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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-26642
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MYRIAD GENETICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0494517
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
320 WAKARA WAY, SALT LAKE CITY, UT 84108
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 584-3600
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (without admitting that any person whose shares are
not included in such calculation is an affiliate) on August 22, 1997 was
$205,182,071, based on the last sale price as reported by The Nasdaq Stock
Market.
As of August 22, 1997, the registrant had 9,255,614 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in
Part III of this Annual Report on Form 10-K is incorporated from the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on November 13, 1997.
PART I
ITEM 1. BUSINESS
GENERAL
Myriad Genetics, Inc. (''Myriad'' or the ''Company'') is a leader in the
discovery and sequencing of genes related to major common diseases. The Company
utilizes analyses of extensive family histories and genetic material, as well as
a number of proprietary technologies, to identify inherited gene mutations which
increase the risk to individuals of developing these diseases. The Company has
also developed a proprietary high-throughput assay to identify protein-protein
interactions. The Company believes that the application of these technologies
may provide new insights into protein function and cellular organization which
may lead to the identification of novel therapeutic targets. The discovery of
disease-predisposing genes and their biochemical pathways provides the Company
with two significant commercial opportunities: (i) the development and marketing
of genetic testing and information services, such as its recently launched
BRACAnalysis(TM) test, for the identification of individuals who are genetically
predisposed to developing a particular disease, and (ii) the development of
therapeutic products for the treatment and prevention of major diseases
associated with these genes and their biochemical pathways. The Company intends
to pursue the development of therapeutic products either in conjunction with its
strategic partners such as Schering Corporation ("Schering"), Novartis
Corporation ("Novartis"), Bayer Corporation ("Bayer") and Eli Lilly and Company
("Lilly"), or independently.
During its history beginning in 1991, the Company has discovered and
sequenced, with its academic collaborators, the following genes associated with
major diseases: BRCA1, BRCA2, MMAC1, MTS1, MTS2 and MTS3. In addition, the
Company has located a number of genes that interact in the biochemical pathways
of its gene discoveries and discovered the chromosomal location of additional
genes involved in heart disease, cancer, osteoporosis and obesity.
Myriad has achieved the following major milestones during the fiscal year
ended June 30, 1997:
* Launched its first commercial genetic predisposition test,
BRACAnalysis(TM), a comprehensive BRCA1 and BRCA2 sequence analysis
for susceptibility to breast and ovarian cancer;
* Discovered, with its academic collaborators, the MMAC1 cancer gene.
This gene is associated with advanced cancers of the brain, prostate,
breast, kidney, and skin;
* Established a strategic alliance with Schering for the discovery of
genes related to prostate and other cancers. Under this agreement, the
Company may receive up to $60 million in equity investments, research
funding and milestone payments, as well as royalties on the sale of
future therapeutic products.
* Composition of matter patents issued for mutations of the MTS1
melanoma gene and a mutation of the AGT hypertension gene.
The Company has begun commercialization of its gene discoveries by
providing genetic tests for individuals to determine whether or not they have
inherited gene mutations which may increase their risk for specific diseases. On
October 30, 1996, Myriad introduced BRACAnalysis(TM), an important genetic test
for women who have been diagnosed with breast or ovarian cancer and women who
are at risk for hereditary breast and ovarian cancer. The Company believes that
BRACAnalysis(TM) is the first comprehensive BRCA1 and BRCA2 sequence analysis
for susceptibility to breast and ovarian cancer. Women who may benefit from
BRACAnalysis(TM) include: women with a diagnosis of breast or ovarian cancer,
especially premenopausal breast cancer; women with a family history of breast or
ovarian cancer, and women with a blood relative who is known to have a mutation
in BRCA1 or BRCA2.
Myriad has developed a highly automated genetic testing platform which the
Company believes will enable it, once
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it has discovered and sequenced a gene, to develop a test for genetic
predisposition relatively quickly and economically. The Company believes that
the information gained from tests that confirm genetic predisposition has
potential value to individuals and their health care providers in the following
areas: (i) proactive health care and lifestyle decisions that may delay or
prevent the onset of disease; (ii) early detection of disease; and (iii)
selection of the most appropriate treatment. Through its wholly-owned
subsidiary, Myriad Genetic Laboratories, Inc. (''Myriad Labs''), the Company has
established a genetic predisposition testing laboratory which has received
federal certification under the Clinical Laboratory Improvement Amendments of
1988 (''CLIA'') and State of New York approval from the New York Department of
Health.
In order to accelerate its gene discovery and therapeutic target
identification programs, the Company employs three synergistic sets of
technologies: (i) the genetic analysis of large Utah families performed by the
Company's scientists and collaborators; (ii) the Company's advanced, proprietary
bioinformatic gene mapping, sequencing, and cloning technologies; and (iii) the
Company's advanced protein interaction and functional genomics technologies. The
Company's collaborators at the University of Utah and IHC Health Services, Inc.
("IHC") have extensively studied large, multi-generational Utah families with
histories of high rates of certain diseases. The clinical information from these
studies, together with genetic analysis of the more than 35,000 DNA samples
collected from family members, provides the Company with an unparalleled
opportunity for accelerating several critical steps of the gene discovery
process. The Company uses proprietary mapping and DNA sequencing technologies to
identify a narrow chromosomal region, to isolate candidate gene sequences and,
ultimately, to identify the actual DNA sequence comprising the disease-
predisposing gene. Once an important disease-predisposing gene has been
identified, the Company uses advanced protein interaction technologies to
identify genes that are upstream and downstream in the biochemical pathways from
the gene discovered in order to understand the biochemical pathways involved in
the disease process. This enables Myriad and its corporate partners to select
promising points of therapeutic intervention along the biochemical pathway.
Myriad's business strategy has five primary components: (i) to expand the
Company's leadership position in discovering and sequencing genes; (ii) to build
the Company's genetic testing and information services business; (iii) based on
its gene discoveries, to identify potential therapeutic targets by understanding
the biochemical pathways related to common diseases; (iv) to capitalize on
strategic alliances with corporate partners to obtain financing for a major
portion of the Company's research and to commercialize certain therapeutic
products for the treatment and prevention of disease; and (v) longer term, to
pursue the independent marketing and development of therapeutic products based
on certain gene discoveries.
MYRIAD'S GENOMICS STRATEGY
Myriad believes that the Company's strategy of combining the three major
approaches to the discovery and sequencing of genes (positional cloning, high
speed DNA sequencing and protein interaction network analysis) greatly increases
the probability that the genes found will be of diagnostic and therapeutic
importance. The focused and direct application of these three approaches at the
appropriate stage of the gene discovery process enables the Company to discover
and sequence important disease-related genes relatively quickly and
economically. Starting with a disease target such as breast cancer, the Company
first utilizes positional cloning, having determined in advance of sequencing
that the gene being sought in fact contributes to a substantial percentage of
incidence of a particular disease and thus may have significant commercial
potential. The Company's positional cloning strategy is based on the presence of
a specific disease-related chromosomal fragment shared by many individuals
within a multi-generational family. The Company uses positional cloning to
reduce the library of candidate genes from tens of thousands to ten or fewer
genes on a specific chromosome.
Myriad has developed proprietary high-speed DNA sequencing technologies that
enable the Company to efficiently and rapidly obtain sequences from the
chromosomal region and sequence the entire gene once it has been identified.
Following the identification of the disease-related gene, the Company uses
protein interaction technologies to identify other related genes that may yield
additional diagnostic or therapeutic opportunities. Myriad identifies genes that
interact with the disease-predisposing gene in order to understand the
biochemical pathway associated with
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the disease. The success of the Company's approach is demonstrated by its
discovery and complete sequencing of six major genes (BRCA1, BRCA2, MMAC1, MTS1,
MTS2, MTS3) and the identification of a number of genes along their biochemical
pathways.
All stages of the gene discovery process use and generate a vast amount of
information. Accordingly, the Company has designed a proprietary bioinformatics
system which provides significant analytical and data management capabilities
which are integral to genetic and molecular analysis. The system is based on
integrated, protocol-driven database management software which is utilized to
track experiments and collect the data generated. The system incorporates data
on DNA samples, genetic markers, maps, DNA clones and DNA sequences which are
generated during the gene discovery process. Further, the system directs the
genetic analysis, fine structure mapping, generation of candidate genes and
mutation screening. It allows the automation of labor intensive steps in the
analysis of DNA sequences, and incorporates Myriad's expert system for detecting
coding regions in random DNA sequences. Proprietary software methods have also
been developed by scientists at the Company which significantly accelerate
mutation screening.
The discovery of disease-causing genes leads directly to two important
commercial opportunities for the Company: (i) genetic testing products and
services such as BRACAnalysis(TM), and (ii) therapeutic products for treatment
or prevention of disease.
Studying the Disease in Families. A key competitive advantage of the
Company's gene discovery process is the information derived from the genetic
analysis of large, multi-generational Utah families. The early Utah population
was characterized by many large families with a dozen or more children, hundreds
of grandchildren and thousands of descendants. By using the extensive and
detailed genealogical records kept by the families themselves, the Company is
better able to resolve the ambiguities caused by interactions between
environmental factors and multiple predisposition genes. Although in practice
combining data from several multi-generational families is more efficient, the
Company can often positionally clone a gene related to a disease by studying DNA
from a single large extended family. This type of analysis is not possible using
small families because the interactions between environmental factors and
multiple causal genes may lead to erroneous conclusions regarding the
chromosomal location of a gene.
To efficiently identify common disease-predisposing genes, the Company has
entered into several exclusive research collaborations. In the field of cancer,
the Company is currently working with researchers at the University of Utah's
Center for Cancer Genetic Epidemiology whose analysis of familial cancers
contributed significantly to the understanding of the hereditary nature of most
types of cancer. These researchers have collected over 25,000 DNA samples from
extended families with breast cancer, ovarian cancer, colon cancer, prostate
cancer, lung cancer, bladder cancer, brain cancer, leukemia, lymphoma, and
melanoma. In the cardiovascular and obesity fields, the Company is currently
working with researchers at the University of Utah's Cardiovascular Genetics
Research Clinic, which has an extensive collection of data from extended
families with cardiovascular disease and obesity, with over 10,000 DNA samples
collected to date. The Company is working with researchers at IHC which manages
24 hospitals in the intermountain west. Research with IHC collaborators
currently involves the study of families with asthma, osteoporosis, or certain
central nervous system disorders.
Analyzing DNA from Family Members. The DNA from selected members of each
extended family is analyzed with a large set of genetic markers, enabling
researchers to identify which chromosomal segment is associated with disease in
a family. The family members' DNA sample preparations are quality controlled,
and then placed on a robotics work station which prepares thousands of
polymerase chain reaction ("PCR") amplifications of the genetic markers and,
after amplification, combines the reaction products so that all of the genetic
markers for a complete genomic search can be analyzed on automated sequencers.
For example, all of the genetic markers for ten family members in an extended
family can be gathered in a single day, often creating enough information to
begin mapping the underlying gene to a specific chromosomal region.
Locating and Narrowing the Chromosome on which the Gene Resides. The
genetic markers from the DNA of
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family members are stored in the Company's proprietary database system and
complex analysis programs search for the chromosome on which the gene resides.
As candidate chromosomal regions are found, additional sets of markers in the
suggested regions are analyzed and the set of families and family members
studied is expanded to narrow the gene's location. Once a gene has been located
on a particular chromosome, the Company uses recombinant DNA libraries to select
DNA fragments which encompass the region surrounding the gene. The Company has
acquired an extensive genomic library for mapping and gene isolation. By using a
proprietary procedure developed at Myriad, the chromosomal region is
significantly narrowed by tracing patterns of inheritance of new genetic markers
which are isolated from the clones encompassing the region.
Identifying the Disease-Predisposing Gene and Characterizing Mutations. The
Company uses high-speed gene sequencing to screen all genes in the narrowed
region to identify mutations that are present in the DNA sequences of diseased
individuals and are absent in the DNA sequences of unaffected individuals. To
find the set of candidate genes in the chromosomal region, the Company uses two
proprietary approaches developed by Myriad scientists, a DNA sequencing
methodology in conjunction with gene detection software, and a high throughput
method for identifying expressed sequences. Gene fragments identified in this
manner are extended to include the entire gene sequence by the Company's
''directed hybrid selection'' technology. The disease-related gene is identified
by detecting sequence variants using automated sequencing and Myriad's
proprietary sequence analysis software. This automatic detection greatly
increases the speed at which genes can be screened for disease-predisposing
mutations.
Once a disease-related gene has been discovered, Myriad scientists examine
DNA from affected and unaffected individuals to estimate the frequency of each
mutation and its associated disease risk in a variety of populations. Relatives
of each individual carrying a disease-related gene are tested for the presence
of the specific mutations. The information derived from these tests has enabled
the Company to develop a large and growing proprietary database to characterize
each mutation by type, severity and age of onset of the associated disease. In
certain cases, functional assays are developed to test the predisposing activity
of each mutation.
Identifying the Biochemical Pathway. As protein-protein interactions
mediate the functions of most cellular processes, identification of such
interactions is critical in understanding a protein's function. Accordingly, the
Company has developed a proprietary high-throughput version of an assay to
identify protein-protein interactions. This system employs the Company's
integrated automation platform and significant bioinformatics capabilities to
rapidly identify protein partners. The Company believes that the application of
this technology may provide new insights into protein function and cellular
organization and may suggest functions for known novel proteins. Ultimately, the
analysis of large numbers of protein interactions may allow the Company to
identify critical interactions that could be targets for therapeutic
intervention.
MYRIAD'S GENE DISCOVERY PROGRAMS
Myriad's research programs are focused on the discovery of disease-related
genes which predispose individuals to cancer, cardiovascular diseases and other
common diseases. The Company's gene discovery and development programs in
cancer, cardiovascular diseases and other major diseases are described below.
CANCER
Scientists and physicians understand that many common disorders have a
strong hereditary component. These diseases, including cancer, involve genetic
changes that affect millions of individuals. Individuals genetically predisposed
to cancer have a disease-related mutation in one of the two copies of a gene
they inherit from their parents. Thus, one step that can lead to cancer has
already occurred in every cell of that individual.
BRCA1 Breast and Ovarian Cancer Gene. The Company and its collaborators
reported the discovery of the BRCA1 breast and ovarian cancer predisposing gene
in the October 7, 1994 issue of the journal Science. In 1997, it is estimated
that approximately 180,000 women in the United States will be diagnosed with
breast cancer and an additional 27,000 women will be diagnosed with ovarian
cancer. During the same period, an estimated 44,000 women will die from breast
cancer (the second highest cancer mortality rate among women) and an estimated
14,000
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women will die of ovarian cancer. BRCA1 appears to be responsible for
approximately half of the early onset hereditary breast cancer cases in an
international study of breast cancer conducted by the Breast Cancer Linkage
Consortium. Hereditary breast cancer is believed to account for approximately 5-
10% of all cases of breast cancer. A study of women in the United States
published in the American Journal of Human Genetics indicates that a woman with
a BRCA1 mutation has an 86% risk of developing breast cancer by age 80 as
compared to a general population risk of 10%. Additionally, according to a
recent study published in Lancet, the risk to a woman with a BRCA1 mutation of
developing ovarian cancer by age 70 is approximately 44%, compared to a general
population risk of approximately 1%.
BRCA2 Breast Cancer Gene. On December 20, 1995, Myriad and its
collaborators announced the discovery of the complete sequence of BRCA2, a
second hereditary breast cancer gene which was found to be responsible for the
majority of the remaining cases of inherited breast cancer, as reported in the
journal Nature Genetics. BRCA2 mutations are thought to account for a large
proportion of the remaining early onset hereditary female breast cancers which
are not accounted for by BRCA1, as well as most hereditary male breast cancers.
Women with BRCA2 mutations have approximately the same risk of breast cancer as
BRCA1 mutation carriers; the risk of ovarian cancer is also increased, although
not as much as in those with BRCA1 mutations. Myriad has developed a genetic
test for this gene which has been combined with the test for BRCA1 to form a
comprehensive integrated test for hereditary breast and ovarian cancer.
MMAC1 Mutated Multiple Advanced Cancer Gene. In January 1997, the Company
announced the identification of a major gene responsible for glioma, a form of
brain cancer that is a leading killer of children with cancer. In March 1997,
the Company further announced that the identified gene was also found to be
associated with other advanced cancers of the prostate, breast, kidney, and
skin. MMAC1 was located through a collaborative effort by scientists at the
Company and the University of Texas M.D. Anderson Cancer Center. It is
anticipated that the location of MMAC1 will accelerate development of new
diagnostic and therapeutic approaches to brain, prostate, breast, kidney, and
skin cancers. There can be no assurance, however, that the identification of
this gene will lead to the development of diagnostic tests or therapeutic
products.
MTS1 Tumor Suppressor Gene. The Company's first major discovery was the
involvement of the MTS1 gene in the formation of many types of cancer including
melanoma, lymphoma, leukemia and cancers of the lung, breast, brain, bone,
bladder, kidney and ovary. The role of MTS1 as a tumor suppressor was discovered
by Myriad and was reported in the April 15, 1994 issue of the journal Science.
When MTS1 is mutated, its function as a molecular brake during a key step in the
cell division process is lost and uncontrollable cell growth may take place.
Myriad has shown that MTS1 is deleted or mutated in approximately half of all
tumor cell lines tested. Because MTS1 is one of the most commonly mutated or
deleted tumor suppressor genes discovered to date, Myriad believes that it is a
promising candidate for the development of new anti-cancer therapies. The MTS1
gene may also have value in monitoring disease progression.
Myriad also discovered that abnormal MTS1 genes can be inherited, and that
when they are inherited they predispose individuals to melanoma. The Company's
discovery of the MTS1 predisposition to melanoma was reported in the September
1994 issue of the journal Nature Genetics. Melanoma is lethal in 86% of cases
where it has metastasized (spread to another site in the body); however, when it
is diagnosed at an early stage, less than 10% of patients die within 5 years.
Since the early 1970's, the incidence of melanoma has increased at about 4% per
year and melanoma has become one of the fastest growing cancers in the United
States. In 1997 it is estimated that approximately 40,300 Americans will be
diagnosed with melanoma. The Company believes that approximately 10% of melanoma
cases are hereditary. The Company and its collaborators have substantial
expertise in the genetic analysis of melanoma and have begun to identify
important disease-predisposing MTS1 mutations. In April 1997, The U.S. Patent
and Trademark Office ("USPTO") issued a composition of matter patent on
mutations of the MTS1 gene to the Company and the University of Utah Research
Foundation.
MTS2 and MTS3 Cell Cycle Genes. Myriad scientists located MTS1 on a narrow
region of chromosome 9. Further analysis of this region yielded two other novel
genes involved in cell growth and cell cycle control, MTS2
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and MTS3. Although other researchers sequenced a portion of MTS2, the Company
discovered that MTS2's expression levels increased during DNA replication and
cell division. Myriad also discovered MTS2's potential involvement in cancer and
is investigating its specific potential role in several types of cancer.
Myriad's discovery of the MTS3 gene has led to a new area of research in cell
division and its possible role in cancer.
Other Cancer Genes. The Company also has active research programs to
identify additional genes believed to be implicated in cancer. Studies by the
Company and its collaborators are focused on major cancer sites including
prostate cancer, colorectal cancer, lung cancer, brain cancer, leukemia and
lymphoma, all of which have a strong hereditary component.
CARDIOVASCULAR DISEASES
Scientists recognize that cardiovascular diseases represent a group of
related disorders that are highly familial and result from both genetic and
environmental risk factors. Genetic predisposition to cardiovascular diseases
involves a number of familial risk factors, including, among others, abnormal
levels of triglycerides (fats used for storage and energy), cholesterol,
angiotensinogen (a protein involved in the regulation of salt and water
retention), and homocysteine (an amino acid involved in blood coagulation), all
of which may interact with environmental risk factors, such as physical
activity, stress, smoking and diet.
AGT Hypertension Gene. Hypertension (high blood pressure) is a complex
disorder which is believed to have a number of causes, including: excess weight,
atherogenesis (formation of fat deposits on the interior walls of arteries), and
salt sensitivity. Approximately 50 million people in the United States are
hypertensive. Hypertension has a significant genetic component and is a major
risk factor for cardiovascular disease, kidney failure and stroke. The
angiotensinogen (''AGT'') gene is believed to be involved in salt-dependent
hypertension. Certain mutations in the AGT gene are believed to cause
individuals to retain excessive amounts of salt, thus increasing their risk for
hypertension. The USPTO has issued a composition of matter patent on a mutation
of the AGT gene and a patent on a method for detecting a predisposition to
hypertension based on the AGT gene to the University of Utah and the Institute
National de la Sante et de la Recherche Medicale (''INSERM'') in December 1994
and December 1996. The Company has an agreement with the University of Utah and
INSERM, pursuant to which it has a co-exclusive license to develop diagnostic
products from the genetic mutations of AGT associated with hypertension, and an
exclusive license to develop therapeutic products from such genetic mutations of
AGT.
CHD1 and CHD2 Heart Disease Genes. Heart disease is the leading cause of
death in the United States and is believed to have a significant genetic
component. Approximately 1.5 million acute myocardial infarctions (heart
attacks) result in 800,000 hospitalizations and more than 500,000 deaths each
year in the United States. The Cardiovascular Genetics Research Clinic at the
University of Utah has assembled a database of approximately 120,000 families
comprising over 1,000,000 individuals and has identified a large number of
families with a strong history of cardiovascular disease.
Myriad has determined the location of two significant cardiovascular
disease genes, CHD1 and CHD2, each within a narrow region of a chromosome. The
Company believes that the CHD1 and CHD2 genes are important predisposing genes
for heart disease, since approximately 15% of families studied with early
coronary heart disease have the condition associated with these genes. The
Company believes that a genetic test for familial cardiovascular disease would
be of value to predisposed individuals, who could benefit from regular
monitoring. The discovery of the CHD1 and CHD2 genes may facilitate early
diagnosis and improved therapeutic products.
OTHER MAJOR DISEASES
HOB1 and HOB2 Obesity Genes. There are approximately 34 million adult
Americans who are classified as obese. The mechanisms of fat storage and energy
balance have a substantial hereditary component, and the Company believes that a
gene or combination of genes is likely to be responsible for a significant
percentage of obesity. It has not been established that the human counterparts
of the rare obesity genes recently discovered in mice play a significant role in
common human obesity. Myriad believes that its collaborator's collection of DNA
from members of extended families with obesity give it a competitive advantage
in the search for human obesity genes. Myriad's
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scientists have determined the chromosomal locations of two significant obesity
genes, HOB1 and HOB2. The Company believes that the HOB1 and HOB2 genes are
important in human obesity and may be responsible for a majority of hereditary
obesity.
OS1 Osteoporosis Gene. Osteoporosis is a disorder of decreasing bone mass
affecting approximately one quarter of women over age 60, nearly half of all
women over 75, and approximately 25 million individuals in the United States.
Osteoporosis is the most significant underlying cause of skeletal fractures
among late middle-aged and elderly women. Early detection of a predisposition to
osteoporosis is important because nutritional and therapeutic intervention can
delay the onset and reduce the severity of the disease. Myriad had determined
the location of a significant gene involved in osteoporosis, OS1, and has
narrowed the OS1 gene to a small region of a chromosome. The Company believes
that the OS1 gene plays an important role in the pathogenesis of osteoporosis.
Asthma Genes. It is estimated that between 10 and 15 million people in the
United States have asthma and there is strong evidence supporting the existence
of a genetic component to asthma. Deaths from severe asthma attacks have been
increasing in the United States and now number approximately 6,000 per year.
Detailed case reviews suggest that many deaths from asthma could have been
prevented by earlier and more intensive medical care. There is currently no
laboratory test which can establish a diagnosis of asthma. Myriad and its
collaborators have begun systematic collection of data from asthma families with
a history of asthma and have also begun chromosomal location analysis.
Depression and Bipolar Disease Genes. There are approximately 13 million
people in the United States that are affected by major depression and an
additional approximately 4 million in the United States with bipolar disorders
or manic depression. In June 1996, the Company entered into a research
collaboration with IHC to link IHC's medical data and patient records of
individuals with disorders of the central nervous system with the Company's
proprietary database of families.
Attention Deficit-Hyperactivity Disorder Genes ("ADHD"). ADHD is often
cited as the most common behavioral problem among school-aged children.
Estimates of the number of children and adolescents in the United States with
ADHD range from 1.4 to 2.2 million or approximately 3-5% of the population. The
disease generally has its onset before the age of seven years with symptoms of
inattention, impulsivity and hyperactivity which persist for longer than six
months. The Company is currently studying families with ADHD s to identify
candidate groups for analysis.
Addictive Behavior Genes. Addictive behaviors are led in prevalence by
alcoholism, which has been described as the third largest health problem in the
United States behind heart disease and cancer. Alcoholism affects 13.8 million
people, costs $98.6 billion and is implicated in 100,000 deaths annually. A
recent study in Archives of General Psychiatry indicates that men with a family
history of alcohol dependence are more than twice as likely to develop
dependence on alcohol themselves, compared to men with no family history. The
Company is currently studying families with addictive behavior problems to
identify candidate groups for analysis.
MYRIAD'S PRODUCT DEVELOPMENT PROGRAMS
The Company has identified two commercial opportunities arising from the
discovery of genes which predispose individuals to common diseases: (i) the
development and marketing of genetic testing and information services for the
identification of individuals who are genetically predisposed to developing a
particular disease, such as its recently launched BRACAnalysis(TM) test, and
(ii) the development of therapeutic products for the treatment and prevention of
major diseases. The Company intends to pursue the development of therapeutic
products either in collaboration with its corporate partners or independently.
BRACANALYSIS(TM) GENETIC PREDISPOSITION TEST
On October 30, 1996, the Company introduced BRACAnalysis(TM), a
comprehensive BRCA1 and BRCA2 sequence analysis for susceptibility to breast and
ovarian cancer. The introduction followed the successful premarket
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evaluation of the test in 14 leading U.S. Cancer centers. BRACAnalysis(TM)
provides women and their family members who are at risk for hereditary breast
and ovarian cancer with important information that the Company believes will
help them and their physicians make better informed lifestyle, dietary,
surveillance and treatment decisions.
BRACAnalysis(TM) is a fully automated testing platform that can deliver a
direct full sequence analysis of BRCA1 and BRCA2 to women who seek knowledge of
their predisposition to breast and ovarian cancer. The Company believes that
women who may benefit from BRACAnalysis(TM) include: women with a diagnosis of
breast or ovarian cancer, especially premenopausal breast cancer, women with a
family history of breast or ovarian cancer; and women with a blood relative who
is known to have a mutation in BRCA1 or BRCA2. Because genetic predisposition
testing raises important medical, psychological and social issues for patients
and their families, Myriad Labs recommends that individuals meet beforehand with
a genetic counselor or other trained health care professional to discuss the
potential benefits and limitations of genetic predisposition analysis.
Physicians are required to confirm that an informed consent was obtained from
each patient prior to testing.
In order to have the test performed, an individual visits his or her
physician or health care provider and a blood sample is obtained, placed in a
bar coded test tube and forwarded to Myriad Labs for processing. Upon receipt
by Myriad Labs, each sample is logged for sample tracking and is then handled by
advanced robotic systems to process the sample and perform the genetic test.
BRACAnalysis(TM) identifies mutations in the BRCA1 and BRCA2 genes through a
process that involves the performance of over 80 separate PCR amplifications and
the sequencing of more than 35,000 DNA base pairs from the individual's blood
sample. For the majority of women, BRACAnalysis(TM) includes a full sequence
analysis of the protein-coding regions of both the BRCA1 and BRCA2 genes.
However, in individuals who have a relative with a known BRCA1 or BRCA2
mutation, the Company can perform a mutation-specific test known as single-
amplicon analysis.
In preparation for the commercial introduction of BRACAnalysis(TM), the
Company hired a sales force with regional responsibilities for sales, promotion
and education of physicians nationwide. The Company currently employs a sales
force of ten individuals and expects to significantly expand its sales force
over the next three years. Marketing and educational efforts initially have been
directed to approximately 50 comprehensive cancer centers, 500 community cancer
centers, 9,000 oncologists and 40 of the largest managed care organizations as
primary customers for BRACAnalysis(TM). Myriad also conducts educational
symposiums for physicians in conjunction with the major medical conferences
across the country. The Company has distributed over 100,000 educational packets
to physicians, health care providers and genetic counselors. Educational
efforts are also underway to secondary customer segments which include
obstetricians, gynecologists and primary care physicians. The Company believes
that broad market acceptance can be achieved only with substantial education
about the benefits and limitations of BRACAnalysis(TM), as well as efforts to
resolve concerns about their appropriate and ethical use.
The Company has engaged a reimbursement consulting company to assist it in
a number of reimbursement activities for BRACAnalysis(TM), including: (i)
working with the Company to secure reimbursement approval from insurance and
managed care organizations for reimbursement for BRACAnalysis(TM); (ii)
providing reimbursement assistance through an 800 number hotline for patients
who wish to file claim forms with their insurance companies or managed care
providers; and (iii) administering a free of charge financial assistance program
for uninsured patients who meet financial means criteria for BRACAnalysis(TM).
While reimbursement policies for BRACAnalysis(TM) are still under discussion
with a number of insurance companies and managed care providers, several major
insurance companies and HMOs have provided reimbursement for BRACAnalysis(TM)
testing to their members.
Although the BRACAnalysis(TM) test has been successfully tested at 14
leading cancer centers across the country, there can be no assurance that this
test or other similar tests developed by the Company in the future will achieve
overall market acceptance. The degree of market acceptance will depend on a
number of factors, including the availability of third-party reimbursement and
demonstration to the medical community of the value, efficacy and cost-
effectiveness of the test to patients, payors and health care providers.
9
AGT GENETIC PREDISPOSITION TEST
The Company is also in the process of developing the AGT genetic
predisposition test and a fully automated testing platform that can identify
specific mutations of the AGT gene to assess an individual's risk of salt-
dependent hypertension. The Company believes that the AGT test may also be
useful to determine which individuals diagnosed with hypertension may benefit
from low-sodium diet therapy. Together with the National Institutes of Health
("NIH"), the Company is currently engaged in a study of the AGT genotypes of
approximately 2,000 individuals with hypertension to determine whether an
individual's ability to lower blood pressure by following a low-sodium diet is
correlated with the presence of certain AGT mutations. Demonstration of these
correlations could validate the use of the AGT genetic test to assist health
care providers in selecting the most effective therapy. Scientists at the
Company have completed the development of the AGT genetic test for salt-
dependent hypertension and are prepared to introduce the test if a correlation
is established in the studies.
MTS1 GENETIC PREDISPOSITION TEST
The Company and its collaborators have begun to identify important disease-
predisposing MTS1 mutations. Similar to the BRACAnalysis(TM) test and the
proposed AGT test, the Company believes that an MTS1 test will assist
individuals in determining if they are at risk for hereditary melanoma, a
potentially lethal disorder which is curable if detected early. Melanoma has
become one of the fastest growing cancers in the United States. The Company is
in the early stages of development of the MTS1 test and there can be no
assurance that the Company will successfully develop or commercialize this
product.
MYRIAD'S COMMERCIALIZATION STRATEGY
Myriad's commercialization strategy is to develop and market genetic
testing and information services for the identification of individuals who have
a high genetic risk of developing a particular disease based on predisposing
genes discovered or licensed by the Company. The development of therapeutic
treatments for such diseases represents a longer term opportunity for the
Company to pursue in collaboration with strategic partners or independently. The
Company has established a commercial genetics laboratory to provide genetic
predisposition testing and has received CLIA laboratory certification from the
Department of Health and Human Services. Myriad began marketing the first such
genetic predisposition test, BRACAnalysis(TM), on October 30, 1996. The Company
believes that the genetic information business represents an attractive
opportunity for the following reasons:
* The discovery of a gene enables the Company to develop and
introduce a commercial test for genetic predisposition in a shorter
period than the time required for therapeutic product development;
* The cost of developing a genetic test is significantly less than the cost
of developing a therapeutic product;
* The identification and patenting of genes may create significant barriers
to other companies attempting to enter the field;
* The market for genetic predisposition testing for cancer, heart disease and
other common diseases potentially includes a very large segment of the
population, since the Company believes that many individuals can
benefit from information regarding their susceptibility to these
diseases;
* The Company's broad technology platform should permit it to identify a
number of disease-predisposing genes and to develop the related
genetic predisposition tests; and
* The Company's gene discoveries provide longer-term opportunities for the
Company to develop and commercialize therapeutic products.
The Company believes that the information gained from genetic tests that
confirm inherited disease susceptibility has potential value in the following
areas: (i) proactive health care and lifestyle decisions that may delay or
prevent the onset of disease; (ii) early detection of disease which may improve
outcomes; and (iii) selection
10
of the most appropriate treatment once an individual develops a disease.
Genetic Predisposition Testing and Information Business
Through Myriad Labs, the Company has established a central genetic testing
laboratory to provide genetic information services to health care providers
based on the genes discovered or licensed by the Company. The Company is
developing a clinical database of information on mutations of each gene
discovered, including the frequencies of occurrence in different population
groups and the clinical effect of these mutations. This database will permit
Myriad Labs to provide health care professionals with detailed genetic
information regarding the risk profile associated with an individual's genetic
test results. Myriad Labs will also provide educational and support services to
physicians and health care professionals as part of its genetic information
business.
There are numerous difficulties and challenges associated with developing
genetic tests based on gene discoveries, as well as uncertainties in
interpreting the results. A defective gene may malfunction in many ways, and the
numerous mutations of the gene may make tests for the mutations difficult. In
addition, even when a genetic test identifies the existence of a mutation in a
particular individual, the interpretation of the genetic test results is limited
to the identification of a statistical probability that the tested individual
will develop the disease for which the test has been completed. There can be no
assurance that the Company will be successful in developing genetic tests in
addition to BRACAnalysis(TM) or that BRACAnalysis(TM) or any such tests will be
able to be marketed at acceptable prices or will receive commercial acceptance
in the markets that the Company expects to target.
By targeting its gene discovery efforts to the genetic predisposition
components of major common diseases such as cancer and cardiovascular disease,
the Company believes it will be able to assist health care providers in
determining an individual's predisposition to such illnesses. The Company
believes that genetic predisposition testing will be of great medical value to
large segments of the population. Both affected individuals and those who are
not currently affected but have a high risk of developing the disease in the
future can benefit from the genetic test information which will enable them to
make more informed decisions concerning selection of the most appropriate
therapy, increased monitoring and preventive measures.
In the longer term, the Company believes that as more genes are added to
its portfolio through discoveries by the Company and licenses of genes
discovered by others, the Company may be positioned to offer an array of genetic
tests which cover a number of major diseases. The availability of a broad
genetic testing profile could lead to expanded markets encompassing substantial
additional segments of the population who could benefit from knowing their risk
of developing a variety of major diseases.
Therapeutic Opportunities
Genes control all physiological processes through the expression of
proteins. Genetic disease manifests itself when a gene produces a protein that
causes a harmful effect or fails to produce a protein necessary for good health.
For example, a mutated gene may express a protein that causes certain cells to
proliferate without control, causing cancer. The Company believes that the
technologies it has developed to identify genes and their biochemical pathways
will enable it to identify important proteins for therapeutic intervention.
Preventing or treating disease involves, either (i) intervening, through the use
of a drug, in the complex series of cellular processes (which may include a
series of receptor, enzyme, hormone and other protein interactions in the
biochemical pathway) that block the activity of a harmful protein or replace the
function of a beneficial protein; (ii) blocking, replacing, modifying or
regulating the gene responsible for a beneficial or harmful protein, or (iii)
replacing a beneficial protein.
STRATEGIC ALLIANCES
The Company seeks to obtain financing for a portion of its research and
development activities through strategic alliances with corporate partners and
endeavors to leverage its research efforts through collaborative agreements with
academic institutions. Myriad has formed strategic alliances with four major
pharmaceutical companies to date. The Company is collaborating with (i) Schering
to discover genes involved in prostate and other cancers, (ii) Novartis to
discover genes involved in certain types of cardiovascular disease, (iii) Bayer
to discover
11
genes involved in obesity, osteoporosis and asthma, and (iv) Lilly on the
discovery of the BRCA1 breast and ovarian cancer gene. The Company is actively
pursuing potential strategic alliances with other partners in areas where it
believes they may enhance the Company's ability to develop and exploit its
technology. The material terms of the Company's current strategic alliances and
collaborative agreements are described below.
Schering-Plough Corporation
In April 1997, the Company entered into a Collaborative Research and
License Agreement and Stock Purchase Agreement with Schering. Under the
agreements, Schering made a $4 million equity investment in the Company, a $4
million one-time license payment to the Company, and agreed to provide $9
million of funding over a three-year period to support the Company's research
and development programs to identify and sequence certain genes involved in the
field of prostate and other cancers. The three-year term of the agreement may be
extended for two additional one-year periods with annual research and
development funding of up to $4 million each additional year. In addition, the
Company may receive future milestone payments up to $35 million and future
royalty payments on therapeutic product sales. The Company granted Schering an
exclusive, worldwide license to develop, manufacture and sell therapeutic
products derived from genes described above.
Under the Schering agreements, the Company will retain the exclusive,
worldwide rights to all diagnostic products, genetic testing services, and
therapeutic products outside of the field, based on the genes discovered under
the research collaboration. The Company will retain the exclusive, worldwide
rights to any therapeutic or diagnostic product for animal health care. In
addition, Schering has certain registration rights with respect to the stock it
purchased under the agreements.
Bayer Corporation
In September 1995, Myriad entered into a Collaborative Research and License
Agreement and Stock Purchase Agreement with Bayer. Under the agreements, Bayer
made a $10 million equity investment in the Company and agreed to provide $25
million of funding over a five-year period to support the Company's research and
development programs to identify and sequence genes involved in the field of
obesity, osteoporosis and asthma. In addition, the Company may receive future
milestone payments up to $36 million and future royalty payments on therapeutic
product sales. The Company granted Bayer an exclusive, worldwide license to
develop, manufacture, and sell therapeutic products derived from genes described
above. Bayer may terminate the research agreement after the second anniversary
if the research steering committee, which is comprised of an equal number of
representatives from the Company and Bayer, determines that the research program
is likely to fail to achieve its objectives in all areas and the parties do not
agree on alternative disease targets for the research program.
Under the Bayer agreements, the Company will retain the exclusive,
worldwide rights to all diagnostic products, genetic testing services, and
therapeutic products outside of the field, based on the genes discovered under
the research collaboration. The Company will retain the exclusive, worldwide
rights to any therapeutic or diagnostic product for animal health care. In
addition, Bayer has certain registration rights with respect to the stock it
purchased under the agreements as well as certain Board representation rights.
Novartis Corporation
In April 1995, Myriad entered into a Collaborative Research and License
Agreement and Stock Purchase Agreement with Novartis. Under the agreements,
Novartis made a $7 million equity investment in the Company and agreed to
provide $25 million of funding over a five-year period to support the Company's
research and development programs to identify and sequence certain genes
involved in the field of cardiovascular disease. In addition, the Company may
receive future milestone payments up to $28 million and future royalty payments
on therapeutic product sales. The Company granted Novartis an exclusive,
worldwide license to develop, manufacture, and sell therapeutic products derived
from genes described above. Novartis may terminate the research agreement after
the second anniversary if the Company fails in a material respect to achieve any
of the research objectives established by the research steering committee, which
is comprised of an equal number of representatives from the Company and
Novartis.
12
Under the Novartis agreements, the Company will retain the exclusive,
worldwide rights to all diagnostic products, genetic testing services, and
therapeutic products outside of the field, based on the genes discovered under
the research collaboration. The Company will retain the exclusive, worldwide
right to any therapeutic or diagnostic product for animal health care. In
addition, Novartis has certain registration rights with respect to the stock it
purchased under the agreements as well as certain Board representation rights.
Eli Lilly and Company
In August 1992, the Company entered into a Research Collaboration and
License Agreement with Lilly and its former subsidiary, Hybritech Incorporated
(''Hybritech''), pursuant to which Lilly and Hybritech made an equity investment
in the Company and provided funding over a three-year period to support the
Company's research and development program to discover and sequence the BRCA1
gene. Hybritech was sold by Lilly to Beckman Instruments, Inc. in 1996. The
Company granted to Lilly an exclusive, worldwide license to develop, manufacture
and sell therapeutic products derived from the BRCA1 gene, and granted to
Hybritech an exclusive, worldwide license to develop, manufacture and sell
diagnostic kits derived from the BRCA1 gene. Royalties with respect to
therapeutic and diagnostic products which may in the future be developed by
Lilly and Hybritech will be payable on product sales in each country until the
expiration of the last valid patent covering such products in that country.
Under the agreement, the Company retained the exclusive, worldwide rights to
provide genetic testing services based on the BRCA1 gene.
Hybritech, a subsidiary of Beckman Instruments, Inc.
In March 1993, the Company and Hybritech entered into a related
Collaborative Agreement which establishes certain rights and obligations of the
Company and Hybritech with respect to Hybritech's development and sale of
diagnostic kits. The agreement provides that Hybritech will have access to the
BRCA1 mutation profile developed by the Company for use in connection with
Hybritech's development of diagnostic kits. The agreement gives the Company the
exclusive right to manufacture DNA or RNA-based reagents for use in Hybritech's
diagnostic kits, should Hybritech elect to develop diagnostic kits based on such
reagents. The agreement also requires Hybritech to make periodic milestone
payments to the Company keyed to progress in the development of a diagnostic
kit. The first of such milestones has been achieved, and Hybritech has made a
portion of the related payments.
ACADEMIC COLLABORATIONS
The Company has a number of collaborative agreements with the University of
Utah (the "University"), IHC and the University of Texas M.D. Anderson Cancer
Center ("MDA") which represent important elements of the Company's research and
development programs. The Company provides funding for its scientific
collaborators at the University, IHC, and MDA to expand the development of
databases of families, the collection of clinical information and the analysis
of DNA samples relating to specific gene discovery projects targeted by the
Company. The University, IHC, and MDA have granted the Company an exclusive,
worldwide, royalty bearing license to any commercial application including all
gene discoveries, inventions and improvements created or discovered during such
research for use by the Company or its corporate partners for diagnostic and
therapeutic purposes.
Collaborations Related to Cancer. The Company has entered into a research
agreement and three related exclusive license agreements with the University in
the field of cancer. The Company and University entered into an Exclusive
License Agreement in October 1991, pursuant to which the Company was granted an
exclusive, worldwide license to the University's patent rights arising out of
the discovery of the BRCA1 breast and ovarian cancer gene for use in the
diagnosis and treatment of breast cancer.
In December 1992, the Company entered into a Standard Research Agreement to
provide funding to the Center for Cancer Genetic Epidemiology for research
projects directed to the isolation, sequencing and characterization of genes
predisposing to cancer, including but not limited to colon cancer, lung cancer,
prostate cancer and melanoma. Following the Company's discovery of the MTS1
gene, the Company entered into a second Exclusive License Agreement with the
University in June 1994, pursuant to which the Company was granted an exclusive,
worldwide license to discoveries and inventions arising out of research at the
Center for Cancer Genetic Epidemiology related to
13
germline mutations of the MTS1 gene and methods of detecting predisposition to
cancer based on the MTS1 gene. In November 1994, the Company entered into a
third Exclusive License Agreement with the University, pursuant to which it was
granted an exclusive, worldwide license to discoveries and inventions arising
out of research at the Center for Cancer Genetic Epidemiology directed to the
localization, sequencing and characterization of the BRCA2 breast cancer
predisposing gene.
In September 1996, the Company entered into a Patent and License Technology
Agreement with the University of Texas and MDA in connection with research
directed to the isolation sequencing and characterization of genes involved in
leukemia, pursuant to which the Company was granted an exclusive, worldwide
license to any commercial application of leukemia genes discovered during such
research. In December 1996, the Company entered into a second Patent and
License Technology Agreement with the University of Texas and MDA in connection
with research directed to the isolation sequencing and characterization of genes
involved in glioma, prostate, and renal cancer, pursuant to which the Company
was granted an exclusive, worldwide license to any commercial application of
glioma, prostate, and renal cancer genes discovered during such research.
Collaborations Related to Cardiovascular Disease , Diabetes and Obesity. In
May and August 1995, as amended in December 1996, the Company entered into two
Standard Research Agreements and two Exclusive License Agreements with the
University under which the Company agreed to reimburse the University for
research performed at its Cardiovascular Genetics Research Clinic on behalf of
the Company in the fields of cardiovascular disease, diabetes and obesity. The
University granted the Company exclusive, worldwide rights to use the database
of families, clinical information and DNA samples for the discovery of genes for
the diagnosis and treatment of cardiovascular disorders, diabetes and obesity.
The research agreement covering cardiovascular disorders and diabetes terminates
on April 30, 2000, while the obesity research agreement terminates on July 31,
2000.
Collaborations Relating to Asthma and Osteoporosis. In September 1995, the
Company entered into a Standard Research Agreement with IHC under which the
Company reimburses IHC for research used to develop a clinical database in the
fields of asthma and osteoporosis, by linking IHC's database of patient records
to the Company's genealogy database. IHC will also collect clinical information
and DNA samples on selected patients. The Company and IHC will jointly own the
clinical database, except that IHC may only use the database for educational and
research purposes and to improve health care services to its patients and may
not (i) use the clinical database to discover genes or develop products from the
genes discovered or (ii) sell, license or furnish access to the database to any
other party.
The Company has the exclusive rights to use the clinical database, clinical
information and DNA samples for the discovery of genes and the development of
products for the diagnosis, prevention and treatment of asthma and osteoporosis.
The research agreement covering asthma and osteoporosis terminates on August 31,
2000.
Collaborations Relating to Central Nervous System ("CNS") Diseases. In June
1996, the Company entered into a Standard Research Agreement with IHC under
which the Company reimburses IHC for research used to develop a clinical
database in the study of CNS disorders, such as depression, attention deficit
hyperactivity disorder, addictive behavior, and obsessive-compulsive disorders,
by linking IHC's database of patient records to the Company's genealogy
database. IHC will also collect clinical information and DNA samples on selected
patients. The Company and IHC will jointly own the clinical database, except
that IHC may only use the database for educational and research purposes and to
improve health care services to its patients and may not (i) use the clinical
database to discover genes or develop products from the genes discovered or (ii)
sell, license or furnish access to the database to any other party.
The Company has the exclusive rights to use the clinical database, clinical
information and DNA samples for the discovery of genes and the development of
products for the diagnosis, prevention and treatment of CNS disorders. The
research agreement covering CNS diseases terminates on April 30, 2001.
PATENTS AND PROPRIETARY RIGHTS
14
The Company intends to seek patent protection in the United States and
major foreign jurisdictions for the genes it discovers, mutations and products
of the genes and related processes, transgenic animals, and other inventions
which it believes are patentable and where the Company believes its interests
would be best served by seeking patent protection. The Company also intends to
seek patent protection or rely upon trade secret rights to protect certain other
technologies which may be used in discovering and characterizing new genes and
which may be used in the development of novel diagnostic and therapeutic
products. To protect its trade secrets and other proprietary information, the
Company requires that its employees and consultants enter into confidentiality
and invention assignment agreements. There can be no assurance as to the
protection that the confidentiality and invention assignment agreements will
afford the Company. In addition, there can be no assurance that any such patents
will issue, or that the breadth or the degree of protection of any claims of
such patents will afford significant protection to the Company.
The Company owns or has licensed rights to three issued patents and 40
patent applications in the United States and numerous foreign patent
applications relating to genes associated with cancer, hypertension and
processes for identifying and sequencing genes. There can be no assurance,
however, that any patent applications which the Company has filed or will file
or to which the Company has licensed or will license rights will issue or that
patents that do issue will contain commercially valuable claims. In addition,
there can be no assurance that any patents issued to the Company or its
licensors will afford meaningful protection for the Company's technology or
products or will not be subsequently circumvented, invalidated or narrowed.
The Company's processes and potential products may also conflict with
patents which have been or may be granted to competitors, academic institutions
or others. As the biotechnology industry expands and more patents are issued,
the risk increases that the Company's processes and potential products may give
rise to interferences in the USPTO, or to claims of patent infringement by other
companies, institutions or individuals. Such entities or persons could bring
legal actions against the Company claiming damages and seeking to enjoin
clinical testing, manufacturing and marketing of the related product or process.
If any such actions are successful, in addition to any potential liability for
damages, the Company could be required to cease the infringing activity or
obtain a license in order to continue to manufacture or market the relevant
product or process. There can be no assurance that the Company would prevail in
any such action or that any license required under any such patent would be made
available on acceptable terms, if at all. Failure by the Company to obtain a
license to any technology that it may require to commercialize its technologies
or potential products could have a material adverse effect on the Company's
business, financial condition and results of operations. There is also
considerable pressure on academic institutions to publish discoveries in the
genetic field. Such a publication by an academic collaborator of the Company
prior to the filing date of the Company's application, if it covers a gene
claimed in the application, may preclude the patent from issuing or the filing
of foreign patent applications, or if a patent was issued, may invalidate the
patent.
The Company also relies upon unpatented proprietary technology, and in the
future may determine in some cases that its interests would be better served by
reliance on trade secrets or confidentiality agreements rather than patents or
licenses. These include the Company's positional cloning, protein interaction,
robotics and bioinformatics technologies. There can be no assurance that the
Company will be able to protect its rights to such unpatented proprietary
technology or that others will not independently develop substantially
equivalent technologies. If the Company is unable to obtain strong proprietary
rights to its processes or products after obtaining regulatory clearance,
competitors may be able to market competing processes and products.
Others may obtain patents having claims which cover aspects of the
Company's products or processes which are necessary for or useful to the
development, use or manufacture of the Company's services or products. Should
any such other group obtain patent protection with respect to its discoveries,
the Company's commercialization of genetic testing services and potential
therapeutic products could be limited or prohibited.
In addition, the Company is party to various license agreements which give
it rights to use certain technology in its research, development and testing
processes. There can be no assurance that the Company will be able to
15
continue to license such technology on commercially reasonable terms, if at all.
Failure by the Company to maintain rights to such technology could have a
material adverse effect on the Company.
COMPETITION
Competition in the Company's potential markets is intense. The technologies
for discovering genes which predispose individuals to major diseases and
approaches for commercializing those discoveries are new and rapidly evolving.
Rapid technological developments could result in the Company's potential
services, products, or processes becoming obsolete before the Company recovers a
significant portion of its related research and development costs and capital
expenditures associated therewith. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and diagnostic companies, specialized biotechnology firms, universities and
other research institutions, including those receiving funding from the Human
Genome Project. Many of the Company's potential competitors have considerably
greater financial, technical, marketing and other resources than the Company,
which may allow these competitors to discover important genes in advance of the
Company. If the Company does not discover disease-predisposing genes,
characterize their functions, develop genetic tests and related information
services based on such discoveries obtain regulatory and other approvals, and
launch such services or products before competitors, the Company could be
adversely affected. In addition, any predisposing tests which the Company may
develop, including the recently introduced BRACAnalysis(TM) test, could be made
obsolete by less expensive or more effective tests or methods which may be
developed in the future. The Company expects competition to intensify in the
fields in which it is involved as technical advances in such fields are made and
become more widely known.
Myriad plans to offer genetic testing and information services to detect
the mutation of genes predisposing individuals to major diseases through Myriad
Labs. The clinical laboratory testing business is characterized by intense
competition. There are several large clinical laboratories that market a broad
range of services nationally, and that have substantially larger financial,
marketing, logistical and laboratory resources than Myriad. These companies
typically offer hundreds of different tests and generally compete based on
quality, price and the time required to report results. While only a few of
these laboratories currently provide DNA sequenced testing services, the Company
anticipates that a number of these entities could offer competitive DNA
sequenced testing services as technology evolves. The Company is aware of other
companies which offer genetic predisposition tests for the BRCA1 and BRCA2
genes. In addition, a number of research institutions and university research
centers offer certain genetic predisposition testing on a limited basis.
The Company is also aware that other companies may be developing DNA probe
kits for genetic risk assessment purposes, some of which may be competitive with
the Company's proposed genetic information business. Companies offering
diagnostic products range from small businesses to large diagnostic, health care
and pharmaceutical companies, many of which have substantially greater assets
and resources than the Company. Several large diagnostic product companies
manufacture test kits and other diagnostic tools that in general are sold to
clinical laboratories.
The Company has licensed to Hybritech the rights to develop, manufacture
and market diagnostic kits for the BRCA1 breast cancer gene. If Hybritech or a
sublicensee is successful in developing a diagnostic kit and receiving FDA
approval for it, Hybritech or such sublicensee could sell the BRCA1 diagnostic
kit to clinical laboratories and other competitors of the Company. Even though
the Company has the right to supply all of the DNA components for such
diagnostic kits and would receive royalties on the sale of all diagnostic kits,
such diagnostic kits, if successfully developed, would likely compete against
the Company's BRCA1 genetic testing business and reduce the Company's market
share and revenues.
The Company also expects to encounter significant competition with respect
to any drugs that may be developed using its technologies. Companies that
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of therapeutic products prior to the Company may achieve a
significant competitive advantage. There can be no assurance, however, that the
Company or its collaborative partners will be able to
16
develop such products successfully or that such parties will obtain patents
covering such products that provide protection against competitors. Moreover,
there can be no assurance that the Company's competitors will not succeed in
developing therapeutic products that circumvent the Company's products, that
such competitors will not succeed in developing technologies or products that
are more effective than those developed by the Company and its collaborative
partners or that would render technologies or products of the Company and it
collaborators less competitive or obsolete.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's proposed services and in its ongoing research and development
activities. The Company's genetic testing and information services, as well as
any therapeutic products which may be developed by its collaborative partners,
will require regulatory approval by governmental agencies prior to
commercialization. The establishment and operation of a genetic laboratory
requires regulatory approval and periodic compliance reviews. Various federal
statutes and regulations also govern or influence the testing, manufacturing,
safety, labeling, storage, record keeping, and marketing of such products. The
process of obtaining these approvals and the subsequent compliance with
applicable statutes and regulations require the expenditure of substantial time
and financial resources. Any failure by the Company or its collaborators,
licensors or licensees to obtain, or any delay in obtaining, regulatory approval
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Genetic Laboratories. Myriad Labs is subject to government regulation at
the federal, state, and local levels as a clinical laboratory. Myriad Labs has
received CLIA certification from the Department of Health and Human Services. On
the state level, only New York has implemented regulations concerning DNA-based
diagnostic testing and the Company has received approval from the State of New
York for both BRCA1 and BRCA2 genetic testing. The Company is aware of several
other states that require licensing or registration of clinical laboratory
activities. The Company believes that it has taken all steps required of it in
such jurisdictions in order for Myriad Labs to conduct business in those
jurisdictions. However, there can be no assurance that the Company will be able
to maintain state level regulatory compliance in all states where Myriad Labs
may do business. Failure to maintain state regulatory compliance, or changes in
state regulatory schemes, could result in a substantial curtailment or even
prohibition of Myriad Lab's clinical activities and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CLIA authorizes the Department of Health and Human Services to regulate
clinical laboratories. These regulations, which affect the Company, mandate that
all clinical laboratories be certified to perform testing on human specimens and
provide specific conditions for certification. These regulations also contain
guidelines for the qualification, responsibilities, training, working conditions
and oversight of clinical laboratory employees. In addition, specific standards
are imposed for each type of test which is performed in a laboratory. CLIA and
the regulations promulgated thereunder are enforced through quality inspections
of test methods, equipment, instrumentation, materials and supplies on a
periodic basis. Any change in CLIA or these regulations or in the interpretation
thereof could have a material adverse effect on the Company's business,
prospects, financial condition or results of operations.
While the FDA does not currently regulate genetic tests developed by the
Company if used in the Company's own testing laboratory, the FDA has stated that
is has the right to do so, and there can be no assurance that the FDA will not
seek to regulate such tests in the future. If the FDA should require that these
tests receive FDA approval prior to their use in the Company's genetic testing
laboratory, there can be no assurance such approval would be received on a
timely basis, if at all. The failure to receive such approval could require the
Company to develop alternative testing methods, which could result in the delay
or cessation of such tests. Such a delay or cessation would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Therapeutics. Under the Company's current strategic alliances, the
Company's partners have the right to
17
develop therapeutic products based on the Company's gene discoveries. The
Company may also elect to develop independently therapeutic products based on
gene discoveries that it has not licensed to partners. Such products, including
any human gene therapy products, will be subject to regulation by the FDA and
foreign regulatory authorities and require approval before they may be
clinically tested and commercially marketed for human therapeutic use in the
United States and other countries. The precise regulatory requirements with
which the Company's corporate partners will have to comply are undergoing
frequent revisions and refinement due to the novelty of the human gene therapies
being developed. Human gene therapy products are a new category of therapeutics,
and there can be no assurance as to the length of the clinical trial period or
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety, efficacy, and potency of human gene
therapy products. It is uncertain that the clinical data generated in such
studies will be acceptable to the FDA such that the FDA will approve the
marketing of such products. In addition, obtaining FDA approval for therapeutic
products is a costly and time consuming process.
The steps required before a pharmaceutical agent may be marketed in the
United States include (a) preclinical laboratory, in vivo and formulation
studies, (b) the submission to FDA of an Investigational New Drug application,
which must become effective before human clinical trials may commence, (c)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug, (d) the submission of a New Drug Application ("NDA") to
FDA and (e) FDA approval of the NDA, including approval of all product labeling
and advertising. Failure to successfully develop therapeutic products could have
a material adverse effect on the Company's business, financial results and
results of operations.
In addition to the FDA requirements, the NIH has established guidelines
providing that transfers of recombinant DNA into human subjects at NIH
laboratories or with NIH funds must be approved by the NIH Director. The
Director has the authority to approve a procedure only if it is determined that
no significant risk to health or the environment is presented.
The Company's business is also subject to regulation under state and
federal laws regarding environmental protection and hazardous substances
control, including the Occupational Safety and Health Act, the Environmental
Protection Act, and the Toxic Substance Control Act. The Company believes that
it is in material compliance with these and other applicable laws and that its
ongoing compliance therewith will not have a material adverse effect on its
business. There can be no assurance, however, that statutes or regulations
applicable to the Company's business will not be adopted which impose
substantial additional costs to assure compliance or otherwise materially
adversely affect the Company's operations.
HUMAN RESOURCES
As of September 12, 1997, Myriad had 197 full-time equivalent employees,
including 27 persons holding doctoral degrees. Most of the Company's employees
are engaged directly in research and development activities. The Company
believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel.
The Company's employees are not covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located in Salt Lake City, Utah. The Company
currently leases all of its facilities, including a 24,800 square foot building
dedicated to research and development and a 48,500 square foot building
dedicated to research and development, administration and laboratory space which
has received federal certification under CLIA to serve as a genetic
predisposition testing laboratory. Additionally, the Company leases 6,440 square
feet for various support functions. Leases are generally for terms of five to
ten years, and usually provide renewal options for terms of up to five
additional years.
18
The Company believes that its existing facilities and equipment are well
maintained and in good working condition. The Company also believes that the
flexibility to expand its new facilities will provide the Company with adequate
capacity for the foreseeable future. The Company continues to make investments
in capital equipment as needed to meet the research requirements of its
collaborative agreements and to meet the anticipated demand for its genetic
predisposition tests.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
June 30, 1997.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock began trading on the Nasdaq National Market on
October 6, 1995 under the symbol "MYGN". Prior to that date, there was no
established trading market for the Common Stock. The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock, as reported by the Nasdaq National Market, since the Common Stock
commenced public trading:
HIGH LOW
------ ------
FISCAL 1998:
First Quarter (through August 22, 1997) $26.75 $24.00
FISCAL 1997:
Fourth Quarter........................... $35.50 $20.75
Third Quarter............................ $46.00 $24.25
Second Quarter........................... $30.50 $20.00
First Quarter............................ $27.00 $16.50
FISCAL 1996:
Fourth Quarter........................... $34.50 $23.50
Third Quarter............................ $36.25 $20.75
Second Quarter (from October 6, 1995).... $39.00 $19.00
As of August 22, 1997, there were approximately 221 stockholders of record
of the Common Stock and, according to the Company's estimates, approximately
2,690 beneficial owners of the Common Stock. The Company has not paid dividends
to its stockholders since its inception and does not plan to pay cash dividends
in the foreseeable future. The Company currently intends to retain earnings, if
any, to finance the growth of the Company.
During the three months ended June 30, 1997, the Company issued a total of
34,746 shares of Common Stock to various Directors, consultants, and employees
of the Company pursuant to the exercise of stock options at a weighted average
exercise price of $3.31 per share. During the same period, the Company issued a
total of 296 shares of Common Stock to various holders of warrants issued to
Spencer Trask Securities Incorporated, the placement agent for the Company's
1993 private placement of Series A Convertible Preferred Stock, at a weighted
average exercise price of $7.00 per share.
No person acted as an underwriter with respect to the transactions set
forth above. In each of the foregoing instances, the Company relied on Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act") or Rule
701 promulgated under the Securities Act, or a registration statement on Form S-
8, as applicable.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables sets forth consolidated financial data with respect to
the Company as of and for each of the five years ended June 30, 1997. The
selected consolidated financial data as of and for each of the five years ended
June 30, 1997 have been derived from the consolidated financial statements of
the Company, which consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The foregoing
consolidated financial statements and the report thereon are included elsewhere
in this Annual Report on Form 10-K. The information below should be read in
conjunction with the consolidated financial statements (and
20
notes thereon) and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in Item 7.
YEARS ENDED JUNE 30,
====================================================================================
1993 1994 1995 1996 1997
-------------- -------------- -------------- -------------- --------------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Research revenue............... $550,000 $600,000 $ 1,294,500 $ 6,628,624 $ 14,732,054
Genetic testing revenue........ - - - - 504,045
------------- ------------- ------------- ------------- -------------
Total revenues............... 550,000 600,000 1,294,500 6,628,624 15,236,099
Costs and expenses:
Research and development....... 788,540 3,008,487 5,161,978 12,990,566 18,580,229
Selling, general and
administrative.............. 328,339 1,154,541 1,788,247 2,525,814 8,755,217
Genetic testing cost of revenue - - - - 340,461
------------- ------------- ------------- ------------- -------------
Total expenses............... 1,116,879 4,163,028 6,950,225 15,516,380 27,675,907
------------- ------------- ------------- ------------- -------------
Operating loss............... (566,879) (3,563,028) (5,655,725) (8,887,756) (12,439,808)
Other income (expense):
Interest income.............. 143,460 273,689 458,353 3,173,749 3,414,379
Interest expense............. (21,161) - (71,011) (97,414) (66,661)
Other........................ - 12,564 - (86,052) (114,190)
------------- ------------- ------------- ------------- -------------
Net loss................... ($444,580) ($3,276,775) ($5,268,383) ($5,897,473 ($9,206,280)
============= ============= ============= ============= =============
Net loss per share......... ($0.16) ($0.81) ($1.19) ($0.78) ($1.03)
Weighted average shares
outstanding............. 2,813,030 4,021,870 4,427,095 7,608,548 8,903,918
AS OF JUNE 30,
====================================================================================
1993 1994 1995 1996 1997
-------------- -------------- -------------- -------------- --------------
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents and
marketable investment
securities.................... $8,999,664 $5,678,356 $16,140,935 $70,002,780 $63,077,439
Working capital................. 8,834,546 5,265,234 13,784,051 41,665,513 38,796,960
Total assets.................... 9,739,690 6,722,784 19,744,451 79,607,497 76,063,331
Notes payable less current
portion....................... -- -- 780,261 471,640 128,844
Net stockholders' equity 9,564,747 6,288,919 16,256,165 70,185,747 66,178,975
- -------------------------------
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Since inception, the Company has devoted substantially all of its resources
to maintaining its research and development programs, establishing and operating
a genetic testing laboratory, and supporting collaborative research agreements.
Revenues received by the Company primarily have been payments pursuant to
collaborative research agreements and sales of genetic predisposition tests.
The Company has been unprofitable since its inception and, for the year ended
June 30, 1997, the Company had a net loss of $9,206,280 and as of June 30, 1997
had an accumulated deficit of $24,147,392.
In August 1995, the Company completed a three-year collaborative research
and development agreement with Lilly to locate and sequence the BRCA1 breast and
ovarian cancer gene. This agreement has provided the Company with research
funding and may provide certain additional payments upon the attainment of
research and regulatory milestones and royalty payments based on sales of any
products resulting from the collaboration. The Company did not recognize
revenue under this agreement for the year ended June 30, 1997.
In April 1995, the Company commenced a five-year collaborative research and
development arrangement with Novartis. This collaboration provides the Company
with an equity investment, research funding and potential milestone payments
totalling up to $60,000,000. The Company is entitled to receive royalties from
sales of therapeutic products sold by Novartis. The Company recognized
approximately $5,100,000 in revenue under this agreement for the year ended June
30, 1997.
In September 1995, the Company commenced a five-year collaborative research
and development arrangement with Bayer. This collaboration provides the Company
with an equity investment, research funding and potential milestone payments
totalling up to $71,000,000. The Company is entitled to receive royalties from
sales of therapeutic products sold by Bayer. The Company recognized
approximately $4,800,000 in revenue under this agreement for the year ended June
30, 1997.
In April 1997, the Company commenced a three-year collaborative research
and development arrangement with Schering. The three-year term may be extended
for two additional one-year periods. This collaboration provides the Company
with an equity investment, license fees, research funding and potential
milestone payments totalling up to $60,000,000. The Company is entitled to
receive royalties from sales of therapeutic products sold by Schering. The
Company recognized $4,750,000 in revenue under this agreement for the year ended
June 30, 1997.
In October 1996, the Company announced the introduction of
BRACAnalysis(TM), a comprehensive BRCA1 and BRCA2 gene sequence analysis for
susceptibility to breast and ovarian cancer. The Company, through its wholly
owned subsidiary Myriad Labs, began accepting testing samples on a commercial
basis on October 30, 1996. Genetic testing revenues of $504,045 were recognized
for the year ended June 30, 1997.
22
In January 1997, the Company announced the identification of a major gene
responsible for glioma, a form of brain cancer that is a leading killer of
children with cancer. In March 1997 the Company further announced that the
identified gene was also found to be associated with other advanced cancers of
the prostate, breast, kidney and skin. MMAC1 was located through a
collaborative effort by scientists at the Company and MDA. It is anticipated
that the discovery of MMAC1 will lead to the development of new molecular
diagnostic and therapeutic products for cancer. There can be no assurance,
however, that the identification of this gene will lead to the development of
diagnostic tests or therapeutic products.
In April 1997, the USPTO granted a patent covering MTS1 gene mutations.
The composition of matter patent on the gene mutations, which are believed to be
associated with melanoma, was issued to Myriad and the University. There can be
no assurance that the patenting of this gene will lead to the development of a
diagnostic test or therapeutic products.
In December 1996, the USPTO granted a patent covering the AGT gene
mutation. The composition of matter patent on the gene mutation, which is
believed to be associated with an individual's risk for salt-dependent
hypertension, was issued to the University, and is exclusively licensed to the
Company for therapeutic applications, and co-exclusively licensed to Myriad for
diagnostic applications. There can be no assurance, however, that the patenting
of this gene will lead to the development of a diagnostic test or therapeutic
products.
The Company intends to enter into additional collaborative relationships to
locate and sequence genes associated with other common diseases as well as
continuing to fund internal research projects. There can be no assurance that
the Company will be able to enter into additional collaborative relationships on
terms acceptable to the Company. The Company expects to incur increasing
expenses and losses for at least the next several years, primarily due to
expansion of its research and development programs, increased staffing costs,
and expansion of its facilities. Additionally, the Company expects to incur
substantial sales, marketing and other expenses in connection with building its
genetic predisposition testing business. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
RESULTS OF OPERATIONS
Years ended June 30, 1997 and 1996.
Research revenues for the Company's fiscal year ended June 30, 1997
increased $8,103,430 from the prior year to $14,732,054. The increase was
attributable to the Company's corporate research collaboration agreements
providing ongoing research funding. The fiscal year ended June 30, 1997 was the
Company's first full year of involvement with Bayer, in addition to the
collaborative research agreement initiated with Schering in April 1997.
Research revenue from the research collaboration agreements is recognized as
related costs are incurred. Consequently, as these programs progress and costs
increase, revenues increase proportionately.
Genetic testing revenues of $504,045 were recognized in the fiscal year
ended June 30, 1997. The Company anticipates genetic testing revenue to
increase in the future as cancer centers develop internal protocols for handling
samples, additional insurance companies offer reimbursement for such tests, and
market awareness of such tests is increased. The Company anticipates an improved
gross margin in the future as increased sales reduce inefficiencies related to
underutilization of capacity. There can be no assurance, however, that any of
these factors will be realized or that genetic testing revenues will continue to
increase at the historical rate.
Research and development expenses for the year ended June 30, 1997
increased to $18,580,229 from $12,990,566 for the prior year. This increase was
primarily due to an increase in research activities as a result of the progress
in the Company's collaborations with Novartis, Bayer and Schering as well as
those programs funded by the Company, including the successful collaborative
effort by the Company and scientists at MDA in discovering the MMAC1 gene. The
increased level of research spending includes third party research programs,
increased depreciation charges related to purchasing of additional research
equipment, the hiring of additional research personnel and the associated
increase in use of laboratory supplies and reagents. The Company also incurred
increased
23
development expenses during the year related to work on developing and launching
BRACAnalysis(TM), its genetic predisposition test for susceptibility to breast
and ovarian cancer. Such expenses will likely increase to the extent that the
Company enters into additional research agreements with third parties.
Selling, general and administrative expenses for the year ended June 30,
1997 increased $6,229,403 from the year ended June 30, 1996. The increase was
primarily attributable to costs associated with the ongoing promotion of
BRACAnalysis(TM) as well as additional administrative, sales, marketing and
education personnel, market research activities, educational material
development, legal fees associated with filing world wide patent applications on
the Company's gene discoveries, product liability insurance premiums, and
facilities-related costs. The Company expects its selling, general and
administrative expenses will continue to increase in support of its genetic
predisposition testing business and its research and development efforts.
Interest income for the year ended June 30, 1997 increased to $3,414,379
from $3,173,749 for the prior year. This increase was primarily due to the
funds available for investment, which were raised in the Company's private
placement of preferred stock in February 1995, its research and development
collaborations entered into with Novartis and Bayer in April 1995 and September
1995, respectively, its initial public offering ("IPO") in October 1995, and its
research and development collaboration with Schering in April 1997. Much of
these funds, while raised in the previous fiscal year, were held by the Company
for the entire fiscal year ended June 30, 1997.
Interest expense for the year ended June 30, 1997, amounting to $66,661,
was due entirely to borrowings under the Company's equipment financing facility.
The other expense of $114,190 in the year ended June 30, 1997 is primarily the
result of losses recognized on the sale of obsolete equipment. The net loss
increased to $9,206,280 for the year ended June 30, 1997 from $5,897,473 for the
year ended June 30, 1996. The Company had federal income tax net operating loss
carryforwards of approximately $31,790,000 and federal income tax research
activities credit carryforwards of approximately $264,800 as of June 30, 1997.
Years ended June 30, 1996 and 1995.
Research revenues for the Company's fiscal year ended June 30, 1996
increased $5,334,124 from the prior year. The increase was attributable to
additional research collaboration agreements providing ongoing research funding.
Research revenue from the research collaboration agreements is recognized as
related costs are incurred. During the year, both the Novartis and Bayer project
teams hired additional researchers, resulting in increased revenues to match the
increased expenditures related to the new hires.
Research and development expenses for the year ended June 30, 1996
increased to $12,990,566 from $5,161,978 for the prior year. This increase was
primarily due to an increase in research as a result of the Company's
collaborations with Novartis and Bayer and an increase in research programs
funded by the Company, including third party research programs, increased
depreciation charges related to purchasing of additional equipment, the hiring
of additional personnel and the associated increase in use of laboratory
supplies and reagents. The Company also incurred increased development expenses
during the year related to work on developing its predisposition test for
mutations of the BRCA1 and BRCA2 breast and ovarian cancer genes. The Company
expects research and development expenses to continue to increase as personnel
and research and development facilities are expanded. Such expenses will also
likely increase to the extent that the Company enters into additional research
agreements with third parties.
General and administrative expenses for the year ended June 30, 1996
increased $737,567 from the year ended June 30, 1995. The increase was
attributable to legal fees associated with filing world-wide patent applications
on the Company's gene discoveries, additional administrative personnel,
facilities-related costs and deferred compensation related to grants of stock
options and warrants. The Company expects its general and administrative
expenses will continue to increase in support of its research and development
efforts and preparations for its genetic predisposition testing business.
24
Interest income for the year ended June 30, 1996 increased to $3,173,749
from $458,353 for the prior year. This increase was primarily due to the
increased funds available for investment, which were raised in the Company's
private placement of preferred stock in February 1995, its research and
development collaborations entered into with Novartis and Bayer in April 1995
and September 1995, respectively, and its IPO. Interest expense for the year
ended June 30, 1996, amounting to $97,414, was due entirely to borrowings under
the Company's equipment financing facility, which are secured by equipment and
have a repayment term of 48 months from the date of funding. The other expense
of $86,052 in the year ended June 30, 1995 is the result of a loss recognized on
the sale of obsolete equipment. The net loss increased to $5,897,473 for the
year ended June 30, 1996 from $5,268,383 for the year ended June 30, 1995. The
Company had federal income tax net operating loss carryforwards of approximately
$11,340,500 and federal income tax research activities credit carryforwards of
approximately $164,800 as of June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $6,581,534 during the fiscal year
ended June 30, 1997 as compared to net cash provided by operating activities of
$1,419,810 during the prior fiscal year. Prepaid expenses increased $357,837
during the year ended June 30, 1997. The increase is primarily due to royalties
paid in advance in order to take advantage of early payment discounts. Trade
receivables increased $183,166 during fiscal 1997 reflecting amounts due from
insurance companies and major cancer centers for genetic predisposition testing
services provided by Myriad Labs. The increase in non-trade receivables of
$215,901 for the fiscal year ended June 30, 1997 is the result of certain legal
fees which the Company has incurred and which will be reimbursed by one of the
Company's collaborative partners. Accounts payable increased between June 30,
1997 and June 30, 1996 as a result of the Company's growth. Deferred revenue,
representing the difference in collaborative payments received and research
revenue recognized, increased $38,051 with the continued payments from Novartis,
Bayer and Schering to the Company. As expenses related to the projects continue
to increase and the associated research revenue is recognized, deferred revenue
will decrease.
The Company's investing activities provided cash of $4,734,548 in the year
ended June 30, 1997 and used cash of $58,985,422 in the year ended June 30,
1996. Investing activities were comprised primarily of capital expenditures for
research equipment, office furniture, and facility expansion. During the year
ended June 30, 1997, the Company shifted a portion of its investment in
marketable securities from longer term investments to cash and cash equivalents
in order to provide for ongoing corporate expenditures.
Financing activities provided $4,287,070 during the year ended June 30,
1997 and provided $58,915,556 in the year ended June 30, 1996. Financing
activities were comprised primarily of Schering's equity investment in April
1997. During fiscal year 1997 the Company reduced the principal on its
equipment financing facility by $308,658 to $471,640. The Company entered into
equipment financing agreements with two commercial financial institutions in
December 1994. Under those agreements, the Company borrowed $1,207,358.
The Company anticipates that its existing capital resources, including the
net proceeds of its initial public offering and interest earned thereon, will be
adequate to maintain its current and planned operations for at least the next
two years, although no assurance can be given that changes will not occur that
would consume available capital resources before such time. The Company's
future capital requirements will be substantial and will depend on many factors,
including progress of the Company's research and development programs, the
results and cost of clinical correlation testing of the Company's genetic tests,
the costs of filing, prosecuting and enforcing patent claims, competing
technological and market developments, payments received under collaborative
agreements, changes in collaborative research relationships, the costs
associated with potential commercialization of its gene discoveries, if any,
including the development of manufacturing, marketing and sales capabilities,
the cost and availability of third-party financing for capital expenditures and
administrative and legal expenses. Because of the Company's significant long-
term capital requirements, the Company intends to raise funds when conditions
are favorable, even if it does not have an immediate need for additional capital
at such time.
25
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that this report on Form 10-K contains certain
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's
current expectations and are subject to a number of factors and uncertainties
which could cause actual results to differ materially from those described in
the forward-looking statements. The Company cautions investors that there can
be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including, but not limited to, the following:
intense competition related to the discovery of disease-related genes and the
possibility that others may discover, and the Company may not be able to gain
rights with respect to, genes important to the establishment of a successful
genetic testing business, difficulties inherent in developing genetic tests once
genes have been discovered; the Company's limited experience in developing and
operating a genetic testing laboratory; the Company's limited marketing and
sales experience and the risk that BRACAnalysis(TM) and any other tests which
the Company develops may not be able to be marketed at acceptable prices or
receive commercial acceptance in the markets that the Company is targeting or
expects to target; uncertainty as to whether there will exist adequate
reimbursement for the Company's services from government, private healthcare
insurers and third-party payors; and uncertainties as to the extent of future
government regulation of the Company's business. As a result, the Company's
future development efforts involve a high degree of risk. For further
information, refer to the more specific risks and uncertainties discussed
throughout this Annual Report on Form 10-K.
26
ITEM 8. FINANCIAL STATEMENTS
MYRIAD GENETICS, INC.
Index to Financial Statements Number
----------------------------- ------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended June 30, 1997,
1996 and 1995........................................................ F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997,
1996 and 1995........................................................ F-7
Notes to Consolidated Financial Statements..................................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Share Ownership" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation--Employment
Agreements, Termination of Employment and Change of Control Arrangements" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
ITEM 14(A). The following documents are filed as part of this annual
report on Form 10-K.
ITEM 14(A)(1). See "Index to Consolidated Financial Statements and Financial
Statement Schedules" at
AND (2) Item 8 to this Annual Report on Form 10-K. Other financial
statement schedules have not been included because they are
not applicable or the information is included in the
financial statements or notes thereto.
ITEM 14(A)(3) Exhibits
--------
The following is a list of exhibits filed as part of this
Annual Report on Form 10-K.
Exhibit
Number Description
------ -----------
(3.1)++ --- Restated Certificate of Incorporation of the Registrant (Filed as Exhibit 3.1)
(3.2)++ --- Restated By-Laws of the Registrant (Filed as Exhibit 3.2)
(4.1)++ --- See Exhibits 3.1, and 3.2 (Filed as Exhibit 4.1)
(4.2)* --- Form of Common Stock Certificate (Filed as Exhibit 4.2)
(10.1)*$ --- 1992 Employee, Director and Consultant Stock Option Plan (Filed as Exhibit 10.1)
(10.2)*$ --- Employee Stock Purchase Plan (Filed as Exhibit 10.2)
(10.3)*$ --- Employment Agreement between Myriad Genetics, Inc., Myriad Genetic Laboratories, Inc. and
--- Peter D. Meldrum, dated May 15, 1993 (Filed as Exhibit 10.3)
(10.4)*$ --- Employment Agreement between Myriad Genetics, Inc., Myriad Genetic Laboratories, Inc. and
--- Mark H. Skolnick, Ph.D., dated January 1, 1994 (Filed as Exhibit 10.4)
(10.5)*$ --- Employment Agreement between Myriad Genetics, Inc., Myriad Genetic Laboratories, Inc. and
--- Jay M. Moyes, dated July 12, 1993 (Filed as Exhibit 10.5)
(10.6)* --- Form of Registration Agreement executed in connection with the private placement of Series A
--- Preferred Stock (Filed as Exhibit 10.6)
(10.7)* --- Stock Purchase Agreement for Series C Convertible Preferred Stock between the Registrant and
--- Novartis Corporation, dated April 27, 1995 (Filed as Exhibit 10.7)
(10.8)* --- Standstill Agreement between the Registrant and Novartis Corporation, dated April 27, 1995
--- (Filed as Exhibit 10.8)
(10.9)* --- Voting Agreement between the Registrant and Novartis Corporation, dated April 27, 1995
--- (Filed as Exhibit 10.9)
(10.10)# --- Collaborative Research and License Agreement between the Registrant and Novartis
--- Corporation, dated April 27, 1995 (Cardiovascular Diseases) (Filed as Exhibit 10.10)
(10.11)# --- Research Collaboration and License Agreement between the Registrant, Eli Lilly & Company
--- and Hybritech Incorporated, dated August 1, 1992 (Breast Cancer--BRCA1) (Filed as Exhibit 10.11)
(10.12)# --- Collaborative Agreement between the Registrant and Hybritech Incorporated, dated March 5,
--- 1993 (BRCA1 Test Kits) (Filed as Exhibit 10.12)
(10.13)# --- Exclusive License Agreement between the Registrant and the University of Utah Research Foun-
--- dation, dated October 8, 1991, as amended (Breast Cancer--BRCA1) (Filed as Exhibit 10.13)
(10.14)# --- Standard Research Agreement and Form of License Agreement between the Registrant and the
--- University of Utah, effective January 1, 1993, as amended (Genes Predisposing to Cancer)
(Filed as Exhibit 10.14)
29
(10.15)# --- Exclusive License Agreement between the Registrant and the University of Utah Research
--- Foundation, dated August 4, 1993 (Angiotensinogen Variants and Predisposition to
--- Hypertension) (Filed as Exhibit 10.15)
(10.16)# --- Exclusive License Agreement between the Registrant and the University of Utah Research
--- Foundation, dated June 21, 1994 (MTS1) (Filed as Exhibit 10.16)
(10.17)# --- Exclusive License Agreement between the Registrant and the University of Utah Research
--- Foundation, dated November 23, 1994 (Breast Cancer--BRCA2) (Filed as Exhibit 10.17)
(10.18)# --- Standard Research Agreement dated May 1, 1995 between the Registrant and the University of
--- Utah (Cardiovascular Disorders and Coronary Heart Disease Database) (Filed as Exhibit 10.18)
(10.19)# --- Exclusive License Agreement dated May 1, 1995 between the Registrant and the University of
--- Utah Research Foundation (Cardiovascular Disorders and Coronary Heart Disease Database)
--- (Filed as Exhibit 10.19)
(10.20)# --- Standard Research Agreement dated July 31, 1995 between the Registrant and the University of
--- Utah (Obesity Database) (Filed as Exhibit 10.20)
(10.21)# --- Exclusive License Agreement dated July 31, 1995 between the Registrant and the University of
--- Utah Research Foundation (Obesity Database) (Filed as Exhibit 10.21)
(10.22)# --- Co-Exclusive License Agreement among the Registrant, the University of Utah Research
Foundation and Institut National de la Sante et de la Recherche Medicale, dated October 6,
1993 (Angiotensinogen and Predisposition to Essential Hypertension) (Filed as Exhibit 10.22)
(10.23)# --- License Agreement between the Registrant and California Institute of Technology, dated
April 21, 1994 (MTS1) (Filed as Exhibit 10.23)
(10.24)* --- Research Agreement between the Registrant and California Institute of Technology, dated
June 3, 1994 (MTS1) (Filed as Exhibit 10.24)
(10.25)* --- Stock Purchase Agreement for Series D Convertible Preferred Stock between the Registrant and
Bayer Corporation, dated September 11, 1995 (Filed as Exhibit 10.25)
(10.26)* --- Standstill Agreement between the Registrant and Bayer Corporation, dated September 11, 1995
(Filed as Exhibit 10.26)
(10.27)* --- Voting Agreement between the Registrant and Bayer Corporation, dated September 11, 1995
(Filed as Exhibit 10.27)
(10.28)# --- Collaborative Research and License Agreement between the Registrant and Bayer Corporation,
dated September 11, 1995 (Filed as Exhibit 10.28)
(10.29)# --- Standard Research Agreement between the Registrant and IHC Health Services, Inc., dated as
of September 1, 1995 (Filed as Exhibit 10.29)
(10.30)@ --- Research Agreement between the Registrant and IHC Health Services, Inc., dated as
of June 24, 1996
(10.31)**@ --- Patent and Technology License Agreement dated September 26, 1996 among the Board of Regents of
the University of Texas System, the University of Texas M.D. Anderson Cancer Center and the
Registrant (Filed as Exhibit 10.1)
(10.32)** --- Lease Agreement, dated October 12, 1995, between the Boyer Research Park Associates V, by its
general partner, the Boyer Company and the Registrant (Filed as Exhibit 10.2)
(10.33)** --- Amendment to Lease Agreement, dated March 29, 1996 between the Boyer Research Park Associates V,
by its general partner, the Boyer Company and the Registrant (Filed as Exhibit 10.3)
(10.34)**@ --- Letter Agreement, dated March 4, 1996, among the University of Utah, Genetic Epidemiology and
the Registrant regarding Extension of Standard Research agreement and Form of License Agreement
between the Registrant and the University of Utah, effective January 1, 1993, as amended (Genes
Predisposing to Cancer) (Filed as Exhibit 10.4)
(10.35)+@ --- Patent and Technology License Agreement dated December 2, 1996 among the Board of Regents of the
University of Texas System, the University of Texas M.D. Anderson Cancer Center and the
Registrant (Filed as Exhibit 10.1)
(10.36)@ --- Collaborative Research and License Agreement among the Registrant, Schering Corporation and
Schering-Plough, Ltd., dated April 22, 1997 (Prostate and Other Cancers)
30
(10.37) --- Standstill Agreement between the Registrant and Schering Corporation, dated April 22, 1997
(10.38) --- Stock Purchase Agreement for Common Stock between the Registrant and Schering Corporation, dated
April 22, 1997
(11.1) --- Statement Regarding Computation of Earnings Per Share
(21.1) --- Revised List of Subsidiaries of the Registrant
(23.1) --- Consent of KPMG Peat Marwick LLP
(27.1) --- Financial Data Schedule
- -------------------------------
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement filed on
Form S-1, File No. 33-95970
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement filed on
Form S-1, File No. 33-95970, and for which Confidential Treatment has been
granted by the Securities and Exchange Commission as to certain portions.
@ Confidential Treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
++ Previously filed and incorporated herein by reference from the Form 10-Q
for the period ending September 30, 1995.
$ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this
report.
** Previously filed and incorporated herein by reference from the Form 10-Q
for the period ending September 30, 1996.
+ Previously filed and incorporated herein by reference from the Form 10-Q
for the period ending December 31, 1996.
Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.
ITEM 14(B) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the year ended
June 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Salt Lake City,
Utah on September 23, 1997.
MYRIAD GENETICS, INC.
By: /s/ Peter D. Meldrum
-------------------------------------
PETER D. MELDRUM
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
By: /s/ Peter D. Meldrum President and Chief Executive September 23, 1997
-------------------------- Officer and Director
PETER D. MELDRUM (principal executive officer)
By: /s/ Jay M. Moyes Vice President of Finance September 23, 1997
-------------------------- (principal financial and
JAY M. MOYES accounting officer)
By: /s/ Walter Gilbert Vice Chairman of the Board September 24, 1997
--------------------------
WALTER GILBERT, PH.D.
By: /s/ Mark H. Skolnick Director September 24, 1997
--------------------------
MARK H. SKOLNICK, PH.D.
By: /s/ Arthur H. Hayes, Jr. Director September 25, 1997
--------------------------
ARTHUR H. HAYES, JR., M.D.
By: /s/ Dale A. Stringfellow Director September 25, 1997
--------------------------
DALE A. STRINGFELLOW, PH.D.
By: /s/ Alan J. Main Director September 26, 1997
--------------------------
ALAN J. MAIN, PH.D.
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Myriad Genetics, Inc.:
We have audited the accompanying consolidated balance sheets of Myriad Genetics,
Inc. and subsidiaries, as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Myriad Genetics,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
Salt Lake City, Utah
August 8, 1997
F-1
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
---------------------------
Assets 1997 1996
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 15,675,763 13,235,680
Marketable investment securities (note 2) 31,952,315 37,212,454
Prepaid expenses 446,260 88,423
Trade receivables 183,166 -
Nontrade receivables 294,967 79,066
------------- -----------
Total current assets 48,552,471 50,615,623
------------- -----------
Equipment and leasehold improvements:
Equipment 13,124,937 9,097,484
Leasehold improvements 2,075,308 863,306
Construction-in-progress - 810,108
15,200,245 10,770,898
Less accumulated depreciation and amortization 3,189,724 1,375,366
Net equipment and leasehold improvements 12,010,521 9,395,532
Long-term marketable investment securities (note 2) 15,449,360 19,554,646
50,979 41,696
------------- -----------
Other assets $ 76,063,331 79,607,497
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,559,035 2,193,285
Accrued liabilities 1,154,254 786,791
Deferred revenue (note 9) 5,699,427 5,661,376
Current portion of notes payable (note 3) 342,796 308,658
------------- -----------
Total current liabilities 9,755,512 8,950,110
------------- -----------
Notes payable, less current portion (note 3) 128,844 471,640
Commitments and contingencies (notes 4, 7, and 9)
Stockholders' equity (notes 5, 6, and 10):
Preferred stock, $0.01 par value. Authorized 5,000,000 shares;
No shares issued and outstanding - -
Common stock, $0.01 par value. Authorized 15,000,000 shares; issued 92,226 87,022
and outstanding 9,222,552 shares in 1997 and 8,702,215 shares in 1996
Additional paid-in capital 91,605,739 87,015,215
Fair value adjustment on marketable investment securities 5,382 (67,865)
Deferred compensation (1,376,980) (1,907,513)
Accumulated deficit (24,147,392) (14,941,112)
------------- -----------
Net stockholders' equity 66,178,975 70,185,747
$ 76,063,331 79,607,497
============= ===========
See accompanying notes to consolidated financial statements.
F-2
MYRIAD GENETICS, INC.,
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30,
---------------------------------------
1997 1996 1995
------------- ------------ ----------
Research revenue (note 9) $ 14,732,054 6,628,624 1,294,500
Genetic testing revenue 504,045 - -
------------- ---------- ----------
Total revenues 15,236,099 6,628,624 1,294,500
Costs and expenses:
Research and development expense 18,580,229 12,990,566 5,161,978
Selling, general, and administrative expenses 8,755,217 2,525,814 1,788,247
Genetic testing cost of revenue 340,461 - -
------------- ---------- ----------
Total costs and expenses 27,675,907 15,516,380 6,950,225
============= ========== ==========
Operating loss (12,439,808) (8,887,756) (5,655,725)
Other income (expense):
Interest income 3,414,379 3,173,749 458,353
Interest expense (66,661) (97,414) (71,011)
Other (114,190) (86,052) -
------------- ---------- ----------
3,233,528 2,990,283 387,342
Net loss $ (9,206,280) (5,897,473) (5,268,383)
============= ========== ==========
Net loss per share $ (1.03) (.78) (1.19)
============= ========== ==========
Weighted average shares outstanding 8,903,918 7,608,548 4,427,095
============= ========== ==========
See accompanying notes to consolidated financial statements.
F-3
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996, and 1995
Fair value
adjustment
on
Preferred stock Common stock Additional marketable Deferred Accum- Net-Stock
---------------------- ------------------- paid-in investment Compen- Ulated holders'
Shares Amount Shares Amount capital securities sation deficit equity
---------- --------- --------- -------- ---------- ----------- ---------- ----------- ----------
Balances at
June 30, 1994 9,300,000 $ 93,000 3,519,529 $ 35,195 9,935,980 - - (3,775,256) 6,288,919
Issuance of common
stock for cash - - 14,286 143 102,590 - - - 102,733
Issuance of common
stock for cash
upon exercise of
options - - 26,823 268 93,378 - - - 93,646
Issuance of series B
preferred stock for
cash, net of
expenses 641,423 6,414 - - 8,012,097 - - - 8,018,511
Issuance of Series C
preferred stock for
cash, net of
expenses 411,765 4,118 - - 6,960,121 - - - 6,964,239
Deferred
compensation
related to grant
of stock options
and warrants - - - - 1,585,500 - (1,585,500) - -
Amortization of
deferred
compensation - - - - - - 56,500 - 56,500
Net loss - - - - - - - (5,268,383) (5,268,383)
---------- --------- --------- -------- ---------- ----------- ---------- ----------- -----------
Balances at
June 30, 1995 10,353,188 103,532 3,560,638 35,606 26,689,666 - (1,529,000) (9,043,639) 16,256,165
F-4
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
Years ended June 30, 1997, 1996, and 1995
Fair value
adjustment
on
Preferred stock Common stock Additional marketable
------------------------------- ------------------------------- paid-in investment
Shares Amount Shares Amount capital securities
------------- -------------- ----------- ------------- ------------ -----------
Issuance of series D
preferred stock for cash,
net of expenses 588,236 $ 5,882 - $ - 9,976,864 -
Issuance of 1,973,566
shares of common stock
upon conversion of
10,941,424 shares of
preferred stock (10,941,424) (109,414) 1,973,566 19,736 89,678 -
Issuance of common stock
for cash, net
of issuance costs of
$1,086,795 - - 2,990,000 29,900 48,926,310 -
Issuance of common stock
for cash upon exercise of
options and warrants - - 176,413 1,764 216,039 -
Issuance of common stock
for cash - - 1,598 16 36,658 -
Deferred compensation
related to grant
of stock options - - - - 1,080,000 -
Amortization of deferred
compensation - - - - - -
Fair value adjustment on
marketable investment
securities - - - - - (67,865)
Net loss - - - - - -
------------- -------------- ----------- ------------- ------------ ----------
Balances at
June 30, 1996 - - 8,702,215 87,022 87,015,215 (67,865)
Deferred Accum- Net
compen- ulated stock-holders'
sation deficit equity
----------- ----------- ------------
Issuance of series D
preferred stock for cash,
net of expenses - - 9,982,746
Issuance of 1,973,566
shares of common stock
upon conversion of
10,941,424 shares of
preferred stock - - -
Issuance of common stock
for cash, net
of issuance costs of
$1,086,795 - - 48,956,210
Issuance of common stock
for cash upon exercise of
options and warrants - - 217,803
Issuance of common stock
for cash - - 36,674
Deferred compensation
related to grant
of stock options (1,080,000) - -
Amortization of deferred
compensation 701,487 - 701,487
Fair value adjustment on
marketable investment
securities - - (67,865)
Net loss - (5,897,473) (5,897,473)
----------- ----------- ------------
Balances at
June 30, 1996 (1,907,513) (14,941,112) 70,185,747
F-5
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
Years ended June 30, 1997, 1996, and 1995
Fair
value
adjustment
on
Preferred stock Common stock Additional marketable Deferred Accum- Net stock
------------------- ------------------- paid-in investment compen- ulated holders'
Shares Amount Shares Amount capital securities sation deficit equity
-------- -------- -------- -------- ---------- ------------ -------- --------- ---------
Issuance of common
stock for cash
upon exercise of
options and warrants - $ - 386,007 $ 3,860 625,802 - - - 629,662
Issuance of common
stock for cash - - 4,665 47 99,722 - - - 99,769
Issuance of common
stock for cash, net
of issuance costs of
$133,703 (note 9) - - 129,665 1,297 3,865,000 - - - 3,866,297
Amortization of deferred
compensation - - - - - - 530,533 - 530,533
Fair value adjustment on
marketable investment
securities - - - - - 73,247 - - 73,247
Net loss - - - - - - - (9,206,280) (9,206,280)
-------- -------- --------- -------- ---------- ------------ --------- ---------- ----------
Balances at
June 30, 1997 - $ - 9,222,552 $ 92,226 91,605,739 5,382 (1,376,980) (24,147,392) 66,178,975
-------- -------- --------- -------- ---------- ------------ --------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-6
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30,
-------------------------------------------
1997 1996 1995
------------ ---------- -----------
Cash flows from operating activities:
Net loss $ (9,206,280) (5,897,473) (5,268,383)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,505,479 1,618,390 380,113
Loss on sale of equipment 68,762 73,436 -
Loss on sale of investment securities 45,428 30,791 -
Increase in trade receivables (183,166) - -
Decrease (increase) in prepaid expenses (357,837) 115,387 (182,977)
Decrease (increase) in nontrade receivables (215,901) 68,265 (147,331)
Decrease (increase) in other assets (9,283) 9,781 (20,013)
Increase in accounts payable and accrued expenses 733,213 539,857 1,246,246
Increase in deferred revenue 38,051 4,861,376 750,000
------------ ------------ -----------
Net cash provided by (used in) operating activities (6,581,534) 1,419,810 (3,242,345)
============ ============ ===========
Cash flows from investing activities:
Proceeds from sale of equipment 68,424 39,375 -
Capital expenditures (4,727,121) (6,414,240) (2,542,381)
Purchase of investment securities held-to-maturity (111,098,966) (460,727,571) (68,909,736)
Maturities of investment securities held-to-maturity 119,313,265 427,043,548 68,812,268
Purchase of investment securities available-for-sale (471,745,972) (161,476,655) -
Sale of investment securities available-for-sale 472,924,917 142,550,121 -
Other - - 10,000
------------ ------------ -----------
Net cash provided by (used in) investing activities 4,734,547 (58,985,422) (2,629,849)
============ ============ ===========
Cash flows from financing activities:
Proceeds from notes payable - - 1,232,292
Payments of notes payable (308,658) (277,877) (174,117)
Net proceeds from issuance of common stock 4,595,728 49,210,687 196,379
Net proceeds from issuance of preferred stock - 9,982,746 14,982,751
------------ ------------ -----------
Net cash provided by financing activities 4,287,070 58,915,556 16,237,305
------------ ------------ -----------
Net increase in cash and cash equivalents 2,440,083 1,349,944 10,365,111
Cash and cash equivalents at beginning of year 13,235,680 11,885,736 1,520,625
------------ ------------ -----------
Cash and cash equivalents at end of year $ 15,675,763 13,235,680 11,885,736
============ ============ ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Interest paid $ 66,678 97,414 71,011
Supplemental Disclosures of Noncash Investing and Financing Activities
- ----------------------------------------------------------------------
Increase in additional paid-in capital as a result of recording
deferred compensation $ - 1,080,000 1,585,500
Accounts payable incurred for construction-in-progress - 810,108 -
Fair value adjustment on investment securities (charged) credited to
stockholders' equity 73,247 (67,865) -
See accompanying notes to consolidated financial statements.
F-7
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Organization and Business Description
-------------------------------------
Myriad Genetics, Inc. (the Company) is a company focused on the
discovery and sequencing of genes related to major common diseases,
such as cancer and cardiovascular disease. The Company utilizes
analyses of extensive family histories and genetic material, as well
as, a number of proprietary technologies, to identify inherited gene
mutations which increase the risk to individuals of developing these
diseases. The Company has also developed a proprietary high-throughput
assay to identify protein-protein interactions. The discovery of
disease-predisposing genes and their biochemical pathways provides the
Company with two significant commercial opportunities: (i) the
development and marketing of genetic testing and information services,
and (ii) in conjunction with its strategic partners, the development
of therapeutic products for the treatment and prevention of major
diseases associated with these genes and their biochemical pathways.
The Company's operations are located in Salt Lake City, Utah.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements presented herein include the
accounts of Myriad Genetics, Inc., and its wholly owned subsidiaries
Myriad Genetic Laboratories, Inc. and Myriad Financial, Inc. All
significant intercompany amounts have been eliminated in
consolidation.
(c) Cash Equivalents
----------------
Cash equivalents of $12,617,125 and $8,254,944 at June 30, 1997 and
1996, respectively, consist of short-term securities with initial
terms of less than 90 days. For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments with
original maturities of 90 days or less to be cash equivalents.
(d) Equipment and Leasehold Improvements
------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed using the straight-line method based on
the lesser of estimated useful lives of the related assets or lease
terms. Equipment and leasehold improvements have depreciable lives
which range from five to seven years. Construction-in-progress
represents leasehold improvements which have not been completed.
F-8
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Income Taxes
------------
Income taxes are recorded using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(f) Revenue Recognition
-------------------
The Company recognizes revenue from research contracts in accordance
with the terms of the contract and the related research activities
undertaken. Payments to the Company under these agreements cover the
Company's direct costs and an allocation for overhead and general and
administrative expenses. Genetic testing revenue is recognized upon
completion of the test and communication of results. Payments received
in advance of the research and genetic testing work performed are
recorded as deferred revenue.
(g) Net Loss Per Share
------------------
For all periods presented, the Company's loss per share is actual or
pro forma based on the weighted average number of common shares and
common share equivalents (if dilutive) resulting from options
outstanding during the periods. For periods prior to October 12, 1995,
the date of the Company's initial public offering, upon which all
outstanding shares of preferred stock were converted to shares of
common stock, the loss presented is pro forma after giving retroactive
effect to the conversion of Series A, B, C, and D preferred stock and
the inclusion of common stock options issued for consideration below
the initial public offering price during the twelve-month period prior
to the date of the initial filing of the Registration Statement, even
when antidilutive, pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, using the treasury-stock method.
(h) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
F-9
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Marketable Investment Securities
--------------------------------
Marketable investment securities consist of U.S. government
obligations, corporate bonds and notes, foreign bank obligations,
federal agency obligations, auction rate securities, foreign bank
obligations, mortgage backed-securities, and certificates of deposit.
The Company accounts for marketable investment securities by grouping
them into one of two categories: held-to-maturity or available-for-
sale. Held-to-maturity securities are those securities that the
Company has the ability and intent to hold until maturity. All other
securities are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Available-
for-sale securities are recorded at fair value. Unrealized holdings
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
Gains and losses on investment security transactions are reported on
the specific-identification method. Dividend and interest income are
recognized when earned. A decline in the market value of any
available-for-sale or held-to-maturity security below cost that is
deemed other than temporary results in a charge to earnings and the
establishment of a new-cost basis for the security. Premiums and
discounts are amortized or accreted over the life of the related held-
to-maturity security as an adjustment to yield using the effective-
interest method.
(j) Reclassifications
-----------------
Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform with classifications
adopted in 1997.
(k) Fair Value Disclosure
---------------------
At June 30, 1997, the book value of the Company's financial
instruments approximates fair value except as disclosed in note 2.
(l) Stock-Based Compensation
------------------------
Effective July 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 permits
entities to adopt a fair value based method of accounting for stock
options or similar equity instruments. However, it also allows an
entity to continue measuring compensation cost for stock based
compensation using the intrinsic-value method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS 123.
F-10
MYRAID GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Marketable Investment Securities
--------------------------------
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale and held-to-maturity
securities by major security type and class of security at June 30, 1997
and 1996, were as follows:
Gross Gross
unrealized unrealized
holding holding
Amortized cost gains losses Fair Value
---------------- ------------- ----------- -----------
At June 30, 1997
Held-to-maturity:
U.S. government obligations $ 14,929,059 1,467 (39,728) 14,890,798
Corporate bonds and notes 6,358,782 - (25,754) 6,333,028
Auction-rate securities 8,437,082 - - 8,437,082
------------ -------- ---------- ------------
$ 29,724,923 1,467 (65,482) 29,660,908
============ ======== ========== ============
Available-for-sale:
U.S. government obligations $ 6,931,123 2,243 - 6,933,366
Federal agency obligations 3,409,870 4,089 - 3,413,959
Foreign bank obligations 4,099,846 - (2,177) 4,097,669
Mortgage-backed securities 2,145,744 5,653 - 2,151,397
Corporate bonds and notes 912,628 - (4,426) 908,202
Certificate of deposit 172,159 - - 172,159
------------ -------- ---------- ------------
$ 17,671,370 11,985 (6,603) 17,676,752
============ ======== ========== ============
At June 30, 1996
Held-to-maturity:
U.S. government obligations $ 13,017,698 - (99,516) 12,918,182
Corporate bonds and notes 24,921,524 - (102,372) 24,819,152
------------ -------- ---------- ------------
$ 37,939,222 - (201,888) 37,737,334
============ ======== ========== ============
Available-for-sale:
U.S. government obligations $ 15,800,003 - (69,476) 15,730,527
Federal agency obligations 2,088,527 2,371 - 2,090,898
Foreign bank obligations 1,007,213 - (760) 1,006,453
------------ -------- ---------- ------------
$ 18,895,743 2,371 (70,236) 18,827,878
============ ======== ========== ============
F-11
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to consolidated Financial Statements
(2) Marketable Investment Securities (continued)
--------------------------------
Maturities of debt securities classified as available-for-sale and held-to-
maturity are as follows at June 30, 1997. (Maturities of mortgage backed
securities have been presented based upon estimated cash flows assuming no
change in the current interest rate environment):
Amortized Fair
cost value
------------ -----------
Held-to-maturity:
Due within one year $ 18,337,912 18,329,287
Due after one year through five years 11,387,011 11,331,621
---------- ----------
$ 29,724,923 29,660,908
========== ==========
Available-for-sale:
Due within one year $ 13,609,938 13,614,403
Due after one year through five years 4,061,432 4,062,349
---------- ----------
$ 17,671,370 17,676,752
========== ==========
(3) Notes Payable
-------------
The Company entered into equipment financing agreements with two commercial
financial institutions. Under the agreements, the Company borrowed
$1,232,292, at an interest rate of approximately 10.5 percent. Monthly
payments are made over 48 months using a payment factor of 2.5383 percent
of the amount borrowed. Principal payments subsequent to June 30, 1997 are
as follows: 1998, $342,796 and 1999, $128,844. At the completion of the 48-
month period, if the Company chooses to keep the equipment, it may either
make a final payment of 15 percent of the amount of the original loan or
make additional payments at a reduced rate for a period of 18 months. The
note is secured by certain equipment having a value exceeding the remaining
principal balance.
f-12
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Leases
------
The Company leases office and laboratory space under three noncancelable
operating leases. Future minimum lease payments under these leases are as
follows:
Fiscal year ending:
1998 $ 1,282,308
1999 1,296,773
2000 939,104
2001 905,832
2002 905,832
Thereafter 3,849,786
-----------
$ 9,179,635
===========
Rental expense was $1,014,931 in 1997, $433,000 in 1996, and $439,000 in
1995.
(5) Stock-Based Compensation
------------------------
Prior to 1992, the Company granted Nonqualified stock options to directors,
employees, and other key individuals providing services to the Company. In
1992, the Company adopted the "1992 Employee, Director, and Consultant
Fixed Stock Option Plan" and has reserved 1,500,000 shares of common stock
for issuance upon the exercise of options that the Company plans to grant
from time to time under this plan. The exercise price of options is
equivalent to the estimated fair market value of the stock at the date of
grant. The number of shares, terms, and exercise period are determined by
the Board of Directors on an option-by-option basis. Options generally vest
ratably over five years and expire ten years from date of grant. Options
for 1,265,662 shares have been granted as of June 30, 1997 under the 1992
plan and are included in the schedule below. For financial statement
presentation purposes, the Company has recorded as deferred compensation
expense the excess of the deemed value of the common stock at the date of
grant over the exercise price. The compensation expense will be amortized
ratably over the vesting period of the options and warrants and will
aggregate a maximum of $2,665,500. Amortization expense was $530,533,
$701,487, and $56,500 for the years ended June 30, 1997, 1996, and 1995,
respectively.
F-13
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Stock-Based Compensation (continued)
------------------------
A summary of activity is as follows:
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
Number Weighted- Number Weighted- Number Price
of average of average of per
shares exercise price shares exercise price shares share
--------- --------------- ---------- ---------------- ------- --------------
Options outstanding
at beginning of year 1,288,925 $ .028 - 24.75 968,957 $ .028 - $7.00 699,005 $ .028 - $5.60
Plus options granted 486,156 23.875 - 40.25 415,266 7.00 - 24.75 302,582 3.50 - 7.00
---------- ---------- -------
Less:
Options exercised (373,329) .028 - 24.75 (80,346) .028 - 7.00 (26,823) 3.50
Options canceled or expired (67,045) 3.50 - 40.25 (14,952) 3.50 - 24.75 (5,807) 3.50
Options outstanding at
end of year 1,334,707 $ .028 - 40.25 1,288,925 $ .028 - $24.75 968,957 $ .028 - $7.00
========== ========== =======
Weighted - average
fair value of options
granted during the year $ 19.04 $12.48
The following table summarizes information about fixed stock options
outstanding at June 30, 1997:
Options outstanding Options exercisable
-------------------------------------------------------- -------------------------------
Number Weighted- Weighted- Number Weighted-
Range of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices June 30, 1997 contractual life price June 30, 1997 price
-------------------- -------------- ------------------- ---------- ---------------- -----------
$ 3.50 - 7.00 609,315 6.9 $ 4.90 375,253 $ 3.80
15.00 - 25.00 331,560 9.0 24.45 61,831 24.65
27.00 - 40.25 393,832 9.8 29.73 1,700 29.75
------------- ----------------
3.50 - 40.25 1,334,707 8.3 17.08 438,784 6.84
============= ================
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS 123, the Company's net loss and
earnings per share would have been changed to the following pro forma
amounts:
1997 1996
------------ -----------
Net loss As reported $ 9,206,280 $ 5,897,473
Pro forma 10,837,607 6,052,988
Loss per share As reported (1.03) (.78)
Pro forma (1.22) (.80)
F-14
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Stock-Based Compensation (continued)
------------------------
The pro forma net loss reflects only options granted in 1997 and 1996.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net losses as shown above
may not be representative of the effects on reported net losses or earnings
for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997 and 1996, respectively: risk-
free interest rates of 6.4 percent; expected dividend yields of 0 percent;
expected lives of 5.5 and 5.2 years; and expected volatility of 70 percent.
(6) Common and Preferred Stock
--------------------------
On October 12, 1995, the Company completed an initial public offering of
2,990,000 shares of common stock, $0.01 par value per share at $18.00 per
share and received approximately $49 million net of underwriting discounts,
commissions, and other offering expenses. In conjunction with the Company's
initial public offering, all outstanding shares of the Company's preferred
stock were converted into common stock.
In February 1995, the Company completed a private placement wherein the
placement agents received warrants to purchase 31,572 shares of the
Company's common stock through the year 2002 at a price of $15.40 which are
still outstanding as of June 30, 1997.
The Company completed a private placement offering in 1993 for shares of
both common and Series A preferred stock. The placement agent, which was
then an affiliate of a director and stockholder of the Company, and
selected dealers received a commission on the gross proceeds and five-year
warrants to purchase 142,874 shares of common stock at an exercise price of
$7.00 per share. As of June 30, 1997, warrants to purchase 24,638 shares
are outstanding.
(7) License Agreements
------------------
The Company has entered into license agreements with certain academic
institutions. The agreements granted the Company exclusive worldwide
licenses to certain technologies and patent applications that the Company
believes will be useful in the development of diagnostic and therapeutic
products. In consideration for the licenses, the Company has paid $375,000,
issued 28,416 shares of common stock, and granted 14,286 stock options. The
Company is also required to make future payments totaling $50,000 and may
make milestone payments of $350,000 upon achievement of certain events. The
Company is also required to make royalty payments based on net sales of
products or services subject to a minimum royalty upon commencement of
sales.
F-15
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes
------------
There was no income tax expense in 1997, 1996, or 1995 due to net operating
losses. The difference between the expected tax benefit and the actual tax
benefit is primarily attributable to the effect of net operating losses
being offset by an increase in the Company's valuation allowance. The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at June 30, 1997 and
1996, are presented below:
1997 1996
------------- ----------
Deferred tax assets:
Net operating loss carryforwards 11,857,000 4,230,000
Research and development credits 264,800 164,800
Accrued expenses 186,800 162,800
Unearned revenue 2,118,000 1,832,000
Deferred compensation - 282,700
------------- ----------
Total gross deferred tax assets 14,426,600 6,672,300
Less valuation allowance (13,426,600) (6,138,300)
------------- ----------
Net deferred tax assets 1,000,000 534,000
Deferred tax liability - equipment,
principally due to differences in depreciation 1,000,000 534,000
------------- ----------
Total gross deferred tax liability 1,000,000 534,000
------------- ----------
Net deferred tax liability $ - -
============= ==========
The net change in the total valuation allowance for the years ended June
30, 1997 and 1996, was an increase of $7,288,300 and $2,299,600,
respectively. Of the subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets as of June 30, 1997,
approximately $4,570,000 will be recognized as additional paid-in capital
and the remainder will be allocated as an income tax benefit to be reported
in the consolidated statement of operations.
At June 30, 1997, the Company had total tax net operating losses of
approximately $31,790,000 and total research and development credit
carryforwards of approximately $264,800, which can be carried forward to
reduce federal income taxes. If not utilized, the tax loss and research and
development credit carryforwards expire beginning in 2007.
F-16
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes (continued)
------------
Under the rules of the Tax Reform Act of 1986, the Company has undergone
changes of ownership and, consequently, the availability of the Company's
net operating loss and research and experimentation credit carryforwards in
any one year is limited. The maximum amount of carryforwards available in a
given year is limited to the product of the Company's value on the date of
ownership change and the federal long-term tax-exempt rate, plus any
limited carryforward not utilized in prior years. Management believes that
these limitations will not prevent these net operating losses from
otherwise being utilized.
(9) Collaborative Research Agreements
---------------------------------
In April 1997, the Company entered into a three-year collaborative research
and license agreement and stock purchase agreement related to locating
genes associated with prostate cancer and other cancers. Under the
agreements, the Company may receive up to $60,000,000, excluding royalties.
The Company received an equity investment of $4,000,000 in exchange for
common stock. The Company also received a license fee of $4,000,000, which
was recognized as revenue in 1997. The Company will receive $3,000,000 in
annual research funding paid quarterly in advance for three years of which
$750,000 has been received and recognized as revenue in 1997. The three-
year term may be extended for two additional one-year periods. The Company
may also receive up to $35,000,000 upon achievement of specified
milestones. The Company retains all rights to diagnostic products and
genetic testing services using the developed technology while licensing to
the collaborator all rights to therapeutic applications. The Company is
entitled to receive royalties from sales of therapeutic products made by
the collaborator.
In September and April 1995, the Company entered into collaborative
research and license agreements and stock purchase agreements with two
pharmaceutical companies. Under the agreements, the Company may receive up
to $131,000,000. The Company received initial equity investments of
$17,000,000 in exchange for Series D and Series C preferred stock, which
were subsequently converted to common stock in conjunction with the
Company's initial public offering. The Company may also receive $50,000,000
in annual research funding paid quarterly in advance for five years of
which $22,500,000 has been received. The Company recognized $9,982,054,
$6,338,624, and $500,000 as revenue relating to these agreements in 1997,
1996, and 1995, respectively. The Company may also receive up to
$64,000,000 upon achievement of specified milestones. The Company retains
all rights to diagnostic products and genetic testing services using the
developed technology while licensing to the collaborators all rights to
therapeutic applications. The Company is entitled to receive royalties from
sales of therapeutic products sold by the collaborators. The collaborations
may be terminated if a steering committee comprised of an equal number of
representatives of the Company and the collaborators determines that the
research programs will not achieve their objectives in all areas.
F-17
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Collaborative Research Agreements (continued)
---------------------------------
In August of 1992, the Company entered into a three-year collaboration and
license agreement with a pharmaceutical company related to the discovery of
the BRCA 1 breast and ovarian cancer gene, under which the Company may
receive up to approximately $4,000,000. This contract provided $1,800,000
over the life of the contract of which none was recognized in 1997 and
$50,000 and $600,000 was recognized as revenue in 1996 and 1995,
respectively. The contract also provides for the receipt of milestone
payments of $1,160,000 of which $240,000 and $180,000 was received and
recorded as revenues in 1996 and 1995, respectively. The Company is also
entitled to receive a specified royalty of net sales from any resulting
products.
(10) Employee Deferred Savings Plan and Stock Purchase Plan
------------------------------------------------------
The Company has a deferred savings plan which qualifies under section
401(k) of the Internal Revenue Code. Substantially all of the Company's
employees are covered by the plan. The Company makes matching contributions
of 50 percent of each employee's contribution with the employer's
contribution not to exceed four percent of the employee's compensation. The
Company's contribution to the plan was $205,866, $100,461, and $58,979 in
1997, 1996, and 1995, respectively.
The Company has an Employee Stock Purchase Plan (the Plan) which was
adopted and approved by the Board of Directors and stockholders in December
1994, under which a maximum of 200,000 shares of common stock may be
purchased by eligible employees. At June 30, 1997, 6,263 shares of common
stock had been purchased under the Plan. Because the discount allowed to
employees under the Plan approximates the Company's cost to issue equity
instruments, the Plan is not deemed to be compensatory and, therefore, is
excluded from the pro forma loss shown in note 5.
(11) Accounting Standards Issued Not Yet Adopted
-------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128).
SFAS 128 establishes a different method of computing earnings (loss) per
share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS 128, the Company will be
required to present both basic earnings (loss) per share and diluted
earnings (loss) per share. Basic and diluted loss per share is expected to
be comparable to the currently presented loss per share.
SFAS 128 is effective for the consolidated financial statements for interim
and annual periods ending after December 15, 1997. Accordingly, the Company
plans to adopt SFAS 128 in the second quarter of its 1998 fiscal year and
at that time all historical earnings per share data presented will be
restated to conform to the provisions of SFAS 128.
F-18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
(10.36)@ Collaborative Research and License Agreement among
the Registrant, Schering Corporation and Schering-Plough, Ltd.,
dated April 22, 1997 (Prostate and Other Cancers)
(10.37) Standstill Agreement between the Registrant and
Schering Corporation, dated April 22, 1997
(10.38) Stock Purchase Agreement for Common Stock between
the Registrant and Schering Corporation, dated April 22, 1997
(11.1) - Statement Regarding Computation of Earnings Per Share
(21.1) - Revised List of Subsidiaries of the Registrant
(23.1) - Consent of KPMG Peat Marwick LLP
(27.1) - Financial Data Schedule
@ Confidential Treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.