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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from September 1, 2000 to December 31, 2000
Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
100 BEAVER STREET;
WALTHAM, MASSACHUSETTS 02453
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 22,708,568
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$.10 PAR VALUE Outstanding September 4, 2001
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Genome Therapeutics Corp. and Subsidiary
Index to Financial Information and Other Information
Page
Part I
Financial Information (unaudited):
Consolidated Condensed Balance Sheets as of
August 31, 2000 and December 31, 2000 3
Consolidated Statements of Operations for the four
month periods from September 1, 1999 to December 31,
1999 and September 1, 2000 to December 31, 2000 4
Consolidated Statements of Cash Flows for the four
month periods from September 1, 1999 to December 31,
1999 and September 1, 2000 to December 31, 2000 5
Notes to Consolidated Condensed Financial Statements 6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Part II
Other Information:
Other Information 18
Signature 19
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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August 31, December 31,
2000 2000
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $52,111,172 $10,095,817
Marketable securities 22,348,841 51,743,917
Interest receivable 574,603 1,466,808
Accounts receivable 268,498 827,106
Unbilled costs and fees 548,807 796,072
Prepaid expenses and other current assets 383,929 900,547
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Total current assets 76,235,850 65,830,267
Equipment, furniture, and leasehold improvements, at cost:
Laboratory and scientific equipment 18,465,674 18,823,063
Leasehold improvements 8,260,884 8,302,308
Equipment and furniture 1,114,195 1,134,320
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27,840,753 28,259,691
Less accumulated depreciation and amortization 14,392,805 15,225,148
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13,447,948 13,034,543
Restricted cash 200,000 200,000
Long-term marketable securities 1,224,184 10,970,153
Other assets 227,541 216,041
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Total assets $91,335,523 $90,251,004
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,543,603 $ 1,296,511
Accrued expenses 3,240,423 3,712,757
Deferred revenue 3,013,847 4,720,234
Current maturities of long-term obligations 4,719,604 4,499,696
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Total current liabilities 12,517,477 14,229,198
Long-term obligations, net of current maturities 4,543,201 3,334,354
Stockholders' equity 74,274,845 72,687,452
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Total liabilities and stockholders' equity $91,335,523 $90,251,004
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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Four Month Period Ended
December 31, December 31,
1999 2000
(Unaudited)
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Revenues:
Contract research, licenses and subscription fees $ 8,942,578 $ 7,964,142
Costs and Expenses:
Research and development 7,214,851 9,245,798
Selling, general and administrative 1,371,203 2,481,267
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Total Costs and Expenses 8,586,054 11,727,065
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Income (Loss) from Operations 356,524 (3,762,923)
Interest income 496,281 1,600,119
Interest expense (271,915) (287,099)
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Net interest income 224,366 1,313,020
Net Income (Loss) $ 580,890 $(2,449,903)
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Net Income (Loss) Per Common Share:
Basic $ 0.03 $ (0.11)
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Diluted $ 0.03 $ (0.11)
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Weighted Average Number Of Common and
Common Equivalent Shares Outstanding:
Basic 19,059,768 22,281,618
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Diluted 20,564,781 22,281,618
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See Notes to Consolidated Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Four Month Period Ended
December 31, December 31,
1999 2000
(Unaudited)
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Cash Flows from Operating Activities:
Net income (loss) $ 580,890 ($ 2,449,903)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,270,855 1,463,486
Loss on disposal of fixed assets -- 106,753
Stock-based compensation expense 169,015 751,605
Changes in assets and liabilities:
Interest receivable (406,611) (892,205)
Accounts receivable (775,083) (558,608)
Unbilled costs and fees (1,980,939) (247,265)
Prepaid expenses and other current assets (293,842) (516,618)
Accounts payable 2,599 (247,092)
Accrued expenses 340,168 472,334
Deferred revenue 1,162,155 1,706,387
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Total adjustments (511,683) 2,038,777
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Net cash provided by (used in) operating activities 69,207 (411,126)
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Cash Flows from Investing Activities:
Purchases of marketable securities (14,122,222) (44,801,044)
Maturities of marketable securities 4,620,000 5,660,000
Purchases of equipment, furniture and leasehold improvements (1,696,485) (859,931)
Decrease in other assets 11,500 11,500
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Net cash used in investing activities (11,187,207) (39,989,475)
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Cash Flows from Financing Activities:
Proceeds from sale of common stock 3,732,115 --
Proceeds from exercise of stock options 953,845 110,905
Payments on long-term obligations (1,354,548) (1,725,659)
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Net cash provided by (used in) financing activities 3,331,412 (1,614,754)
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Net Decrease in Cash and Cash Equivalents (7,786,588) (42,015,355)
Cash and Cash Equivalents, at beginning of period 12,802,162 52,111,172
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Cash and Cash Equivalents, at end of period $ 5,015,574 $ 10,095,817
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Supplemental Disclosure of Cash Flow Information:
Interest paid during period $ 271,915 $ 287,099
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Income taxes paid during period $ 9,000 $ 9,000
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Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital lease obligations $ 372,000 $ 296,904
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See Notes to Consolidated Condensed Financial Statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
This transactional report covering the transition period of September
1, 2000 to December 31, 2000 is being filed in conjunction with the Board of
Directors' approval on July 24, 2001 to change the Company's fiscal year end
from August 31 to December 31, effective the fiscal year ended December 31,
2000.
The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the unaudited consolidated condensed financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments (consisting only of normal recurring entries) necessary
for a fair presentation of interim period results. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The accompanying consolidated condensed financial statements should
be read in conjunction with the Company's Form 10-K, which was filed with the
Securities and Exchange Commission on November 22, 2000.
2. REVENUE RECOGNITION
Revenues consist of contract research, license fees and subscription
fees from the PathoGenome(TM) Database. These revenues are derived from
alliances with pharmaceutical companies, government grants and contracts, and
fees received from custom gene sequencing and analysis. The Company follows the
provisions of Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition. In
accordance with SAB No. 101, revenues from contract research derived from
alliances with pharmaceutical companies, from government grants and contracts,
and from custom gene sequencing and analysis are recognized over the respective
contract periods as the services are provided. License fees are recognized
ratably over the life of the alliance. Subscription fees from the PathoGenome
Database are recognized ratably over the life of the subscription. Milestone
payments, that are deemed to be substantive from research and development
alliances, are recognized when they are achieved. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts billed and received prior to revenue recognition.
3. NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share, which establishes standards for computing and
presenting earnings per share. Basic earnings per share was determined by
dividing net income by the weighted average common shares outstanding during the
period. Diluted earnings per share was determined by dividing net income by the
weighted average common and common equivalent shares outstanding during the
period using the treasury stock method. Diluted loss per share is the same as
basic loss per share for the four month period from September 1, 2000 to
December 31, 2000, as the effect of the potential common stock is antidilutive.
Dilutive securities, which consist of stock options, restricted stock and
directors' deferred stock, that were not included in diluted net loss per common
share numbered 3,227,049 at December 31, 2000.
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4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At December 31, 2000 and August 31, 2000, the
Company's cash equivalents and marketable securities are classified as
held-to-maturity, as the Company has the positive intent and ability to hold
these securities to maturity. Cash equivalents are short-term, highly liquid
investments with original maturities of three months or less. Marketable
securities are investment securities with original maturities of greater than
three months. Cash equivalents are carried at cost, which approximates market
value, and consist of money market funds, repurchase agreements and debt
securities. Marketable securities are recorded at amortized cost, which
approximates market value. The Company has not recorded any realized gains or
losses on its marketable securities. Marketable securities consist of commercial
paper and U.S. government debt securities. The average maturity of the Company's
marketable securities is approximately 10 months at December 31, 2000.
At August 31, 2000 and December 31, 2000, the Company's cash, cash equivalents
and marketable securities consisted of the following:
August 31, December 31,
2000 2000
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Cash and Cash Equivalents:
Cash ....................................... $42,211,172 $ 9,245,817
Debt securities ............................ 9,900,000 850,000
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Total cash and cash equivalents .... $52,111,172 $10,095,817
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Marketable Securities:
Short-term securities ...................... $22,348,841 $51,743,917
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Long-term securities ....................... 1,224,184 10,970,153
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Total marketable securities ........ $23,573,025 $62,714,070
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The Company has $200,000 in restricted cash in connection with certain long-term
obligations at August 31, 2000 and December 31, 2000 (see Note 8).
5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6. COMPREHENSIVE LOSS
The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The Company's total
comprehensive net loss for the four month periods from September 1, 1999 to
December 31, 1999 and September 1, 2000 to December 31, 2000 were the same as
reported net loss for those periods.
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7. SEGMENT REPORTING
The Company applies 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 maker, or decision-making group, in
making decisions 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 one operating segment. As a
result, the financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segment. All of the Company's revenues are generated in the United States and
all of its assets are located in the United States.
8. LONG-TERM OBLIGATIONS
On February 23, 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. On December 18, 2000, the Company increased the line of credit
by $3,000,000 to $7,000,000. The Company, at its discretion, can enter into
either an operating or capital lease. Borrowings under operating leases are
payable in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of December 31, 2000, the Company had entered into $144,000 in
operating leases and $3,692,000 in capital leases. The interest rates under the
capital leases range from 9.31% to 10.37%. The Company had approximately
$3,164,000 available under this line of credit at December 31, 2000.
In addition, the Company had entered into other capital lease
arrangements under which it financed approximately $15,060,000 of laboratory,
computer and office equipment, as well as facility renovations. These leases are
payable in 36 to 48 monthly installments from date of initiation. Interest rates
range from 7.63% to 10.28%. Under several agreements, we are required to
maintain certain financial ratios pertaining to minimum cash balances, tangible
net worth and debt service coverage. As of December 31, 2000, the Company was in
compliance with all of these covenants. We had no additional borrowing capacity
under these capital lease agreements at December 31, 2000.
9. ALLIANCES
(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 to further develop and annotate the
Company's H. pylori genomic sequence database, identify therapeutic and vaccine
targets and develop appropriate biological assays. In August 1999, the Company
successfully concluded its portion of the research alliance and transitioned the
program to AstraZeneca for pre-clinical testing.
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 received $13.5 million in license fees, expense
allowances, milestone payments and research funding under the Astra agreement
through December 31, 2000.
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The Company will also be entitled to receive royalties on Astra's sale
of products protected by the claims of patents licensed exclusively 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. The
Company has the right, under certain circumstances, to convert Astra's license
to a nonexclusive license in the event that Astra is not actively pursuing
commercialization of the technology.
For the four month periods from September 1, 1999 to December 31, 1999 and
September 1, 2000 to December 31, 2000, the Company recorded revenue of $16,000
and $0, respectively, under this agreement, which consisted of contract research
revenue.
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance and
license 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 also granted Schering-Plough a
nonexclusive license to use the Company's bioinformatics systems for
Schering-Plough's internal use in connection with the genomic databases licensed
to Schering-Plough under the agreement and other genomic databases
Schering-Plough develops or acquires. The Company also agreed to undertake
certain research efforts to identify bacteria-specific genes essential to
microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough paid an initial license fee and
will fund the research program through September 2001. Under this agreement,
Schering-Plough agreed to pay the Company a minimum of $21.9 million in an
up-front license fee, research funding and milestone payments. Subject to the
achievement of additional product development milestones, Schering-Plough agreed
to pay the Company up to an additional $24 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 by the Company 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 from the Company. A total
of $20.4 million had been received through December 31, 2000.
For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, the Company recorded revenue of
$756,000 and $573,000, respectively, under this agreement, which consisted of
contract research revenue.
In December 1996, the Company entered into its second strategic
alliance and license agreement with Schering-Plough. This agreement calls for
the use of genomics to discover new pharmaceutical products for treating asthma.
As part of the agreement, the Company will employ 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, (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, Schering-Plough paid an initial license fee and
an expense allowance to the Company. Schering-Plough agreed to fund the research
program through at least December 2001.
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In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments, as well as pay royalties based upon sales of
therapeutics products developed from this collaboration. If all milestones are
met and the research program continues for its full term, total payments to the
Company will approximate $75.9 million, excluding royalties. Of the total
potential payments, approximately $31.4 million represents license fees and
research payments, and $44.5 million represent milestone payments based on
achievement of research and product development milestones. A total of $30.7
million has been received through December 31, 2000.
For the four month period from September 1, 1999 to December 31, 1999,
the Company recorded revenue of $2,885,000 under this agreement, which consisted
of contract research revenue and a milestone payment. For the four month period
from September 1, 2000 to December 31, 2000, the Company recorded revenue of
$1,517,000 under this agreement, which consisted of contract research revenue.
On September 1997, the Company entered into a third strategic alliance
and license agreement with Schering-Plough to use genomics to discover and
develop new pharmaceutical products to treat fungal infections.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the alliance related to two fungal pathogens, Candida albicans and
Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed during
the course of the research program. In return, Schering-Plough agreed to fund a
research program through September 2001. If all milestones are met and the
research program continues for its full term, total payments to the Company will
approximate $32.7 million, excluding royalties. Of the total potential payments,
$9.7 million represents contract research payments and $23.0 million represents
milestone payments based on achievement of research and product development
milestones. A total of $11.6 million has been received through December 31,
2000. Additionally, the Company entered into a subscription agreement with
Schering-Plough to provide Schering-Plough with nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome, and associated
information relating to microbial organisms (see Note 10).
For the four month period from September 1, 1999 to December 31, 1999,
the Company recorded revenue of $1,840,000 under this agreement, which consisted
of contract research revenue and a milestone payment. For the four month period
from September 1, 2000 to December 31, 2000, the Company recorded revenue of
$463,000 under this agreement, which consisted of contract research revenue.
(c) 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
participating as part of an international consortium in a full-scale effort to
sequence the human genome. The Company is entitled to receive research and
development funding from the National Human Genome Research Institute (NHGRI) of
up to $15.6 million over a three-year period, of which $12.0 million is
appropriated through October 2001.
In October 1999, the NHGRI named the Company as a pilot center to the
Mouse Genome Sequencing Network. The Company is entitled to receive $12.9
million in funding over three years with respect to this agreement, of which
$9.0 million is appropriated through October 2001. In August 2000, the Company
was named one of two primary centers for the Rat Sequencing Program from NHGRI.
As part of the agreement, we 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.
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For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, the Company recorded revenue of
$1,437,000 and $3,053,000, respectively, under these agreements.
Funding under our government grants and research contracts is subject
to appropriation each year by the U.S. Congress and can be discontinued or
reduced at any time. In addition, we cannot be certain that we will receive
additional grants or contracts in the future.
(d) BIOMERIEUX ALLIANCE
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 Database (see Note 10),
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 ratably over the four-year term of the agreement.
For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, the Company recorded revenue of
$232,000 and $411,000, respectively, under this agreement, which consisted of
contract research revenue and amortization of an up-front license fee. A total
of $2.4 million had been received through December 31, 2000.
(e) WYETH-AYERST LABORATORIES
In December 1999, the Company entered into a strategic alliance with
Wyeth-Ayerst Laboratories 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-Ayerst'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-Ayerst paid the Company
an up-front license fee, and will fund a multi-year research program, which
includes milestone payments and royalties on sales of therapeutics products
developed from this alliance. 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 $118 million.
For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, the Company recorded revenue of $0
and $640,000, respectively, under this agreement, which consisted of contract
research revenue and amortization of an up-front license fee. A total of $2.1
million had been received through December 31, 2000.
10. 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 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 Database. The Company
retains all rights associated with protein therapeutic, diagnostic and vaccine
use of bacterial genes or gene products.
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For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, the Company recorded revenue of
$1,483,000 and $937,000, respectively, under these agreements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("GTC", "we", or "our") is a leader in the
commercialization of genomics-based drug discovery. We have over ten years of
experience in genomics research and have been one of the original recipients of
funding from the United States government under its genome programs. Our
commercial strategy is to use our genomics and related proprietary technologies
to identify and validate novel drug targets for commercialization. Our two areas
of scientific focus are the discovery and characterization of novel targets for
human diseases and infectious diseases. We also commercialize our sequencing
capabilities through the GTC Sequencing Center, which we established in July
1999 to provide high quality, industrial scale sequencing to pharmaceutical and
biotechnology companies on a fee for service basis. In May 1997, we introduced a
non-exclusive genetic database, the PathoGenome(TM) Database, which provides
subscribers with genetic information to identify gene targets. We believe that
our genomic discoveries and information from our database will lead to the
development of novel therapeutics, vaccines, and diagnostic products.
We receive payments from our strategic partners based on license fees,
contract research and milestone payments during the term of the alliance. In
addition, subscribers to our PathoGenome Database pay access fees for the
information they obtain. Once a product resulting from a research alliance or a
subscriber's use of the PathoGenome Database is commercialized, we are entitled
to receive royalty payments based upon product revenues. 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 the strategic
partners 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. Additionally, we sell, as a contract service business, high quality
genomic sequencing information to third parties, including pharmaceutical
companies, biotechnology companies, governmental agencies, and academic
institutions.
Our primary sources of revenue are from alliance agreements with
pharmaceutical company partners, subscription agreements to our PathoGenome
Database and government research grants and contracts. Currently, we have seven
strategic research 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 H. pylori. In
August 1999, the sponsored 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. We entered into an alliance with
Schering-Plough in December 1995. Under this alliance, Schering-Plough can use
our Staph. aureus genomic database to identify new gene targets for the
development of novel antibiotics. 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 September 1997, we established our third research alliance with
Schering-Plough for the development of new pharmaceutical products to treat
fungal infections. 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
Database and made an equity investment. In December 1999, we entered into a
strategic alliance with Wyeth-Ayerst to develop drugs based on our genetic
research to treat osteoporosis.
In May 1997, we introduced our PathoGenome 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, 2000, we had a total of seven
subscribers. Under our agreements, the subscribers receive non-exclusive access
to information relating to microbial organisms in our PathoGenome 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.
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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. These programs strengthen our genomics technology base and
enhance the expertise of our scientific personnel. In July 1999, the government
named us as one of the nationally funded DNA sequencing centers of the
international Human Genome Project. We are participating in an international
consortium in a full-scale effort to sequence the human genome. We will receive
funding from the National Human Genome Research Institute (NHGRI) under the
Human Genome Project of up to $15.6 million over a three-year period, of which
$12.0 million is appropriated through October 2001. In October 1999, NHGRI
appointed us as one of the initial centers in the Mouse Genome Sequencing
Network. The NHGRI agreed to provide us with funding under this program of up to
$12.9 million over a three-year period, of which $9.0 million is appropriated
through October 2001. In August 2000, we were named as one of two primary
centers for the Rat Sequencing Program by NHGRI. As part of the agreement, we
switched our focus from the mouse genome to the rat genome and agreed to use all
remaining funding under the mouse genome award and a portion of the remaining
funding under the human genome award to participate in the rat genome
initiative. These programs are subject to annual appropriations by the
government based upon the availability of government funds and the achievement
by us of certain milestones.
We have incurred significant operating losses since our inception. As
of December 31, 2000, we had an accumulated deficit of approximately $72
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 contracts and 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.
We are subject to risks common to companies in our industry including
unproven technology and business strategy, reliance upon collaborative partners
and others, rapid technological change, history of operating losses, need for
future capital, competition, patent and proprietary rights, dependence on key
personnel, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, healthcare reform and related matters, availability of, and competition
for, unique family resources, and volatility of our stock.
RESULTS OF OPERATIONS
FOUR MONTH PERIOD FROM SEPTEMBER 1, 1999 TO DECEMBER 31, 1999 AND SEPTEMBER 1,
2000 TO DECEMBER 31, 2000
This transactional report covering the transition period of September
1, 2000 to December 31, 2000 is being filed in conjunction with the Board of
Directors' approval on July 24, 2001 to change the Company's fiscal year end
from August 31 to December 31, effective the fiscal year ended December 31,
2000.
REVENUES
Contract research, licenses, and subscription fees decreased 11% from
$8,943,000 for the four month period from September 1, 1999 to December 31, 1999
to $7,964,000 for the four month period from September 1, 2000 to December 31,
2000. The decrease in contract research, licenses and subscription fees was
primarily attributable to lower milestone payments received in the 2000 period
under our existing strategic alliances, as well as lower subscription fees to
our PathoGenome Database. This decrease in revenue was partially offset by an
increase in revenue recognized under our GTC Sequencing Center, which provides
sequencing services for our biotechnology and pharmaceutical customers, as well
as for the National Human Genome Research Institute as a participant in the
International Human Genome Project and the Rat Genome Sequencing projects.
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COSTS AND EXPENSES
Total costs and expenses increased 37% from $8,586,000 for the four
month period from September 1, 1999 to December 31, 1999 to $11,727,000 for the
four month period from September 1, 2000 to December 31, 2000. Research and
development expense, which includes internal research and development expenses
and research expenses funded pursuant to arrangements with our strategic
alliances, commercial sequencing customers and the U.S. government, increased
28% from $7,215,000 for the four month period from September 1, 1999 to December
31, 1999 to $9,246,000 for the four month period from September 1, 2000 to
December 31, 2000. The increase was primarily due to an increase in costs and
expenses associated with the increase in revenues earned under our GTC
Sequencing Center, as noted above. The increase also reflected an expansion of
our internal research programs, specifically in the area of infectious diseases,
human gene discovery and pharmacogenomics. The increase consisted of an increase
in payroll and related expenses, laboratory supplies and overhead expenses
related to our operations.
Selling, general and administrative expenses increased 81% from
$1,371,000 for the four month period from September 1, 1999 to December 31, 1999
to $2,481,000 for the four month period from September 1, 2000 to December 31,
2000. This increase was primarily attributable to an increase in payroll related
expenses, recruiting and employee relocation expenses. In addition, we recorded
a charge for severance expenses in accordance with the terms of our severance
agreement with Dr. Richard Gill.
INTEREST INCOME AND EXPENSE
Interest income increased 223% from $496,000 for the four month period
from September 1, 1999 to December 31, 1999 to $1,600,000 for the same period
ended December 31, 2000, reflecting primarily an increase in funds available for
investment. The increase in funds available for investment was primarily due to
proceeds received from the sale of 1,500,000 shares of common stock for net
proceeds of $44,723,000 in June and July 2000.
Interest expense remained relatively unchanged at $272,000 for the four
month period from September 1, 1999 to December 31, 1999 and $287,000 for the
same period ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have been payments received from strategic
alliances, subscription fees, government grants and contracts, borrowings under
equipment lending facilities and capital leases and proceeds from the sale of
equity securities.
As of December 31, 2000, we had cash, cash equivalents, and short-term
and long-term marketable securities of approximately $72,810,000. During the
twelve months ended December 31, 2000, we sold 1,500,000 shares of common stock
in a series of transactions through the Nasdaq National Market, resulting in net
proceeds of $44,723,000. During the same period, we issued 1,288,943 shares of
common stock related to the exercise of stock options and the employee stock
purchase plan, resulting in net proceeds of $3,528,000. During the twelve months
ended December 31, 1999, we sold 678,610 shares of common stock to bioMerieux, a
strategic alliance partner, resulting in net proceeds of approximately
$3,732,000. During the same period in 1999, we issued 472,459 shares of common
stock related to the exercise of stock options, resulting in net proceeds of
$1,235,000.
We have various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. At December 31, 2000, we had an
aggregate of $7,834,000 outstanding under our borrowing arrangements, which was
repayable over the next 35 months, of which $4,500,000 was repayable within the
next 12 months. Under these arrangements, we are required to maintain certain
financial ratios, including minimum levels of tangible net worth, total
indebtedness to tangible net worth, minimum cash level, debt service coverage
and minimum restricted cash balances. As of December 31, 2000, the Company was
in compliance with all of these covenants. At December 31, 2000, we had
approximately $3,164,000 available under one of these arrangements for future
borrowings.
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Our operating activities provided cash of $69,000 for the four month
period from September 1, 1999 to December 31, 1999, primarily due to our net
income, increases in deferred revenue, accrued expenses, noncash expenditures
such as depreciation and amortization and stock-based compensation expense,
partially offset by decreases in interest receivable, accounts receivable,
unbilled costs & fees and prepaid expense and other current assets. Our
operating activities used cash of $411,000 for the four month period from
September 1, 2000 to December 31, 2000 primarily due to our net loss, and
increases in interest receivable, accounts receivable, unbilled costs & fees,
and prepaid expense and other current assets. These uses of cash were partially
offset by increases in deferred revenue, accrued expenses, and noncash
expenditures such as depreciation and amortization, stock-based compensation
expense and loss on sale of disposal of fixed assets.
For the four month periods from September 1, 1999 to December 31, 1999
and September 1, 2000 to December 31, 2000, our investing activities used cash
of $11,187,000 and $39,989,000, respectively, to purchase marketable securities,
capital equipment and leasehold improvements, partially offset by the conversion
of marketable securities to cash and cash equivalents.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $1,157,000 for the four month period from September 1,
2000 to December 31, 2000. Purchases consisted primarily of laboratory and
computer equipment.
Our financing activities provided cash of approximately $3,331,000 for
the four month period from September 1, 1999 to December 31, 1999, primarily
from the sale of equity securities, exercise of stock options, net of payments
of long-term obligations. Our financing activities used cash of $1,615,000 for
the four month period from September 1, 2000 to December 31, 2000, primarily for
payments of long-term obligations, partially offset by proceeds received from
the exercise of stock options.
At August 31, 2000, we had net operating loss and tax credits
(investment and research) carryforwards of $87,055,000 and $3,071,000,
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 these losses are expiring due to the limitations of the
carryforwards period.
We believe that under our current rate of investment in research and
development, our existing capital resources are adequate for the foreseeable
future. There is no assurance, however, that changes in our plans or events
affecting our operations will not result in accelerated, or unexpected
expenditures.
We may seek additional funding in the future through public or private
financing. Additional financing may not be available when needed, or if
available, it may not be on terms acceptable to us. To the extent that we raise
additional capital by issuing equity or convertible debt securities, ownership
dilution to stockholders will result.
We do not currently use derivative financial instruments. We generally
place our marketable security investments in high quality credit instruments, as
specified in our investment policy guidelines; the policy also limits the amount
of 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.
This Form 10-Q and documents we have filed with the Securities and
Exchange Commission contain forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements represent our management's judgment regarding future
events. Forward-looking statements typically are identified by use of terms such
as "may," "will," "should," "plan," "expect," "intend," "anticipate,"
"estimate," and similar words, although some forward-looking statements are
expressed differently. All forward-looking statements, other than statements of
historical fact, included in this report regarding our financial position,
business strategy and plans or objectives for future operations are
forward-looking statements.
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We cannot guarantee the accuracy of the forward-looking statements, nor do we
plan to update these forward-looking statements. You should be aware that our
actual results could differ materially from those contained in the forward
looking statements due to a number of risks affecting our business, including
the ability of the Company and its alliance partners to (i) successfully develop
products based on the Company's genomic information, (ii) obtain the necessary
governmental approvals, (iii) effectively commercialize any products developed
before its competitors and (iv) obtain and enforce intellectual property rights,
as well as the risk factors set forth in the Exhibit 99 to the Company's Annual
Report on Form 10-K for the year ended August 31, 2000 and those set forth in
other filings that we may make with the Securities and Exchange Commission from
time to time.
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Part II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
None
b) Reports on Form 8-K
None
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Stephen Cohen
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Stephen Cohen, SVP & CFO
(Principal Financial Officer)
Date: September 7, 2001
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