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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-10824
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GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
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Massachusetts 04-2297484
(State or other (IRS employer
jurisdiction identification number)
of incorporation or
organization)
100 Beaver Street, 02453
Waltham, Massachusetts
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number: (781) 398-2300
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of June 28, 2002, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$53,333,000.
The number of shares outstanding of the registrant's common stock as of
March 25, 2003 was 23,635,460.
Documents Incorporated By Reference. Portions of the registrant's proxy
statement for use at its Annual Meeting to be held on May 9, 2003 are
incorporated by reference into Part III.
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PART I
Item 1. Business
Overview
We are a biopharmaceutical company focused on the discovery, development and
commercialization of pharmaceutical and diagnostic products. Our strategic goal
is to directly participate in the commercialization of products that are used
primarily in hospitals. For diseases treated by larger physician audiences, we
seek to discover, develop and commercialize products through alliances with
major pharmaceutical companies.
We have nine established product development programs. We are managing the
development and commercialization of our lead product candidate, Ramoplanin, in
the United States and Canada. This product is in a Phase III clinical trial for
the prevention of bloodstream infections caused by vancomycin-resistant
enterococci (VRE) and a Phase II trial for the treatment of patients with
Clostridium difficile-associated diarrhea (CDAD). We have seven product
discovery and development alliances with pharmaceutical companies including
Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition, we have
a portfolio of internal drug discovery programs. During 2002, we also
maintained an active service business, GenomeVision/TM/ Services, providing
drug discovery services to pharmaceutical and biotechnology companies and to
the National Human Genome Research Institute. As part of our continued
evolution into a biopharmaceutical company, this business unit was divested in
March 2003.
We concentrate our product discovery, development and commercialization
efforts in two principal areas:
(i) infectious diseases caused by bacterial and fungal pathogens, and
(ii) human diseases believed to have a significant genetic component.
Infectious diseases remain the world's leading cause of premature death.
Each year approximately 2 million patients in the U.S. develop antibiotic
resistant infections while being treated in hospitals. Antibiotic resistant
organisms, many of which have multiple antibiotic resistances, cause these
infections. Industry sources estimate that the pharmaceutical market for
antibiotic products worldwide was more than $22 billion in 2002.
We seek to supplement our drug discovery efforts with an active in-licensing
program. Our in-licensing efforts are focused on products in preclinical and/or
clinical development that will complement our internal drug discovery efforts
for infectious diseases as well as our strategic focus on the hospital target
market. In October 2001, we in-licensed the compound Ramoplanin, a novel
glycolipodepsipeptide antibiotic produced by fermentation of the bacteria
Actinoplanes, with activity against Gram-positive aerobic and anaerobic
microorganisms. We are developing this antibiotic for the prevention of
bloodstream infections caused by VRE and the treatment of Clostridium
difficile-associated diarrhea (CDAD). We have invested to build an experienced
clinical development and regulatory team that is overseeing the clinical
development of Ramoplanin. We have also built a commercial team to develop and
implement the marketing planning effort for this product.
We have long been a leader in the use of genomics to discover new drugs for
the treatment of bacterial and fungal infections. We have built integrated
discovery platforms to discover genes and characterize their function. We use
these platforms to pursue the discovery of new products through strategic
alliances with corporate partners and through internal research programs. We
have two ongoing anti-infective discovery and development collaborations with
Schering-Plough. The first is focused on new treatments for drug-resistant
bacterial infections, including those caused by Staphylococcus aureus, and the
second is focused on identifying novel antifungals. We have partnered with
AstraZeneca to develop treatments for ulcers caused by Helicobacter pylori (H.
pylori) and with bioMerieux to develop diagnostics for bacterial infections.
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In addition to drug discovery for bacterial and fungal infections, we are
leaders in the use of population genetics as a tool in discovering new
therapies for the treatment of chronic human diseases. We have formed three
alliances with pharmaceutical companies: Schering-Plough for the discovery of
new treatments for asthma; Wyeth for the prevention or treatment of
osteoporosis; and Amgen for the prevention and treatment of bone diseases,
including osteoporosis. We also continue to invest in the development of new
therapies for the treatment of other chronic human diseases, including central
nervous system disorders.
Our internal discovery efforts are focused on bacterial and fungal
infections. During the last two years, we have built a high-throughput
screening capability and a diverse compound library of approximately 130,000
compounds derived from commercial sources. We have invested in our in vivo,
pre-clinical capabilities and have commenced in vivo testing on several
compounds. We have also formed joint ventures and collaborations with other
biotechnology companies to discover and develop new broad-spectrum antibiotics.
While we will seek to partner some of these programs with larger companies, we
may also develop and commercialize some of these discoveries ourselves for
niche opportunities, such as hospital-acquired infections or infections in
immunocompromised patients.
Biopharmaceutical and Diagnostic Programs
We have nine ongoing product development programs. Our lead product
candidate, Ramoplanin, is in a Phase III clinical trial for the prevention of
bloodstream infections caused by VRE and a Phase II clinical trial for the
treatment of Clostridium difficile-associated diarrhea (CDAD). We have seven
alliances with pharmaceutical companies including Amgen, AstraZeneca,
bioMerieux, Schering-Plough and Wyeth. In addition to these seven alliances, we
have a number of collaborators and a portfolio of internal drug discovery
programs.
Ramoplanin
Bacteria are commonly classified into two categories: Gram-positive and
Gram-negative. Enterococci are a family of Gram-positive bacteria that are part
of the normal flora of the human gastrointestinal (GI) tract. While these
organisms do not normally cause infections in healthy people, they become a
threat in patients that have a compromised immune system and are frequently
found in hospitalized patients. Enterococci are now the second most common
cause of bloodstream infections acquired in the Intensive Care Units (ICUs) of
hospitals in the United States. Enterococcal bloodstream infections in the ICU
have been associated with a crude mortality rate of over 30%.
For thirty years, the antibiotic of last resort for enterococcal bloodstream
infections was vancomycin. However, the widespread use of vancomycin and other
antibiotics, such as third generation cephalosporins, has increased the
prevalence of resistant strains of enterococci, known as vancomycin-resistant
enterococci (VRE). In 2000, more than 26% of intensive care unit enterococci
infections were caused by VRE, a 93% increase from 1994.
Given its rapid spread and the difficulty in treating blood-borne
infections, VRE has received significant attention from both the medical and
public health communities. Most VRE are not only resistant to vancomycin, but
also to other common antibiotics. This resistance provides VRE with a selective
advantage over other enterococcal isolates in the gut and enables resistant
pathogens to easily colonize the human GI tract. The morbidity and mortality
associated with VRE bloodstream infections is substantially higher than for
enterococcal bloodstream infections caused by vancomycin-sensitive strains of
enterococci.
Given the high morbidity, mortality and cost of VRE bloodstream infections
and the limited treatment options for active infections, a great deal of focus
within the infectious diseases community has been placed on infection control
practices within the hospital to prevent VRE infections. Infection control has
focused on
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screening to identify colonized patients and the use of barrier methods to
avoid the spread of the bacteria to other patients. Typically, these measures
require isolation of the patient in a room with negative air pressure and the
"gowning and gloving" of physicians and nursing staff. Such patients are often
not allowed to have family visitors.
The large quantity of VRE in the gut has motivated investigators to seek to
decolonize the gut in an attempt to prevent VRE bloodstream infections.
However, attempts to prevent VRE bloodstream infections by decolonization have
been unsuccessful. Bacitracin to date has been tried in combination with or
without gentamicin or a tetracycline. Novobiocin has also been tried. It is
believed that these approaches have not been successful due to lack of potency
or the inability of the antibacterials to reach sufficient levels in the gut to
suppress VRE effectively.
Clostridium difficile-associated diarrhea (CDAD), a serious form of colitis
caused by toxins produced by the Gram-positive bacteria Clostridium difficile
(C. difficile), is the most common form of antibiotic-associated diarrhea in
the hospital. One study has demonstrated that as many as 20% of hospital
patients are colonized with C. difficile either prior to or during admission.
Because it is a spore-forming bacterium, C. difficile is readily spread from
person to person, especially in the hospital and nursing home environment.
Under certain conditions, such as extended antibiotic therapy and
gastrointestinal surgery, C. difficile can colonize the gut and release toxins,
leading to bowel inflammation and severe diarrhea. Serious cases can occur and
involve the development of fulminant colitis (severe inflammation of the
colon); such occurrences can be life threatening, especially in elderly or
immunocompromised populations.
Over 400,000 patients are treated in U.S. hospitals each year for CDAD. CDAD
is associated with an average increase of length of stay in the hospital of 3.6
days and an average increase in hospital costs of over $3,600 per patient. It
is estimated that the annual increase in hospital costs attributable to CDAD
exceeds $1 billion.
Current therapies for the treatment of CDAD include oral metronidazole and
oral vancomycin. Both of these agents are associated with a 15-20% relapse
rate. The use of oral vancomycin has been associated with the selection of
vancomycin-resistant organisms, including VRE. The use of oral metronidazole
has been associated with increased density of VRE in the gastrointestinal
tracts of treated patients. Resistance has been reported for both drugs.
Finally, both drugs are used extensively for the treatment of systemic
infections outside of the gastrointestinal tract.
In October 2001, we in-licensed Ramoplanin from Biosearch Italia S.p.A
(which merged with Versicor Inc. in March 2003). Subsequently, Versicor changed
its name to Vicuron Pharmaceuticals Inc. (Vicuron). Ramoplanin is a novel
glycolipodepsipeptide antibiotic produced by fermentation of the bacteria
Actinoplanes, with activity against Gram-positive aerobic and anaerobic
microorganisms. In preclinical studies, Ramoplanin has been shown to be
bactericidal against most Gram-positive species, including
methicillin-resistant staphylococci, VRE and C. difficile. Ramoplanin inhibits
the bacterial cell wall peptidoglycan biosynthesis with a mechanism different
from that of vancomycin, teicoplanin or other cell wall-synthesis inhibitors.
No evidence of cross-resistance between Ramoplanin and other glycopeptide
antibiotics has been observed. Ramoplanin has a unique profile (see Table:
Ramoplanin Profile--below) that may make it a particularly attractive compound
for killing bacteria in the GI tract. This may make the product a useful drug
in the treatment of certain infections (such as C. difficile) that occur in the
GI tract. It may also make the compound effective in the prevention of
bloodstream infections by Gram-positive organisms that are concentrated in the
GI tract, including VRE. Finally, Ramoplanin may show value in preventing
patient-to-patient transmission of Gram-positive pathogens in the hospital
setting.
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Table : Ramoplanin Profile
Characteristic Potential Advantage
------------------------- -------------------------
Novel class of antibiotic No observed
cross-resistance with
other antibiotics
No observed resistance
Orally administered, but Concentrates and exerts
not absorbed into its killing effects in
bloodstream the GI tract
Bactericidal Rapid killing effect
Less likely to develop
resistance
Potential value to
prevent
patient-to-patient
transmission of
pathogens
Gram Positive Spectrum Low potency against
Gram-negative anaerobes
Less likely to result in
overgrowth of other
opportunistic organisms
Potential value vs. C.
difficile
In a Phase II, multicenter, double-blind, placebo-controlled trial, oral
Ramoplanin was well tolerated. In addition, after seven days of treatment, 90%
of patients who were colonized with VRE at the beginning of the study had no
detectable VRE in their GI tract, while all of the placebo patients had
detectable VRE (p=0.01). Ramoplanin has been granted Fast Track status by the
FDA and is currently being tested in a Phase III clinical study. The ongoing
Phase III study is designed to demonstrate whether oral Ramoplanin reduces the
incidence of VRE bloodstream infections in cancer patients carrying VRE
bacteria in their intestines. Approximately half of the planned 950 patients
have been enrolled in the study at more than 40 clinical trial sites in the
U.S. and more than 50% of the projected 65 events (bloodstream infections
caused by VRE) required for completion have been recorded. We have stated our
goal of filing a New Drug Application in 2004. Enrollment in this study remains
challenging due, in part, to many potential patients being excluded from the
study because of their participation in other clinical trials to treat their
underlying malignancies. We continue discussions with the FDA to introduce
modifications to our Phase III trial, aimed at accelerating completion of the
trial and increasing the probability of meeting our 2004 filing goal.
Shortly after the close of 2002, we began a Phase II trial to assess the
safety and efficacy of Ramoplanin to treat CDAD. The protocol calls for an
87-person, open-label, multi-center trial comparing two doses of Ramoplanin
(200 mg and 400 mg twice daily) to vancomycin (which requires a dose of 125 mg
four times daily for the treatment of CDAD). Both agents will be administered
for ten days, during which data on Ramoplanin will be collected to measure
safety and efficacy. The results of the Phase II trial will guide the design of
a Phase III investigation of Ramoplanin for the treatment of CDAD. Ramoplanin
has demonstrated in vitro activity against C. difficile, including strains
resistant to metronidazole and vancomycin.
The CDAD Phase II trial will use a newly developed capsule formulation of
Ramoplanin. At the end of 2002, we announced the completion of a clinical study
comparing the microbiological activity and the pharmacokinetic profile of the
capsule and sachet (powder for reconstitution) formulations. Analysis of the
data confirmed Ramoplanin's ability to suppress enterococci in the GI tract.
Further, both formulations were equally active microbiologically and there was
no evidence of systemic absorption with either formulation. Developing this
capsule formulation is an important step toward readying the product for
commercialization, as a capsule is expected to be the formulation preferred by
most patients.
Our license agreement with Vicuron provides us with exclusive rights to
develop and market oral Ramoplanin in the U.S. and Canada. Vicuron will provide
the bulk material for the manufacture of the product. Under the terms of the
agreement, we paid Vicuron initial consideration of $2 million. We will also
make milestone payments of up to an additional $8 million in a combination of
cash and notes convertible into our stock if certain development milestones are
met. In addition to purchasing bulk material from Vicuron, we will fund the
completion of clinical trials and pay a royalty to Vicuron on product sales.
The combined total of bulk product purchases and royalties is expected to be
26% of our net product sales.
5
We have established a joint committee with Vicuron to coordinate global
efforts for the ongoing clinical development and future commercialization of
Ramoplanin.
Drug Discovery Alliances
We form strategic alliances with major pharmaceutical companies to maximize
our success in product discovery and development. The following table
summarizes our existing product discovery and development partnerships:
Bacterial and Fungal Infections Alliances
Proceeds Received Potential Proceeds,
Partner as of December Excluding
Alliance Focus ( Date of Agreement) Status of Alliance 31, 2002 Royalties*
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Ulcers AstraZeneca Contract research program
(September 1995) completed; Program
transferred to AstraZeneca;
Currently in lead optimization. $13.7 million $23.3 million
Drug-Resistant Schering-Plough Contract research program
Bacterial Infections (December 1995) completed; Validated targets
and screening assays
transferred to Schering-Plough;
Currently in high-throughput
screening. $21.5 million $45.5 million
Fungal Infections Schering-Plough Contract research program
(September 1997) completed; Validated targets
and screening assays
transferred to Schering-Plough;
Currently in high-throughput
screening. $12.2 million $33.2 million
Infectious Disease bioMerieux PathoGenome(TM) Database
Diagnostics (September 1999) delivered; Identification of
gene markers ongoing. $4.4 million $5.2 million
Human Disease Alliances
Proceeds
Received as
of
Partner (Date of December 31, Potential Proceeds,
Alliance Focus Agreement) Status of Alliance 2002 Excluding Royalties*
-------------- ---------------- -------------------------------------- ------------ --------------------
Osteoporosis Wyeth Identified specific gene mutation that
(December 1999) leads to increased bone mass; Contract
research extended through December
2003; Currently in high-throughput $9.2
screening. million $119.0 million
Asthma Schering-Plough Two genes discovered; Transferred to
(December 1996) Schering-Plough in January 2003;
Currently in high-throughput $42.4
screening. million $81.0 million
Bone Diseases Amgen**
(December 2002) Gene target identification underway. $0 $67.0 million**
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* Assumes receipt or payment of all license fees, funded research and
contingent payments for achieving milestones, after extensions and/or
reallocations; excludes potential royalties.
** If all milestones are met in our alliance with Amgen, total payments to us
will approximate $67.0 million, excluding royalties, if a single product is
developed, and a maximum of $104.0 million, excluding royalties, if more
than one product is developed under the agreement.
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Bacterial and Fungal Infection Alliances
Ulcers
H. pylori infection affects an estimated 30% of the United States
population, causing more than 5 million cases of peptic ulcer disease per year.
Industry sources estimate that the market for ulcer disease products worldwide
was $14.5 billion in 2001.
The pathogen, H. pylori, is believed to be responsible for 90% of duodenal
ulcers, the most common type of ulcer, and approximately 80% of gastric peptic
ulcers. The World Health Organization has estimated that H. pylori is
responsible for 550,000 new cases of stomach cancer per year worldwide. Using
our sequencing technology, we completed the sequencing and finishing of the
genome of H. pylori. We believe that drugs targeted at genes essential to the
survival of H. pylori will provide novel treatments for peptic ulcers.
In September 1995, we formed an alliance with AstraZeneca to identify genes
critical to the survival of H. pylori and proteins on the surface of the
bacterium that we believe to be likely targets for drugs. AstraZeneca is a
leader in the field of products to treat peptic ulcer disease. Its anti-ulcer
franchise, which includes Nexium(R) and Prilosec(R), generated worldwide sales
of $6.2 billion in 2001. As of December 31, 2002, we had received payments of
$13.7 million under this alliance and have rights to receive, based on
attainment of milestones, an additional $9.6 million of payments in addition to
potential royalties. In August 1999, we completed our research obligations
under this alliance and turned over validated drug targets and assays to
AstraZeneca for pre-clinical testing. AstraZeneca announced in 2002 that it had
begun a lead optimization program on a lead identified through the
high-throughput screening program conducted using one of these targets. As of
March 31, 2003, Astra's exclusive access rights to our H. pylori genomic
sequence technology will terminate and we will be able to enter into alliances
with other partners to develop drugs, vaccines and diagnostic products
effective against peptic ulcers or any other disease caused by H. pylori.
Drug-Resistant Bacterial Infections
The pathogen Staphylococcus aureus is a common cause of skin, wound and
blood infections. Staph. aureus infections are typically treated with
antibiotics. In recent decades, the incidence of Staph. aureus infections that
are resistant to available antibiotic treatments has risen. Using our
high-throughput sequencing capabilities, we have sequenced the genome of
antibiotic-resistant Staph. aureus. We believe that drugs targeted at genes
essential to the survival of Staph. aureus will provide novel treatments for
skin, wound and blood infections contracted in hospitals.
In December 1995, we formed an alliance with Schering-Plough to identify and
validate gene targets for the development of drugs to treat infections caused
by Staph. aureus and other pathogens that have become resistant to current
antibiotics. Schering-Plough is an established participant in the
anti-infective market and a leader in the utilization of genomics to discover
novel anti-infective products. As of December 31, 2002, we had received
payments of $21.5 million under this alliance and have rights to receive, based
on attainment of milestones, an additional $24.0 million of payments as well as
potential royalties. As of December 31, 2001, we had completed our research
obligations under this alliance and had turned over validated drug targets and
assays to Schering-Plough for high-throughput screening.
Fungal Infections
The past twenty years have seen dramatic changes in the pattern of fungal
infections in humans. These pathogens have assumed a much greater importance
because of their increasing incidence in immunocompromised patients, such as
AIDS patients, transplant recipients, cancer patients and other groups of
immunocompromised individuals. Increased international travel and misuse of
antimicrobial agents have also contributed to this trend and the emerging
resistance to certain treatments. Industry sources estimate that the global
market for prescription antifungal drugs was approximately $4.3 billion in
2002, with non-prescription
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fungal treatments adding significantly to overall market size. Currently, there
are a limited number of antifungals available for use against hospital related
fungal infections, and many of the products currently on the market have
serious side effects. We believe that drugs targeted at genes that are
essential to the survival of fungal pathogens will provide novel and effective
treatments for fungal infections.
In September 1997, we formed an alliance with Schering-Plough to use our
high-throughput sequencing capabilities and genomic tools to identify new,
validated fungal targets for the development of drugs to treat fungal
infections. Schering-Plough is a leader in the field of drugs targeted against
fungal infections, with market leading products such as the Lotrimin AF(R) and
Tinactin(R) lines of topical antifungals. As of December 31, 2002, we had
received payments of $12.2 million under this alliance and have rights to
receive, based on attainment of milestones, an additional $21.0 million of
payments in addition to potential royalties. In early 2002, we completed our
research obligations under this alliance and turned over validated drug targets
and assays to Schering-Plough for high-throughput screening.
Infectious Disease Diagnostics
The World Health Organization estimates that more than 14 million people
worldwide die of an infectious disease each year, with many of those infections
acquired in hospitals. There has been a global resurgence of infectious
diseases, including the identification of new pathogens, the re-emergence of
old infectious agents and the rapid spread of resistance to anti-infective
agents. Rapidly identifying the specific microorganisms involved in a disease
is becoming increasingly important and complex, providing challenges and
opportunities for infectious disease testing. Highly sophisticated and
versatile methods are needed to identify a larger and more diverse list of
pathogens, including variants with drug-resistant characteristics. It is
anticipated that nucleic acid tests incorporating such methods will be part of
the fastest growing segment of the $20 billion in vitro diagnostic global
market.
In September 1999, we entered into a strategic alliance with bioMerieux to
develop, manufacture and sell in vitro pathogen diagnostics for human clinical
and industrial applications. A privately held company based in France,
bioMerieux is one of the top 10 diagnostics companies in the world and the
leader in the field of microbiology. The total amount of research and
development funding provided by bioMerieux approximates $5.2 million for the
four-year term of this agreement. As of December 31, 2002, we had received
payments of $4.4 million and have rights to receive future milestone payments
and royalties based upon successful commercialization of diagnostic products.
Chronic Human Disease Alliances
Osteoporosis
Osteoporosis is a major health problem characterized by low bone mass that
affects more than 200 million people worldwide and approximately one-third of
post-menopausal women. In the U.S. alone, osteoporosis contributes to more than
1.5 million bone fractures per year. Estimated direct expenditures in the
United States for osteoporosis and associated fractures were $17.0 billion in
2001. Twin and family studies suggest a strong genetic component to the
disease. Under a collaboration with Creighton University of Omaha, Nebraska, we
have gained access to data from related individuals identified by Creighton who
exhibit high bone mass. We believe the identification of genes regulating bone
density and disease progression will lead to the discovery of novel drugs for
treating osteoporosis by increasing bone mass, as well as to the development of
diagnostic tests.
In December 1999, we formed an alliance with Wyeth to develop drugs to treat
osteoporosis based on our genetic research. Wyeth is a leader in the field of
women's health with a broad array of products, including Premarin(R), a leading
estrogen replacement therapy. As of December 31, 2002, we had received payments
of $9.2 million under this alliance and have rights to receive, subject to the
achievement of milestones, an additional $109.8 million in milestone payments
and research support, as well as royalties on sales of any products developed.
Under this alliance, we are carrying out functional studies to confirm the
identity of target genes. In
8
the January 2002 issue of the American Journal of Human Genetics, we reported
the identification of a specific gene mutation in the LRP5 gene that leads to
increased bone mass. Also in 2002, this program entered high-throughput
screening for drug candidates. Recently, the sponsored research phase of this
alliance was extended through December 31, 2003.
Asthma
Asthma affects over 155 million people worldwide according to the World
Health Organization and the incidence of asthma appears to be rising
dramatically. In the United States, the incidence of asthma has doubled over
the past two decades and affects approximately 4% to 10% of the United States
population. The annual direct and indirect costs associated with treating the
disease exceed $15.0 billion. Published research suggests that multiple genetic
factors, as well as environmental influences, play a role in the disease. We
believe that the asthma genes that we have identified will facilitate the
development of superior diagnostics and novel drugs.
In December 1996, we formed an alliance with Schering-Plough to use our
disease gene identification strategies to identify genes involved in the
development of asthma. Schering-Plough is a leader in the field of allergy and
respiratory care products, with products such as Afrin(R) nasal spray, a
leading product in the branded nasal spray market, and Clarinex(R) and the
Claritin(R) line of antihistamines, which generated $2.0 billion in sales in
2002. As of December 31, 2002, we had received payments of $42.4 million under
this alliance and have rights to receive, based on attainment of milestones, an
additional $38.6 million of payments as well as potential royalties. During the
past two years, we used our proprietary genomics tools, bioinformatics and
high-throughput sequencing to discover two genes associated with asthma. As of
December 31, 2002, we had completed our research obligations under this
alliance. The two genes discovered have been transferred to Schering-Plough for
further drug discovery efforts. In 2002 this program advanced into
high-throughput screening for drug candidates and the first gene discovery was
published in the peer-reviewed journal, Nature.
Bone Diseases
On January 2, 2003, we announced an agreement with Amgen Inc. for the
identification and development of novel therapeutic agents for bone diseases,
including osteoporosis. Both companies will participate in collaborative
research efforts to discover one or more drug candidates suitable for
development. The companies may, as part of the research activities, use genetic
information, developed by us based on research conducted at the Creighton
University Osteoporosis Research Center, which has been exclusively licensed to
Amgen.
As part of the agreement, we will receive from Amgen an upfront cash
payment, sponsored research funding, and potentially additional milestones and
other downstream consideration depending on the success of the discovery,
development and commercialization activities. Amgen will be responsible for
development and commercialization of any products.
Contingent upon the success of the discovery, development and
commercialization activities, Amgen may also purchase shares of our common
stock. Amgen's equity ownership in us will be limited to no more than 4.99% of
our outstanding shares. If all milestones are met, total payments to us will
approximate $67.0 million, excluding royalties, if a single product is
developed, and a maximum of $104.0 million, excluding royalties, if more than
one product is developed under the agreement. Of the total potential payments
for one product, approximately $59 million represents research payments,
milestone payments and a license fee, and $8.0 million represents an equity
investment in us by Amgen. We recognized approximately $42,000 in revenue
during the year ended December 31, 2002, which consisted of amortization of an
up-front license fee.
We will receive royalties on product sales ranging from 4%-10% depending on
the level of those sales. We may elect to participate in the funding of the
clinical development program, in which case we may co-promote in the U.S. and
Canada and receive either increased royalties on sales or participate in
profits from product sales in the U.S. and Canada.
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Internal Drug Discovery
Bacterial and Fungal Infections
Our internal pre-clinical anti-infectives efforts are directed at
discovering new antibiotics active against novel antimicrobial targets. We
accomplish this through both our internal investment and through joint ventures
with other biotechnology companies. We began this effort two years ago focusing
on our family of validated microbial targets. Using our proprietary functional
genomics technology, our scientists have been able to discover bacterial and
fungal genes that are essential for the survival of pathogenic organisms. Our
gene discovery approach has generated validated essential microbial targets
that possess both selectivity and specificity, which are ideal attributes for
drug intervention. These targets serve as the basis for our internal drug
discovery efforts. In this regard, we have drawn upon our strengths in
microbial genetics to develop both biochemical and cell based assays for these
targets for use in our high-throughput screening platform. We have built a
compound library of over 130,000 compounds and generated more than 3 million
screening data points on a dozen of our genomic targets. From our screening
efforts, we have established a growing portfolio of hits and leads.
We have formed two joint ventures focused on discovering new broad-spectrum
antibacterials: one with ArQule, beginning in 2000; and one with MerLion
Pharmaceuticals initiated at the beginning of 2003.
In October 2000, we formed a joint venture with ArQule, Inc. The joint
venture, which replaced an earlier 1998 collaboration agreement between the
companies, included commitment of shared, dedicated scientific and technical
resources from both companies and joint ownership rights to all lead compounds
and commercial outcomes that result from this effort. The joint venture focused
on the discovery and development of novel, small molecule, broad-spectrum
antibacterials. In July 2002, the companies announced they had nominated two
anti-infective lead compound series for optimization arising out of the
collaboration. By screening chemical compounds against validated microbial
genomic targets that we identified and by performing microbiological,
biochemical and hit-to-lead chemical analyses, the companies were able to
identify these novel small molecule compound series. At that time, the
companies also announced an agreement to restructure their joint venture
arrangement. Under the restructuring, Genome Therapeutics will take full
operational and financial responsibility for advancing these leads through
optimization and clinical development, thus ending ArQule's involvement in this
joint venture.
We recently initiated a second drug discovery joint venture, this one with
MerLion Pharmaceuticals, aimed at identifying natural products with potential
utility as anti-infective drugs. This effort will focus on leveraging our
validated antibacterial drug targets against MerLion's extensive natural
product libraries to select compounds for future clinical development,
including those appropriate for Investigational New Drug (IND) status. We will
share all costs and expenses of the early-stage drug discovery research with
MerLion. We will provide MerLion with screening assays on target proteins
essential for the survival of many common pathogens. MerLion will screen the
targets against its vast natural product libraries to isolate and identify
novel chemical entities with an inhibitory effect on the target proteins. We
will profile active compounds for their in vitro and in vivo antibacterial
properties to identify novel antibacterial lead series. A joint research
committee, comprised of members from both companies, will monitor and direct
the course of the research. Both companies retain rights for lead optimization,
clinical development and commercialization of lead candidates identified during
the collaboration.
We initiated a collaboration with InterLink Biotechnologies for accessing
their libraries of natural products for cell-based screening. Having access to
InterLink's and MerLion's natural product libraries is critical for expanding
our broad-spectrum anti-infective drug development program, as we seek to
increase the number of clinical candidates in our pipeline.
In June, we commenced a new collaboration with F2G Limited to discover novel
antifungal drugs. In this effort, F2G is using our in-house compound library
and F2G's antifungal whole-cell assay screening capabilities
10
to identify specific compounds with potent activity against medically important
fungal pathogens. The combination of our in-house compound library with F2G's
high-throughout whole-cell assay screening expertise supports our efforts to
advance the next generation of novel antifungals, either through internal
efforts or with a development partner.
Shortly after the close of 2002, we entered into an agreement with PanTherix
to support our lead optimization activities. PanTherix will apply its protein
structure determination expertise to provide structural information on our drug
targets and leads, providing important information on drug-protein interactions
and accelerating the development of antibacterial drug candidates. By using
PanTherix's x-ray technology, we are gaining information that we expect will
support the progress of our lead optimization projects.
As a result of our internal drug discovery efforts, we have identified two
novel lead chemical series, GTC-162 and GTC-637 analogs, and are entering the
lead optimization phase. These two lead series are aimed at novel,
broad-spectrum targets and have the potential to be new classes of
antibacterials. Behind these lead compounds, we have identified hit series on
six additional antimicrobial screens. As these compound series progress, we may
enter into alliances with other companies to engage in their development,
commercialization and marketing.
Chronic Human Diseases
We have developed an integrated suite of technologies, tools and data
management and analysis capabilities to discover genes associated with human
disease. We have developed sophisticated techniques for evaluating families
whose members suffer from diseases with a significant inherited component. Our
scientists carefully characterize human phenotypes and develop linkage maps to
discover genes associated with human disease. Our human disease drug discovery
platform uses a well-developed yeast-2 hybrid capability, bioinformatics and
microarrays to elucidate the protein pathways of the genes we discover. This
approach enables us to find multiple targets for screening. Our asthma alliance
and our osteoporosis alliance have advanced into high throughput screening for
drug candidates.
We plan to continue to invest in our human gene discovery program. We are
evaluating a number of families who are affected by chronic diseases with a
strong inherited component. By gaining access to these families and analyzing
their history and their genetics, we are able to discover disease-associated
genes. Additionally, we continue to invest in functional genomics technologies
to help determine gene function.
We plan to continue to partner all of our programs in human diseases with
major pharmaceutical companies. These companies have the biological and disease
expertise, the clinical development capabilities and the sales and marketing
infrastructure required to discover and develop new drugs in these areas.
GenomeVision(TM) Services
As part of our continued evolution into a focused biopharmaceutical company,
in March 2003, we sold our GenomeVision(TM) Services business to privately held
Agencourt Bioscience Corporation. As part of the agreement, we transferred our
sequencing operations, including certain equipment and personnel to Agencourt.
We will receive a percentage of revenues from commercial and government
customers, transferred to Agencourt, for a period of two years, as well as
shares of Agencourt common stock. We retain rights to our PathoGenome(TM)
Database product, including all associated intellectual property, subscriptions
and royalty rights on products developed by subscribers. Furthermore, we retain
the capabilities necessary to satisfy the research needs of our existing
product-focused alliances, as well as potential new alliances. Through this
divestiture, we eliminated approximately 60 full-time positions.
In July 1999, the U.S. government named us one of five NIH funded DNA
sequencing centers in the U.S. for the international Human Genome Project. We
have been scheduled to receive funding from the NHGRI of up
11
to $17.4 million through February 2003, of which all funds have been
appropriated. This grant is intended to be transferred to Agencourt and subject
to the terms of the divestiture agreement.
In October 1999, the U.S. Government named us as one of ten initial centers
in the Mouse Genome Sequencing Network. The NHGRI agreed to provide us with
funding of up to $13.4 million through February 2003, of which all funds have
been appropriated. In August 2000, we were named as one of two primary centers
for the Rat Genome Sequencing Program and agreed to switch our research focus
from the Mouse Program to the Rat Program. Remaining funds from the Mouse
Program, as well as a portion of the remaining funds from the Human Genome
Project, are being redirected to the Rat Genome Sequencing Program. This grant
is intended to be transferred to Agencourt and subject to the terms of the
divestiture agreement.
PathoGenome/TM/ Database
In 1997, we introduced to the market the PathoGenome(TM) Database, a
database consisting of proprietary and publicly available genetic information
from over thirty microbial organisms, including organisms responsible for the
most prevalent bacterial infections. The PathoGenome(TM) Database provides
subscribers with non-exclusive access to a large volume of highly organized and
functionally annotated sequence information related to some of the most
medically important microbial organisms and fungi. We designed the
PathoGenome(TM) Database to be accessed at the client site using our
proprietary bioinformatics software. The PathoGenome(TM) Database enables
researchers to search for new genes among multiple pathogens and
cross-reference genomic information for the development of new anti-infective
products. In 2001, we entered into an agreement with EraGen Biosciences, under
which they are responsible for the marketing, distribution and maintenance of
this product, while we retain our rights to use it and receive a percentage of
subscription fees and royalties from subscriber discoveries.
Our Technology
We have created an integrated platform of drug discovery technologies that
include target identification and validation, single nucleotide polymorphism
(SNP) discovery and typing, bioinformatics, assay development, high-throughput
screening and compound profiling capabilities.
Internal Drug Discovery Technologies
We have internal capabilities to identify and screen compounds against
validated drug targets. Our screening technologies allow for the
high-throughput use of biochemical and cell-based screening assays. From these
screens, we have used our bioinformatics expertise to build a diverse compound
library of over 130,000 compounds from which we can produce profiles based on
the compound's "drug-like" properties. Since 2001, we have screened our
libraries against multiple targets generating over 3 million data points and
advanced two internally-derived compounds series into lead optimization.
Gene Target Identification Technologies
We possess the capabilities to perform genetic sequencing, with a focus on
gene mutation and SNP identification. Using our advanced genotyping techniques
for sequencing and finishing, we identify specific gene mutations and SNPs with
relevance to chronic human diseases. Through this process, robust raw data is
produced and subsequently organized, managed, and analyzed by the
bioinformatics team using computers, software, and databases. With this
approach, we have identified three gene mutations; one linked to high bone
mass, and two linked to asthma susceptibility.
12
Patents and Proprietary Technology
Our ultimate commercial success depends in part on our ability to obtain
intellectual property protection on our methods, technologies and discoveries,
including genes, proteins encoded by genes, patentable human single nucleotide
polymorphisms (SNPs), haplotypes or products based on genes or our proprietary
gene technology. To that end, our policy is to protect our proprietary
technology primarily through patents, in spite of the fact that the current
criteria for obtaining patent protection for partially sequenced genes and for
genes are unclear. Our current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous or orthologous sequences. If we have not characterized the
biological function of a gene or gene fragment at the time of filing a patent
application, we supplement our patent filing as soon as additional biological
function information about such gene or gene fragment becomes available.
We have filed patent applications and will continue to do so with respect to
a number of full-length genes and corresponding proteins and partial genes
resulting from our pathogens program. Along with our collaborators, we file
foreign counterparts of these U.S. applications within the appropriate time
frames. Our patent applications seek to protect these full length and partial
gene sequences and corresponding proteins, as well as equivalent sequences, and
products derived from and uses of these sequences. We have over 15 pending U.S.
patent applications and one issued patent on genes and protein sequences of
pathogenic organisms. Three of the pending patent applications are allowed by
the U.S. PTO and are expected to issue in the near future.
There have been, and continue to be, intensive discussions on the scope of
patent protection for gene fragments, single nucleotide polymorphisms, and
full-length genes. In 1996, the U.S. PTO issued guidelines limiting the number
of nucleic acid sequences that can be covered in a single patent application.
In addition, the U.S. courts continue to redefine and narrow the enforceable
scope of claims to genes, gene fragments, SNPs, and proteins. In 2000, the U.S.
PTO also issued new Utility Guidelines that address the requirements for
demonstrating utility, particularly in inventions relating to human
therapeutics, and Written Description guidelines that address the amount of
disclosure required to support claims to nucleotide sequences. Consequently, we
continually must assess our patent applications to determine those that we can
support for prosecution.
While the U.S. PTO guidelines do not require clinical efficacy data for
issuance of patents for human therapeutics, the guidelines have been in effect
for only a short period of time and it is possible that the U.S. PTO may
interpret them in a way that could delay or adversely affect our ability or the
ability of our collaborators to obtain patent protection. The biotechnology
patent situation outside the United States is even more uncertain and is
currently undergoing review and revision in many countries.
We have also filed patent applications on pharmaceutical compositions and
corresponding medical uses of these compositions resulting from our clinical
trials, and new chemical entities resulting from our internal research
programs. We file foreign counterparts to these U.S. applications within the
appropriate timeframes. These patent applications seek to protect our
pharmaceutical compositions and other products as well as the uses and
processes related to these pharmaceutical compositions and products.
We are free to apply for patents on the results of our research conducted
with government funds. Under the government grants, subject to the limitations
described below, we have exclusive ownership rights to any commercial
applications of inventions that we first reduce to practice under the grants,
including all gene discoveries and technology improvements created or
discovered. We are under an obligation under some of the government grants to
submit sequencing data resulting from the research to public databases within
24 hours of the date on which we generate such data and materials. The
government grants also restrict us from applying for blanket patents on large
numbers of human or mouse genes. In addition, the government has a statutory
right to practice or permit others to practice inventions that we first reduce
to practice under a government grant or contract. In addition, under our
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material the government
furnished to us.
13
The patent positions of biotechnology and pharmaceutical companies are
generally uncertain and involve complex legal and factual issues. No assurance
can be given that any patent issued to or licensed by us or our collaborators
will provide protection that has commercial significance. We cannot assure that:
. our patents will afford protection against competitors with similar
compounds or technologies,
. our patent applications will issue,
. others will not obtain patents having claims similar to the claims in our
patents or applications,
. the patents of others will not have an adverse effect on our ability to
do business, or
. the patents issued to or licensed by us will not be infringed,
challenged, opposed, narrowed, invalidated or circumvented.
Moreover, we believe that obtaining foreign patents may, in some cases, be
more difficult than obtaining domestic patents because of differences in patent
laws. We therefore recognize that our patent position may generally be stronger
in the U.S. than abroad.
In particular, we are aware that 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 us. Because of this, our collaborators or we may not be able
to obtain a patent with respect to the genes of H. pylori. Further, the value
of certain other patents issued to us or our collaborators that are the subject
of other collaborations may be limited. Also, even if a patent were issued to
our collaborators or us, the scope of coverage or protection afforded to such
patent may be limited.
We also rely upon trademarks, unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain our competitive position. We generally protect this information with
confidentiality agreements that provide that all confidential information
developed or made known to others during the course of the employment,
consulting or business relationship shall be kept confidential except in
specified circumstances. Agreements with employees provide that all inventions
conceived by the individual while employed by us are our exclusive property. We
cannot guarantee, however, that these agreements will be honored, that we will
have adequate remedies for breach if they are not honored or that our trade
secrets will not otherwise become known or be independently discovered by
competitors.
Competition
The biopharmaceutical industry generally, and our drug discovery and
development programs specifically, are characterized by rapidly evolving
technology and intense competition. Our competitors include pharmaceutical and
biotechnology companies both in the United States and abroad.
Many of our competitors have greater research and product development
capabilities and financial, scientific, marketing and human resources than we
do, and some competitors' drug discovery and clinical development programs are
more advanced than our programs. Therefore, our competitors may succeed in
discovering or developing products earlier, in obtaining authorization from the
FDA for products more rapidly and in developing products that are more
effective than those proposed by our collaborators or us. Potential products
based on genes that we have identified or may identify in our discovery efforts
may face competition both from companies developing gene-based products and
from companies developing antibiotics and other forms of diagnosis or treatment
for the particular diseases.
14
Accordingly, competition with respect to our technologies and product
candidates is and will be based on, among other things:
. our ability to create and maintain advanced technology,
. our ability to obtain regulatory approvals for our product candidates in
a cost efficient and timely manner,
. the speed with which we can identify and characterize the genes involved
in human diseases,
. our ability to rapidly sequence the genomes of selected pathogens,
. our ability and our partners' ability to develop and commercialize
therapeutic, vaccine and diagnostic products based upon our gene
discoveries,
. our ability to attract and retain qualified personnel,
. our ability to obtain patent protection,
. our ability to develop internally or in-license product candidates for
clinical development, and
. our ability to secure sufficient capital resources to fund our research
and clinical development operations.
We also face increasing competition for strategic alliances with leading
pharmaceutical and biotechnology companies. We cannot be certain that we will
be able to obtain such strategic alliances in the future or that we will be
able to obtain them on terms comparable with existing alliances. Competition
among companies seeking to discover human disease genes is also increasing for
access to unique data from related individuals that are employed to identify
those genes. We also face increasing competition for in-licensing opportunities
with leading pharmaceutical and biotechnology companies. We cannot be certain
that we will be able to in-license product opportunities in the future.
Competitive disadvantages in any of these areas could materially harm our
business and financial condition.
Government Regulation
Regulation by governmental entities in the United States and other countries
will be a significant factor in the development, manufacturing and marketing of
any products that our collaborators or we develop. The extent to which such
regulation may apply to our collaborators or us will vary depending on the
nature of the product. Virtually all of our or our collaborators'
pharmaceutical products will require regulatory approval by governmental
agencies prior to commercialization. In particular, the Food and Drug
Administration (FDA) in the United States and similar health authorities in
foreign countries subject human therapeutic and vaccine products to rigorous
preclinical and clinical testing and other approval procedures. Various U.S.
federal and, in some cases, state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of human therapeutic and vaccine products. Obtaining these approvals
and complying with appropriate federal and foreign statutes and regulations
requires a substantial amount of time and financial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Our most advanced product,
Ramoplanin, will be regulated by the Center for Drug Evaluation and Research
(CDER). Products discovered based on our technologies could potentially fall
into all three categories. The FDA generally requires the following steps for
pre-market approval of a new drug or biological product:
. preclinical laboratory and animal tests,
. submission to the FDA of an investigational new drug application, or IND,
which must become effective before clinical trials may begin,
15
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product for its intended indication,
. submission to the FDA of a marketing application; a new drug application,
or NDA, if the FDA classifies the product as a new drug; or a biologics
license application, or BLA, if the FDA classifies the product as
biologic, and
. FDA review of the marketing application and NDA or BLA in order to
determine, among other things, whether the product is safe and effective
for its intended uses.
Our collaborators or we also may develop diagnostic products based upon the
human or pathogen genes that we identify. We believe that the FDA is likely to
regulate these diagnostic products as devices rather than drugs or biologics.
The nature of the FDA requirements applicable to diagnostic devices depends on
how the FDA classifies the diagnostic devices. The FDA most likely will
classify a diagnostic device that our collaborators or we develop as a Class
III device, requiring pre-market approval. Obtaining premarket approval
involves the following process, which may be costly and time-consuming:
. conducting pre-clinical studies,
. obtaining an investigational device exemption to conduct clinical tests,
. conducting clinical trials,
. filing a pre-market approval application, and
. attaining FDA approval.
Products on the market are subject to continual review by the FDA.
Therefore, subsequent discovery of previously unknown problems, or failure to
comply with the applicable regulatory requirements may result in restricted
marketing or withdrawal of the product from the market and possible civil or
criminal sanctions. The FDA also may subject biologic products to batch
certification and lot release requirements. To the extent that any of our
products involve recombinant DNA technology, additional layers of government
regulation and review are possible. Similarly, there are additional regulatory
requirements for products marketed outside the United States governing the
conduct of clinical trials, product licensing, pricing and reimbursement.
Manufacturing and Marketing
We do not expect to manufacture pharmaceutical products in the near term.
The terms of our agreement for Ramoplanin obligate the licensor, Vicuron (which
was formed through the merger of Biosearch Italia SpA. and Versicor Inc. in
March 2003) to manufacture the bulk drug. We are responsible for the
manufacture of the finished dosage form for the United States and Canada. We
currently use a contract manufacturer to produce Ramoplanin for our clinical
trial program. We also plan to use a contract manufacturer to produce the final
dosage to support product sales. In the event we decide to establish a
manufacturing facility of our own, we will require substantial additional funds
and will need to hire and train significant additional personnel and will need
to comply with the FDA's extensive "good manufacturing practice" regulations
applicable to such a facility. In addition, if the FDA regulated any products
produced at our facility as biologics, we would need to file and obtain
approval of an Establishment License Application for our facility.
Our current plan is to market and sell Ramoplanin through our own sales and
marketing organization. We may, at a later date, determine that the commercial
success of Ramoplanin will benefit from the additional resources that a
pharmaceutical marketing partner would provide. We currently do not have the
resources to market Ramoplanin by ourselves, but fully expect to assemble a
sales and marketing organization at the appropriate time.
16
Human Resources
As of December 31, 2002, we had 152 full-time equivalent employees, with 122
of these employees engaged in research and development activities and 30 of
them conducted general and administrative functions. Twenty-seven of our
employees held Ph.D. degrees and 34 more held other advanced degrees. Following
the divestiture of our GenomeVision(TM) Services business unit in February
2003, we had 95 employees, of which 68 of these employees engaged in research
and development activities and 27 of them conducted general and administrative
functions. Currently, 20 of our employees hold Ph.D. degrees and 20 more hold
other advanced degrees.
None of our employees is covered by a collective bargaining agreement, and
we consider our relations with our employees to be good.
Item 2. Properties
Facilities
Our executive offices and laboratories are located at 100 Beaver Street,
Waltham, Massachusetts. We lease approximately 80,000 square feet of space and
our lease expires on November 15, 2006 with options to extend for two
consecutive five-year periods. During 2002, we incurred aggregate rental costs,
excluding maintenance and utilities, for our facility of approximately
$1,020,000.
Item 3. Legal Proceedings
None.
Item 4. Submission Of Matters to a Vote of Security Holders
None.
17
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Our common stock is traded on the Nasdaq National Market System (ticker
symbol "GENE"). The table below sets forth the range of high and low quotations
for each fiscal quarter during 2002 and 2001 as furnished by the National
Association of Securities Dealers Quotation System.
2002 2001
------------- --------------
High Low High Low
------ ------ ------- ------
First Quarter. $7.200 $4.930 $11.690 $4.750
Second Quarter 5.810 2.000 16.900 4.781
Third Quarter. 2.390 1.250 15.450 4.010
Fourth Quarter 2.480 1.000 8.390 5.450
As of March 26, 2003, there were approximately 1,036 shareholders of record
of our common stock.
We have not paid any dividends since our inception and presently anticipate
that all earnings, if any, will be retained for development of our business and
that no dividends on our common stock will be declared in the foreseeable
future. Any future dividends will be subject to the discretion of our Board of
Directors and will depend upon, among other things, future earnings, the
operating and financial condition of the Company, our capital requirements and
general business conditions.
Item 6. Selected Consolidated Financial Data
For the Year Ended December 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
Revenues:
Biopharmaceutical........... $ 18,135,038 $ 18,162,056 $ 11,851,091 $ 18,438,286 $ 7,715,992
GenomeVision(TM) Services... 3,913,376 6,665,529 13,594,143 17,302,239 15,270,863
------------ ------------ ------------ ------------ ------------
Total revenues............. 22,048,414 24,827,585 25,445,234 35,740,525 22,986,855
Net loss........................ (12,967,676) (3,940,075) (5,846,839) (10,090,302) (34,017,025)
Net loss per common share....... (0.71) (0.21) (0.27) (0.45) (1.48)
Weighted average common shares
outstanding.................... 18,289,644 18,627,045 21,376,685 22,572,427 22,920,875
As of December 31,
-----------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, restricted cash,
warrant and long and short-term marketable
securities................................ $30,816,859 $26,778,026 $73,009,887 $67,341,249 $50,866,198
Working capital............................ 19,749,608 19,447,189 51,601,069 44,156,478 36,511,427
Total assets............................... 48,920,973 45,443,236 90,251,004 82,739,598 65,845,134
Shareholders' equity....................... 27,557,237 28,846,957 72,687,452 66,731,938 35,416,724
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Certain information contained in this report should be considered
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995. These statements represent, among other things, the
expectations, beliefs, plans and objectives of management and/or assumptions
underlying or judgments concerning and future financial performance and other
matters discussed in this document. The words "may,"
18
"will," "should," "plan," "believe," "estimate," "intend," "anticipate,"
"project," and "expect" and similar expressions are intended to identify
forward-looking statements. All forward-looking statements involve certain
risks, estimates, assumptions, and uncertainties with respect to future
revenues, cash flows, expenses and the cost of capital, among other things.
Some of the important risk factors that could cause our actual results to
differ materially from those expressed in our forward-looking statements
include, but are not limited to:
. risks related to our lead product candidate, Ramoplanin, such as (i) our
inability to obtain regulatory approval to commercialize Ramoplanin due
to negative, inconclusive or insufficient clinical data and (ii) delays
in the progress of our clinical trials for Ramoplanin, and increased
cost, due to the pace of enrollment of patients in the trials or
fluctuations in the infection rate of enrolled patients;
. our inability or the inability of our alliance partners to successfully
develop and obtain regulatory approval for products based on our genomics
information;
. our history of operating losses and our need to raise future capital to
support our product development and research initiatives;
. intensified competition from pharmaceutical or biotechnology companies
that may have greater resources and more experience than us;
. our inability to obtain or enforce our intellectual property rights; and
. our dependence on key personnel.
In addition to the risk factors set forth above, you should consider the
risks set forth in Exhibit 99.1 to this Annual Report, the "Business" section
of this Annual Report and elsewhere in our filings with the Securities and
Exchange Commission. We undertake no obligation to revise the forward-looking
statements included in this Annual Report to reflect any future events or
circumstances.
Overview
We are a biopharmaceutical company focused on the discovery, development and
commercialization of pharmaceutical and diagnostic products. Our strategic goal
is to directly participate in the commercialization of products that are used
primarily in hospitals. For diseases treated by larger physician audiences, we
seek to discover, develop and commercialize products through alliances with
major pharmaceutical companies.
We have nine established product development programs. We are managing the
development and commercialization of our lead product candidate, Ramoplanin, in
the United States and Canada. This product is in a Phase III clinical trial for
the prevention of bloodstream infections caused by vancomycin-resistant
enterococci (VRE) and a Phase II trial for the treatment of patients with
Clostridium difficile-associated diarrhea (CDAD). We have seven product
discovery and development alliances with pharmaceutical companies including
Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition, we have
a portfolio of internal drug discovery programs. During 2002, we also
maintained an active service business, GenomeVision/TM/ Services, providing
drug discovery services to pharmaceutical and biotechnology companies and to
the National Human Genome Research Institute. As part of the our continued
evolution into a biopharmaceutical company, this business unit was divested in
March 2003.
We concentrate our product discovery, development and commercialization
efforts in two principal areas:
(i) infectious diseases caused by bacterial and fungal pathogens, and
(ii) human diseases believed to have a significant genetic component.
19
In October 2001, we acquired an exclusive license in the United States and
Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A, which
merged with Versicor Inc. (Versicor) in March 2003. Subsequently, Versicor
changed its name to Vicuron Pharmaceuticals Inc. (Vicuron). We have assumed
responsibility for the product development in the United States of Ramoplanin,
currently in a Phase III clinical trial for the prevention of bloodstream
infections caused by vancomycin-resistant enterococci (VRE), as well as a Phase
II clinical trial to assess the safety and efficacy of Ramoplanin to treat
Clostridium difficile-associated diarrhea (CDAD). Our license agreement with
Vicuron provides us with exclusive rights to develop and market oral Ramoplanin
in the United States and Canada. Vicuron will retain all other rights to market
and sell Ramoplanin. In addition, we are obligated to purchase bulk material
from Vicuron, fund the completion of clinical trials and pay a royalty on
product sales. Upon commercialization the combined total of bulk product
purchases and royalties is expected to be approximately 26% of our net product
sales.
Our primary sources of revenue are from alliance agreements with
pharmaceutical company partners. Currently, we have seven major product
discovery alliances, and we currently receive contract research funding from
three of these alliances. In August 1995, we entered into an alliance with
AstraZeneca to develop pharmaceutical, vaccine and diagnostic products
effective against gastrointestinal infections or any other disease caused by
Helicobacter pylori (H. pylori). In August 1999, the contract research under
the alliance concluded and the program transitioned into AstraZeneca's
pipeline. We are entitled to receive additional milestone payments and
royalties based upon the development by AstraZeneca of any products from the
research alliance. In December 1995, we entered into an alliance with
Schering-Plough. Under this alliance, Schering-Plough can use our
Staphylococcus aureus (Staph. aureus) genomic database to identify new gene
targets for the development of novel antibiotics. In March 2002, we had
completed our research obligations under this alliance and had turned over
validated drug targets and assays to Schering-Plough for high-throughput
screening. In December 1996, we entered into our second research alliance with
Schering-Plough to identify genes and associated proteins that Schering-Plough
can utilize to develop new pharmaceuticals for treating asthma. In December
2002, we had completed our research obligations under this alliance and the
research program has advanced into high-throughput screening at Schering-Plough
to identify drug candidates. In September 1997, we established our third
research alliance with Schering-Plough for the development of new
pharmaceutical products to treat fungal infections. In March 2002, we had
completed our research obligations under this alliance and had turned over
validated drug targets and assays to Schering-Plough for high-throughput
screening. In September 1999, we entered into a strategic alliance with
bioMerieux to develop, manufacture and sell in vitro pathogen diagnostic
products for human clinical and industrial applications. As part of the
strategic alliance, bioMerieux purchased a subscription to our PathoGenome(TM)
Database and made an equity investment in the Company. In December 1999, we
entered into a strategic alliance with Wyeth to develop drugs based on our
genetic research to treat osteoporosis. In December 2002, we entered into a
strategic alliance with Amgen, Inc. to identify and develop novel therapeutic
agents for bone diseases, including osteoporosis.
In 2002 and past fiscal years, we have also received revenues from our
GenomeVision(TM) Services business from selling, as a contract service
business, high quality genomic sequencing information to our customers. As part
of our continued evolution into a focused biopharmaceutical company, on March
14, 2003, we completed the sale of our GenomeVision(TM) Services business to
privately held Agencourt Bioscience Corporation. As part of the agreement, we
transferred our sequencing operations, including certain equipment and
personnel to Agencourt. We will receive a percentage of revenues from
commercial and government customers, transferred to Agencourt, for a period of
two years from the date of sale, as well as shares of Agencourt common stock.
We retain rights to our PathoGenome(TM) Database product, including all
associated intellectual property, subscriptions and royalty rights on products
developed by subscribers. Furthermore, we retain the capabilities necessary to
satisfy the research needs of our existing product-focused alliances, as well
as potential new alliances. We do not expect the sale of the GenomeVision(TM)
Services business to have a significant impact on our net loss during the next
two years, as a result of reductions in costs associated with this sale and our
rights to receive royalties on gene sequencing revenue earned by Agencourt that
is related to the transferred business for a period of two years from the date
of sale.
20
In connection with the sale of its GenomeVision(TM) Services business, we
determined that certain equipment related to this segment will no longer be
used and will be abandoned subsequent to the sale. As a result, we revised the
estimated useful lives of this equipment and recorded additional depreciation
expense of $669,000 during the fourth quarter of 2002. We also evaluated and
wrote down our excess inventory of disposables related to the GenomeVision(TM)
Services business by $312,000 during the fourth quarter of 2002. Additionally,
through this divestiture, we eliminated approximately 60 full-time positions,
of which approximately 49 employees were not offered employment with Agencourt.
We will record and pay severance costs of approximately $636,000 during the
first quarter of 2003 related to these employees.
In May 1997, we introduced our PathoGenome(TM) Database and sold our first
subscription. Since that date, we have continued to contract with subscribers
on a non-exclusive basis, and, as of December 31, 2002, we had seven
subscribers. In 2001, we entered into an agreement with EraGen Biosciences,
under which they are responsible for the marketing, distribution and
maintenance of this product, while we retain our rights to use it and receive a
percentage of subscription fees and royalties from subscriber discoveries.
Under our agreements, the subscribers receive non-exclusive access to
information relating to microbial organisms in our PathoGenome(TM) Database.
Subscriptions to the database generate revenue over the term of the
subscription with the potential for royalty payments to us from future product
sales. Our revenues relating to subscription fees declined in 2002, and we
expect to see a further revenue decline in subscription fees over the next year
as subscribers complete their data mining of the PathoGenome/TM/ Database.
Since 1989, the United States government has awarded us a number of research
grants and contracts related to government genomics programs. The scope of the
research covered by grants and contracts encompasses technology development,
sequencing production, technology automation and disease gene identification.
In July 1999, we were named as one of the nationally funded DNA sequencing
centers of the international Human Genome Project. We received funding from the
National Human Genome Research Institute (NHGRI) of $18.4 million through June
2003, of which all funds have been appropriated and $17.4 million has been
received through December 31, 2002. As part of the sale of GenomeVision/TM/
Services to Agencourt, this program, as well as follow-on work associated with
this project, is expected to be transferred to Agencourt and we expect to
receive royalty payments on revenues earned by Agencourt for a period of two
years from the date of sale. In October 1999, the NHGRI named us as a pilot
center to the Mouse (Rat) Genome Sequencing Network. We received $14.8 million
in funding through February 2003 with respect to this agreement, of which all
funds have been appropriated and $14.1 million had been received through
December 31, 2002. In August 2000, we were named as one of two primary centers
for the Rat Genome Sequencing Program and agreed to switch its research focus
from the Mouse Program to the Rat Program. Remaining funds from the Mouse
Program, as well as a portion of the remaining funds from the Human Genome
Project, were redirected to the Rat Genome Sequencing Program. Any follow-on
work associated with this grant is expected to be transferred to Agencourt and
be subject to the terms of the purchase agreement with Agencourt.
We receive payments under our biopharmaceutical business from our product
discovery alliances based on license fees, contract research and milestone
payments during the term of the alliance. We anticipate that our alliances will
result in the discovery and commercialization of novel pharmaceutical, vaccine
and diagnostic products. In order for a product to be commercialized based on
our research, it will be necessary for our product discovery partner to conduct
preclinical tests and clinical trials, obtain regulatory clearances,
manufacture, sell, and distribute the product. Accordingly, we do not expect to
receive royalties based upon product revenues for many years, if at all.
We have incurred significant operating losses since our inception. As of
December 31, 2002, we had an accumulated deficit of approximately $125.8
million. Our losses are primarily from costs associated with prior operating
businesses and research and development expenses. These costs have often
exceeded our revenues generated by our alliances, subscription agreements and
government grants. Our results of operations have fluctuated from period to
period and may continue to fluctuate in the future based upon the timing,
amount and type of funding. We expect to incur additional operating losses in
the future.
21
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Statement No. 144 (SFAS No. 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a
disposal of a segment of a business. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with transition provisions for assets "held
for sale" that were initially recorded under previous models (APB No. 30 or
SFAS No. 121) and do not meet the new "held for sale" criteria. The Company
adopted SFAS No. 144 in the first quarter of 2002.
In May 2002, the FASB issued Statement of Financial Accounting Standard No.
145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections". Among other things, SFAS 145
rescinds Statement of Financial Accounting Standards No. 4 (SFAS 4), "Reporting
Gains and Losses from Extinguishment of Debt" and eliminates the requirement
that gains and losses from the extinguishment of debt be classified as an
extraordinary item, net of related income tax effects, unless the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are
met. Adoption of this statement is generally required in fiscal years beginning
after May 15, 2002. We do not expect the adoption of this statement to have a
material impact on our consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal
Activities". SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 (EITF
94-3), "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. We will
adopt the provisions of SFAS 146 for all exit activities, if any, initiated
after December 31, 2002. We do not expect the adoption of this statement to
have a material impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (the Interpretation) which expands on the
accounting guidance of Statements No. 5, 57 and 107 and incorporates without
change the provisions of FASB Interpretation No.34, which is being superseded.
The Interpretation will significantly change current practice in the accounting
for and disclosure of guarantees. Guarantees meeting the characteristics
described in the Interpretation are to be recognized at fair value and
significant disclosure rules have been implemented even if the likelihood of
the guarantor making payments is remote. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002, while the initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Certain guarantees are excluded from the initial recognition provisions of the
Interpretation, however specific disclosures are still required. We do not
expect the adoption of this statement to have a material impact on our
consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation-- Transition
and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires disclosure of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS No. 148 is
effective for fiscal
22
years ending after December 15, 2002. The disclosure requirements for interim
financial statements containing condensed consolidated financial statements are
effective for interim periods beginning after December 15, 2002. We adopted
SFAS No. 148 in the fourth quarter of 2002
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables,
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities and is effective
for agreements entered into during fiscal periods beginning after June 15,
2003. In some arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable, and there exists sufficient evidence
of their fair values to separately account for some or all of the deliverables
(that is, there are separate units of accounting). In other arrangements, some
or all of the deliverables are not independently functional, or there is not
sufficient evidence of their fair values to account for them separately. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its financial position and results of operations.
Critical Accounting Policies
We have identified the policies below as critical to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
this and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements of this Annual Report on Form 10-K. Our preparation of
this Annual Report on Form 10-K requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Biopharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies.
GenomeVision(TM) Services revenues consist of government grants, fees received
from custom gene sequencing and analysis services and subscription fees from
the PathoGenome(TM) Database. Revenues from contract research, government
grants, the PathoGenome(TM) Database subscription fees, and custom gene
sequencing and analysis services are recognized over the respective contract
periods as the services are performed, provided there is persuasive evidence of
an arrangement, the fee is fixed or determinable and collection of the related
receivable is probable. License fees are recognized ratably over the
performance period in accordance with Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition. Milestone payments will be recognized upon achievements of
the milestone as long as the milestone is deemed to be substantive and we have
no other performance obligations related to the milestone. Unbilled costs and
fees represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
Clinical Trial Accrual
Our clinical development trials related to Ramoplanin are primarily
performed by outside parties. It is not unusual at the end of each accounting
period for us to estimate both the total cost and time period of the trials and
the percent completed as of that accounting date. We also adjust these
estimates when final invoices are received. To date, these adjustments have not
been material to our financial statements, and we believe that the estimates
that we made as of December 31, 2002 are reflective of the actual expenses
incurred as of that date. However, readers should be cautioned that the
possibility exists that the timing or cost of the Ramoplanin clinical trials
might be longer or shorter and cost more or less than we have estimated and
that the associated financial adjustments would be reflected in future periods.
23
Results of Operations
Years Ended December 31, 2001 and 2002
Revenues
Total revenues decreased 36% from $35,741,000 in 2001 to $22,987,000 in
2002. Biopharmaceutical revenue decreased 58% from $18,438,000 in 2001 to
$7,716,000 in 2002 primarily due to the absence in 2002 of milestone payments
that were earned in 2001 under our product discovery alliances with
Schering-Plough and Wyeth. The decrease in biopharmaceutical revenue also
reflects lower sponsored research revenue as a result of the completion of our
research obligations under our two anti-infective alliances with
Schering-Plough in March 2002, as well as our strategic decision to seek to
partner discovery programs at a later stage of development.
Revenue from GenomeVision(TM) Services decreased 12% from $17,302,000 in
2001 to $15,271,000 in 2002 primarily due to lower revenues recognized under
our government grants with the National Human Genome Research Institute to
participate in the Human Genome and Mouse (Rat) Genome sequencing projects, as
well as lower subscription fees earned under our PathoGenome(TM) Database
business as a result of third parties not renewing their database subscriptions.
Costs and Expenses
Total costs and expenses increased 16% from $48,978,000 in 2001 to
$56,836,000 in 2002. Cost of services decreased 7% from $16,153,000 in 2001 to
$15,019,000 in 2002 primarily due to decreased costs and expenses associated
with the above mentioned decrease in GenomeVision(TM) Services revenue. The
decrease consisted primarily of lower labor and material costs.
Research and development expenses include internal research and development,
research funded pursuant to arrangements with our strategic alliance partners,
as well as clinical development costs and expenses. Research and development
expenses increased 35% from $24,058,000 in 2001 to $32,435,000 in 2002. This
planned increase was primarily due to an increase in expenses incurred in the
clinical development of Ramoplanin of approximately $8,349,000, as well as
increased investment in our internal drug discovery programs, specifically in
the area of anti-infective and chronic human diseases, of $2,105,000. These
increases in research and development expenses were partially offset by a
decline in research funded under our product discovery alliances of
approximately $2,077,000.
Selling, general and administrative expenses increased 7% from $8,767,000 in
2001 to $9,382,000 in 2002 reflecting an expansion in the areas of corporate
development and sales and marketing, as well as severance related charges of
approximately $350,000 associated with our decision to reduce expenditures by
eliminating 34 full-time staff positions in the areas of early stage research
and administration.
Interest Income and Expense
Interest income decreased 54% from $3,839,000 in 2001 to $1,769,000 in 2002
reflecting lower interest rate yields from investments, as well as a decrease
in funds available for investment.
Interest expense increased 180% from $692,000 in 2001 to $1,936,000 in 2002.
The increase in interest expense was due to an increase in our outstanding
balances under long-term obligations from approximately $5.6 million at
December 31, 2001 to $18.3 million at December 31, 2002. The increase in our
long-term obligations resulted primarily from the March 2002 sale of
convertible notes payable in a private placement transaction, which resulted in
gross proceeds of $15 million. Interest expense also includes approximately
$774,000 related to the amortization of deferred issuance costs and warrants
issued in connection with the convertible notes payable.
24
Years Ended December 31, 2000 and 2001
Revenues
Total revenues increased 40% from $25,445,000 in 2000 to $35,741,000 in
2001. Biopharmaceutical revenue increased 56% from $11,851,000 in 2000 to
$18,438,000 in 2001 primarily due to increased milestone payments under our
product discovery alliances with Wyeth and Schering-Plough.
Revenue from GenomeVision(TM) Services increased 27% from $13,594,000 in
2000 to $17,302,000 in 2001 due to increased revenue recognized under our
commercial sequencing business of approximately $935,000, as well as increased
revenue recognized under our government grants with the National Human Genome
Research Institute to participate in the Human Genome and Mouse (Rat) Genome
sequencing projects of approximately $3,175,000.
Costs and Expenses
Total costs and expenses increased 45% from $33,780,000 in 2000 to
$48,978,000 in 2001. Cost of services increased 38% from $11,715,000 in 2000 to
$16,153,000 in 2001 primarily due to increased costs and expenses associated
with the above mentioned increase in GenomeVision/TM/ Services revenue. The
increase consisted primarily of higher labor and material costs.
Research and development expenses include internal research and development,
research funded pursuant to arrangements with our strategic alliance partners,
as well as clinical development costs and expenses. Research and development
expenses increased 58% from $15,191,000 in 2000 to $24,058,000 in 2001. This
planned increase was primarily due to costs associated with the acquisition and
clinical development of Ramoplanin of approximately $5,549,000, as well as
increased investment in our internal drug discovery programs of $4,138,000,
specifically in the area of anti-infectives and chronic human diseases.
Selling, general and administrative expenses increased 28% from $6,875,000
in 2000 to $8,767,000 in 2001 reflecting an expansion in the areas of corporate
development, sales and marketing and clinical development administrative
expenses. The increase consisted of an increase in payroll and related
expenses, as well as recruiting and consulting expenses.
Interest Income and Expense
Interest income increased 15% from $3,331,000 in 2000 to $3,839,000 in 2001
reflecting an increase in funds available for investment as a result of (i)
proceeds received from the sale of common stock through public offerings in
2000 and 2001, (ii) proceeds received from the exercise of stock options, and
(iii) proceeds received from our employee stock purchase plan.
Interest expense decreased 18% from $843,000 in 2000 to $692,000 in 2001.
The decrease was due to a decrease in our outstanding balances under long-term
obligations from approximately $7.8 million at December 31, 2000 to $5.6
million at December 31, 2001.
Liquidity and Capital Resources
Our primary sources of cash have been payments received from product
discovery alliances, subscription fees, government grants, borrowings under
equipment lending facilities and capital leases and proceeds from the sale of
debt and equity securities.
As of December 31, 2002, we had cash, cash equivalents and short-term and
long-term marketable securities of approximately $50,866,000. On March 5, 2002,
we sold convertible notes payable to two institutional investors in a private
placement transaction, raising $15 million in gross proceeds. The convertible
notes payable may be converted into shares of our common stock at the option of
the holder, at a price of $8.00 per share,
25
subject to certain adjustments. The maturity date of the convertible notes
payable is December 31, 2004, provided, that if 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 convertible notes payable can require that all or any part
of the outstanding principal balance of the notes payable plus all accrued but
unpaid interest be repaid. Interest on the notes payable accrues at 6% annually
and the interest is payable, in cash or in stock, semi-annually on June 30 and
December 31 of each year. As of December 31, 2002, two interest payments on the
convertible notes payable had become due and were paid by issuing 494,083
shares of our common stock to the holders of the notes payable, of which
120,986 and 373,107 shares were issued in July 2002 and January 2003,
respectively. The investors also received a warrant to purchase up to an
aggregate of 487,500 shares of common stock at an exercise price of $8.00 per
share, subject to certain adjustments. The warrant is exercisable at the time
the convertible notes payable are converted or if certain other redemptions or
repayments of the convertible notes payable occur and will terminate upon the
earlier of four years from date of such conversion or December 31, 2008. The
warrant was valued, using the Black-Scholes option pricing model, at
$1,736,000. The amount was recorded as a discount to long-term debt and will be
amortized to interest expense over the term of the convertible notes payable.
Additionally, we are obligated to issue a warrant to purchase up to 100,000
shares of common stock at an exercise price of $15.00 per share to our
placement agent in this transaction. The warrant is exercisable over a
three-year term which commenced upon the closing of the notes payable
transaction. This warrant was valued, using the Black-Scholes option pricing
model, at $244,000. This amount is included in deferred issuance costs and will
be amortized to interest expense over the term of the convertible notes
payable. In 2002, we also issued 154,076 shares of common stock related to the
exercise of stock options and our employee stock purchase plan, resulting in
proceeds received of approximately $466,000.
In 2001, we sold 127,500 shares of common stock in a series of transactions
through the Nasdaq National Market, resulting in proceeds received of
approximately $1,706,000, net of issuance costs. In 2001, we also issued
352,950 shares of common stock related to the exercise of stock options and our
employee stock purchase plan, resulting in proceeds received of approximately
$1,204,000. In 2000, we sold 1,500,000 shares of common stock in a series of
transactions through the Nasdaq National Market, resulting in proceeds received
of approximately $44,723,000, net of issuance costs. In 2000, we issued
1,288,943 shares of common stock related to the exercise of stock options and
our employee stock purchase plan, resulting in proceeds received of
approximately $3,528,000.
We received payments of approximately $17,406,000, $19,500,000 and
$6,454,000 in 2000, 2001 and 2002, respectively, from our product discovery
partners consisting of up-front license fees, contract research funding,
subscription fee, milestone payments and expense reimbursement.
We have various arrangements under which we have financed certain office and
laboratory equipment and leasehold improvements. We had an aggregate of
approximately $4,504,000 outstanding under our borrowing arrangements at
December 31, 2002. This amount is repayable over the next 26 months, with
$2,624,000 repayable over the next 12 months. Under these arrangements, we are
required to maintain certain financial ratios, including minimum levels of
unrestricted cash. We had no additional borrowing capacity under these capital
lease agreements at December 31, 2002.
Our operating activities used cash of approximately $26,428,000 in 2002
primarily due to an increase in our net loss, accounts receivables, unbilled
costs and fees and deferred revenue. These uses of cash were partially offset
by a decrease in interest receivable, prepaid expenses and other current
assets, as well as an increase in accounts payables and accrued liabilities.
Our operating activities used cash of approximately $3,101,000 in 2001 and
provided cash of approximately $2,506,000 in 2000.
Our investing activities provided cash of approximately $1,226,000 and
$17,266,000 in 2002 and 2001, respectively, through the conversion of
marketable securities to cash and cash equivalents, partially offset by
purchases of marketable securities, equipment and additions to leasehold
improvements, as well as an increase in other assets in 2002. The increase in
other assets in 2002 reflects the inclusion of deferred issuance costs
26
associated with the convertible notes payable, which will be amortized to
interest expense over the term of the convertible notes payable. Our investing
activities used cash of approximately $48,755,000 in 2000 to purchase
marketable securities, equipment and additions to leasehold improvements,
partially offset by the conversion of marketable securities to cash and cash
equivalents and the sale of certain laboratory equipment.
Capital expenditures totaled $3,818,000 during 2002 primarily consisting of
purchases of laboratory, computer, and office equipment. We amended an existing
capital lease financing arrangement to finance the majority of these capital
expenditures. We currently estimate that we will acquire approximately
$1,000,000 in capital equipment in 2003 consisting primarily of computers,
laboratory equipment, and additions to leasehold improvements.
Our financing activities provided cash of approximately $14,626,000 in 2002
primarily from proceeds received from the sale of convertible notes payable
totaling $15 million in gross proceeds, proceeds received from entering into an
additional credit line for $3,500,000, of which $500,000 was used to refinance
a portion of an existing line of credit, as well as proceeds received from
issuances of stock under the employee stock purchase plan. These proceeds from
financing activities were partially offset by payments of long-term obligations
of $4,629,000. Our financing activities provided cash of approximately $545,000
and $47,328,000 in 2001 and 2000, respectively, primarily from proceeds
received from the sale of equity securities, exercise of stock options, and
employee stock purchase plan, net of payments of long-term obligations.
At December 31, 2002, we had net operating loss and tax credits (investment
and research) carryforwards of approximately $120,307,000 and $9,084,000,
respectively, available to reduce federal taxable income and federal income
taxes, respectively, if any. Net operating loss carryforwards are subject to
review and possible adjustment by the Internal Revenue Service and may be
limited, in the event of certain cumulative changes in ownership interests of
significant shareholders over a three-year period in excess of 50%.
Additionally, certain of our losses have begun to expire due to the limitations
of the carryforward period.
We believe that our existing capital resources are adequate for
approximately eighteen months under our current rate of investment in research
and development. There is no assurance, however, that changes in our plans or
events affecting our operations will not result in accelerated, or unexpected
expenditures.
We plan to continue to invest in our internal research and development
programs, primarily in our lead candidate, Ramoplanin, currently in a Phase III
clinical trial for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE), and a Phase II clinical trial to assess
the safety and efficacy of Ramoplanin to treat Clostridium difficile-associated
diarrhea (CDAD). We expect to incur approximately $10-15 million in clinical
development expenditures during 2003.
We plan to seek additional funding in the next 12 months through public or
private financing in order to fund our clinical development and research
projects. Additional financing may not be available when needed or if
available, it may not be on terms acceptable to us. Any additional capital that
we raise by issuing equity or convertible debt securities will dilute the
ownership of existing stockholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As specified in our investment policy guidelines, investments are made
primarily in high-grade corporate bonds with effective maturities of two years
or less, and U.S. government agency securities. These investments are subject
to risk of default, changes in credit rating and changes in market value. These
investments are also subject to interest rate risk and will decrease in value
if market interest rates increase. A hypothetical 100 basis point increase in
interest rates would result in an approximate $366,000 decrease in the fair
value of our investments as of December 31, 2002. However, the conservative
nature of our investments mitigates our interest rate exposure, and our
investment policy limits the amount of our credit exposure to any one issue,
issuer, and type of instrument. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is limited.
27
We are also subject to interest rate risk through our borrowing activities.
We use United States dollar denominated borrowings to fund certain investment
needs. As of December 31, 2002, we had $2.6 million outstanding under our
$3,500,000 line of credit that bears interest at the prevailing LIBOR rate
(2.06% at December 31, 2002) plus 1.50%. A 10% increase in market rates would
have increased our interest expense by approximately $9,000 in fiscal 2002.
As of December 31, 2002, we did not have any financing arrangements that
were not reflected in our balance sheet.
In 2000, we entered into two separate interest-rate swap agreements with a
bank for an aggregate amount of approximately $1,900,000. Under these
agreements, we paid a fixed rate of 8.78% and received a variable rate tied to
the one month LIBOR rate. As of December 31, 2001, the variable rate was 3.83%.
These swap agreements met the required criteria set forth in SFAS No. 133 to
use special hedge accounting, and we recorded an unrealized loss of $30,830 at
December 31, 2001, through other comprehensive income, for the change in the
fair value of the swap agreements. At February 28, 2002, this debt had been
paid off in its entirety and the interest-rate swap agreements expired. We do
not currently own any derivative financial instruments.
The interest rates on our convertible notes payable and capital lease
obligations are fixed and therefore not subject to interest rate risk.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by Item 8 are set forth
at the pages indicated in Item 15(a) below.
28
PART III
Pursuant to General Instruction G(3) to Form 10-K, the information required
for Part III (Items 10, 11, 12, and 13) is incorporated herein by reference
from the Company's proxy statement for the Annual Meeting of Shareholders to be
held on May 9, 2003.
Item 14. Controls and Procedures.
Within the 90 days prior to the date of filing this Annual Report on Form
10-K, we carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required
to be included in our periodic SEC filings. Subsequent to the date of that
evaluation, there have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls, nor were
any corrective actions required with regard to significant deficiencies and
material weaknesses.
29
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See
"Index to Consolidated Financial Statements and Financial Statement Schedules"
appearing on page F-1.
(3) Exhibits
Exhibit
No. Description
------- -----------
3 Restated Articles of Organization and By-laws(1)
3.1 Amendment dated January 5, 1982 to Restated Articles of Organization(2)
3.2 Amendment dated January 24, 1983 to Restated Articles of Organization(3)
3.3 Amendment dated January 17, 1984 to Restated Articles of Organization(4)
3.4 Amendment dated October 20, 1987 to the By-laws(8)
3.5 Amendment dated December 9, 1987 to Restated Articles of Organization(9)
3.6 Amendment dated October 16, 1989 to the By-law(11)
3.7 Amendment dated January 24, 1994 to Articles Restated Articles of Organization(14)
3.8 Amendment dated August 31, 1994 to Restated Articles of Organization(14)
3.9 Amendment dated March 15, 2001 to Restated Articles of Organization(33)
3.10 By-Laws of Genome Therapeutics Corp (as amended through July 24, 2001)(34)
4.2 Form of Note dated March 5, 2002 received by Smithfield Fiduciary LLC and the Tail Wind Fund,
Ltd.(35)
4.3 Form of Warrant received by Smithfield Fiduciary LLC and The Tail Wind Fund, Ltd.(35)
10.4 Incentive Stock Option Plan and Form of Stock Option Certificate(1)
10.6 Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings Plan(6)
10.7 Amendment dated November 4, 1986 to the Genome Therapeutics Corp. (f/k/a Collaborative
Research) Incentive Savings Plan dated March 1, 1985(7)
10.14 1991 Stock Option Plan and Form of Stock Option Certificate(12)
10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts(13)
10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts(13)
10.19 Employment Agreement with Robert J. Hennessey(13)
10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA(14)
10.24 1993 Stock Option Plan and Form of Stock Option Certificate(14)
10.28 Agreement between the Company and AstraZeneca PLC (f/k/a Astra Hassle AB) dated August 31,
1995(16)*
10.29 Collaboration and License Agreement between the Company, Schering Corporation and Schering-
Plough Ltd., dated as of December 6, 1995(18)*
10.30 Form of director Stock Option Agreement and schedule of director options granted(17)
10.37 Lease amendment dated November 15, 1996 to certain property in Waltham, MA(19)
30
Exhibit
No. Description
------- -----------
10.38 Collaboration and License Agreement between the Company, Schering Corporation and Schering-
Plough Ltd., dated as of December 20, 1996(20)*
10.39 Credit agreement between the Company and Fleet National Bank dated February 28, 1997(21)
10.40 Credit agreement between the Company and U S Trust (f/k/a Sumitomo Bank, Limited) dated July 31,
1997(22)
10.41 Collaboration and License Agreement between the Company and Schering Corporation, dated
September 22, 1997(23)*
10.42 Collaboration and License Agreement between the Company and Schering-Plough Ltd. dated
September 22, 1997(23)*
10.43 Credit modification agreement between the Company and Fleet National Bank, dated March 9,
1998(24)
10.44 1997 Directors' Deferred Stock Plan(25)
10.45 1997 Stock Option Plan(25)
10.46 Amended Employment Agreement with Robert J. Hennessey(26)
10.47 Collaboration and License Agreement between the Company and American Home Products, Inc.,
acting through its Wyeth-Ayerst Division, dated December 20, 1999(27)
10.49 Collaboration and License Agreement between Genome Therapeutics Corporation and bioMerieux
Incorporated dated as of September 30, 1999(29)
10.50 Registration Rights Agreement between the Company and bioMerieux Alliance sa dated
September 30, 1999(30)
10.51 Compound Discovery Collaboration Agreement, dated October 17, 2000 between the Company and
ArQule, Inc.(31)*
10.52 2001 Incentive Plan(32)
10.53 Stock Option Agreements with Steven M. Rauscher(32)
10.55 Employment Letter with Steven M. Rauscher(34)
10.56 Employment Letter with Stephen Cohen(34)
10.57 Employment Letter with Richard Labaudinere PhD(34)
10.58 Purchase Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund,
Ltd. and the Company(35)
10.59 Registration Rights Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail
Wind Fund, Ltd. and the Company(35)
10.60 Employment Letter with Robert J. Hennessey(36)
10.61 License and Supply Agreement between the Company and Biosearch Italia, S.P.A., dated October 8,
2001(37)*
10.62 Research Collaboration and License Agreement between the Company and Amgen Inc., dated
December 20, 2002(38)*
10.63 Stock Purchase Agreement between the Company and Amgen Inc., dated December 20, 2002(38)*
10.64 Letter Agreement between the Company and Biosearch Italia, S.P.A., dated October 22, 2002 (38)*
23.1 Consent of Ernst & Young LLP Independent Public Accounts(38)
99.1 Risk Factors(38)
99.2 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act(38)
99.3 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act(38)
31
--------
* Confidential treatment requested with respect to a portion of this Exhibit.
(1) Filed as exhibits to the Company's Registration Statement on Form S-1 (No.
2-75230) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 27, 1982 and incorporated herein by reference.
(3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 26, 1983 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 25, 1984 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
(7) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1986 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended August 31, 1987 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 28, 1987 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1989 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1992 and incorporated herein by reference.
(13) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 and incorporated herein by reference.
(14) Filed as exhibits of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994 and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Annual Report on Form 10-K/A3 for the
year ended August 31, 1995 and incorporated herein by reference.
(17) Filed as an exhibit to the Company Registration Statement on Forms S-8
(File No. 33-61191) and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 25, 1995 and incorporated herein by reference.
(19) Filed as an exhibit to the Company's 10-K for fiscal year ended August 31,
1996 and incorporated herein by reference.
(20) Filed as an exhibit to the Company's 10-Q/A for the quarter ended March 1,
1997 and incorporated herein by reference.
(21) Filed as an exhibit to the Company's 10-Q for the quarter ended May 31,
1997 and incorporated herein by reference.
(22) Filed as an exhibit to the Company's 10-K for fiscal year ended August 31,
1997 and incorporated herein by reference.
(23) Filed as exhibits to the Company's 10-Q for the quarter ended February 28,
1998 and incorporated herein by reference.
(24) Filed as an exhibit to the Company's 10-Q for the quarter ended May 30,
1998 and incorporated herein by reference.
(25) Filed as exhibits to the Company's Registration Statement on Forms S-8
(333-49069) and incorporated herein by reference.
(26) Filed as an exhibit to the Company's 10-K for the fiscal year ended August
31, 1998 and incorporated herein by reference.
(27) Filed as an exhibit to the Company's 8-K filed on March 8, 2000 and
incorporated herein by reference.
(29) Filed as an exhibit to the Company's 10-Q for the quarter ended November
27, 1999 and incorporated herein by reference.
32
(30) Filed as an exhibit to the Company's Registration Statement on Forms S-3
(333-32614) and incorporated herein by reference.
(31) Filed as an exhibit to the Company's 10-K for the quarter ended November
25, 2000 and incorporated herein by reference.
(32) Filed as an exhibit to the Company's Registration Statement on Form S-8
(333-58274) and incorporated herein by reference.
(33) Filed as an exhibit to the Company's 10-Q for the quarter ended February
24, 2001 and incorporated herein by reference.
(34) Filed as an exhibit to the Company's 10-Q for the quarter ended September
29, 2001 and incorporated herein by reference.
(35) Filed as an exhibit to the Company's 8-K filed on March 6, 2002 and
incorporated herein by reference.
(36) Filed as an exhibit to the Company's 10-K for the fiscal year ended
December 31, 2001 and incorporated herein by reference.
(37) Filed as an exhibit to the Company's 10-K/A2 for the fiscal year ended
December 31, 2001 and incorporated herein by reference.
(38) Filed herewith.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
31, 2003.
GENOME THERAPEUTICS CORP.
/s/ STEPHEN COHEN
-------------------------------
Stephen Cohen
Senior Vice President and Chief
Financial Officer
34
GENOME THERAPEUPITCS CORP. AND SUBSIDIARY
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven M. Rauscher, President and Chief Executive Officer of Genome
Therapeutics Corp., certify that:
1. I have reviewed this annual report on Form 10-K of Genome Therapeutics
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ STEVEN M. RAUSCHER
Steven M. Rauscher
President & Chief Executive
Officer
Date: March 31, 2003
35
GENOME THERAPEUPITCS CORP. AND SUBSIDIARY
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen Cohen, Senior Vice President & Chief Financial Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of Genome Therapeutics
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Stephen Cohen
Stephen Cohen
Senior Vice President & Chief
Financial Officer
Date: March 31, 2003
36
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants................................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002.............................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income for Years Ended
December 31, 2000, 2001 and 2002........................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 F-7
Notes to Consolidated Financial Statements................................................ F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Genome Therapeutics Corp.
We have audited the accompanying consolidated balance sheet of Genome
Therapeutics Corp. as of December 31, 2002, and the related statements of
operations, shareholders' equity and comprehensive income, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Genome Therapeutics Corp. as of December 31, 2001 were audited by other
auditors who have ceased operations and whose report dated June 18, 2002,
except with respect to the matter discussed in note 1(m) as to which the date
is June 18, 2002, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genome
Therapeutics Corp. as of December 31, 2002, and the results of its operations,
stockholders' equity, and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 18, 2003, except with respect to Note 13, as to which
the date is March 14, 2003
F-2
This is a copy of a report previously issued by Andersen and Andersen has not
reissued the report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corp. and subsidiary (the Company) as of December 31, 2000 and
2001, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genome
Therapeutics Corp. and subsidiary as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 28, 2002 (except with
respect to the matter discussed
in Note 1(m) as to which the
date is June 18, 2002)
F-3
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
2001 2002
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 24,805,385 $ 14,228,507
Marketable securities (held-to-maturity).............................. 29,961,540 32,584,384
Marketable securities (available-for-sale)............................ -- 485,550
Interest receivable................................................... 1,074,726 784,372
Accounts receivable................................................... 513,885 2,043,862
Unbilled costs and fees............................................... 164,465 714,468
Prepaid expenses and other current assets............................. 1,583,320 444,402
------------ -------------
Total current assets.............................................. 58,103,321 51,285,545
Property and Equipment, at cost:
Laboratory and scientific equipment................................... 20,918,535 21,906,312
Leasehold improvements................................................ 8,798,842 8,923,916
Equipment and furniture............................................... 1,267,854 1,281,932
------------ -------------
30,985,231 32,112,160
Less--Accumulated depreciation........................................ 19,091,703 21,973,715
------------ -------------
11,893,528 10,138,445
Restricted Cash (Note 2)................................................. 200,000 --
Long-term Marketable Securities (held-to-maturity)....................... 11,839,045 3,567,757
Warrant (available-for-sale)............................................. 535,279 --
Other Assets............................................................. 168,425 853,387
------------ -------------
$ 82,739,598 $ 65,845,134
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations........................... $ 3,571,578 $ 2,623,986
Accounts payable...................................................... 2,092,593 2,175,047
Accrued expenses (Note 12)............................................ 4,832,713 8,408,940
Deferred revenue...................................................... 3,449,959 1,566,145
------------ -------------
Total current liabilities......................................... 13,946,843 14,774,118
Long-term Obligations, net of current maturities......................... 2,060,817 15,654,292
Commitments (Note 4 and 10)
Shareholders' Equity:
Common stock, $0.10 par value--Authorized--50,000,000 shares Issued
and outstanding--22,772,170 and 23,066,072 shares in 2001 and 2002,
respectively........................................................ 2,277,217 2,306,607
Additional paid-in capital............................................ 156,214,735 158,976,618
Accumulated deficit................................................... (91,758,375) (125,775,400)
Deferred compensation and note receivable from officer (Note 6(e)).... (506,088) (376,490)
Accumulated other comprehensive income................................ 504,449 285,389
------------ -------------
Total shareholders' equity........................................ 66,731,938 35,416,724
------------ -------------
$ 82,739,598 $ 65,845,134
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
2000 2001 2002
----------- ------------ ------------
Revenues:
Biopharmaceutical....................... $11,851,091 $ 18,438,286 $ 7,715,992
GenomeVision(TM) Services............... 13,594,143 17,302,239 15,270,863
----------- ------------ ------------
Total revenues...................... 25,445,234 35,740,525 22,986,855
Costs and Expenses:
Cost of services........................ 11,714,955 16,152,707 15,019,436
Research and development................ 15,190,531 24,057,760 32,435,086
Selling, general and administrative..... 6,874,579 8,767,229 9,381,931
----------- ------------ ------------
Total costs and expenses............ 33,780,065 48,977,696 56,836,453
----------- ------------ ------------
Loss from operations............. (8,334,831) (13,237,171) (33,849,598)
Interest Income (Expense):
Interest income......................... 3,330,625 3,839,260 1,768,690
Interest expense........................ (842,633) (692,391) (1,936,117)
----------- ------------ ------------
Net interest income (expense)....... 2,487,992 3,146,869 (167,427)
=========== ============ ============
Net loss......................... $(5,846,839) $(10,090,302) $(34,017,025)
=========== ============ ============
Net Loss per Common Share:
Basic and diluted....................... $ (0.27) $ (0.45) $ (1.48)
=========== ============ ============
Weighted Average Common Shares Outstanding:
Basic and diluted....................... 21,376,685 22,572,427 22,920,875
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock
---------------------
Deferred Compen-
sation & Note
$0.10 Par Additional Paid- Accumulated Receivable From
Shares Value In Capital Deficit Officer
---------- ---------- ---------------- ------------- ----------------
Balance, December 31, 1999................................ 19,499,715 $1,949,971 $103,836,131 $ (75,821,234) $(1,117,911)
========== ========== ============ ============= ===========
Sale of common stock, net of issuance costs of
$718,066.............................................. 1,500,000 150,000 44,572,729 -- --
Exercise of stock options.............................. 1,280,612 128,062 3,184,327 -- --
Issuance of stock under employee stock purchase
plan.................................................. 8,331 833 214,723 -- --
Deferred compensation from grant of stock options...... -- -- 1,377,161 -- (1,377,161)
Amortization of deferred compensation and other
stock-based compensation expense...................... -- -- -- -- 1,436,660
Reversal of deferred compensation related to
cancellation of stock options......................... -- -- (461,783) -- 461,783
Net loss............................................. -- -- -- (5,846,839) --
---------- ---------- ------------ ------------- -----------
Balance, December 31, 2000................................ 22,288,658 2,228,866 152,723,288 (81,668,073) (596,629)
========== ========== ============ ============= ===========
Sale of common stock, net of issuance costs of
$44,622............................................... 127,500 12,750 1,693,017 -- --
Exercise of stock options.............................. 251,354 25,135 736,584 -- --
Issuance of stock under employee stock purchase
plan.................................................. 74,596 7,460 434,410 -- --
Issuance of restricted common stock and loan to
officer (Note 6e)..................................... 24,000 2,400 (2,400) -- (163,000)
Deferred compensation from grant of stock options...... -- -- 647,942 -- (647,942)
Issuance of stock under directors deferred stock plan.. 6,062 606 (606) -- --
Amortization of deferred compensation and other
stock-based compensation expense...................... -- -- -- -- 883,983
Reversal of deferred compensation related to
cancellation of stock options......................... -- -- (17,500) -- 17,500
Unrealized gain on long-term investment (available
for sale).............................................
Unrealized loss on derivative instruments..............
Net loss............................................. -- -- -- (10,090,302) --
---------- ---------- ------------ ------------- -----------
Balance, December 31, 2001................................ 22,772,170 2,277,217 156,214,735 (91,758,375) (506,088)
========== ========== ============ ============= ===========
Exercise of stock options.............................. 10,614 1,061 11,987 -- --
Issuance of stock under employee stock purchase
plan.................................................. 143,462 14,346 438,587 -- --
Issuance of stock related to interest payable under
convertible notes..................................... 120,986 12,099 276,394
Deferred compensation from grant of stock options...... -- -- 300,740 -- (300,740)
Issuance of stock under directors deferred stock plan.. 18,840 1,884 (1,884) -- --
Amortization of deferred compensation and other
stock-based compensation expense...................... -- -- -- -- 430,338
Value of warrants issued in connection with
convertible notes..................................... -- -- 1,736,059 --
Unrealized loss on short-term investment (available
for sale).............................................
Reversal of unrealized loss on derivative instruments..
Net loss............................................. -- -- -- (34,017,025) --
---------- ---------- ------------ ------------- -----------
Balance, December 31, 2002................................ 23,066,072 $2,306,607 $158,976,618 $(125,775,400) $ (376,490)
========== ========== ============ ============= ===========
Accumulated Total
Other Share- Compre-
Comprehensive holders' hensive
Income Equity Income
------------- ------------ ------------
Balance, December 31, 1999................................ -- $ 28,846,957 $ (3,940,075)
========= ============ ============
Sale of common stock, net of issuance costs of
$718,066.............................................. -- 44,722,729
Exercise of stock options.............................. -- 3,312,389
Issuance of stock under employee stock purchase
plan.................................................. -- 215,556
Deferred compensation from grant of stock options...... -- --
Amortization of deferred compensation and other
stock-based compensation expense...................... -- 1,436,660
Reversal of deferred compensation related to
cancellation of stock options......................... -- --
Net loss............................................. -- (5,846,839) (5,846,839)
--------- ------------ ------------
Balance, December 31, 2000................................ -- 72,687,452 (5,846,839)
========= ============ ============
Sale of common stock, net of issuance costs of
$44,622............................................... -- 1,705,767
Exercise of stock options.............................. -- 761,719
Issuance of stock under employee stock purchase
plan.................................................. -- 441,870
Issuance of restricted common stock and loan to
officer (Note 6e)..................................... -- (163,000)
Deferred compensation from grant of stock options...... -- --
Issuance of stock under directors deferred stock plan.. -- --
Amortization of deferred compensation and other
stock-based compensation expense...................... -- 883,983
Reversal of deferred compensation related to
cancellation of stock options......................... -- --
Unrealized gain on long-term investment (available
for sale)............................................. 535,279 535,279 535,279
Unrealized loss on derivative instruments.............. (30,830) (30,830) (30,830)
Net loss............................................. -- (10,090,302) (10,090,302)
--------- ------------ ------------
Balance, December 31, 2001................................ 504,449 66,731,938 (9,585,853)
========= ============ ============
Exercise of stock options.............................. -- 13,048
Issuance of stock under employee stock purchase
plan.................................................. -- 452,933
Issuance of stock related to interest payable under
convertible notes..................................... 288,493
Deferred compensation from grant of stock options...... -- --
Issuance of stock under directors deferred stock plan.. -- --
Amortization of deferred compensation and other
stock-based compensation expense...................... -- 430,338
Value of warrants issued in connection with
convertible notes..................................... -- 1,736,059
Unrealized loss on short-term investment (available
for sale)............................................. (249,890) (249,890) (249,890)
Reversal of unrealized loss on derivative instruments.. 30,830 30,830 30,830
Net loss............................................. -- (34,017,025) (34,017,025)
--------- ------------ ------------
Balance, December 31, 2002................................ $ 285,389 $ 35,416,724 $(34,236,085)
========= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
2000 2001 2002
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss....................................................................... $ (5,846,839) $(10,090,302) $(34,017,025)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities--
Depreciation and amortization................................................. 4,471,722 4,807,379 5,544,813
Non-cash interest expense..................................................... -- -- 510,605
Loss (Gain) on disposal of equipment and leasehold improvements............... 160,624 29,053 (51,926)
Amortization of deferred compensation......................................... 1,436,660 883,983 430,338
Changes in assets and liabilities--
Interest receivable......................................................... (612,005) 392,082 290,354
Accounts receivable......................................................... (10,787) 313,221 (1,529,977)
Unbilled costs and fees..................................................... 1,220,195 631,607 (550,003)
Prepaid expenses and other current assets................................... (323,730) (682,773) 1,138,918
Accounts payable............................................................ 305,954 796,082 82,454
Accrued expenses............................................................ 1,049,809 1,089,126 3,895,550
Deferred revenue............................................................ 654,545 (1,270,275) (1,883,814)
------------ ------------ ------------
Net cash provided by (used in) operating activities...................... 2,506,148 (3,100,817) (26,139,713)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities............................................. (69,013,466) (47,526,465) (36,730,976)
Proceeds from sale of marketable securities.................................... 23,860,411 68,439,950 42,179,260
Purchases of property and equipment............................................ (4,152,675) (3,705,719) (3,817,612)
Proceeds from sale of property and equipment................................... 504,583 10,302 79,807
Decrease in restricted cash.................................................... -- -- 200,000
Decrease (increase) in other assets............................................ 46,167 47,616 (684,962)
------------ ------------ ------------
Net cash (used in) provided by investing activities...................... (48,754,980) 17,265,684 1,225,517
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock............................................. 44,722,729 1,705,767 --
Proceeds from exercise of stock options........................................ 3,312,389 761,719 13,048
Proceeds from issuance of stock under the employee stock purchase plan......... 215,556 441,870 452,933
Note receivable from officer................................................... 120,000 (163,000) --
Gross proceeds from convertible notes payable.................................. -- -- 15,000,000
Proceeds from borrowings on equipment financing arrangements................... 3,691,840 2,761,441 3,500,000
Payments on long-term obligations.............................................. (4,734,876) (4,963,096) (4,628,663)
------------ ------------ ------------
Net cash provided by financing activities................................ 47,327,638 544,701 14,337,318
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents.............................. 1,078,806 14,709,568 (10,576,878)
Cash and Cash Equivalents, beginning of year...................................... 9,017,011 10,095,817 24,805,385
------------ ------------ ------------
Cash and Cash Equivalents, end of year............................................ $ 10,095,817 $ 24,805,385 $ 14,228,507
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year.................................................. $ 842,633 $ 692,391 $ 1,131,725
============ ============ ============
Income taxes paid during the year.............................................. $ 8,231 $ 60,000 $ 50,004
============ ============ ============
Supplemental Disclosure of Noncash Investing and Financing Activities:
Equipment acquired under capital leases........................................ $ 3,691,840 $ 2,761,441 $ --
============ ============ ============
Unrealized gain (loss) on marketable securities................................ $ -- $ 535,279 $ (249,890)
============ ============ ============
Issuance of warrant in connection with convertible notes payable............... $ -- $ -- $ 1,736,059
============ ============ ============
Unrealized (loss) gain on derivative instruments............................... $ -- $ (30,830) $ 30,830
============ ============ ============
Issuance of common stock related to interest payable under convertible notes... $ -- $ -- $ 288,493
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. and subsidiary (the Company) is a
biopharmaceutical company focused on the discovery, development and
commercialization of pharmaceutical and diagnostic products. Its strategic goal
is to directly participate in the commercialization of products that are used
primarily in hospitals. For diseases treated by larger physician audiences, the
Company seeks to discover, develop and commercialize products through alliances
with major pharmaceutical companies.
The Company has nine established product development programs. The Company
is managing the development and commercialization of its lead product
candidate, Ramoplanin, in the United States and Canada. This product is in a
Phase III clinical trial for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE) and a Phase II trial for the treatment
of patients with Clostridium difficile-associated diarrhea (CDAD). The Company
has seven product discovery and development alliances with pharmaceutical
companies including Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth.
In addition, the Company has a portfolio of internal drug discovery programs.
During 2002, the Company also maintained an active service business,
GenomeVision/TM/ Services, providing drug discovery services to pharmaceutical
and biotechnology companies and to the National Human Genome Research
Institute. (See Note 13)
The Company concentrates its product discovery, development and
commercialization efforts in two principal areas:
(i) infectious diseases caused by bacterial and fungal pathogens, and
(ii) human diseases believed to have a significant genetic component.
The accompanying consolidated financial statements reflect the application
of certain accounting policies, as described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Collaborative Securities Corp. (a
Massachusetts Securities Corporation). All intercompany accounts and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
Biopharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies.
GenomeVision/TM/ Services revenues consist of government grants, fees received
from custom gene sequencing and analysis services and subscription fees from
the PathoGenome/TM/ Database. Revenues from contract research, government
grants, the PathoGenome/TM/ Database subscription fees, and custom gene
sequencing and analysis services are recognized over the respective contract
periods as the services are performed, provided there is persuasive evidence of
an arrangement, the fee is fixed or determinable and collection of the related
receivable is probable. License fees are recognized ratably over the
performance period in accordance with Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition. Milestone payments will be recognized upon achievement of
the milestone as long as the milestone is deemed to be substantive and the
Company has no other performance obligations related to the milestone. Unbilled
costs and fees represent revenue recognized prior to billing. Deferred revenue
represents amounts received prior to revenue recognition.
F-8
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Property and Equipment
Property and equipment, including leasehold improvements, are depreciated
over their estimated useful lives using the straight-line method. The estimated
useful life for leasehold improvements is the lesser of the term of the lease
or the estimated useful life of the assets. The majority of the Company's
equipment and leasehold improvements are financed through bank lines of credit.
Estimated Useful Life
---------------------
Laboratory Equipment......... 5 Years
Computer Equipment & Licenses 3 Years
Office Equipment............. 5 Years
Furniture & Fixtures......... 5 Years
Depreciation expense was approximately $4,472,000, $4,807,000 and $5,545,000
for the years ended December 31, 2000, 2001, and 2002, respectively.
(d) Net Loss Per Share
Basic and diluted earnings per share were determined by dividing net loss by
the weighted average shares outstanding during the period. Diluted loss per
share is the same as basic loss per share for all periods presented, as the
effect of the potential common stock is antidilutive. Antidilutive securities
which consist of stock options, securities sold under the Company's employee
stock purchase plan, directors' deferred stock, warrants and unvested
restricted stock that are not included in diluted net loss per share were
3,247,316, 3,746,794 and 5,322,897 shares during the years ended December 31,
2000, 2001 and 2002, respectively.
(e) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no off-balance-sheet or concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company maintains its cash and cash
equivalents and investment balances with several nonaffiliated institutions.
The Company maintains reserves for the potential write-off of accounts
receivable. To date, the Company has not written off any significant accounts.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and their aggregate percentage of
the Company's total revenues:
Percentage of
Number of Total Revenues
Significant -------------
Year ended December 31, Customers A B C
----------------------- ----------- -- -- --
2000.......... 2 35% 36% --
2001.......... 3 31% 36% 18%
2002.......... 2 23% 46% --
F-9
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of the Company's total accounts receivable:
Percentage of Total
Accounts Receivable
------------------
At December 31, B D E F G
--------------- -- -- -- -- --
2000...... 87% -- -- -- --
2001...... -- 37% 29% -- --
2002...... 23% -- -- 27% 37%
(f) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(g) Financial Instruments
The estimated fair value of the Company's financial instruments, which
includes cash and cash equivalents, short-term and long-term marketable
securities, accounts receivable, accounts payable and long-term debt,
approximates the carrying values of these instruments.
(h) Reclassifications
The Company has reclassified certain prior-year information to conform with
the current year's presentation.
(i) Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires disclosure of all components of comprehensive
income (loss) on an annual and interim basis. Comprehensive income (loss) is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. In 2001,
the Company recorded approximately $535,000 to comprehensive income related to
the value of a warrant received in connection with its collaboration agreement
with Versicor Inc., which subsequenty merged with Biosearch Italia S.p.A and
changed its name to Vicuron Pharmaceuticals Inc. (Vicuron). In 2002, the
Company recorded approximately $250,000 to comprehensive loss related to the
decrease in the fair market value of common shares of Vicuron received in
connection with the exercise of this warrant. These common shares are
classified as available for sale short-term marketable securities in the
accompanying balance sheet. See Note 2 for further discussion.
(j) Segment Reporting
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No. 131
also establishes standards for related disclosures about products and services
and geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision
F-10
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maker, or decision-making group, in making decisions as to how to allocate
resources and assess performance. The Company's chief decision makers, as
defined under SFAS No. 131, are the chief executive officer and chief financial
officer. To date, the Company has viewed its operations and manages its
business as principally two operating segments: GenomeVision/TM/ Services and
Biopharmaceutical. As a result, the financial information disclosed herein
represents all of the material financial information related to the Company's
two operating segments. All of the Company's revenues are generated in the
United States and all assets are located in the United States.
GenomeVision(TM)
Services Biopharmaceutical Total
---------------- ----------------- -----------
2000
Revenues............................. $13,594,143 $11,851,091 $25,445,234
Gross profit......................... 1,879,188 3,715,045 5,594,233
Company-funded research & development -- 7,054,485 7,054,485
2001
Revenues............................. $17,302,239 $18,438,286 $35,740,525
Gross profit......................... 1,149,532 11,122,807 12,272,339
Company-funded research & development -- 16,742,281 16,742,281
2002
Revenues............................. $15,270,863 $ 7,715,992 $22,986,855
Gross profit......................... 251,427 2,477,466 2,728,893
Company-funded research & development -- 27,196,560 27,196,560
The Company does not allocate assets by its operating segments.
(k) Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a
disposal of a segment of a business. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with transition provisions for assets "held
for sale" that were initially recorded under previous models (APB No. 30 or
SFAS No. 121) and do not meet the new "held for sale" criteria. The Company
adopted SFAS No. 144 in the first quarter of 2002.
In May 2002, the FASB issued Statement of Financial Accounting Standard No.
145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections". Among other things, SFAS
145 rescinds Statement of Financial Accounting Standards No. 4 (SFAS 4),
"Reporting Gains and Losses from Extinguishment of Debt" and eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as an extraordinary item, net of related income tax effects, unless the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
are met. Adoption of this statement is generally required in fiscal years
beginning after May 15, 2002. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal
Activities". SFAS 146 nullifies Emerging Issues Task
F-11
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Force Issue No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Therefore, SFAS 146 eliminates the definition and
requirements for recognition of exit costs in EITF 94-3. The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. We will adopt the provisions of SFAS 146 for all exit
activities, if any, initiated after December 31, 2002. The Company does not
expect the adoption of this statement to have a material impact on its
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (the Interpretation) which expands on the
accounting guidance of Statements No. 5, 57 and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation will significantly change current practice in the accounting
for and disclosure of guarantees. Guarantees meeting the characteristics
described in the Interpretation are to be recognized at fair value and
significant disclosure rules have been implemented even if the likelihood of
the guarantor making payments is remote. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002, while the initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Certain guarantees are excluded from the initial recognition provisions of the
Interpretation, however specific disclosures are still required. The Company
does not expect the adoption of this statement to have a material impact on its
consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation--Transition
and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires disclosure of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. The disclosure
requirements for interim financial statements containing condensed consolidated
financial statements are effective for interim periods beginning after December
15, 2002. The Company adopted SFAS No. 148 in the fourth quarter of 2002.
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables,
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities and is effective
for agreements entered into during fiscal periods beginning after June 15,
2003. In some arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable, and there exists sufficient evidence
of their fair values to separately account for some or all of the deliverables
(that is, there are separate units of accounting). In other arrangements, some
or all of the deliverables are not independently functional, or there is not
sufficient evidence of their fair values to account for them separately. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its financial position and results of operations.
(l) Pro Forma Disclosure of Stock-based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations, in
accounting for stock-based compensation issued to employees, rather than the
alternative fair value accounting method provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation". Under APB 25, when the exercise
price of options granted under
F-12
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is required. In accordance with Emerging Issues
Task Force ("EITF") 96-18, the Company records compensation expense equal to
the fair value of options granted to non-employees over the vesting period,
which is generally the period of service.
The following tables illustrate the assumptions used and the effect on net
loss and net loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to employee stock-based compensation.
The Company has computed the pro forma disclosures required under SFAS No. 123
and SFAS No, 148 for all employee stock options granted using the Black-Scholes
option pricing model prescribed by SFAS No. 123.
2000 2001 2002
---------- ---------- ----------
Risk-free interest rate...................... 5.36%-6.71% 4.31%-5.24% 3.50%-5.14%
Expected dividend yield...................... -- -- --
Expected life................................ 5 years 5 years 5 years
Expected volatility.......................... 87% 87% 84%
Weighted average grant date fair market value $11.45 $6.25 $1.83
2000 2001 2002
----------- ------------ ------------
Net loss as reported........................................... $(5,846,839) $(10,090,302) $(34,017,025)
Add: Stock-based employee compensation cost, included in the
determination of net loss as reported........................ 1,436,660 883,983 430,338
Less: Total stock-based compensation cost determined under fair
value based method for all employee awards................... (2,765,385) (7,494,633) (4,936,526)
----------- ------------ ------------
Pro forma net loss............................................. $(7,175,564) $(16,700,952) $(38,523,213)
=========== ============ ============
Basis and diluted net loss per share
As reported................................................. $ (0.27) $ (0.45) $ (1.48)
=========== ============ ============
Pro forma................................................... $ (0.34) $ (0.74) $ (1.68)
=========== ============ ============
The Company's stock option grants vest over several years and the Company
intends to grant varying levels of stock options in the future periods.
Therefore, the pro forma effects on 2000, 2001, and 2002 net loss and net loss
per common share of expensing the estimated fair value of stock options and
common shares issued pursuant to the stock option plan are not necessarily
representative of the effects on reported results from operations for future
years.
(m) Restatement
During 2002, the Company and its previous auditors determined that an error
had inadvertently been made in the accounting during 1996 and 1997 for two
stock options granted to the Company's former Chief Executive Officer. Due to
this error, the accounting treatment did not properly reflect that these
options contained a cashless exercise provision. As a result of required
non-cash adjustments, the Company's net loss for the year ended December 31,
1996 was understated and the Company's net loss for the year ended December 31,
1997 was overstated. As reflected below, these corrections have no cash impact
on the Company and have no impact on Total Shareholders' Equity.
F-13
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the cumulative impact of the restatement on the Company's
financial statements as of December 31, 2000 and December 31, 2001 is as
follows:
As previously
reported As restated
------------- ------------
December 31, 2000
Accumulated deficit....... $(71,963,333) $(81,668,073)
Additional paid in capital 143,018,548 152,723,288
Total shareholders' equity 72,687,452 72,687,452
December 31, 2001
Accumulated deficit....... $(82,053,635) $(91,758,375)
Additional paid in capital 146,509,995 156,214,735
Total shareholders' equity 66,731,938 66,731,938
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 2001 and 2002, the
Company's investments include short-term and long-term marketable securities,
which are classified as held-to-maturity, as the Company has the positive
intent and ability to hold these securities to maturity. Cash equivalents are
short-term, highly liquid investments with original maturities of 90 days or
less. Marketable securities are investment securities with original maturities
of greater than 90 days. Cash equivalents are carried at cost, which
approximates market value, and consist of debt securities. Marketable
securities that are classified as held to maturity are recorded at amortized
cost, which approximates market value and consist of commercial paper and U.S.
government debt securities. The average maturity of the Company's investments
is approximately 6.5 months at December 31, 2002. At December 31, 2002, the
Company had an unrealized gain of approximately $99,000, which is the
difference between the amortized cost and the market value of the held to
maturity investments.
At December 31, 2002, the Company's short-term marketable securities also
includes 45,000 shares of common stock of Vicuron received in connection with
its collaboration agreement with Vicuron dated March 10, 1997. The Company is
accounting for the shares in accordance with SFAS No. 115 as
"available-for-sale securities" and as a result, the shares are recorded at
fair value. The shares are subject to restrictions under the securities
regulations and cannot be liquidated until at least March 2003.
F-14
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2001 and 2002, the Company's cash and cash equivalents and
investments consisted of the following:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Loss Fair Value
----------- ---------- ---------- -----------
December 31, 2001--Held to Maturity
Cash and Cash Equivalents:
Cash.................................... $21,801,201 $ -- $ -- $21,801,201
Debt securities......................... 3,004,184 (84) 3,004,100
----------- -------- ------- -----------
Total cash and cash equivalents..... $24,805,385 $ -- $ (84) $24,805,301
=========== ======== ======= ===========
Investments:
Short-term marketable securities........ $29,961,540 $221,183 $ -- $30,182,723
Long-term marketable securities......... 11,839,045 221,083 -- 12,060,128
----------- -------- ------- -----------
Total investments................... $41,800,585 $442,266 $ -- $42,242,851
=========== ======== ======= ===========
December 31, 2001--Available for Sale
Warrant.................................... $ 535,279 $ -- $ -- $ 535,279
=========== ======== ======= ===========
December 31, 2002--Held to Maturity
Cash and Cash Equivalents:
Cash.................................... $11,128,507 $ -- $ -- $11,128,507
Debt securities......................... 3,100,000 -- -- 3,100,000
----------- -------- ------- -----------
Total cash and cash equivalents..... $14,228,507 $ -- $ -- $14,228,507
=========== ======== ======= ===========
Investments:
Short-term marketable securities........ $32,584,384 $ 89,220 $(3,067) $32,670,537
Long-term marketable securities......... 3,567,757 14,311 (1,862) 3,580,206
----------- -------- ------- -----------
Total investments................... $36,152,141 $103,531 $(4,929) $36,250,743
=========== ======== ======= ===========
December 31, 2002--Available for Sale
Investment in equity securities............ $ 200,160 $285,390 $ -- $ 485,550
=========== ======== ======= ===========
The Company also has $200,000 in restricted cash at December 31, 2001 in
connection with certain capital lease obligations (see Note 5).
(3) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes, which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates
in effect for the year in which the differences are expected to reverse. SFAS
No. 109 requires deferred tax assets and liabilities to be adjusted when the
tax rates or other provisions of the income tax laws change.
At December 31, 2002, the Company had net operating loss and tax credit
carryforwards of approximately $120,307,000 and $9,084,000, respectively,
available to reduce federal taxable income and federal income taxes,
F-15
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, if any. Net operating loss and tax credit carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in the ownership
interest of significant shareholders over a three-year period in excess of 50%.
The net operating loss and tax credit carryforwards expire approximately as
follows:
Investment
Net Operating Loss Research Tax Credit Tax Credit
Expiration Date Carryforwards Carryforwards Carryforwards
--------------- ------------------ ------------------- -------------
2003........ $ -- $ -- $ --
2004........ -- -- --
2005........ -- 80,000 --
2006........ 1,807,000 208,000 --
2007-2021... 118,500,000 8,759,000 37,000
------------ ---------- -------
$120,307,000 $9,047,000 $37,000
============ ========== =======
The components of the Company's net deferred tax asset at the respective
dates are as follows:
December 31,
--------------------------
2001 2002
------------ ------------
Net operating loss carryforwards........ $ 37,265,000 $ 48,448,000
Research and development credits........ 6,605,000 9,047,000
Investment tax credits.................. 37,000 37,000
Capitalized research & development costs -- 4,897,000
Depreciation............................ 1,435,000 1,459,000
Other temporary differences............. 2,798,000 1,783,000
------------ ------------
Net deferred tax asset............... 48,140,000 65,671,000
Valuation allowance..................... (48,140,000) (65,671,000)
------------ ------------
$ -- $ --
============ ============
The valuation allowance has been provided due to the uncertainty surrounding
the realization of the deferred tax assets.
(4) COMMITMENTS
(a) Lease Commitments
At December 31, 2002, the Company has operating leases for computer
equipment and office and laboratory facilities, the last of which expires on
November 15, 2006. Approximate minimum lease payments and facilities charges
under the operating leases at December 31, 2002 are as follows:
Year ending December 31,
------------------------
2003.......... $1,100,000
2004.......... 1,099,000
2005.......... 1,103,000
2006.......... 1,067,000
----------
$4,369,000
==========
F-16
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under these operating leases was approximately $927,000,
$1,007,000 and $1,020,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
(b) Employment Agreements
The Company has employment agreements with its executive officers and
several key employees, which provide for bonuses, as defined, and severance
benefits upon termination of employment, as defined.
(5) LONG-TERM OBLIGATIONS
On March 5, 2002, the Company sold convertible notes payable to two
institutional investors in a private placement transaction, raising $15 million
in gross proceeds. The convertible notes payable may be converted into shares
of the Company's common stock at the option of the holder, at a price of $8.00
per share, subject to certain adjustments. The maturity date of the convertible
notes payable is December 31, 2004, provided, that if at any time on or after
December 31, 2003, the Company maintains 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 convertible notes payable can require
that all or any part of the outstanding principal balance of the convertible
notes payable plus all accrued but unpaid interest be repaid. Interest on the
convertible notes payable accrues at 6% annually and the interest is payable,
in cash or in stock, semi-annually on June 30 and December 31 of each year. As
of December 31, 2002, two interest payments on the convertible notes payable
had become due and were paid by issuing 494,083 shares of the Company's common
stock to the holders of the notes payable, of which 120,986 and 373,107 shares
were issued in July 2002 and January 2003, respectively. The investors also
received a warrant to purchase up to an aggregate of 487,500 shares of common
stock at an exercise price of $8.00 per share, subject to certain adjustments.
The warrant is exercisable at the time the convertible notes payable are
converted or if certain other redemptions or repayments of the convertible
notes payable occur and will terminate upon the earlier of four years from the
date of such conversion or December 31, 2008. The warrant was valued, using the
Black-Scholes option pricing model, at approximately $1,736,000. The amount was
recorded as a discount to long-term obligations and will be amortized to
interest expense over the term of the convertible notes payable. Additionally,
the Company is obligated to issue a warrant to purchase up to 100,000 shares of
common stock at an exercise price of $15.00 per share to its placement agent in
this transaction. The warrant is exercisable over a three-year term which
commenced upon the closing of the notes payable transaction. This warrant was
valued, using the Black-Scholes option pricing model, at $244,000. This amount
is included in deferred issuance costs and will be amortized to interest
expense over the term of the convertible notes payable. As of December 31,
2002, this warrant has not yet been issued.
In February 2002, the Company entered into an additional line of credit for
$3,500,000, of which $500,000 was used to refinance a portion of an existing
line of credit. This line of credit is payable in twelve consecutive quarterly
payments at the prevailing LIBOR rate (2.06% at December 31, 2002) plus 1.50%.
The Company is required to maintain certain financial covenants pertaining to
minimum cash balances. As of December 31, 2002, $2.6 million was outstanding
under the credit line, and the Company was in compliance with all of the
covenants.
In February 2000, the Company entered into an equipment line of credit under
which it may finance up to $4,000,000 of laboratory, computer and office
equipment. In December 2000, the Company increased the line of credit by
$2,712,000 to $6,712,000. The Company, at its discretion, can enter into either
operating or capital leases. The borrowings under the operating leases are
payable in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of December 31, 2002, the Company had approximately $6,000
outstanding under operating leases and approximately $1,904,000 outstanding
under capital leases. The interest rates under the capital leases range from
7.50% to 10.37%. There are no financial covenants related to this agreement. In
March 2003, this debt had been paid off in its entirety and there is no
additional borrowing capacity available under this line of credit.
F-17
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum payments under long-term obligations at December 31, 2002 are as
follows:
Year ending December 31,
------------------------
2003....................................... $ 3,681,041
2004....................................... 17,527,720
2005....................................... 292,507
-----------
Total minimum payments.................. 21,501,268
Less--Discount to long-term obligation..... 1,225,454
Amount representing interest.......... 1,997,536
-----------
Present value of total minimum payments. 18,278,278
Less--Current portion...................... 2,623,986
-----------
$15,654,292
===========
(6) SHAREHOLDERS' EQUITY
(a) Stock Options
The Company has granted stock options to key employees and consultants under
its 1991, 1993, 1995 and 1997 Stock Option Plans, as well as the 2001 Incentive
Plan. The Stock Option and Compensation Committee of the Board of Directors
determines the purchase price and vesting schedule applicable to each option
grant. In addition, under separate agreements not covered by any plan, the
Company has granted certain key employees and directors of the Company, options
to purchase common stock.
The Company granted nonqualified stock options for the purchase of 65,000
and 10,000 shares of common stock to consultants during fiscal years 1997 and
1999, respectively. The options were granted with an exercise price equal to
the fair market value price at the date of grant and vest ratably over the
contract period, as defined. In accordance with Emerging Issues Task Force
(EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,
the Company will measure the fair value of the options as they vest using the
Black-Scholes option pricing model. The Company has charged $281,636, $3,160
and $0 to operations for the years ended December 31, 2000, 2001 and 2002,
respectively, related to the grant of these options.
During 1999, the Company granted to certain employees the right to receive
154,616 shares of common stock. The employees received the common stock in two
equal installments on the anniversary of the grant date. The Company recorded
deferred compensation of $647,942 related to the grant of these rights to
receive the common stock, which will be amortized to expense over the period
the shares are earned. Since the inception of this program, employees who
resigned from the Company forfeited 62,915 shares of the restricted stock.
The Company records deferred compensation when stock options, restricted
stock and other stock-based awards are granted at an exercise price per share
that is less than the fair market value on the date of the grant. Deferred
compensation is recorded in an amount equal to the excess of the fair market
value per share over the exercise price times the number of options or shares
granted. Deferred compensation is amortized over the vesting period of the
underlying awards. During the years ended 2000, 2001 and 2002, the Company
recorded $1,377,161, $647,942 and $300,740, respectively, of deferred
compensation. The Company recorded amortization of deferred compensation of
approximately $1,436,660, $883,983 and $430,338 for the years ended December
31, 2000, 2001 and 2002, respectively. During 2000 and 2001, in connection with
the termination of several employees, the Company reversed $461,783 and
$17,500, respectively, of unamortized deferred compensation due to the
forfeiture of options.
F-18
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There were 1,571,240 common shares available for future grant at December
31, 2002. The following is a summary of all stock option activity:
Number of Exercise Weighted
Shares Price Range Average Price
---------- ----------- -------------
Outstanding, December 31, 1999 3,639,358 0.00-14.50 3.45
Granted.................... 1,198,004 0.00-66.00 14.89
Exercised.................. (1,280,612) 0.00-14.72 2.59
Cancelled.................. (381,769) 0.00-66.00 4.44
---------- ----------- ------
Outstanding, December 31, 2000 3,174,981 0.00-66.00 7.99
Granted.................... 865,640 1.80-16.08 7.87
Exercised.................. (251,354) 0.00-14.72 3.03
Cancelled.................. (143,403) 0.00-39.38 11.74
---------- ----------- ------
Outstanding, December 31, 2001 3,645,864 $0.00-66.00 $ 8.15
Granted.................... 1,363,746 0.83-7.03 2.43
Exercised.................. (10,614) 0.00-4.42 1.23
Cancelled.................. (522,469) 0.10-48.25 7.72
---------- ----------- ------
Outstanding, December 31, 2002 4,476,527 $0.10-66.00 $ 6.47
========== =========== ======
Exercisable, December 31, 2002 2,238,018 $0.10-66.00 $ 6.72
========== =========== ======
Exercisable, December 31, 2001 1,951,126 $0.10-66.00 $ 5.73
========== =========== ======
Exercisable, December 31, 2000 1,607,085 $0.00-14.72 $ 4.10
========== =========== ======
The range of exercise prices for options outstanding and options exercisable
at December 31, 2002 are as follows:
Options Outstanding Options Exercisable
---------------------------- --------------------------
Weighted Average
Remaining Contractual
Range of Life of Options Weighted Average Weighted Average
Exercise Prices Outstanding (In Years) Number Exercise Price Number Exercise Price
--------------- ---------------------- ----------- ---------------- --------- ----------------
$ 0.00- 3.38 5.90 1,920,017 $ 1.64 904,754 $ 1.86
$ 3.40- 4.88 7.07 433,112 4.30 328,165 4.37
$ 5.05- 7.50 8.27 533,543 6.41 133,152 6.80
$ 7.56- 9.50 4.48 415,874 8.71 330,313 8.82
$ 9.93-14.72 7.96 1,089,231 13.74 498,752 14.28
$15.97-66.00 7.54 84,750 22.82 42,882 22.88
Total 6.70 4,476,527 $ 6.47 2,238,018 $ 6.72
(b) Sale of Common Stock
In June and July of 2000, the Company sold 1,500,000 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $31.01 per share resulting in proceeds of $44,722,729, net of
issuance costs of $718,066.
In June and July of 2001, the Company sold 127,500 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $13.73 per share resulting in proceeds of $1,705,767, net of
issuance costs of $44,622.
F-19
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) 1997 Directors' Deferred Stock Plan
In January 1998, the Company's stockholders approved the 1997 Directors'
Deferred Stock Plan (the 1997 Directors' Plan) covering 150,000 shares of
common stock. The shares will be granted as services are performed by members
of the Company's Board of Directors. As of December 31, 2002, the Company
granted 66,002 shares of restricted common stock under the 1997 Directors'
Plan. These shares are issued at the end of the three-year period or earlier if
the individual ceases to serve as a member of the Company's Board of Directors.
As of December 31, 2002, 25,702 shares of restricted common stock were vested
but not yet issued under the 1997 Directors' Plan.
(d) Note Receivable from Officer
On March 28, 2001, the Company loaned $163,000 to an officer of the Company
to allow him to pay income tax liabilities associated with a restricted stock
grant of 24,000 shares. The loan bears interest at 4% and is payable in full on
December 31, 2004 and may be extended to December 31, 2006 at the option of the
officer, subject to certain conditions. The principal amount of the note is
non-recourse as it is secured only by the 24,000 shares of restricted stock.
The interest portion of the loan is full-recourse as it is secured by the
officer's personal assets. The Company issued these shares to the officer for
no consideration and as a result recorded deferred compensation of
approximately $347,000, which will be amortized over the vesting period of the
award, which is forty-eight months.
(e) Employee Stock Purchase Plan
On February 28, 2000, the Company adopted an Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings
toward the semi-annual purchase of the Company's common stock. The employees'
purchase price will be 85% of the fair market value of the common stock at the
time of grant of option or the time at which the option is deemed exercised,
whichever is less. No compensation expense will be recorded in connection with
the plan. As of December 31, 2002, the Company has issued 226,389 shares under
this plan.
(7) INCENTIVE SAVINGS 401(K) PLAN
The Company maintains an incentive savings 401(k) plan (the Plan) for the
benefit of all employees. In February 2002, the Company changed its match to
50% of the first 6% of salary from 100% of the first 2% of salary and 50% of
the next 2% of salary, limited to the first $100,000 of annual salary. The
Company contributed $201,759, $251,157 and $283,718 to the Plan for the years
ended December 31, 2000, 2001 and 2002, respectively.
(8) ALLIANCES--BIOPHARMACEUTICAL
(a) ASTRAZENECA
In August 1995, the Company entered into a strategic alliance with
AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and
diagnostic products effective against peptic ulcers or any other disease caused
by H. pylori. The Company granted Astra exclusive access to the Company's H.
pylori genomic sequence database and exclusive worldwide rights to make, use
and sell products based on the Company's H. pylori technology. The agreement
provided for a four-year research alliance (which ended in August 1999) to
further develop and annotate the Company's H. pylori genomic sequence database,
identify therapeutic and vaccine targets, and develop appropriate biological
assays.
F-20
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under this agreement, Astra agreed to pay the Company, subject to the
achievement of certain product development milestones, up to $23.3 million (and
possibly a greater amount if more than one product is developed under the
agreement) in license fees, expense allowances, research funding and milestone
payments. The Company has received a total of $13.7 million in license fees,
expense allowances, milestone payments, maintenance fees and research funding
under the Astra agreement through December 31, 2002.
The Company will also be entitled to receive royalties on Astra's sale of
products protected by the claims of patents licensed to Astra by the Company
pursuant to the agreement or the discovery of which was enabled in a
significant manner by the genomic database licensed to Astra by the Company. In
its development of new anti-ulcer products, Astra has selected a novel lead
series from the Company's H. pylori database for advancement into lead
optimization. As of March 31, 2003, Astra's exclusive access rights to the
Company's H. pylori genomic sequence technology will terminate and the Company
will be able to enter into alliances with other partners to develop drugs,
vaccines and diagnostic products effective against peptic ulcers or any other
disease caused by H. pylori.
The Company recognized approximately $6,000, $0 and $172,000 in revenue
under the agreement during the years ended December 31, 2000, 2001 and 2002,
respectively.
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance and license
agreement (the December 1995 agreement) with Schering Corporation and
Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by
Schering-Plough of the genomic sequence of Staph. aureus to identify and
validate new gene targets for development of drugs to target Staph. aureus and
other pathogens that have become resistant to current antibiotics. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's proprietary Staph. aureus genomic sequence database. The Company
agreed to undertake certain research efforts to identify bacteria-specific
genes essential to microbial survival and to develop biological assays to be
used by Schering-Plough in screening natural product and compound libraries to
identify antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough paid an initial license fee and funded
a research program through March 31, 2002. Schering-Plough paid the Company
$21.5 million in an up-front license fee, research funding and milestone
payments through December 31, 2002. Subject to the achievement of additional
product development milestones, Schering-Plough agreed to pay the Company up to
an additional $24.0 million in milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough and on the technology developed in the
course of the research program. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed. The Company had completed its research
obligations under this alliance and had turned over validated drug targets and
assays to Schering-Plough for high-throughput screening.
Under the December 1995 agreement, the Company recognized approximately
$1,887,000, $1,570,000 and $127,000 in revenue during the years ended December
31, 2000, 2001 and 2002, respectively.
In December 1996, the Company entered into its second strategic alliance and
license agreement (the December 1996 agreement) with Schering-Plough. This
agreement calls for the use of genomics to discover new
F-21
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pharmaceutical products for treating asthma. As part of the agreement, the
Company employed its high-throughput disease gene identification,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop
pharmaceuticals and vaccines for treating asthma. Under this agreement, the
Company has granted Schering-Plough exclusive access to (i) certain gene
sequence databases made available under this research program, (ii) information
made available to the Company under certain third-party research agreements,
and (iii) an exclusive worldwide right and license to make, use and sell
pharmaceutical and vaccine products based on the rights to develop and
commercialize diagnostic products that may result from this alliance.
Under this agreement (and subsequent extensions), Schering-Plough paid an
initial license fee and an expense allowance to the Company and funded the
research program through December 2002. In addition, upon completion of certain
scientific developments, Schering-Plough has made or will potentially make
milestone payments, as well as pay royalties based upon sales of therapeutic
products developed from this collaboration. If all milestones are met, total
payments to the Company will approximate $81.0 million, excluding royalties. Of
the total potential payments, approximately $36.5 million represents license
fees and research payments, and $44.5 million represents milestone payments
based on achievement of research and product development milestones. In
December 2002, the Company had completed its research obligations under this
alliance and the research program has advanced into high-throughput screening
at Schering-Plough. A total of $42.4 million has been received through December
31, 2002.
Under the December 1996 agreement, the Company recognized approximately
$4,711,000, $8,084,000 and $5,088,000 in revenue during the years ended
December 31, 2000, 2001 and 2002, respectively.
In September 1997, the Company entered into a third strategic alliance and
license agreement (the September 1997 agreement) with Schering-Plough to use
genomics to discover and develop new pharmaceutical products to treat fungal
infections. Under this agreement, the Company employed its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough has received exclusive access to the genomic information
developed in the alliance related to two fungal pathogens, Candida albicans and
Aspergillus fumigatus. Schering-Plough has also received exclusive worldwide
rights to make, use and sell products based on the technology developed during
the course of the research program. In return, Schering-Plough agreed to fund a
research program through March 31, 2002. If all milestones are met, total
payments to the Company will approximate $33.2 million, excluding royalties. Of
the total potential payments, approximately $10.2 million represents contract
research payments and $23.0 million represents milestone payments based on
achievement of research and product development milestones. The Company has
completed its research obligations under this alliance and has turned over
validated drug targets and assays to Schering-Plough for high-throughput
screening. A total of $12.2 million has been received through December 31, 2002.
Under the September 1997 agreement, the Company recognized approximately
$1,912,000, $1,137,000 and $6,000 in revenue for the years ended December 31,
2000, 2001 and 2002, respectively.
Under certain circumstances, the Company may have an obligation to give
Schering-Plough a right of first negotiation to develop with the Company
certain of its asthma and infectious disease related discoveries if it decides
to seek a third party collaborator to develop such discoveries.
F-22
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) BIOMERIEUX
In September 1999, the Company entered into a strategic alliance with
bioMerieux to develop, manufacture and sell in vitro diagnostic products for
human clinical and industrial applications. As part of the alliance, bioMerieux
purchased a subscription to the Company's PathoGenome(TM) Database (see Note
9), paid an up-front license fee, agreed to fund a research program for at
least four years and pay royalties on future products. In addition, bioMerieux
purchased $3.75 million of the Company's common stock. The total amount of
research and development funding, excluding subscription fees, approximates
$5.2 million for the four-year term of this agreement. The research and
development funding will be recognized as the research services are performed
over the four-year term of the agreement. Approximately $4.4 million has been
received through December 31, 2002.
The Company recognized approximately $1,469,000, $1,173,000 and $1,188,000
in revenue during the years ended December 31, 2000, 2001 and 2002,
respectively, which consisted of alliance research revenue and amortization of
the up-front license fees.
(d) WYETH
In December 1999, the Company entered into a strategic alliance with Wyeth
to develop novel therapeutics for the prevention and treatment of osteoporosis.
The alliance will focus on developing therapeutics, utilizing targets based on
the characterization of a gene associated with a unique high bone mass trait.
The agreement provides for the Company to employ its established
capabilities in positional cloning, bioinformatics and functional genomics in
conjunction with Wyeth's drug discovery capabilities and its expertise in bone
biology and the osteoporotic disease process to develop new pharmaceuticals.
Under the terms of the agreement, Wyeth agreed to pay an up-front license fee,
milestone payments and fund a research program for a minimum of two years with
an option to extend. On December 30, 2002, Wyeth exercised its option to extend
the research program to December 2003. If the research program continues for
its full term and substantially all of the milestone payments are met, total
payments to the Company, excluding royalties, would exceed $119 million.
Approximately $9.2 million has been received through December 31, 2002.
The Company recognized approximately $1,640,000, $6,485,000 and $1,060,000
in revenue during the years ended December 31, 2000, 2001 and 2002,
respectively, which consisted of alliance research revenue, amortization of the
up-front license fees and milestone payments.
(e) AMGEN
In December 2002, the Company entered into a strategic alliance with Amgen,
Inc. to identify and develop novel therapeutic agents for bone diseases,
including osteoporosis. Both companies will participate in collaborative
research efforts to discover one or more drug candidates suitable for
development. The companies will, as part of the research activities, use
genetic information, developed by the Company based on research conducted at
the Creighton University Osteoporosis Research Center, which has been
exclusively licensed to Amgen.
Under the terms of the agreement, Amgen will pay the Company an up-front
license fee, and fund a multi-year research program, which includes milestone
payments and royalties on sales of therapeutics products developed from this
alliance. Contingent upon the success of the discovery, development and
commercialization activities, Amgen may also purchase common shares of the
Company. Amgen's equity ownership in the Company will be limited to no more
than 4.99% of the Company's outstanding shares. If all milestones are met,
total payments to the Company will approximate $67 million, excluding royalties
if a single product is developed and a maximum of $104 million if more than one
product is developed under the agreement. Of the total potential payments,
approximately $59.0 million represents research payments, milestone payments
and a license fee, and $8.0 million represents an equity investment in the
Company by Amgen.
F-23
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company will receive royalties on product sales ranging from 4%-10%
depending on the level of those sales. We may elect to participate in the
funding of the clinical development program, in which case we may co-promote
the product in the U.S. and Canada and receive either increased royalties on
sales or participate in profits from product sales in the U.S. and Canada. The
Company recognized approximately $42,000 in revenue during the year ended
December 31, 2002, which consisted of amortization of an up-front license fee.
(9) GENOMEVISION(TM) SERVICES
GenomeVision(TM) Services revenues consist of government grants, fees
received from custom gene sequencing and analysis and subscription fees from
PathoGenome(TM) Database. (See Note 13)
(a) DATABASE SUBSCRIPTIONS
The Company has entered into a number of PathoGenome(TM) Database
subscriptions. The database subscriptions provide nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome(TM) Database, and
associated information relating to microbial organisms. These agreements call
for the Company to provide periodic data updates, analysis tools and software
support. Under the subscription agreements, the customer pays an annual
subscription fee and will pay royalties on any molecules developed as a result
of access to the information provided by the PathoGenome(TM) Database. The
Company retains all rights associated with protein therapeutic, diagnostic and
vaccine use of bacterial genes or gene products. In 2001, we entered into an
agreement with EraGen Biosciences, under which they are responsible for the
marketing, distribution and maintenance of this product, while we retain our
rights to use it and receive a percentage of subscription fees and royalties
from subscriber discoveries.
(b) NATIONAL HUMAN GENOME RESEARCH INSTITUTE
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company is
entitled to receive funding from the National Human Genome Research Institute
(NHGRI) of up to $18.4 million through June 2003, of which all funds have been
appropriated. As of December 31, 2002, the Company recognized approximately
$17.4 million in revenue under this agreement.
In October 1999, the NHGRI named the Company as a pilot center to the Mouse
Genome Sequencing Network. The Company is entitled to receive $14.8 million in
funding through February 2003, of which all funds have been appropriated. As of
December 31, 2002, the Company recognized approximately $14.7 million in
revenue under this agreement. In August 2000, the Company was named one of two
primary centers for the Rat Sequencing Program from NHGRI. As part of the
agreement, the Company will use remaining funding under the mouse award, as
well as a portion of the remaining funding under the human award, to
participate in this rat genome initiative.
(10) PRODUCT DEVELOPMENT
In October 2001, the Company acquired an exclusive license in the United
States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia
S.p.A (which merged with Versicor in March 2003 and subsequently changed its
name to Vicuron). The Company has assumed responsibility for the product
development in the United States of Ramoplanin, currently in a Phase III
clinical trial for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE), as well as a Phase II clinical trial to
assess the safety and efficacy of Ramoplanin to treat Clostridium
difficile-associated diarrhea (CDAD). The agreement provides the Company with
exclusive rights to develop and market oral Ramoplanin in the U.S. and Canada.
Vicuron will provide the bulk material for manufacture of the product and will
retain all other rights to market and sell Ramoplanin.
F-24
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of this agreement, the Company paid Vicuron an initial
license fee of $2 million and is obligated to make payments of up to $8 million
in a combination of cash and notes convertible into Company stock upon the
achievement of specified milestones. In addition, the Company is obligated to
purchase bulk material from Vicuron, fund the completion of clinical trials and
pay a royalty on product sales. The combined total of bulk product purchases
and royalties is expected to be approximately 26% of the Company's net product
sales.
The Company expended approximately $5,549,000 and $13,895,000 during the
years ended December 31, 2001 and 2002, respectively, which consisted of the
initial license fee, milestone payment and clinical development expenses.
(11) QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the eight quarters in the period ended December 31, 2002. In
the opinion of management, this information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this Form 10-K, and
all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations.
Quarter Quarter Quarter Quarter
One Two Three Four Year
----------- ----------- ----------- ----------- ------------
2001
Revenues:
Biopharmaceutical..................... $ 3,557,570 $ 7,459,478 $ 2,917,389 $ 4,503,849 $ 18,438,286
GenomeVision(TM) Services............. 4,532,678 3,930,400 4,460,646 4,378,514 17,302,239
----------- ----------- ----------- ----------- ------------
Total revenues..................... 8,090,248 11,389,879 7,378,035 8,882,363 35,740,525
Costs and Expenses:
Cost of services...................... 3,680,816 3,430,803 4,633,058 4,408,030 16,152,707
Research and development.............. 3,822,329 4,438,822 5,247,912 10,548,697 24,057,760
Selling, general and administrative... 1,634,922 2,190,432 2,559,004 2,382,871 8,767,229
----------- ----------- ----------- ----------- ------------
Total costs and expenses........... 9,138,067 10,060,057 12,439,974 17,339,598 48,977,696
----------- ----------- ----------- ----------- ------------
Loss from operations............... (1,047,819) 1,329,822 (5,061,939) (8,457,235) (13,237,171)
Interest Income (Expense):
Interest income....................... 1,143,795 986,723 1,055,631 653,111 3,839,260
Interest expense...................... (169,342) (212,123) (174,269) (136,657) (692,391)
----------- ----------- ----------- ----------- ------------
Net interest income................ 974,453 774,600 881,362 516,454 3,146,869
----------- ----------- ----------- ----------- ------------
Net loss........................... $ (73,366) $ 2,104,422 $(4,180,577) $(7,940,781) $(10,090,302)
=========== =========== =========== =========== ============
Net Loss per Common Share:
Basic and diluted..................... $ (0.00) $ 0.09 $ (0.18) $ (0.35) $ (0.45)
=========== =========== =========== =========== ============
Weighted Average Common Shares
Outstanding:
Basic and diluted..................... 22,409,501 22,451,753 22,685,660 22,742,794 22,572,427
=========== =========== =========== =========== ============
F-25
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarter Quarter Quarter Quarter
One Two Three Four Year
----------- ----------- ------------ ----------- ------------
2002
Revenues:
Biopharmaceutical..................... $ 2,433,725 $ 1,927,960 $ 1,844,312 $ 1,509,995 $ 7,715,992
GenomeVision(TM) Services............. 3,730,792 4,056,708 3,155,353 4,328,010 15,270,863
----------- ----------- ------------ ----------- ------------
Total revenues..................... 6,164,517 5,984,668 4,999,665 5,838,005 22,986,855
Costs and Expenses:
Cost of services...................... 3,392,777 3,696,543 3,074,407 5,255,709 15,019,436
Research and development.............. 7,813,973 8,283,727 9,211,517 7,125,869 32,435,086
Selling, general and administrative... 2,057,385 2,188,430 2,629,129 2,506,987 9,381,931
----------- ----------- ------------ ----------- ------------
Total costs and expenses........... 13,264,135 14,168,700 14,915,053 14,488,565 56,836,453
----------- ----------- ------------ ----------- ------------
Loss from operations............... (7,099,618) (8,184,032) (9,915,388) (8,650,560) (33,849,598)
Interest Income (Expense):
Interest income....................... 530,932 494,671 400,636 342,451 1,768,690
Interest expense...................... (216,090) (628,126) (557,865) (534,036) (1,936,117)
----------- ----------- ------------ ----------- ------------
Net interest income (expense)...... 314,842 (133,455) (157,229) (191,585) (167,427)
----------- ----------- ------------ ----------- ------------
Net loss........................... $(6,784,776) $(8,317,487) $(10,072,617) $(8,842,145) $(34,017,025)
=========== =========== ============ =========== ============
Net Loss per Common Share:
Basic and diluted..................... $ (0.30) $ (0.36) $ (0.44) $ (0.38) $ (1.48)
=========== =========== ============ =========== ============
Weighted Average Common Shares
Outstanding:
Basic and diluted..................... 22,798,224 22,812,226 23,032,463 23,040,590 22,920,875
=========== =========== ============ =========== ============
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
---------------------
2001 2002
---------- ----------
Payroll and related expenses................. $1,990,394 $2,278,679
Facilities................................... 463,279 368,601
Professional fees............................ 108,375 180,000
Employee relocation.......................... 224,543 --
Interest related to convertible notes payable -- 453,699
Clinical development......................... 1,286,324 4,329,792
All Other.................................... 759,798 798,169
---------- ----------
$4,832,713 $8,408,940
========== ==========
(13) SUBSEQUENT EVENT
On March 14, 2003, the Company completed the sale of its GenomeVision(TM)
Services business to Agencourt Bioscience (Agencourt). As part of the
agreement, the Company transferred its gene sequencing operations, including
both commercial and government customer contracts and certain personnel and
equipment, to Agencourt in exchange for an upfront cash payment and shares of
Agencourt common stock. The Company will also receive royalties on gene
sequencing revenue earned by Agencourt that is related to the transferred
business for a period of two years after the date of sale. The Company retains
rights to its PathoGenome(TM) Database, including all associated intellectual
property, subscriptions and royalty rights on products developed by subscribers.
F-26
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed above, the Company will receive royalties on gene sequencing
revenue earned by Agencourt that is related to the transferred business for a
period of two years after the date of sale. Accordingly, the cash flows from
the GenomeVision(TM) Services group will not have been completely eliminated
from the ongoing operations of the Company as a result of the disposal
transaction. As a result, the sale does not initially qualify as a
"discontinued operation" as defined by SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
In connection with the sale of its GenomeVision(TM) Services business, the
Company determined that certain equipment related to this segment will no
longer be used and will be abandoned subsequent to the sale. As a result, the
Company revised the estimated useful lives of this equipment and recorded
additional depreciation expense of $669,000 during the fourth quarter of 2002.
The Company also evaluated and wrote down its excess inventory of disposables
related to the GenomeVision(TM) Services business by $312,000 during the fourth
quarter of 2002. Additionally, through this divestiture, the Company eliminated
approximately 60 full-time positions, of which approximately 49 employees were
not offered employment with Agencourt. The Company will record and pay
severance costs of approximately $636,000 during the first quarter of 2003
related to these employees. Refer to Note 1(j) for certain segment information
related to GenomeVision(TM) Services.
F-27