delays in research and development
expenditures by companies in these industries. These effects on the
pharmaceutical and biotechnology industries may affect our ability to conclude
deals with collaborative partners.
In addition, our future revenues may be adversely affected by mergers and
consolidations in the pharmaceutical and biotechnology industries, which will
reduce the number of our potential customers. Large pharmaceutical and
biotechnology customers could also decide to conduct their own genomic
programs, rely on publicly available information or joint consortia or seek
other providers instead of using our products or services.
We may not succeed in obtaining regulatory approval for commercialization of
our product candidates or maintain regulatory compliance with respect to
products approved for commercial use.
On October 9, 2001, we acquired a license to develop the antibiotic
Ramoplanin, our first product candidate, and we intend to expand our pipeline
of clinical candidates, both through internal development efforts and
acquisitions. The development, manufacture and marketing of pharmaceutical
products are subject to government regulation in the United States and other
countries. In the United States and most foreign countries, we must complete
rigorous pre-clinical testing and extensive human clinical trials that
demonstrate the safety and effectiveness of a product in order to apply for
regulatory approval to market the product. These processes are expensive and
can take many years to complete. We may not be able to demonstrate the safety
and efficacy of our products to the satisfaction of the U.S. Food and Drug
Administration, commonly referred to as the FDA, or other regulatory
authorities. We may also be required to demonstrate that our proposed product
represents an improved form of treatment over existing therapies and we may be
unable to do so without conducting further clinical studies. Negative,
inconclusive or inconsistent clinical trial results could prevent regulatory
approval, increase the cost and timing of regulatory approval or require
additional studies or a filing for a narrower indication.
In addition, regulatory approval may take longer than we expect as a result
of a number of factors, including failure to qualify for priority review of our
applications. Delays in obtaining regulatory approval can be extremely costly
in terms of lost sales opportunities and increased clinical trial costs.
Furthermore, all statutes and regulations governing the approval of our product
candidates are subject to change in the future. These changes may increase the
time or cost of regulatory approval, limit approval, or prevent it completely.
Even if we receive regulatory approval for our product candidates, the later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions, including withdrawal of the product from
the market. Approval of a product candidate may be conditioned upon certain
limitations and restrictions as to the drug's use, or upon the conduct of
further studies, and may be subject to continuous review. After approval of a
product, we will have significant ongoing regulatory compliance obligations,
and if we fail to comply with these requirements, we could be subject to
penalties, including warning letters, fines, product recalls, withdrawal of
regulatory approval, operating restrictions, injunctions, and criminal
prosecution.
4
Clinical studies are costly, time consuming and unpredictable, and we have
limited experience conducting and managing necessary pre-clinical and clinical
trials for our product candidates.
Our initial product candidate, Ramoplanin, is in Phase III clinical trials
for the prevention of bloodstream infections caused by vancomycin-resistant
enterococci, also known as VRE. Prior clinical and pre-clinical trials for
Ramoplanin were conducted by Biosearch Italia and its licensees, from whom we
acquired our license to develop Ramoplanin. The speed with which we complete
our clinical trials and our applications for marketing approval will depend on
several factors, including the following:
. the rate of patient enrollment, which is a function of many factors,
including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the nature
of the protocol;
. institutional review board approval of the protocol and the informed
consent form;
. prior regulatory agency review and approval of our applications and
procedures;
. analysis of data obtained from pre-clinical and clinical activities
which are susceptible to varying interpretations, which interpretations
could delay, limit or prevent regulatory approval;
. changes in the policies of regulatory authorities for drug approval
during the period of product development; and
. the availability of skilled and experienced staff to conduct and monitor
clinical studies, to accurately collect data and to prepare the
appropriate regulatory applications.
In addition, the cost of human clinical trials varies dramatically based on
a number of factors, including the order and timing of clinical indications
pursued, the extent of development and financial support from alliance
partners, the number of patients required for enrollment, the difficulty of
obtaining clinical supplies of the product candidate, and the difficulty in
obtaining sufficient patient populations and clinicians.
We have limited experience in conducting and managing the pre-clinical and
clinical trials necessary to obtain regulatory marketing approvals. We may not
be able to obtain the approvals necessary to conduct clinical studies. Also,
the results of our clinical trials may not be consistent with the results
obtained in pre-clinical studies or the results obtained in later phases of
clinical trials may not be consistent with those obtained in earlier phases. A
number of companies in the biopharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after experiencing promising results
in early animal and human testing. If regulatory approval of a drug is granted,
such approval is likely to limit the indicated uses for which it may be
marketed. Furthermore, even if a product of ours gains regulatory approval, the
product and the manufacturer of the product will be subject to continuing
regulatory review. We may be restricted or prohibited from marketing or
manufacturing a product, even after obtaining product approval, if previously
unknown problems with the product or its manufacture are subsequently
discovered.
We will need to develop marketing and sales capabilities to successfully
commercialize our product candidates.
Because we have only recently acquired a license to develop our first
product candidate, we currently have no marketing or sales experience. We will
need to develop a marketing and sales staff to successfully commercialize our
product candidates, including Ramoplanin. The development of marketing and
sales capabilities will require significant expenditures, management resources
and time. We may be unable to build such a sales force, the cost of
establishing such a sales force may exceed any product revenues, or our
marketing and sales efforts may be unsuccessful. Failure to successfully
establish sales and marketing capabilities in a timely manner or find suitable
sales and marketing partners may materially adversely affect our business and
results of operation. Even if we are able to develop a sales force or find a
suitable marketing partner, our products may not be accepted by health care
providers or consumers.
5
Health care insurers and other payers may not pay for our products or may
impose limits on reimbursement.
Our ability to commercialize Ramoplanin and our future products will depend,
in part, on the extent to which reimbursement for such products will be
available from third-party payers, such as Medicare, Medicaid, health
maintenance organizations, health insurers and other public and private payers.
If we succeed in bringing Ramoplanin or other products in the future to market,
we cannot assure you that third-party payers will pay for Ramoplanin or other
products or will establish and maintain price levels sufficient for realization
of an appropriate return on our investment in product development. If adequate
coverage and reimbursement levels are not provided by government and private
payers for use of our products, our products may fail to achieve market
acceptance and our results of operations may be materially adversely affected.
Many health maintenance organizations and other third-party payers use
formularies, or lists of drugs for which coverage is provided under a health
care benefit plan, to control the costs of prescription drugs. Each payer that
maintains a drug formulary makes its own determination as to whether a new drug
will be added to the formulary and whether particular drugs in a therapeutic
class will have preferred status over other drugs in the same class. This
determination often involves an assessment of the clinical appropriateness of
the drug and sometimes the cost of the drug in comparison to alternative
products. We cannot assure you that Ramoplanin or any of our future products
will be added to payer's formularies, whether our products will have preferred
status to alternative therapies, nor whether the formulary decisions will be
conducted in a timely manner. We may also decide to enter into discount or
formulary fee arrangements with payers, which could result in us receiving
lower or discounted prices for Ramoplanin or future products.
We currently depend and will in the future depend on third parties to
manufacture our product candidates, including Ramoplanin.
We do not have the internal capability to manufacture commercial quantities
of pharmaceutical products under the FDA's current Good Manufacturing
Practices. We have entered into an agreement with Biosearch for the manufacture
of Ramoplanin and expect to enter into similar agreements with third parties
for the manufacture of future product candidates. We cannot be certain that
Biosearch or future manufacturers will be able to deliver commercial quantities
of product candidates to us or that such deliveries will be made on a timely
basis. If we are required to find additional or alternative sources of supply
for Ramoplanin or other future product candidates, we may face additional cost
and delay in product development and commercialization. We may not be able to
enter into alternative supply arrangements at commercially acceptable rates, if
at all. Also, if we change the source or location of supply or modify the
manufacturing process, regulatory authorities will require us to demonstrate
that the product produced by the new source or from the modified process is
equivalent to the product used in any clinical trials that we had conducted.
In addition, any contract manufacturers that we may use must adhere to the
FDA's regulations on current Good Manufacturing Practices, which are enforced
by the FDA through its facilities inspection program. These facilities are
subject to periodic inspection by the FDA. The manufacture of products at these
facilities will be subject to strict quality control testing and recordkeeping
requirements.
Moreover, while we may choose to manufacture products in the future, we have
no experience in the manufacture of pharmaceutical products for clinical trials
or commercial purposes. If we decide to manufacture products, we would be
subject to the regulatory requirements described above. In addition, we would
require substantial additional capital and would be subject to delays or
difficulties encountered in manufacturing pharmaceutical products. No matter
who manufactures the products, we will be subject to continuing obligations
regarding the submission of safety reports and other post-market information.
The genomics industry is intensely competitive and evolving.
There is intense competition among entities attempting to sequence segments
of the human genome and identify genes associated with specific diseases and
develop products and services based on these discoveries.
6
We face competition in these areas from genomic, pharmaceutical, biotechnology
and diagnostic companies, academic and research institutions and government or
other publicly-funded agencies, both in the United States and abroad. Some of
our competitors are developing databases containing gene sequence, gene
expression, genetic variation or other genomic information and are marketing or
plan to market their data to pharmaceutical companies. Additional competitors
may attempt to establish databases containing this information in the future.
In addition, some entities are attempting to identify and patent randomly
sequenced genes and gene fragments, while others are pursuing a gene
identification, characterization and product development strategy based on
positional cloning or other technologies. Numerous pharmaceutical companies
also are developing genomic research programs, either alone or in partnership
with our competitors. Competition among these entities to sequence genes,
identify and characterize genes of interest, obtain patent protection and
market this genomic information is intense and is expected to increase. In
order to compete against existing and future technologies, we will need to
demonstrate to potential customers that our technologies and capabilities are
superior to competing technologies.
Many of our competitors have substantially greater capital resources,
sequencing capabilities, research and developmental staffs, facilities,
manufacturing and marketing experience, distribution channels and human
resources than us. These competitors may discover, characterize or develop
important genes, drug targets or leads, drug discovery technologies or drugs in
advance of us or our customers or which are more effective than those developed
by us or our customers, or may obtain regulatory approvals of their drugs more
rapidly than our customers do, any of which could have a material adverse
effect on any of our similar programs. Moreover, these competitors may obtain
patent protection or other intellectual property rights that would limit our
rights or our customers' ability to use our products to commercialize
therapeutic, diagnostic or vaccine products.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related
technologies. In addition, certain pharmaceutical and biotechnology companies
have significant needs for genomic information and may choose to develop or
acquire competing technologies to meet such needs. We also face competition
from providers of software. A number of companies have announced their intent
to develop and market software to assist pharmaceutical companies and academic
researchers in managing and analyzing their own genomic data and publicly
available data.
Our intellectual property protection may be inadequate to protect our
proprietary rights.
Our success will depend, in part, on our ability to obtain commercially
valuable patent claims and protect our intellectual property. Our patent
position involves complex legal and factual questions, and legal standards
relating to the validity and scope of claims in our technology field are still
evolving. Therefore, the degree of future protection for our proprietary rights
is uncertain.
The risks and uncertainties that we face with respect to our patents and
other proprietary rights include the following:
. the pending patent applications we have filed or to which we have
exclusive rights may not result in issued patents or may take longer
than we expect to result in issued patents;
. the claims of any patents which are issued may be limited from those in
our patent applications and may not provide meaningful protection;
. we may not be able to develop additional proprietary technologies that
are patentable;
. the patents licensed or issued to us or our customers may not provide a
competitive advantage;
. other companies may challenge patents licensed or issued to us or our
customers;
. patents issued to other companies may harm our ability to do business;
. other companies may independently develop similar or alternative
technologies or duplicate our technologies; and
. other companies may design around technologies we have licensed or
developed.
7
We may apply for patent protection for compositions and methods relating to
gene expression and disease-specific patterns of gene expression that we
identify and individual disease genes and targets that we discover. These
patent applications may include claims relating to novel genes, gene fragments,
single nucleotide polymorphisms (SNPs) or encoded protein and to novel uses for
known genes, gene fragments, SNPs or proteins identified from the use of our
genomic information and our databases.
We may not be able to obtain meaningful patent protection for our
discoveries. Even if patents are issued, their scope of coverage or protection
is uncertain. For example, we or our collaborators have filed patent
applications with respect to a number of full length genes and corresponding
proteins and partial genes of H. pylori, of M. leprae and several other
organisms. These applications seek to protect these full-length and partial
gene sequences and corresponding proteins, as well as equivalent sequences and
products and uses derived from these sequences and proteins. Some court
decisions and US Patent and Trademark Office guidelines indicate that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full-length sequence.
In addition, we are aware that some companies have published patent
applications relating to nucleic acids encoding several H. pylori proteins and,
in other disease programs, relating to genes for which we have found mutations
of interest. If these companies are issued patents, their patents may limit our
ability and the ability of our collaborators to practice under any patents that
may be issued to our collaborators or us. Because of this, we or our
collaborators may not be able to obtain patents with respect to the genes of
infectious agents such as H. pylori, or the value of certain other patents
issued to us or our collaborators may be limited. Also, even if a patent were
issued to us, the scope of coverage or protection afforded to such patent may
be limited.
Our proprietary position may depend on our ability to protect trade secrets.
We rely on trade secret protection for our confidential and proprietary
information and procedures, including procedures related to sequencing genes
and to searching and identifying important regions of genetic information. We
currently protect such information and procedures as trade secrets. We protect
our trade secrets through recognized practices, including access control,
confidentiality agreements with employees, consultants, collaborators, and
customers, and other security measures. These confidentiality agreements may be
breached, however, and we may not have adequate remedies for any such breach.
In addition, our trade secrets may otherwise become known or be independently
developed by competition.
We may infringe the intellectual property rights of third parties and may
become involved in expensive intellectual property litigation.
The intellectual property rights of biotechnology companies, including our
company, are generally uncertain and involve complex legal, scientific and
factual questions. Our success in the functional genomic field may depend, in
part, on our ability to operate without infringing on the intellectual property
rights of others and to prevent others from infringing on our intellectual
property rights.
There has been substantial litigation regarding patents and other
intellectual property rights in the genomic industry. We may become party to
patent litigation or proceedings at the U.S. Patent and Trademark Office or a
foreign patent office to determine our patent rights with respect to third
parties which may include subscribers to our database information services.
Interference proceedings in the U.S. Patent and Trademark Office or opposition
proceedings in a foreign patent office may be necessary to establish which
party was the first to discover such intellectual property. We may become
involved in patent litigation against third parties to enforce our patent
rights, to invalidate patents held by such third parties, or to defend against
such claims. The cost to us of any patent litigation or similar proceeding
could be substantial, and it may absorb significant management time. If an
infringement litigation against us is resolved unfavorably, we may be enjoined
from manufacturing or selling certain of our products or services without a
license from a third party. We may not be able to obtain such a license on
commercially acceptable terms, or at all.
8
We may not be able to obtain meaningful patent protection for discoveries under
our government contracts.
Under our government grants and contracts, the government has a statutory
right to practice or have practiced any inventions developed under the
government research contracts. In addition, under certain circumstances, such
as inaction on the part of us or our licensees to achieve practical application
of the invention or a need to alleviate public health or safety concerns not
reasonably satisfied by us or our licensees, the government has the right to
grant to other parties licenses to any inventions first reduced to practice
under the government grants and contracts. If the government grants such a
license to a third party, our patent position may be jeopardized. In addition,
the government has ownership rights in the data, clones, genes and other
material derived from the material furnished to us by the government, while we
have ownership rights in other technology developed solely by us. We are also
obligated under certain government grants to submit sequencing data and
materials resulting from our research to public databases within 24 hours from
the date such data and materials are developed. Our ability to obtain patent
protection for our discoveries and inventions may be adversely affected by this
publication.
International patent protection is uncertain.
Patent law outside the United States is uncertain and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts. Finally, some of our patent
protection in the United States is not available to us in foreign countries due
to the laws of those countries.
We expect to raise additional funds in the future.
We believe that our existing cash and marketable securities together with
borrowings under equipment financing arrangements and anticipated cash flow
from operations will be sufficient to support our current plans for
approximately two years. However, we expect to raise additional capital,
subject to market conditions and strategic considerations over the course of
the next 18 months. In particular, we may need additional funds to increase our
research and development activities and fund our clinical trials. We may seek
funding through additional public or private equity offerings, debt financings
or agreements with customers. If we raise additional capital by issuing equity
or convertible debt securities, the issuances may dilute share ownership of
existing investors and future investors may be granted rights superior to those
of current shareholders. Additional financing may not be available when needed,
or, if available, may not be available on favorable terms. If we cannot obtain
adequate financing on acceptable terms when such financing is required, our
business will be adversely affected.
We have issued $15 million of convertible notes due December 31, 2004, which
contain restrictive covenants, including covenants that can cause early
repayment of the Notes.
On March 5, 2002, we issued convertible notes, bearing interest at 6% per
annum, to two institutional investors in the aggregate principal amount of $15
million. The Notes are due on December 31, 2004, but if at any time on or after
December 31, 2003, we maintain a net cash balance (i.e., cash and cash
equivalents less obligations for borrowed money bearing interest) of less than
$35 million, then the holders of the notes can require that all or any part of
the outstanding principal balance of the notes plus all accrued but unpaid
interest be repaid. If we have to repay the notes early, our cash position and
ability to execute our business plan could be adversely affected. The notes
also contain provisions limiting Genome Therapeutics' ability to incur debt
that is senior to the notes, with an exception for certain equipment financing,
and provisions that can cause the payment of a premium to the holders of the
notes on a change of control transaction.
The notes are convertible into our common stock at a price of $8 per share
(subject to anti-dilution and other adjustments). As part of the transaction,
the purchasers also received warrants to purchase up to 487,500 shares
9
of our common stock at an exercise price of $8.00 per share (subject to
anti-dilution and other adjustments), which become exercisable to the extent
the notes are converted or if certain other redemptions or repayments of the
notes occur. The shares underlying the notes and the warrants will be
registered for re-sale and if the notes are converted and the warrants
exercised, these shares could be sold into the market creating dilution of the
ownership of our shareholders at that time.
We rely on funding from the United States government.
As of December 31, 2001, we had approximately $8.6 million of government
research contracts outstanding under which we had not yet completed all of the
services. Funding under our government grants and research contracts is subject
to appropriation each year by the United States Congress and can be
discontinued or reduced at any time. In addition, there can be no assurance
that we will receive additional grants or contracts in the future. The
government's failure to fund our research in this area not only would end our
participation in the program, but might adversely affect the industry-wide
perception of genomics and the utility of genomic information.
Our research and product development depends on access to tissue samples and
other biological materials from individuals.
To continue to build our database products, we will need access to normal
and diseased human and other tissue samples, other biological materials and
related clinical and other information, which may be in limited supply. We
compete with many other companies for these materials and information. We may
not be able to obtain or maintain access to these materials and information on
acceptable terms. In addition, government regulation in the United States and
foreign countries could result in restricted access to, or use of, human and
other tissue samples. If we lose access to sufficient numbers or sources of
tissue samples, or if tighter restrictions are imposed on our use of the
information generated from tissue samples, our business may be harmed.
Competition among genomics companies is also increasing for access to unique
data from related individuals that we use to identify genes for specific human
diseases.
Ethical, legal and social issues related to the use of genetic information and
genetic testing may cause less demand for our products.
Genetic testing has raised issues regarding confidentiality and the
appropriate uses of the resulting information. For example, consumers have
expressed concerns towards insurance carriers and employers using such tests to
discriminate on the basis of such information, resulting in barriers to the
acceptance of such tests. This could lead to governmental authorities calling
for limits on or regulation of the use of genetic testing or prohibit testing
for genetic predisposition to certain diseases, particularly those that have no
known cure. Any of these scenarios could reduce the potential markets for our
products.
We may not succeed in realizing any additional revenue from the PathoGenome
Database.
In 1997, we introduced the PathoGenome Database that consists of genetic
information from more than thirty microbial organisms. In the past, our
strategy for our database depended on entering into subscription agreements
with pharmaceutical, biotechnology and other companies for the use of our
database. Each of the agreements that we may have with our customers is for a
specific term, and we anticipate that they may not be renewed upon expiration
or may be renewed at a substantially lower price. If any agreements expire and
are not renewed, our revenue would suffer.
Our sales cycle is lengthy and we may spend considerable resources on
unsuccessful negotiation efforts or may not be able to complete deals on the
schedule anticipated.
Our ability to obtain new customers for genomic information products depends
on our customers' belief that we can help accelerate their drug discovery
efforts. Our negotiation cycle is typically lengthy because we need to
10
educate potential customers and sell the benefits of our products and services
to a variety of constituencies within companies. In addition, each agreement
involves the negotiation of unique terms. We may expend substantial funds and
management effort with no assurance that an agreement will result. Actual and
proposed consolidations of pharmaceutical companies have affected and may in
the future affect the timing and progress of our ability to conclude deals with
collaborative partners.
We depend on key personnel in a highly competitive market for skilled personnel.
We are highly dependent on the principal members of our senior management
and key scientific and technical personnel. The loss of any of these personnel
could have a material adverse effect on our ability to achieve our goals. Our
future success is also dependent upon our ability to attract and retain
additional qualified scientific, technical and managerial personnel. Our plan
to expand our biopharmaceutical program will require us to hire a number of new
personnel with expertise in the areas of clinical trials and sales and
marketing. We experience intense competition for qualified personnel and may
not be able to continue to attract and retain skilled personnel necessary for
the development of our business.
Our activities involve hazardous materials and may subject us to environmental
liability.
Our research and development involve the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state
and local laws and regulations governing the use, manufacture, storage,
handling and disposal of these materials and certain waste products. Although
we believe that our safety procedures for handling and disposing of these
materials comply with legally prescribed standards, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident, we could be held liable for damages or penalized
with fines, and this liability could exceed our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
We may have difficulty managing our growth.
We expect to continue to experience growth in the number of our employees
and customers and the scope of our operations. In particular, we plan
significant growth in our service (GenomeVision) and bioPharmaceutical
business. This growth may continue to place a significant strain on our
management and operations. Our ability to manage this growth will depend upon
our ability to broaden our management team and our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer relationships and to
hire, train and manage our employees.
Our stock price is highly volatile.
The market price of our stock has been and is likely to continue to be
highly volatile due to the risks and uncertainties described in this section of
the prospectus, as well as other factors, including:
. conditions and publicity regarding the genomic or life sciences
industries generally;
. price and volume fluctuations in the stock market at large which do not
relate to our operating performance; and
. comments by securities analysts, or our failure to meet market
expectations.
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the subject of securities class action litigation. If litigation
were instituted on this basis, it could result in substantial costs and a
diversion of management's attention and resources.
11
Multiple factors beyond our control may cause fluctuations in our operating
results and may cause our business to suffer.
Our revenues and results of operations may fluctuate significantly,
depending on a variety of factors, including the following:
. our success in concluding deals for, and changes in the demand for, our
products;
. variations in the timing of payments from partners and customers and the
recognition of these payments as revenues;
. the terms we are able to negotiate in our deals;
. the progress of our pre-clinical and clinical trials;
. the timing of our new product introductions, if any;
. changes in the research and development budgets of our customers and
potential customers;
. the introduction of new products and services by our competitors;
. regulatory actions;
. expenses related to, and the results of, litigation and other
proceedings relating to intellectual property rights;
. the cost and timing of our adoption of new technologies;
. the cost, quality and availability of cell and tissue samples, reagents
and related components and technologies, including those supplied to us
pursuant to contractual arrangements; and
. the lengthy nature of our sales cycle for concluding alliances and other
deals.
We will not be able to control many of these factors. In addition, if our
revenues in a particular period do not meet expectations, we may not be able to
adjust our expenditures in that period, which could cause our business to
suffer. We believe that period-to-period comparisons of our financial results
will not necessarily be meaningful. You should not rely on these comparisons as
an indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price may fall, possibly by a significant amount.
Future acquisitions may absorb significant resources and may be unsuccessful.
As part of our strategy, we may pursue acquisitions of businesses or assets,
investments and other relationships and alliances. Acquisitions may involve
significant cash expenditures, debt incurrence, additional operating losses,
dilutive issuances of equity securities, and expenses that could have a
material adverse effect on our financial condition and results of operations.
For example, to the extent that we elect to pay the purchase price for such
acquisitions in shares of our stock, the issuance of additional shares of our
stock will be dilutive to our stockholders. Acquisitions involve numerous other
risks, including:
. difficulties integrating acquired technologies and personnel into our
business;
. diversion of management from daily operations;
. inability to obtain required financing on favorable terms;
. entering new markets in which we have little or no previous experience;
. potential loss of key employees or customers of acquired companies;
. assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies; and
. amortization of the intangible assets of acquired companies.
It may be difficult for us to complete these types of transactions quickly
and to integrate the businesses efficiently into our current business. Any
acquisitions or investments by us may ultimately have a negative impact on our
business and financial condition.
USE OF PROCEEDS
The net proceeds from the sale of the securities will be received by the
selling stockholders. We will not receive any proceeds from the sale of the
securities by the selling stockholders.
12
SELLING STOCKHOLDERS
On March 5, 2002, we entered into a Purchase Agreement with the selling
stockholders named below pursuant to which we issued convertible notes to such
selling stockholders in the aggregate principal amount of $15 million in a
private placement. As part of the transaction, we also issued them warrants to
purchase up to 487,500 shares of our common stock, which become exercisable to
the extent the notes are converted or if certain other redemptions or
repayments of the notes occur. The shares of our common stock registered for
resale in the registration statement of which this prospectus is a part are the
shares underlying the notes and warrants (subject to antidilution adjustments)
as well as a certain number of shares to satisfy interest payment obligations
on the notes.
The number of shares registered in the registration statement of which this
prospectus is a part and the number of shares offered in this prospectus
represents our bona fide estimate of the number of shares issuable upon
conversion of the convertible notes and exercise of the warrants (subject, in
each case, to antidilution adjustments) and payment of all interest on the
notes in shares of common stock. The number of shares that will ultimately be
issued to the selling stockholders cannot be determined at this time because it
depends on: (1) whether the holders of the convertible notes elect to convert
the convertible notes into shares of common stock; (2) whether we elect to
require the conversion of the convertible notes upon the market price of the
common stock meeting a specified price threshold; (3) whether the holders of
the warrants exercise their warrants; (4) the conversion price of the
convertible notes and the exercise price of the warrants at the time of
conversion of the convertible notes and exercise of the warrants; (5) the
period for which the convertible notes remain outstanding; and (6) the market
price of our common stock at the time we make any interest payments on the
convertible notes.
The table below sets forth information regarding ownership of our common
stock by the selling stockholders and the number of shares that may be sold by
them under this prospectus. The number of shares set forth in the table as
being held by the selling stockholders includes the number of shares of common
stock that are issuable upon conversion of the convertible notes and the
exercise of the warrants as of March 29, 2002. The number of shares set forth
on the table as being offered hereby represents the total number of shares we
have registered for resale by the selling stockholders based on our bona fide
estimate of the number of shares of common stock that we will need to issue to
the selling stockholders on conversion of the notes and exercise of the
warrants (subject, in each case, to antidilution adjustments) and payment of
all interest on the notes. This amount includes 100% of the number of shares of
common stock issuable as of March 29, 2002 upon conversion of the convertible
notes and exercise of the warrants and 100% of the number of shares we believe
will need to be issued as interest payments over the term of the notes.
However, the actual number of shares of common stock issuable upon conversion
of the convertible notes, exercise of the warrants and payment of interest is
indeterminable, and could be materially more or less than the amounts listed on
the table due to possible conversion and exercise price adjustments, and, in
the case of interest payments, changes to the market price of our common stock.
Because the selling stockholders may offer all or some portion of the common
stock listed in the table pursuant to this prospectus or otherwise, no estimate
can be given as to the amount of common stock that will be held by the selling
stockholders upon termination of the offering. The selling stockholders may
sell all, part, or none of the shares listed. The number of shares owned by the
selling stockholders is determined by rules promulgated by the Commission for
beneficial ownership and is not necessarily indicative of ownership for any
other purpose. None of the selling stockholders has had any position, office or
other material relationship with us, other than as a security holder, during
the past three years.
Shares Shares of Shares
Name of Selling Owned Prior Common Stock Owned After
Shareholder To Offering Offered Hereby Offering
----------- ----------- -------------- -----------
Smithfield Fiduciary LLC 2,370,000(1) 2,370,000 0
The Tail Wind Fund, Ltd. 592,500(2) 592,500 0
--------
(1) Includes 1,500,000 shares issuable upon conversion of $12,000,000 of
convertible notes, plus 390,000 shares issuable upon the exercise of
warrants and 480,000 shares that may be issued upon payment of interest on
convertible notes or upon antidilution adjustments.
(2) Includes 375,000 shares issuable upon conversion of $3,000,000 of
convertible notes, plus 97,500 shares issuable upon the exercise of
warrants and 120,000 shares that may be issued upon payment of interest on
convertible notes or upon antidilution adjustments.
13
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. The selling stockholders will act independently of us in making
decisions with respect to the timing, manner and size of each sale. All costs,
expenses and fees in connection with the registration of the shares offered by
this prospectus will be borne by us, other than brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares which will
be borne by the selling stockholders. Sales of shares may be effected by
selling stockholders from time to time in one or more types of transactions
(which may include block transactions) on the Nasdaq National Market, in the
over-the-counter market, in negotiated transactions, through put or call
options transactions relating to the shares, through short sales of shares, or
a combination of such methods of sale, at market prices prevailing at the time
of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling stockholders have advised us that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their shares, nor is there
an underwriter or coordinated broker acting in connection with the proposed
sale of shares by the selling stockholders.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in
short sales of the shares or of securities convertible into or exchangeable for
the shares in the course of hedging positions they assume with selling
stockholders. The selling stockholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealers or other financial institutions of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as amended or supplemented
to reflect such transaction).
The selling stockholders may make these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares owned by them. If the selling
stockholders default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell their shares from time to time
under a supplement to this prospectus or a post-effective amendment to the
registration statement of which this prospectus is a part, as applicable law
may require, amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus. The selling stockholders also may transfer the shares in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
subject to filing any supplement to this prospectus or post-effective amendment
to the registration statement required by applicable law.
The selling stockholders and any broker-dealers that act in connection with
the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The selling stockholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the shares against certain liabilities, including
liabilities arising under the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will
be subject to the prospectus delivery requirements of the Securities Act. We
have informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
14
Selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.
Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
. the name of each such selling stockholder and of the participating
broker-dealer(s);
. the number of shares involved;
. the initial price at which such shares were sold;
. the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
. that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus;
and
. other facts material to the transactions.
We have agreed to indemnify the selling stockholders in certain
circumstances against some liabilities, including liabilities that could arise
under the Securities Act. The selling stockholders have agreed to indemnify us,
our directors and our officers who sign the registration statement against some
liabilities in certain circumstances, including liabilities that could arise
under the Securities Act.
We have agreed to maintain the effectiveness of this registration statement
until the earlier of the sale of all the shares offered by this prospectus or
the date that each holder of such shares can sell all of the shares it holds in
compliance with Rule 144(k) promulgated under the Securities Act, but in no
event beyond March 5, 2007. No sales may be made pursuant to this prospectus
after the expiration date unless we amend or supplement this prospectus to
indicate that we have agreed to extend the period of effectiveness. The selling
stockholders may sell all, some or none of the shares offered by this
prospectus.
LEGAL MATTERS
Ropes & Gray, Boston, Massachusetts, will pass upon the validity of the
shares of common stock we are offering.
EXPERTS
The consolidated financial statements, incorporated by reference in this
prospectus and elsewhere in the registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
AVAILABLE INFORMATION
This prospectus, which constitutes a part of a registration statement on
Form S-3 (the "registration statement") filed by us with the Securities and
Exchange Commission (the "Commission") under the Securities Act, omits certain
of the information set forth in the registration statement. Reference is hereby
made to the registration statement and to the exhibits thereto for further
information with respect to us and the securities offered hereby. Copies of the
registration statement and the exhibits thereto are on file at the offices of
the Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the Commission
described below or via the Commission's web site described below.
15
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by us (File No.
0-10824) with the Commission are incorporated herein by reference:
(a) Our Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
(b) Our Current Report on Form 8-K as filed on March 6, 2002.
(c) The description of our common stock contained in our registration
statement on Form 10/A filed with the Commission on January 9, 1996
under the Exchange Act, including any amendment or reports filed for the
purpose of updating such description.
All reports and other documents subsequently filed by us pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing of
a post-effective amendment that indicates that all securities offered hereby
have been sold or which deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference into this prospectus and to be a part
hereof from the date of the filing of such reports or documents. Any statement
contained in a document, all or a portion of which is incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained or incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
Upon written or oral request, we will provide without charge to each person,
including any beneficial owner, to whom this prospectus is delivered a copy of
any or all of such documents which are incorporated herein by reference (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference into the documents that this prospectus
incorporates). Written or oral requests for copies should be directed to Manny
Bougoulas, Comptroller, 100 Beaver Street, Waltham, Massachusetts 02453,
telephone number (781) 398-2300.
We are subject to the informational requirements of the Exchange Act, and,
accordingly, file reports, proxy statements and other information with the
Commission. You can read our Commission filings, including the registration
statement, over the Internet at the Commission's website at http://www.sec.gov.
You may also read and copy any document we file with the Commission at its
public reference facilities at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the operation of public reference
facilities.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
16
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We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information. If anyone provides you with different
or inconsistent information, you should not rely on it. This prospectus does
not offer to sell any shares in any jurisdiction where it is unlawful. The
information in this prospectus is current as of the date shown on the cover
page.
Genome Therapeutics Corp.
2,962,500 Shares of
Common Stock
-----------------
PROSPECTUS
-----------------
April 19, 2002
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