SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No: 0-10824
GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
(State or other jurisdiction (I.R.S. Employer Identification no.)
of incorporation or organization)
100 BEAVER STREET;
WALTHAM, MASSACHUSETTS 02453
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (781) 398-2300
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 22,837,403
$.10 PAR VALUE Outstanding May 10, 2002
1
Genome Therapeutics Corp. and Subsidiary
Index to Financial Information and Other Information
Page
Part I
Financial Information (unaudited):
Consolidated Condensed Balance Sheets as of
December 31, 2001 and March 30, 2002 3
Consolidated Statements of Operations for the
thirteen-week period ended March 24, 2001
and the thirteen-week period ended March 30, 2002 4
Consolidated Statements of Cash Flows for the
thirteen-week period ended March 24, 2001
and the thirteen-week period ended March 30, 2002 5
Notes to Consolidated Condensed Financial
Statements 6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
Part II
Other Information:
Other Information 19
Signature 20
2
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------------------------------------------------
December 31, March 30,
2001 2002
-------------------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and cash equivalents $24,805,385 $42,764,885
Short-term investments 29,961,540 32,752,766
Interest receivable 1,074,726 478,742
Accounts receivable 513,885 212,862
Unbilled costs and fees 164,465 1,135,706
Prepaid expenses and other current assets 1,583,320 1,288,167
----------- -----------
Total current assets 58,103,321 78,633,128
----------- -----------
Property and Equipment, at cost:
Laboratory and scientific equipment 20,918,535 20,611,213
Leasehold improvements 8,798,842 8,885,789
Equipment and furniture 1,267,854 1,277,780
----------- -----------
30,985,231 30,774,782
Less--Accumulated depreciation 19,091,703 18,776,055
----------- -----------
11,893,528 11,998,727
Restricted Cash 200,000 -
Long-term Investments 12,374,324 517,571
Other Assets 168,425 1,100,352
----------- -----------
$82,739,598 $92,249,778
=========== ===========
Liabilities and Shareholders' Equity:
Current Liabilities:
Current maturities of long-term obligations 3,571,578 3,052,990
Accounts payable 2,092,593 1,205,468
Accrued expenses 4,832,713 7,097,379
Deferred revenue 3,449,959 1,344,718
----------- -----------
Total current liabilities 13,946,843 12,700,555
Long-term obligations, net of current maturities 2,060,817 19,013,713
Shareholders' Equity 66,731,938 60,535,510
----------- -----------
$82,739,598 $92,249,778
=========== ===========
See Notes to Consolidated Condensed Financial Statements
3
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------
Thirteen-Week Period Ended
-------------------------------
March 24, 2001 March 30, 2002
------------------------------------------------------------------------------
Revenue:
BioPharmaceutical $ 3,557,570 $ 2,433,725
GenomeVision(TM) Services 4,532,678 3,730,792
----------- -----------
Total revenue 8,090,248 6,164,517
=========== ===========
Costs and Expenses:
Cost of services 3,680,816 3,392,777
Research and development 3,822,329 7,813,973
Selling, general and administrative 1,634,922 2,057,385
----------- -----------
Total costs and expenses 9,138,067 13,264,135
----------- -----------
Loss from operations (1,047,819) (7,099,618)
Interest Income (Expense):
Interest income 1,143,795 530,932
Interest expense (169,342) (216,090)
----------- -----------
Net interest income 974,453 314,842
----------- -----------
Net loss $ (73,366) $(6,784,776)
=========== ===========
Net Loss per Common Share:
Basic and diluted $ - $ (0.30)
=========== ===========
Weighted Average Common Shares Outstanding:
Basic and diluted 22,409,501 22,798,224
=========== ===========
See Notes to Consolidated Condensed Financial Statements
4
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------
Thirteen-Week Period Ended
-----------------------------------------
March 24, 2001 March 30, 2002
----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss ($73,366) ($6,784,776)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,123,532 1,196,538
Gain on disposal of equipment and leasehold improvements (7,653) (53,121)
Amortization of deferred compensation 141,065 213,032
Changes in assets and liabilities:
Interest receivable 92,640 595,984
Accounts receivable (1,275,379) 301,023
Unbilled costs and fees (1,017,145) (971,241)
Prepaid expenses and other current assets 21,491 295,153
Accounts payable (246,326) (887,125)
Accrued expenses (715,024) 2,295,496
Deferred revenue (1,048,990) (2,105,241)
------------------ ------------------
Net cash used in operating activities (3,005,155) (5,904,278)
------------------ ------------------
Cash Flows from Investing Activities:
Purchases of investments (15,240,138) (1,043,768)
Proceeds from sale of investments 25,994,216 10,187,749
Purchases of property and equipment (499,037) (1,248,616)
Decrease in restricted cash - 200,000
Decrease (increase) in other assets 15,075 (931,927)
------------------ ------------------
Net cash provided by investing activities 10,270,116 7,163,438
------------------ ------------------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options 609,717 6,881
Proceeds from issuance of stock under the employee stock purchase plan - 259,151
Proceeds from convertible notes payable - 15,000,000
Proceeds from borrowings under equipment financing arrangements 1,410,587 3,500,000
Note receivable from officer (130,157) -
Payments on long-term obligations (1,033,735) (2,065,692)
------------------ ------------------
Net cash provided by financing activities 856,412 16,700,340
------------------ ------------------
Net Increase in Cash and Cash Equivalents 8,121,373 17,959,500
Cash and Cash Equivalents, beginning of period 10,095,817 24,805,385
------------------ ------------------
Cash and Cash Equivalents, end of period $18,217,190 $42,764,885
------------------ ------------------
Supplemental Disclosure of Cash Flow Information:
Interest paid during period $169,342 $230,913
------------------ ------------------
Income tax paid during period $32,500 $12,501
------------------ ------------------
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Property and equipment acquired under capital leases $1,410,587 $ -
------------------ ------------------
Unrealized gain on marketable securities $ - $613,733
------------------ ------------------
See Notes to Consolidated Condensed Financial Statements.
5
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(1) Basis of Presentation
These consolidated condensed financial statements have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of the Company's 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 adjustments) necessary for a
fair presentation of results for the interim period. Certain information and
footnote disclosures normally included in the consolidated 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 April 1, 2002.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements reflect the
application of certain accounting policies, as described in this note and
elsewhere in the accompanying notes to the consolidated condensed financial
statements.
(a) Principles of Consolidation
The accompanying consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiary, Collaborative
Securities Corp. (a Massachusetts Securities Corporation). All intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
BioPharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies. GenomeVision
Services revenues are from government grants, fees received from custom gene
sequencing and analysis services and subscription fees from the PathoGenome(TM)
Database. Revenues from contract research, government grants, the PathoGenome
Database subscription fees, and custom gene sequencing and analysis services are
recognized over the respective contract periods as the services are provided.
License fees and milestone payments are recognized in accordance with Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments will
be recognized upon achievements of the milestone as long as the milestone is
deemed to be substantive and the Company has no other performance obligations
related to the milestone. License fees are recognized ratable over the term of
the license. Unbilled costs and fees represent revenue recognized prior to
billing. Deferred revenue represents amounts received prior to revenue
recognition.
(c) Net Loss Per Share
Basic and diluted earnings per share were determined by dividing net loss by
the weighted average shares outstanding during the period. Diluted loss per
share is the same as basic loss per share for all periods presented, as the
effect of the potential common stock is antidilutive. Antidilutive securities
which consist of stock options, directors' deferred stock and unvested
restricted stock that are not included in diluted net loss per share were
3,257,068 shares and 3,949,380 shares at March 24, 2001 and March 30, 2002,
respectively.
(d) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no off-balance-sheet or concentrations of credit
risk such as
6
foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company maintains its cash and cash equivalents and investment
balances with several nonaffiliated institutions.
The Company maintains reserves for the potential write-off of accounts
receivable. To date, the Company has not written off any significant accounts
receivable.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and their aggregate percentage of
the Company's total revenues:
Number of
Significant
Customers A B
----------------------------
Thirteen-week period ended:
March 24, 2001 2 36% 35%
March 30, 2002 2 30% 48%
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of the Company's total accounts receivable:
Percentage of
Total Accounts Receivable
-----------------------------------------------------
A B C D E F G H
-----------------------------------------------------
As of:
December 31, 2001 - - 37% 29% - - - -
March 30, 2002 - - 6% 7% 14% 25% 15% 13%
(e) Use of Estimates
The preparation of consolidated condensed financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated condensed financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(f) Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires disclosure of all components of comprehensive income (loss) on
an annual and interim basis. Comprehensive income (loss) is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. At March 30, 2002, the
Company recorded approximately $78,000 to comprehensive income related to the
value of common shares received from Versicor, Inc. in connection with the
exercise of a warrant, which are classified in short-term investments in the
accompanying balance sheet. See Note 3 for further discussion.
(g) Segment Reporting
The Company adopted 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 as
to how to allocate resources and assess performance. The Company's chief
decision makers, as defined under SFAS No. 131, are the chief executive officer
and chief financial officer. To date, the Company has viewed its operations and
manages its business as principally two operating segments: GenomeVision
Services and BioPharmaceutical. As a result, the financial information disclosed
herein represents all of the material financial information related to the
Company's two operating segments. All of the Company's revenues are generated in
the United States and all assets are located in the United States.
7
GenomeVision(TM)
Services BioPharmaceutical Total
------------------- -------------------- -------------
Thirteen-week period ended March 24, 2001-
Revenues $4,532,678 3,557,570 $8,090,248
Gross profit 851,862 1,989,662 2,841,524
Company-funded research & development -- 2,254,421 2,254,421
Thirteen-week period ended March 30, 2002-
Revenues $3,730,792 2,433,725 $6,164,517
Gross profit 338,015 942,724 1,280,739
Company-funded research & development -- 6,322,972 6,322,972
The Company does not allocate assets by its operating segments.
(3) CASH EQUIVALENTS AND INVESTMENTS
The Company applies the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 2001 and March 30,
2002, the Company's investments primarily include short-term and long-term
investments which are classified as held-to-maturity, as the Company has the
positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original maturities
of 90 days or less. The Company's short-term and long-term investments include
marketable securities with original maturities of greater than 90 days. Cash
equivalents are carried at cost, which approximates market value, and consist of
debt securities. Short-term and long-term investments are recorded at amortized
cost, which approximates market value and consist of commercial paper and U.S.
government debt securities. The average maturity of the Company's investments is
approximately 7.3 months and 7.5 months at March 30, 2002 and December 31, 2001,
respectively. At March 30, 2002, the Company had an unrealized gain of
approximately $230,000, which is the difference between the amortized cost and
the fair market value of the held to maturity investments.
The Company's investments also include the purchase, pursuant to the exercise
of a warrant, of 45,000 shares of common stock of Versicor, Inc. in connection
with its collaboration agreement with Versicor, Inc. dated March 10, 1997. The
Company is accounting for the shares in accordance with SFAS No. 115 as
available for sale securities and as a result, the shares are recorded at fair
value. The shares are subject to restrictions under the securities regulations
and cannot be liquidated until March 2003. At March 30, 2002, the Company had
recorded an unrealized gain of $614,000 in accumulated other comprehensive
income in its consolidated statements of shareholders' equity related to the
appreciation in value of the shares.
At December 31, 2001 and March 30, 2002, the Company's cash and cash
equivalents and investments consisted of the following:
December 31, March 30,
2001 2002
------------------------------
Cash and cash equivalents:
Cash $21,801,201 $40,764,885
Debt securities 3,004,184 2,000,000
------------------------------
Total cash and cash equivalents $24,805,385 $42,764,885
==============================
Investments:
Short-term investments $29,961,540 $32,752,766
Long-term investments 12,374,324 517,571
------------------------------
Total investments $42,335,864 $33,270,337
==============================
The Company also had $200,000 in restricted cash at December 31, 2001 in
connection with certain capital lease obligations.
8
(4) LONG-TERM OBLIGATIONS
On March 5, 2002, the Company sold convertible notes payable to two
institutional investors in a private placement transaction, raising $15 million
in gross proceeds. The convertible notes payable may be converted into shares of
the Company's common stock at the option of the holder, at a price of $8.00 per
share, subject to certain adjustments. The maturity date of the convertible
notes payable is December 31, 2004, provided, that if any time on or after
December 31, 2003, the Company maintains a net cash balance (i.e., cash and cash
equivalents less obligations for borrowed money bearing interest) of less than
$35 million, then the holders of the convertible notes payable can require that
all or any part of the outstanding principal balance of the convertible notes
payable plus all accrued but unpaid interest be repaid. Interest on the
convertible notes payable accrues at 6% annually. The investors also received
the right to receive a warrant to purchase up to an aggregate of 487,500 shares
of common stock at an exercise price of $8.00 per share, subject to certain
adjustments. The warrants will only be issued at the time the convertible notes
payable are converted or if certain other redemptions or repayments of the
convertible note payable occur. Additionally, the Company issued a warrant to
purchase up to 100,000 shares of common stock at an exercise price of $15.00 per
share to its placement agent. The warrant is exercisable over a three-year term
commencing upon issuance. The warrant was valued, using the Block-Scholes option
pricing model in accordance with EITF 96-18, at $244,000. This amount is
included in deferred issuance costs and will be amortized to interest expense
over the term of the convertible notes payable.
In February 2002, the Company entered into an additional line of credit for
$3,500,000, of which $500,000 will be used to refinance a portion of an existing
line of credit. This line of credit is payable in twelve consecutive quarterly
payments at the prevailing LIBOR rate (2.08% at February 28, 2002) plus 1 1/2 %.
The Company is required to maintain certain financial covenants pertaining to
minimum cash balances. As of March 30, 2002, the Company was in compliance with
all of the covenants.
In February 2000, the Company entered into an equipment line of credit under
which it may finance up to $4,000,000 of laboratory, computer and office
equipment. In December 2000, the Company increased the line of credit by
$2,712,000 to $6,712,000. The Company, at its discretion, can enter into either
operating or capital leases. The borrowings under the operating leases are
payable in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of December 31, 2001, the Company had entered into $256,000 in
operating leases and $6,456,000 in capital leases. The interest rates under the
capital leases range from 7.55% to 10.37%. The Company had no additional
borrowing capacity under this line of credit at March 30, 2002. There are no
covenants related to this agreement.
(5) ALLIANCES - BIOPHARMACEUTICAL
(a) ASTRAZENECA
In August 1995, the Company entered into a strategic alliance with
AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and
diagnostic products effective against peptic ulcers or any other disease caused
by H. pylori. The Company granted Astra exclusive access to the Company's H.
pylori genomic sequence database and exclusive worldwide rights to make, use and
sell products based on the Company's H. pylori technology. The agreement
provided for a four-year research alliance (which ended in August 1999) to
further develop and annotate the Company's H. pylori genomic sequence database,
identify therapeutic and vaccine targets and develop appropriate biological
assays.
Under this agreement, Astra agreed to pay the Company, subject to the
achievement of certain product development milestones, up to $23.3 million (and
possibly a greater amount if more than one product is developed under the
agreement) in license fees, expense allowances, research funding and milestone
payments. The Company has received a total of $13.5 million in license fees,
expense allowances, milestone payments and research funding under the Astra
agreement through March 30, 2002.
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.
9
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance and license
agreement (the December 1995 agreement) with Schering Corporation and
Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by
Schering-Plough of the genomic sequence of Staph. aureus to identify and
validate new gene targets for development of drugs to target Staph. aureus and
other pathogens that have become resistant to current antibiotics. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's proprietary Staph. aureus genomic sequence database. The Company
agreed to undertake certain research efforts to identify bacteria-specific genes
essential to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough paid an initial license fee and agreed
to fund the research program through March 31, 2002. Under this agreement,
Schering-Plough agreed to pay the Company a minimum of $21.4 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 $24.0 million in milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough and on the technology developed in the
course of the research program. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed. As of March 30, 2002, the Company had
completed its research obligations under this alliance and had turned over
validated drug targets and assays to Schering-Plough for high-throughput
screening. A total of $21.4 million has been received through March 30, 2002.
Under the December 1995 agreement, the Company recognized approximately
$397,000 and $126,000 in revenue during the thirteen-week period ended
March 24, 2001 and March 30, 2002, respectively.
In December 1996, the Company entered into its second strategic alliance and
license agreement (the December 1996 agreement) with Schering-Plough. This
agreement calls for the use of genomics to discover new 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, and (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this alliance.
Under this agreement (and subsequent extensions), Schering-Plough paid an
initial license fee and an expense allowance to the Company and agreed to fund
the research program through at least December 2002. In addition, upon
completion of certain scientific developments, Schering-Plough has made or will
potentially make milestone payments, as well as pay royalties based upon sales
of 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 $81.0 million, excluding royalties. Of the total
potential payments, approximately $36.5 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 $38.5
million has been received through March 30, 2002.
Under the December 1996 agreement, the Company recognized approximately
$2,118,000 in revenue during the thirteen-week period ended March 24, 2001,
which consisted of alliance research revenue and a milestone payment. The
Company recognized approximately $1,730,000 in revenue during the thirteen-week
period ended March 30, 2002, which consisted of alliance research revenue.
10
In September 1997, the Company entered into a third strategic alliance and
license agreement (the September 1997 agreement) with Schering-Plough to use
genomics to discover and develop new pharmaceutical products to treat fungal
infections.
Under this agreement, the Company 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
rights to make, use and sell products based on the technology developed during
the course of the research program. In return, Schering-Plough agreed to fund a
research program through March 31, 2002. If all milestones are met and the
research program continues for its full term, total payments to the Company will
approximate $33.2 million, excluding royalties. Of the total potential payments,
approximately $10.2 million represents contract research payments and $23.0
million represents milestone payments based on achievement of research and
product development milestones. As of March 30, 2002, the Company had completed
its research obligations under this alliance and had turned over validated drug
targets and assays to Schering-Plough for high-throughput screening. A total of
$12.2 million has been received through March 30, 2002.
Under the September 1997 agreement, the Company recognized approximately
$385,000 and $6,000 in revenue during the thirteen-week period ended
March 24, 2001 and March 30, 2002, respectively.
Under certain circumstances, the Company may have an obligation to give
Schering-Plough a right of first negotiation to develop with the Company certain
of its asthma and infectious disease related discoveries if it decides to seek a
third party collaborator to develop such discovery.
(c) 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 6(a)),
paid an up-front license fee, agreed to fund a research program for at least
four years and pay royalties on future products. In addition, bioMerieux
purchased $3.75 million of the Company's common stock. The total amount of
research and development funding, excluding subscription fees, approximates $5.2
million for the four-year term of this agreement. The research and development
funding will be recognized as the research services are performed over the
four-year term of the agreement. Approximately $3.4 million has been received
through March 30, 2002.
The Company recognized approximately $282,000 and $297,000 in revenue during
the thirteen-week period ended March 24, 2001 and March 30, 2002, respectively,
which consisted of alliance research revenue and amortization of the up-front
license fees.
(d) 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 funded 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. Approximately $8.4 million has been
received through March 30, 2002.
11
The Company recognized approximately $360,000 in revenue during the
thirteen-week period ended March 24, 2001, which consisted of alliance research
revenue and amortization of the up-front license fees. The Company recognized
approximately $261,000 in revenue during the thirteen-week period ended March
30, 2002, which consisted of alliance research revenue.
(6) GENOMEVISION(TM) SERVICES
GenomeVision(TM) Services revenues are from government grants, fees received
from custom gene sequencing and analysis and subscription fees from
PathoGenome(TM) Database.
(a) DATABASE SUBSCRIPTIONS
The Company has entered into a number of PathoGenome 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.
(b) NATIONAL HUMAN GENOME RESEARCH INSTITUTE
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company is
entitled to receive funding from the National Human Genome Research Institute
(NHGRI) of up to $17.4 million through February 2003, of which all funds have
been appropriated.
In October 1999, the NHGRI named the Company as a pilot center to the Mouse
Genome Sequencing Network. The Company is entitled to receive $13.4 million in
funding through February 2003 with respect to this agreement, of which all funds
have been appropriated. In August 2000, the Company was named one of two primary
centers for the Rat Sequencing Program from NHGRI. As part of the agreement, the
Company will use remaining funding under the mouse award, as well as a portion
of the remaining funding under the human award, to participate in this rat
genome initiative.
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.
(7) PRODUCT DEVELOPMENT
In October 2001, the Company acquired an exclusive license in the United
States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia
S.p.A (Biosearch Italia). The Company will assume responsibility for the product
development in the United States of Ramoplanin, currently in Phase III clinical
trials. The agreement provides the Company with exclusive rights to develop and
market oral Ramoplanin in the U.S. and Canada. Biosearch Italia will provide the
bulk material for manufacture of the product and will retain all other rights to
market and sell Ramoplanin.
Under the terms of this agreement, the Company paid Biosearch Italia an
initial license fee of $2 million and is obligated to make payments of up to $8
million in a combination of cash and notes convertible into Company stock upon
the achievement of specified milestones. In addition, the Company is obligated
to purchase bulk material from Biosearch Italia and fund the completion of
clinical trials and pay a royalty on product sales. The combined total of bulk
product sales and royalties is expected to be 26% of the Company's net product
sales.
The Company expended approximately $3.1 million during the thirteen-week
period ended March 30, 2002, which consisted of clinical development expenses.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are a biopharmaceutical company focused on the discovery and development
of pharmaceutical and diagnostic products. We have eight established product
development programs. Our lead product candidate, Ramoplanin, is in Phase III
clinical trials for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE). We have six alliances with
pharmaceutical companies including Schering-Plough, AstraZeneca, Wyeth-Ayerst
and bioMerieux, and a joint venture with ArQule. In addition to these eight
projects, we have a portfolio of earlier stage internal drug discovery programs.
We also maintain an active service business, GenomeVision(TM) Services,
providing drug discovery services to pharmaceutical and biotechnology companies
and to the National Human Genome Research Institute.
We receive payments under our bioPharmaceutical business from our product
discovery alliances based on license fees, contract research and milestone
payments during the term of the alliance. We also receive payments under our
GenomeVision Services business from selling, as a contract service business,
high quality genomic sequencing information to our customers, including
pharmaceutical companies, biotechnology companies, governmental agencies, and
academic institutions. In addition, under our GenomeVision Services business,
subscribers to our PathoGenome(TM) Database pay access fees for the information
they obtain. We anticipate that our alliances will result in the discovery and
commercialization of novel pharmaceutical, vaccine and diagnostic products. In
order for a product to be commercialized based on our research, it will be
necessary for our product discovery partner to conduct preclinical tests and
clinical trials, obtain regulatory clearances, manufacture, sell, and distribute
the product. Accordingly, we do not expect to receive royalties based upon
product revenues for many years, if at all.
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 six
product discovery alliances and one joint venture, of which we currently receive
contract research funding from three of these alliances. In August 1995, we
entered into an alliance with AstraZeneca to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infections or any other
disease caused by H. pylori. In August 1999, the contract research under the
alliance concluded and the program transitioned into AstraZeneca's pipeline. We
are entitled to receive additional milestone payments and royalties based upon
the development by AstraZeneca of any products from the research alliance. In
December 1995, we entered into an alliance with Schering-Plough. Under this
alliance, Schering-Plough can use our Staph. aureus genomic database to identify
new gene targets for the development of novel antibiotics. As of March 30, 2002,
we had completed our research obligations under this alliance and had turned
over validated drug targets and assays to Schering-Plough for high-throughput
screening. In December 1996, we entered into our second research alliance with
Schering-Plough to identify genes and associated proteins that Schering-Plough
can utilize to develop new pharmaceuticals for treating asthma. In September
1997, we established our third research alliance with Schering-Plough for the
development of new pharmaceutical products to treat fungal infections. As of
March 30, 2002, we had completed our research obligations under this alliance
and had turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. In September 1999, we entered into a strategic
alliance with bioMerieux to develop, manufacture and sell in vitro pathogen
diagnostic products for human clinical and industrial applications. As part of
the strategic alliance, bioMerieux purchased a subscription to our PathoGenome
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 September 2000, we entered into a joint
venture with ArQule, Inc. to identify novel anti-infective drug compounds.
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 March 30, 2002, we had 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. We do
expect to see a revenue
13
decline in subscription fees over the next two years as subscribers
substantially complete data mining of PathoGenome.
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, we were named as one of the
nationally funded DNA sequencing centers of the international Human Genome
Project. We are entitled to receive funding from the National Human Genome
Research Institute (NHGRI) of up to $17.4 million through February 2003, of
which all funds have been appropriated and $12.5 million had been received
through March 30, 2002. In October 1999, the NHGRI named us as a pilot center to
the Mouse Genome Sequencing Network. We are entitled to receive $13.4 million in
funding over forty-one months with respect to this agreement, of which all funds
have been appropriated and $12.3 million had been received through
March 30, 2002. In August 2000, we were 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.
In October 2001, we acquired an exclusive license in the United States and
Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A
(Biosearch). We will assume responsibility for the product development in the
United States of Ramoplanin, currently in Phase III clinical trials. The
agreement provides us with exclusive rights to develop and market oral
Ramoplanin in the U.S. and Canada. Biosearch will retain all other rights to
market and sell Ramoplanin. In addition, we are obligated to purchase bulk
material from Biosearch and fund the completion of clinical trials, purchase
bulk material, and pay a royalty on product sales. The combined total of bulk
product purchases and royalties is expected to be approximately 26% of our net
product sales.
We have incurred significant operating losses since our inception. As of
March 30, 2002, we had an accumulated deficit of approximately $88.8 million.
Our losses are primarily from costs associated with prior operating businesses
and research and development expenses. These costs have often exceeded our
revenues generated by our alliances, subscription agreements and government
grants. Our results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing, amount and type of
funding. We expect to incur additional operating losses in the future.
We are subject to risks common to companies in our industry including
unproven technology and business strategy, reliance upon collaborative partners
and others, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, rapid technological change, history of operating losses, need for
future capital, competition, patent and proprietary rights, dependence on key
personnel, healthcare reform and related matters, availability of, and
competition for, unique family resources, and volatility of our stock.
CRITICAL ACCOUNTING POLICIES
We considered the disclosure requirement requirements of FR-60 regarding
critical accounting policies and FR-61 regarding liquidity and capital
resources, certain trading activities and related party/certain other
disclosures, and concluded that nothing materially changed during the quarter
that would warrant further disclosure under these releases.
14
RESULTS OF OPERATIONS
Thirteen-Week Periods Ended March 24, 2001 and March 30, 2002
Revenue
Total revenue decreased 24% from $8,090,000 for the thirteen-week period
ended March 24, 2001 to $6,165,000 for the thirteen-week period ended March 30,
2002. BioPharmaceutical revenue decreased 32% from $3,558,000 for the
thirteen-week period ended March 24, 2001 to $2,434,000 for the thirteen-week
period ended March 30, 2002 primarily due to the timing of milestone payments.
The decrease in BioPharmaceutical revenue was principally attributable to a
milestone payment earned in the first quarter of last year under our product
discovery alliance with Schering-Plough.
Revenue from GenomeVision Services decreased 18% from $4,533,000 for the
thirteen-week period ended March 24, 2001 to $3,731,000 for the thirteen-week
period ended March 30, 2002 primarily due to a decrease in subscription fees
earned on our PathoGenome database business as a result of third parties not
renewing our database subscription.
Costs and Expenses
Total costs and expenses increased 45% from $9,138,000 for the thirteen-week
period ended March 24, 2001 to $13,264,000 for the thirteen-week period ended
March 30, 2002.
Cost of services decreased 8% from $3,681,000 for the thirteen-week period
ended March 24, 2001 to $3,393,000 for the thirteen-week period ended
March 30, 2002 due partially to a decrease in revenues from GenomeVision
Services.
Research and development expenses include internal research and development,
research funded pursuant to arrangements with our strategic alliance partners,
as well as clinical development costs and expenses. Research and development
expenses increased 105% from $3,822,000 for the thirteen-week period ended
March 24, 2001 to $7,814,000 for the thirteen-week period ended March 30, 2002.
This planned increase was primarily due to expenses incurred in the clinical
development of Ramoplanin of approximately $3,109,000, as well as increased
investment in our internal drug discovery programs, specifically in the area of
anti-infectives and chronic human diseases, of $960,000.
15
Selling, general and administrative expenses increased 26% from $1,635,000
for the thirteen-week period ended March 24, 2001 to $2,057,000 for the
thirteen-week period ended March 30, 2002 reflecting an expansion in the areas
of corporate development and sales and marketing. The increase consisted of an
increase in payroll and related expenses.
Interest Income and Expense
Interest income decreased 54% from $1,144,000 for the thirteen-week period
ended March 24, 2001 to $531,000 for the thirteen-week period ended
March 30, 2002 reflecting fluctuation in interest rates, as well as lower funds
made available for investment.
Interest expense increased 28% from $169,000 for the thirteen-week period
ended March 24, 2001 to $216,000 for the thirteen-week period ended
March 30, 2002. The increase was due to an increase in our outstanding balances
under long-term obligations from approximately $8.2 million at March 24, 2001 to
$22.1 million at March 30, 2002. The increase in our long-term obligations
resulted primarily from the sale of convertible notes payable in March 2002 in a
private placement transaction, which resulted in gross proceeds of $15 million.
Liquidity and Capital Resources
Our primary sources of cash have been payments received from product
discovery alliances, subscription fees, government grants, borrowings under
equipment lending facilities and capital leases and proceeds from sale of
securities.
As of March 30, 2002, we had cash, cash equivalents, restricted cash and
short-term and long-term investments of approximately $76,035,000. On March 5,
2002, we sold convertible notes payable to two institutional investors in a
private placement transaction, raising $15 million in gross proceeds. The
convertible notes payable may be converted into shares of our common stock at
the option of the holder, at a price of $8.00 per share, subject to certain
adjustments. The maturity date of the convertible notes payable is December 31,
2004, provided, that if any time on or after December 31, 2003 we maintain a net
cash balance (i.e., cash and cash equivalents less obligations for borrowed
money bearing interest) of less than $35 million, then the holders of the
convertible notes payable can require that all or any part of the outstanding
principal balance of the notes payable plus all accrued but unpaid interest be
repaid. Interest on the notes payable accrues at 6% annually. The investors also
received the right to receive a warrant to purchase up to an aggregate of
487,500 shares of common stock at an exercise price of $8.00 per share, subject
to certain adjustments. The warrants will only be issued at the time the
convertible notes payable are converted or if certain other redemptions or
repayments of the convertible notes payable occur. Additionally, the Company
issued a warrant to purchase up to 100,000 shares of common stock at an exercise
price of $15.00 per share to its placement agent in this transaction. The
warrant is exercisable over a three year term commencing upon issuance. The
warrant was valued, using Black-Scholes option pricing model in accordance with
EITF 96-18, at $244,000. This amount is included in deferred issuance costs and
will be amortized to interest expense over the term of the convertible notes
payable.
In 2001, we sold 127,500 shares of common stock in a series of transactions
through the Nasdaq National Market, resulting in proceeds received of
approximately $1,706,000, net of issuance costs. In 2001, we also issued 325,950
shares of common stock related to the exercise of stock options and our employee
stock purchase plan, resulting in total proceeds of approximately $1,204,000.
We had various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. We had an aggregate of
approximately $7,067,000 outstanding under these borrowing arrangements at
March 30, 2002. This amount is repayable over the next 35 months, of which
$3,053,000 is repayable over the next 12 months. Under these arrangements, we
are required to maintain certain financial ratios, including minimum levels of
unrestricted cash. We had no additional borrowing capacity under these capital
lease agreements at March 30, 2002.
Our operating activities used cash of approximately $5,904,000 for the
thirteen-week period ended March 30, 2002 primarily due to an increase in our
net loss, unbilled costs and fees, and lower accounts payable and deferred
revenue. These uses of cash were partially offset by a decrease in accounts
receivable, interest receivable, prepaids and other current assets, as well as
an increase in accrued liabilities. Our operating activities used cash of
approximately $3,005,000 for the thirteen-week period ended March 24, 2001.
16
Our investing activities provided cash of approximately $7,163,000 for the
thirteen-week period ended March 30, 2002 through the conversion of marketable
securities to cash and cash equivalents, partially offset by purchases of
marketable securities, equipment and additions to leasehold improvements and an
increase in other assets. Our investing activities provided cash of
approximately $10,270,000 for the thirteen week period ended March 24, 2001
through the conversion of marketable securities to cash and cash equivalents,
partially offset by purchases of marketable securities and equipment and
additions to leasehold.
Capital expenditures totaled $1,249,000 for the thirteen-week period ended
March 30, 2002 consisting of leasehold improvements and purchases of laboratory,
computer, and office equipment. We utilized an existing line of credit to
finance all of these capital expenditures. We currently estimate that we will
acquire approximately $5,000,000 in capital equipment in 2002 consisting
primarily of computers, laboratory equipment, and additions to leasehold
improvement.
Our financing activities provided cash of approximately $16,700,000 for the
thirteen-week period ended March 30, 2002 primarily from proceeds received from
the sale of convertible notes payable totaling $15 million in gross proceeds, as
well as proceeds received from entering into an additional credit line for
$3,500,000, of which $500,000 was used to refinance a portion of an existing
line of credit. These financing activities were partially offset by payments of
long-term obligations of $2,066,000. Our financing activities provided cash of
approximately $856,000 for the thirteen week period ended March 24, 2001
primarily from proceeds received from an equipment financing arrangement and the
exercise of stock options, partially offset by payments of long-term obligations
and notes receivable from an officer.
At December 31, 2001, we had net operating loss and tax credits (investment
and research) carryforwards of approximately $93,767,000 and $6,642,000,
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
carryforward period.
We believe that our existing capital resources are adequate for approximately
two years under our current rate of investment in research and development.
There is no assurance, however, that changes in our plans or events affecting
our operations will not result in accelerated or unexpected expenditures.
We plan to continue to invest in our internal research and development
programs, including our lead candidate, Ramoplanin, currently in Phase III
clinical development.
We expect to 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 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. 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 our inability to obtain, or delays in
obtaining, the regulatory approvals necessary to commercialize our lead
candidate, Ramoplanin, or our inability or the inability of our alliance
partners to (i) successfully develop products based on the Company's genomics
17
information, (ii) obtain the necessary regulatory approvals, (iii) effectively
commercialize any products developed before our competitors are able to
commercialize competing products or (iv) obtain and enforce intellectual
property rights, as well as the risk factors set forth in the Exhibit 99.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
and those set forth in other filings that we may make with the Securities and
Exchange commission from time to time.
18
Part II
Item 1. Legal Proceedings
None
Item 2. Changes In Securities
On March 5, 2002, pursuant to the private placement exemption under
Section 4(2) of the Securities Act of 1933, as amended, the Company issued to
two institutional investors (i) warrants to purchase up to an aggregate 487,500
shares of the Company's common stock at an exercise price of $8.00 per share,
subject to certain adjustments, and (ii) 6% Convertible Notes, raising $15
million in gross proceeds. The warrants only become exercisable to the extent
the notes are converted or if certain other redemptions or repayments of the
notes occur. The notes may be converted into shares of the Company's common
stock at the option of the holder, at a price of $8.00 per share, subject to
certain adjustments. On March 5, 2002, as partial payment of the placement fee,
the Company also issued, pursuant to the private placement exemption under
Section 4(2) of the Securities Act of 1933, as amended, to the placement agent,
Ladenburg Thalmann & Co, warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $15.00 per share, subject to customary
adjustments. The warrants issued to the placement agent are exercisable over a
three year term commencing upon issuance. Additional information on the
transaction is available on our Current Report on Form 8-K filed on
March 6, 2002.
Item 3. Defaults Upon Senior Securities
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
4.1 Purchase Agreement by and among Genome Therapeutics Corp. and
certain Purchasers dated March 5, 2002.*
4.2 Form of Note*
4.3 Form of Warrant*
4.4 Form of Registration Rights Agreement*
b) Reports on Form 8-K
Current Report on Form 8-K was filed on March 6, 2002 under Item
5 relating to the Company's sale to two institutional investors
of convertible notes and warrants to purchase common stock.
* Filed as an exhibit to the Company's Current Report on Form 8-K filed
on March 6, 2002.
19
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: May 14, 2002
20