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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
For Quarter Ended: February 24, 2001
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
(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;
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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 22,456,499
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$.10 PAR VALUE Outstanding April 6, 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 3
August 31, 2000 and February 24, 2001
Consolidated Condensed Statements of Operations 4
for the thirteen and twenty-six week periods ended
February 26, 2000 and February 24, 2001
Consolidated Statements of Cash Flows for the 5
thirteen and twenty-six week periods ended February 26, 2000
and February 24, 2001
Notes to Consolidated Condensed Financial 6-12
Statements
Management's Discussion and Analysis of Financial 13-18
Condition and Results of Operations
Part II
Other Information:
Other Information 19-20
Signature 21
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
August 31, February 24,
2000 2001
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $52,111,172 $21,616,604
Marketable securities 22,348,841 40,422,234
Interest receivable 574,603 1,281,133
Accounts receivable 268,498 2,308,678
Unbilled costs and fees 548,807 1,931,340
Prepaid expenses and other current assets 383,929 852,510
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Total current assets 76,235,850 68,412,499
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 18,465,674 19,159,791
Leasehold improvements 8,260,884 8,406,208
Equipment and furniture 1,114,195 1,140,069
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27,840,753 28,706,068
Less accumulated depreciation
and amortization 14,392,805 15,932,133
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13,447,948 12,773,935
Restricted cash 200,000 200,000
Long-term marketable securities 1,224,184 9,584,205
Other assets 227,541 203,841
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Total assets $91,335,523 $91,174,480
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,543,603 $ 1,610,736
Accrued expenses 3,240,423 2,843,338
Deferred revenue 3,013,847 4,519,280
Current maturities of long-term obligations 4,719,604 4,754,633
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Total current liabilities 12,517,477 13,727,987
Long-term obligations, net of current maturities 4,543,201 3,730,687
Shareholders' equity 74,274,845 73,715,806
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Total liabilities and shareholders' equity $91,335,523 $91,174,480
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Week Periods Ended Twenty-Six Week Periods Ended
February 26, February 24, February 26, February 24,
2000 2001 2000 2001
(Unaudited) (Unaudited)
Revenues:
Contract research, licenses,
subscription fees and royalties $ 7,805,171 $ 8,190,878 $ 13,840,173 $ 13,801,834
Costs and Expenses:
Research and development 6,408,241 7,837,148 11,749,546 14,490,344
Selling, general and administrative 1,718,304 1,849,734 2,687,949 3,427,203
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Total costs and expenses 8,126,545 9,686,882 14,437,495 17,917,547
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Loss from Operations (321,374) (1,496,004) (597,322) (4,115,713)
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Interest income 435,596 1,151,879 799,267 2,381,864
Interest expense (187,125) (186,241) (396,451) (394,274)
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Net interest income 248,471 965,638 402,816 1,987,590
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Net loss ($72,903) ($530,366) ($194,506) ($2,128,123)
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Net Loss per Common Share:
Basic and diluted ($0.00) ($0.02) ($0.01) ($0.10)
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Weighted average common shares outstanding:
Basic and diluted 19,843,446 22,354,296 19,395,565 22,317,015
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-Six Week Periods Ended
February 26, February 24,
2000 2001
(Unaudited)
Cash Flows from Operating Activities:
Net loss ($194,506) ($2,128,123)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,976,058 2,215,852
Loss on disposal of fixed assets -- 106,426
Deferred compensation 469,705 856,286
Changes in assets and liabilities:
Interest receivable (6,275) (706,530)
Accounts receivable (85,812) (2,040,180)
Unbilled costs and fees (45,749) (1,382,533)
Prepaid expenses and other current assets (259,319) (468,581)
Accounts payable (46,222) 67,133
Accrued expenses 1,907,078 (397,085)
Deferred revenue 1,737,507 1,505,433
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Total adjustments 5,646,971 (243,779)
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Net cash provided by (used in)
operating activities 5,452,465 (2,371,902)
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Cash Flows from Investing Activities:
Purchases of marketable securities (21,125,970) (49,554,414)
Maturities of marketable securities 25,876,550 23,121,000
Purchases of equipment and leasehold improvements 54,817 59,225
Decrease in other assets 22,250 23,700
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Net cash provided by (used in) investing activities 4,827,647 (26,350,489)
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Cash Flows from Financing Activities:
Proceeds from sale of common stock 3,732,115 --
Proceeds from exercise of stock options 3,636,092 585,608
Proceeds from employee stock purchase plan -- 124,790
Proceeds from issuance of restricted stock -- 2,400
Payments on long-term obligations (2,068,686) (2,484,975)
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Net cash provided by (used in) financing activities 5,299,521 (1,772,177)
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Net Increase in Cash and Cash Equivalents 15,579,633 (30,494,568)
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 $ 28,381,795 $ 21,616,604
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Supplemental Disclosure of Cash Flow Information:
Interest paid during period $ 396,451 $ 394,274
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Income taxes paid during period $ 7,800 $ 13,500
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Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired under capital lease obligations $ 2,376,272 $ 1,707,491
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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
The condensed consolidated 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 condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments (consisting only of normal recurring accruals) 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 results of operations for the twenty-six week period ended
February 24, 2001 are not necessarily indicative of the results to be expected
for the full fiscal year. The accompanying condensed consolidated 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 license fees, contract research and subscription
fees from the PathoGenome(TM) Database. These revenues are derived from
alliances with pharmaceutical companies, government grants, and fees received
from custom gene sequencing and analysis. 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 as earned. Subscription fees from the PathoGenome Database are
recognized ratably over the life of the subscription. Milestone payments 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 received prior to revenue recognition.
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, was
issued in December 1999 and is effective for companies with fiscal years
beginning after December 15, 2000. SAB No. 101 requires companies to recognize
certain up-front nonrefundable fees over the life of the related alliances when
such fees are received in conjunction with alliances that have multiple
elements. The Company is required to adopt this new accounting principles
through a cumulative charge to its statement of operations, in accordance with
Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, no later
than the fourth quarter of fiscal 2001. The Company believes that the adoption
of SAB No. 101 will not have a material impact on its future operating results
as it relates to the up-front nonrefundable payments and milestone payments
received in connection with alliances.
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 and diluted earnings per share were
determined by dividing net loss by the weighted average common 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,
restricted stock and directors' deferred stock that were not included in diluted
net loss per common share were 3,3510,147 and 2,533,967 at February 24, 2001 and
February 26, 2000, respectively.
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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 February 24, 2001 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 less than three months. 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 11 months at February 24, 2001.
At August 31, 2000 and February 24, 2001, the Company's cash, cash equivalents
and marketable securities consisted of the following:
August 31, February 24,
2000 2001
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Cash and Cash Equivalents:
Cash .................................. $42,211,172 $21,115,572
Debt securities ....................... 9,900,000 501,032
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Total cash and cash equivalents $52,111,172 $21,616,604
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Marketable Securities:
Short-term securities ................. $22,348,841 $40,422,234
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Long-term securities .................. 1,224,184 9,584,205
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Total marketable securities ... $23,573,025 $50,006,439
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The Company has $200,000 in restricted cash in connection with certain long-term
obligations (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 twenty-six week periods ended February 24, 2001
and February 26, 2000 were the same as reported net loss for those periods.
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
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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 lease
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
credit line 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 February 24, 2001, the Company has entered into
$256,000 in operating leases and $5,102,000 in capital leases. The interest
rates under the capital leases range from 7.85% to 10.37%. The Company had
approximately $1,642,000 available under this line of credit at February 24,
2001.
The Company had entered into other capital lease line 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. We had no additional borrowing capacity under these
capital lease agreements at February 24, 2001.
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 February 24, 2001.
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.
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For the twenty-six week periods ended February 24, 2001 and February 26,
2000, the Company recorded $0 and $13,000, 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 at least 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 $20.3 million has been received through February 24, 2001.
For the thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $416,000 and $532,000, respectively, under
this agreement, which consisted of contract research revenue.
For the twenty-six week periods ended February 24, 2001 and February
26, 2000, the Company recorded revenue of $827,000 and $1,119,000 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. 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
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payments to the Company will $75.9 million, excluding royalties. Of the total
potential payments, approximately $31.4 million represents license fees and
research payments, and $44.5 million represents milestone payments based on
achievement of research and product development milestones. A total of $30.7
million has been received through February 24, 2001.
For the thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $2,116,000 and $2,318,000, respectively,
under this agreement, which consisted of contract research revenue, and
milestone payments.
For the twenty-six week periods ended February 24, 2001 and February
26, 2000, the Company recorded revenue of $3,216,000 and $3,757,000,
respectively, under this agreement, which consisted of contract research revenue
and milestone payments.
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 at least September 2001. If all milestones are met and
the research program continues for its full term, total payments to the Company
will $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 $11.5 million has been received through February 24,
2001. 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 thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $397,000 and $621,000, respectively, under
this agreement, which consisted of contract research revenue.
For the twenty-six week period ended February 24, 2001, the Company
recorded revenue of $717,000 under this agreement, which consisted of contract
research revenue. For the twenty-six week period ended February 26, 2000, the
Company recorded revenue of $2,275,000 under this agreement, which consisted of
contract research revenue and a milestone payment.
(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 in 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
$8.8 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 thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $2,619,000 and $2,190,000, respectively,
under these agreements. For the twenty-six week periods ended February 24, 2001
and February 26, 2000, the Company recorded revenue of $4,732,000 and
$3,153,000, 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),
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 thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $297,000 and $430,000, respectively, under
this agreement, which consisted of contract research revenue and amortization of
up-front license fees. For the twenty-six week periods ended February 24, 2001
and February 26, 2000, the Company recorded revenue of $594,000 and $519,000,
respectively, under this agreement, which consisted of contract research revenue
and amortization of up-front license fees. A total of $2.4 million has been
received through February 24, 2001.
(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 osteroporotic 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 thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $500,000 and $250,000, respectively, under
this agreement, which consisted of contract research revenue and amortization of
an up-front license fee. For the twenty-six week periods ended February 24, 2001
and February 26, 2000, the Company recorded revenue of $875,000 and $250,000,
respectively, under this agreement, which consisted of contract research revenue
and amortization of an up-front license fee. A total of $2.4 million has been
received through February 24, 2001.
10. DATABASE SUBSCRIPTIONS
The Company has entered into a number of PathoGenome(TM) Database
subscriptions. The database subscription provides 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.
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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.
For the thirteen-week periods ended February 24, 2001 and February 26,
2000, the Company recorded revenue of $1,017,000 and $1,162,000, respectively,
under these agreements. For the twenty-six week periods ended February 24, 2001
and February 26, 2000, the Company recorded revenue of $1,767,000 and
$2,225,000, 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 February 24, 2001, 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 $8.8 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 February 24, 2001, we had an accumulated deficit of approximately $71.6
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
THIRTEEN-WEEK PERIODS ENDED FEBRUARY 26, 2000 AND FEBRUARY 24, 2001
REVENUES
Contract research, licenses, and subscription fees increased 5% from
$7,805,000 for the thirteen-week period ended February 26, 2000 to $8,191,000
for the thirteen-week period ended February 24, 2001. The increase in contract
research, licenses and subscription fees was primarily attributable to 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. This
increase in revenue was partially offset by a decline in contract research
revenue under our existing strategic alliances and lower subscription fees to
our PathoGenome Database.
COSTS AND EXPENSES
Total costs and expenses increased 19% from $8,127,000 for the
thirteen-week period ended February 26, 2000 to $9,687,000 for the thirteen-week
period ended February 24, 2001. Research and development expense, which includes
internal research and development and research funded pursuant to arrangements
with our strategic alliances, commercial sequencing customers and the U.S.
government, increased 22% from $6,408,000 in the thirteen-week period ended
February 26, 2000 to $7,837,000 for the thirteen-week period ended February 24,
2001. The increase was primarily due to
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an increase in costs and expenses associated with the increase in revenues
earned under our GTC Sequencing Center, as noted above. The increase also
reflects 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 8% from
$1,718,000 for the thirteen-week periods ended February 26, 2000 to $1,850,000
for the thirteen-week periods ended February 24, 2001. This increase was
primarily attributable to an increase in payroll related expenses, recruiting
and employee relocation expenses.
INTEREST INCOME AND EXPENSE
Interest income increased 164% from $436,000 for the thirteen-week
period ended February 26, 2000 to $1,152,000 for the same period ended February
24, 2001, reflecting primarily an increase in funds available for investment.
Interest expense remained relatively the same at $187,0000 for
thirteen-week period ended February 26, 2000 and $186,000 for the same period
ended February 24, 2001.
TWENTY-SIX WEEK PERIODS ENDED FEBRUARY 26, 2000 AND FEBRUARY 24, 2001
REVENUES
Contract research, licenses, and subscription fees decreased slightly
from $13,840,000 for the twenty-six week period ended February 26, 2000 to
$13,802,000 for the twenty-six period ended February 24, 2001. The slight
decrease was primarily attributable to a decline in contract research revenue,
as well as lower milestone payments earned this year in comparison to last year.
These decreases were equivalently offset by an increase in revenues derived from
our GTC Sequencing Center, specifically, from our government collaborations with
the National Human Genome Research Institute in participation of the
International Human Genome Project and the Rat Genome Sequencing projects.
COSTS AND EXPENSES
Total costs and expenses increased 24% from $14,437,000 for the
twenty-six week period ended February 26, 2000 to $17,918,000 for the twenty-six
week period ended February 24, 2001. Research and development expense, which
includes internal research and development and research funded pursuant to
arrangements with our strategic alliances, commercial sequencing customers and
the U.S. government, increased by 23% from $11,750,000 for the twenty-six week
period ended February 26, 2000 to $14,490,000 for the twenty-six week period
ended February 24, 2001. The increase was primarily attributable to an increase
in revenues earned under our GTC Sequencing Center, as noted above. The increase
also reflects 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 28% from
$2,688,000 for the twenty-six periods ended February 26, 2000 to $3,427,000 for
the twenty-six week periods ended February 26, 2001. This increase was primarily
attributable to an increase in payroll and related expenses and recruiting and
relocation expenses.
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INTEREST INCOME AND EXPENSE
Interest income increased 198% from $799,000 for the twenty-six week
period ended February 26, 2000 to $2,382,000 for the same period ended February
24, 2001, reflecting primarily an increase in funds available for investment.
Interest expense remained relatively the same from $396,000 for the
twenty-six week periods ended February 26, 2000 to $394,000 for same period
ended February 24, 2001.
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 sale of equity
securities.
As of February 24, 2001, we had cash, cash equivalents, and short-term
and long-term marketable securities of approximately $71,823,000. In fiscal
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
$44,723,000, net of issuance costs. During fiscal 2000, we issued 1,532,302
shares of common stock related to the exercise of stock options, resulting in
proceeds received of approximately $4,155,000. In fiscal 2000, we also sold
678,610 shares of common stock to bioMerieux, a strategic alliance partner,
resulting in proceeds received of approximately $3,732,000, net of issuance
costs. For the twenty-six week period ended February 24, 2001, we issued 164,129
shares of common stock related to the exercise of stock options and the employee
stock purchase plan, resulting in proceeds received of $711,000.
We have various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. At February 24, 2001, we had an
aggregate of $8,485,000 outstanding under our borrowing arrangements which is
repayable over the next 36 months, of which $4,755,000 is 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. At February 24, 2001, we had approximately
$1,642,000 available under one of these arrangements for future borrowings.
Our operating activities used cash of $138,000 for the twenty-six week
period ended February 24, 2001, primarily due to our net loss, and increases in
interest receivable, unbilled costs & fees, prepaid expense and other current
assets, as well as a decrease in accrued liabilities. Cash used in operations
for the twenty-six week period ended February 24, 2001 was equivalently offset
by noncash expenditures such as depreciation and amortization, stock based
compensation and loss on sale of disposal of fixed assets, as well as an
increase in deferred revenue.
Our investing activities used cash of $26,456,000 for the twenty-six
week period ended February 24, 2001 to purchase marketable securities, capital
equipment and leasehold improvements, partially offset by the conversion of
marketable securities to cash and cash equivalents. Our investing activities
provided cash of $4,828,000 from the conversion of marketable securities to cash
and cash equivalents, partially offset by the purchase of marketable securities
and capital equipment and leasehold improvements.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $1,754,000 for the twenty-six week period ended February
24, 2001. Purchases consisted primarily of laboratory and computer equipment. We
currently estimate that we will acquire an additional $4,000,000 in capital
equipment in fiscal 2001 consisting primarily of computer, laboratory equipment,
and additions to leasehold improvement. We intend to finance the majority of
capital purchases made during fiscal 2001 under existing and new equipment
financing arrangements, yet to be negotiated.
Our financing activities used cash of $1,772,000 for the twenty-six
week period ended February 24, 2001, primarily for payments of long-term
obligations, partially offset by proceeds
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received from the exercise of stock options and the sale of common stock under
the employee stock purchase plan. Our financing activities provided cash of
approximately $5,300,000 for the twenty-six week period ended February 26, 2000,
primarily from the sale of equity securities, exercise of stock options, net of
payments of long-term obligations.
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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material impact on its financial
statements.
SAB No. 101 was issued in December 1999 and is effective for companies
with fiscal years beginning after December 15, 2000. SAB No. 101 will require
companies to recognize certain up-front nonrefundable fees over the life of the
related alliances when such fees are received in conjunction with alliances that
have multiple elements. The Company is required to adopt this new accounting
principles through a cumulative charge to its statement of operations, in
accordance with APB Opinion No. 20 no later than the fourth quarter of fiscal
2001. The Company believes that the adoption of SAB No. 101 will not have a
material impact on its future operating results as it relates to the up-front
nonrefundable payments and milestone payments received in connection with
alliances.
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 judgement 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. 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
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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
For a description of the lawsuit brought by Commonwealth
Biotechnologies, Inc. against the Company and other parties, see the Company's
Quarterly Report on Form 10-Q for quarter ended November 25, 2000.
Item 2. Changes In Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on February 27, 2001. At
the meeting, shareholders took the following actions:
1) Election of Directors.
Name of Nominee Shares Voted For Withhold Authority
--------------- ---------------- ------------------
Marc B. Garnick 18,980,312 689,705
Robert J. Hennessey 18,995,149 674,868
Philip J. Leder 18,981,008 689,009
Lawrence Levy 18,974,874 695,143
Steven M. Rauscher 18,973,678 696,339
Norbert Riedel 18,102,267 1,567,750
2) To approve the Company's 2001 Equity Incentive Plan.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
5,778,429 3,537,104 92,556 10,261,928
3) To approve the Amendment to the Articles of Organization to increase the
number of shares of Common Stock, $.10 par value, the Company is authorized to
issue from 35,000,000 to 50,000,000 shares.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
18,171,161 1,429,209 68,297 1,350
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4) To ratify the selection of Arthur Andersen LLP as the Company's auditors for
the fiscal year ending August 31, 2001.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
19,537,316 80,743 50,608 1,350
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
3.1 Articles of Amendment to Amended and Restated
Articles of Organization, dated March 15, 2001.
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
----------------------
Stephen Cohen, SVP & CFO
(Principal Financial Officer)
Date: April 10, 2001
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