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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, 1998
[ ] 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
---------- ------------
(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 28, 1998 was
$69,331,624, based on the last sale price as reported by The Nasdaq Stock
Market.
As of September 14, 1998 the registrant had 9,345,535 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 12, 1998.
PART I
ITEM 1. BUSINESS
GENERAL
Myriad Genetics, Inc. (''Myriad'' or the ''Company'') is a leader in the
discovery of major common human disease genes and their related pathways. 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 ProNet(TM), 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 three significant commercial
opportunities: (i) the development and marketing of genetic testing and
information services, such as its BRACAnalysis(TM) test and its recently
launched CardiaRisk(TM) test, for the identification of individuals who are
genetically predisposed to developing a particular disease, (ii) the marketing
of subscriptions to the ProNet(TM) database of protein interactions, and (iii)
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 major genes: BRCA1,
BRCA2, CHD1, MMAC1, MMSC1, MMSC2, CtIP, p16, p19, and MTS2. 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, asthma, cancer, osteoporosis and obesity.
Myriad has achieved the following major milestones during the fiscal year
ended June 30, 1998:
. Expanded its strategic alliance with Bayer to add the discovery of genes
related to central nervous system disorders. The expanded agreement also
provides Bayer access to the Company's ProNet(TM) technology. Under this
agreement, the Company may receive up to $54 million in research funding
and milestone payments, as well as royalties on the sale of future
therapeutic products.
. Discovered, with its academic collaborators, the CHD1 gene. This gene is
associated with cardiovascular disease.
. Discovered, through the use of the Company's ProNet(TM) protein interaction
technology, the MMSC1, MMSC2, and CtIP genes and the anti-tumor genesis
properties of the MKK3 and MKK4 genes. These genes are associated with
brain and prostate cancer and breast and ovarian cancer, respectively.
. Launched its second commercial genetic predisposition test, CardiaRisk(TM),
to help determine the risk of cardiovascular disease in hypertensive
patients and their responsiveness to life style and drug therapy.
. Earned and received milestone payments of $3,000,000 as a result of
discoveries made with Schering and Novartis.
. Was awarded eight patents from the U.S. Patent and Trademark Office
("USPTO") covering a variety of discoveries including major disease genes,
diagnostic tests, and gene discovery technologies.
The Company has begun commercialization of its gene discoveries by
providing genetic tests for individuals to
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determine whether or not they have inherited genetic 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) was the
first and is currently the only 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.
On January 28, 1998, the Company announced the introduction of its second
genetic test, CardiaRisk(TM). The Company believes that the test, which
identifies a mutation in the Angiotensinogen gene ("AGT"), will assist
physicians both in identifying which hypertensive patients are at a
significantly increased risk of developing cardiovascular disease, and
identifying which patients are likely to respond to low salt diet therapy and
antihypertensive drug therapy.
Myriad has developed a highly automated genetic testing platform which the
Company believes will enable it, once 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 40,000 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.
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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 the disease. The success of the Company's
approach is demonstrated by its discovery and complete sequencing of a number of
major genes and the identification of numerous genes along their biochemical
pathways.
All stages of the gene discovery process 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 CardiaRisk(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
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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
40 hospitals and clinics in the intermountain west. Research with IHC
collaborators currently involves the study of families with asthma,
osteoporosis, or certain central nervous system disorders. Over 5,000 DNA
samples have been collected to date.
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 robotic 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 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 system 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.
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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 cancer and other common disorders
have a strong hereditary component. These diseases 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 1998, it is estimated
that approximately 179,000 women in the United States will be diagnosed with
breast cancer and an additional 25,000 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
15,000 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
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 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.
MMSC1 Scaffold Gene. In January 1998, the Company announced the discovery
of MMSC1, a gene which appears to interact directly with the MMAC1 brain and
prostate cancer gene. MMSC1 is expected to provide a superior target for
possible small molecule therapeutic intervention. There can be no assurance,
however, that the identification of this gene will lead to the development of
therapeutic products. Analysis of the MMSC1 gene and its biological pathway is
in progress through the Myriad/Schering collaboration.
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p16 Tumor Suppressor Gene. The Company's first major discovery was the
involvement of the p16 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 p16 as a tumor suppressor was discovered
by Myriad and was reported in the April 15, 1994 issue of the journal Science.
When p16 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 p16 is deleted or mutated in approximately half of all
tumor cell lines tested. Because p16 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 p16
gene may also have value in monitoring disease progression.
Myriad also discovered that abnormal p16 genes can be inherited and
predispose individuals to melanoma. The Company's discovery of the p16
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 melanoma 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 1998 it is estimated that approximately 42,000 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 p16 mutations.
MTS2 and p19 Cell Cycle Genes. Myriad scientists located p16 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 and p19. 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 p19 gene has led to a new area of research in cell division and
its possible role in the regulation of another important tumor suppressor gene,
p53.
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 the level of
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
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exclusive license to develop therapeutic products from such genetic mutations of
AGT.
CHD1 Heart Disease Gene. 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. In March 1998, Myriad and Novartis announced the discovery of a novel
gene that is believed to play an important role in cardiovascular disease. The
gene, named CHD1 for Coronary Heart Disease 1, encodes a novel protein that may
lead to a new class of therapies for cardiovascular disease. The Company has
filed U.S. Patent applications, jointly prepared with Novartis, on the CHD1 gene
and its protein as well as its use in diagnostic and therapeutic applications.
The Company believes that a genetic test for familial cardiovascular disease
would be of value to predisposed individuals, who could benefit from regular
monitoring.
OTHER MAJOR DISEASES
HOB1 and HOB2 Human 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. 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 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 chromosomal location of a significant gene involved in osteoporosis, OS1.
The Company believes that the OS1 gene plays an important role in the
pathogenesis of osteoporosis.
ASM1 Asthma Gene. 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 determined the location of a significant gene
involved in asthma, ASM1, and have narrowed the ASM1 gene to a small region of
the chromosome.
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.
MYRIAD'S PRODUCT DEVELOPMENT PROGRAMS
The Company has identified three 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 BRACAnalysis(TM) test and its recently launched
CardiaRisk(TM) test, (ii) the marketing of subscriptions to the
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ProNet(TM) database of protein interactions, and (iii) 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, through Myriad Labs, introduced
BRACAnalysis(TM), a comprehensive BRCA1 and BRCA2 sequence analysis for
susceptibility to breast and ovarian cancer. 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.
CARDIARISK(TM) GENETIC PREDISPOSITION TEST
On January 20, 1998, the Company introduced CardiaRisk(TM). This test,
like BRACAnalysis(TM), has been fully automated and is performed by Myriad Labs
using DNA extracted from a patient's blood sample. There are approximately 50
million hypertensive patients in the United States. Therapy for these patients
includes the use of a low-salt diet, other dietary regimens, and numerous drug
therapies, including ACE inhibitors, to control the blood pressure. Although a
low salt diet is frequently recommended for hypertensive patients, either alone
or in combination with drug therapy, only an estimated 20% of patients actually
receive any benefit from a special low salt diet. Moreover, patients often have
difficulty complying with the low salt diet due to the expense and inconvenience
of preparing special meals.
CardiaRisk(TM) identifies patients who have a greater risk of myocardial
infarction (heart attack) and coronary disease by determining the presence of a
genetic variation of the AGT gene. In a study published in the June 24, 1995
issue of Lancet of 422 patients with documented coronary heart disease, those
with two copies of the variant AGT gene had a 2.6 times greater risk of coronary
heart disease and a 3.4 fold greater risk of myocardial infarction than those
individuals with one or no copies of the variant. Results of a recent study of
1,509 patients by the National Institutes of Health showed that of all patients
placed on a low salt diet, only patients with the AGT mutation achieved a
significant reduction in blood pressure over the three year course of the study.
Hypertensive patients in this study with the variant form of the AGT gene were
also found to be 42% more likely to progress beyond borderline hypertensive
blood pressure levels, and their hypertension is more likely to occur earlier in
life and become more severe. Additional clinical studies have shown that
individuals with both copies of the variant form of the AGT gene have
experienced greater reduction in blood pressure with ACE inhibitor therapy
versus individuals
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with normal copies of the AGT gene.
The Company maintains a sales force with regional responsibilities for
sales, promotion and education of physicians nationwide. The Company currently
employs a sales force of 33 individuals and expects to significantly expand its
sales force over the next three years. Marketing and educational efforts
initially have been directed to comprehensive cancer centers, community cancer
centers, oncologists and managed care organizations as primary customers for
BRACAnalysis(TM) and CardiaRisk(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. The Company
believes that broad market acceptance can be achieved only with substantial
education about the benefits and limitations of BRACAnalysis(TM)and
CardiaRisk(TM), as well as efforts to resolve concerns about their appropriate
and ethical use.
There can be no assurance that these tests 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 tests to
patients, payors and health care providers.
PRONET(TM) DATABASE
ProNet(TM) is a proprietary database of human proteins, the proteins they
interact with and their biochemical pathways. Each protein and its interacting
partners form a network, which reads like a map positioning the protein in the
disease pathway and tracing the protein's role in that pathway. The Company
believes that since virtually all cellular processes are controlled by proteins,
including important disease processes, knowledge of how proteins interact can be
extremely valuable in the identification of drug targets for novel therapeutic
development.
Myriad's proprietary automation and sequencing capabilities developed for
the Company's positional cloning and diagnostic efforts have been applied to the
search process to allow high throughput processing of protein interactions. As
Myriad's efforts to identify protein interactions progresses, the Company's
elucidation of an ever increasing fraction of these interactions may enable
researchers to identify functional complexes and trace pathways that are
involved in disease progression. The Company believes that ProNet(TM) provides
a significant opportunity to identify and develop novel drug targets and that
the drug discovery efforts of pharmaceutical and biotechnology companies may
benefit from ProNet(TM) in a number of ways:
. Information from ProNet(TM) may enable researchers to identify proteins
involved in critical interactions. These proteins can be developed as
targets for therapeutic intervention;
. Knowledge of interacting partners may aid in assigning proteins to
biochemical or disease-related pathways;
. Analysis of ProNet(TM) may suggest functions for many novel proteins;
. Identification of new relationships may suggest novel roles for known
proteins; and
. Selection of high-quality drug discovery targets from the numerous
candidate genes involved in disease pathways may be possible.
On November 20, 1997, the Company and Bayer jointly announced a research
collaboration focusing on the discovery of gene targets and the development of
new therapeutics to treat dementia and depression. The research program will
utilize ProNet(TM), making Bayer the first pharmaceutical company to access the
technology.
MYRIAD'S COMMERCIALIZATION STRATEGY
Myriad's commercialization strategy is to develop and market genetic
testing and information services for the
10
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 establishment of the ProNet(TM) database also gives the Company
potential licensing and subscription revenues in the near term. 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. 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, hypertension,
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 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 also provides 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) and CardiaRisk(TM) or that BRACAnalysis(TM),
CardiaRisk(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.
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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.
Database Access
ProNet(TM) is a powerful technology which the Company believes will aid
major pharmaceutical collaborators in identifying the most appropriate targets
for therapeutic interventions. Myriad intends to license non-exclusive access to
the ProNet(TM) database to pharmaceutical companies for use in identifying novel
proteins and their biochemical pathways for use in the development of new
therapeutics. There can be no assurance that the Company will be able to obtain
information on all of the proteins in the human body and their biochemical
pathways or that the Company will successfully license rights to the database.
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 genes involved in obesity, osteoporosis, asthma, dementia,
depression, 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,
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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.
In October 1997, the Company announced that Schering had licensed the
therapeutic rights to the MMAC1 gene. In March 1998, the Company demonstrated
the tumor-suppressor activity of the MMAC1 gene. Each event triggered milestone
payments from Schering to the Company.
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 at any time 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.
In November 1997, the Company announced the expansion of its collaborative
research and development arrangement with Bayer to identify and sequence genes
involved in dementia and depression. The expanded collaboration provides the
Company with additional research funding and potential milestone payments of up
to $54 million or a total potential of up to $125 million.
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. In March 1998, the Company and Novartis
discovered the CHD1 gene which triggered a milestone payment from Novartis to
the Company. 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 at any time 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.
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
13
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, the University of Texas M.D. Anderson Cancer
Center ("MDA"), and Valley Mental Health ("VMH") which represent important
elements of the Company's research and development programs. The Company
provides funding for its scientific collaborators at the University, IHC, MDA,
and VMH 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, MDA, and VMH
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 University of Utah 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
p16 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 germline mutations of the p16
gene and methods of detecting predisposition to cancer based
14
on the p16 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 and September 1997, the Company entered into Standard Research Agreements
with IHC and VMH, respectively. Under these agreements, the Company reimburses
IHC and VMH for research used to develop clinical databases in the study of CNS
disorders, such as depression, attention deficit hyperactivity disorder,
addictive behavior, and obsessive-compulsive disorders, by linking IHC's and
VMH's databases of patient records to the Company's genealogy database. IHC and
VMH will also collect clinical information and DNA samples on selected patients.
The Company and IHC will jointly own the IHC clinical database and the Company
and VMH will jointly own the VMH database. IHC and VMH may only use the
databases for educational and research purposes and to improve health care
services to their 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 databases to any other party.
The Company has the exclusive rights to use the clinical databases,
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 IHC and VMH research agreements covering CNS diseases terminate
on April 30, 2001 and August 31, 2002, respectively.
15
PATENTS AND PROPRIETARY RIGHTS
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 14 issued patents and numerous
patent applications in the United States as well as numerous foreign patent
applications relating to genes associated with cancer, heart disease, and
hypertension; processes for identifying and sequencing genes, and other related
gene discovery technologies. 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.
16
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 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 BRACAnalysis(TM) test and the recently introduced
CardiaRisk(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 currently offers genetic testing and information services to detect
the mutation of genes predisposing individuals to several 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 not aware of
other companies which at this time offer genetic predisposition tests for the
BRCA1 and BRCA2 genes. A number of research institutions and university
research centers offer certain genetic predisposition testing on a limited
basis.
The Company is 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. However, the Company believes that the full DNA sequencing
analysis used in its testing platform is the most complete and accurate method
of assessing the risk of hereditary breast and ovarian cancer.
17
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 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 breast cancer susceptibility (BRCA1 and BRCA2) and
hypertension/heart disease risk (AGT). 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
18
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 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 1, 1998, Myriad had 270 full-time equivalent employees,
including 35 persons holding doctoral degrees and three medical doctors. 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
19
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. The Company has also committed to lease a
48,000 square foot building which is currently under construction. It is planned
that this new building will replace the existing 24,800 square foot facility
when that lease expires in 1999. 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.
The Company believes that its existing facilities and equipment are well
maintained and in good working condition. The Company is currently in the
process of expanding its facilities which the Company believes will provide
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
On November 17, 1997, OncorMed, Inc. ("OncorMed") filed an action in the
United States District Court of the District of Columbia alleging infringement
by the Company of patent number 5,654,155 entitled "Consensus Sequence of the
Human BRCA1 Gene" issued to OncorMed by the U.S. Patent and Trademark Office
("USPTO"). The action was seeking a permanent injunction and unspecified
damages. On December 8, 1997, the Company filed an answer and counterclaim.
On December 2, 1997, the Company filed an action against OncorMed in the
United States District Court for the District of Utah alleging infringement of
patent number 5,693,473 entitled "Linked Breast and Ovarian Cancer
Susceptibility Gene" issued to the Company on December 2, 1997 by the USPTO.
The action was seeking a preliminary and permanent injunction and unspecified
damages. On December 29, 1997, OncorMed filed an answer and counterclaim.
On January 20, 1998, the Company filed an action against OncorMed in the
United States District Court for the District of Utah alleging infringement of
patent number 5,709,999 entitled "Linked Breast and Ovarian Cancer
Susceptibility Gene" issued to the Company on January 20, 1998 by the USPTO.
The action was seeking a preliminary and permanent injunction and unspecified
damages. On February 10, 1998, OncorMed filed an answer and counterclaim.
On January 20, 1998, OncorMed filed an action against the Company in the
United States District Court for the District of Columbia alleging incorrect
inventorship of patent numbers 5,093,473 and 5,709,999. The action was seeking
to correct inventorship and seeks unspecified damages. The Company moved to
dismiss the action on February 9, 1998.
On May 15, 1998, the Company entered into a Settlement and Patent License
Agreement with OncorMed. Terms of the agreement include the dismissal by both
parties of each of the above mentioned actions. The Company is currently 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, 1998.
20
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 last two fiscal years, the high and low sales prices for the
Common Stock, as reported by the Nasdaq National Market:
HIGH LOW
------- -------
FISCAL 1998:
Fourth Quarter........................... $23.625 $ 14.00
Third Quarter............................ $25.625 $18.188
Second Quarter........................... $ 30.00 $ 21.50
First Quarter............................ $28.125 $ 22.75
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
As of August 28, 1998, there were approximately 187 stockholders of record
of the Common Stock and, according to the Company's estimates, approximately
2,300 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.
SALE OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
The Company filed its initial Form SR with the Securities and Exchange
Commission on January 15, 1996 reporting for the period from October 5, 1995
(the effective date of the Company's registration statement for its initial
public offering) through January 5, 1996. The Company filed through July 1997
amendments to its Form SR covering each subsequent six month period on a timely
basis. Since November 1997, the Company has included information concerning use
of proceeds in its Forms 10-Q, the most recent of which was filed May 12, 1998
for the quarter ended March 31, 1998 ("March 31, 1998 Form 10-Q"). The
following schedule reflects as of June 30, 1998 an estimate of the amount of net
offering proceeds received by the Company from its initial public offering ("the
IPO Proceeds") used for each of the purposes listed below (and reflects only the
changes to the information provided by the Company in its March 31, 1998 Form
10-Q). As of June 30, 1998, all of the IPO Proceeds have been spent by the
Company.
Direct or indirect payments to anyone other
than directors, officers, persons owning ten
percent or more of any class of equity
securities of the Company, and affiliates of
the Company (of which there were no such
payments).
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
Construction of plant, building
and facilities $ 1,494,462
- --------------------------------------------------------------------------------
Purchase and installation of
machinery and equipment $12,189,450
- --------------------------------------------------------------------------------
Cash and investments $0
- --------------------------------------------------------------------------------
Genetic discovery research
expenses $ 9,103,193
- --------------------------------------------------------------------------------
Diagnostic test development
and operation expenses $16,284,197
- --------------------------------------------------------------------------------
General and administrative expenses $10,191,890
- --------------------------------------------------------------------------------
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, 1998. The
selected consolidated financial data as of and for each of the five years ended
June 30, 1998 have been derived from the consolidated financial statements of
the Company. The consolidated financial statements and the report thereon for
the year ended June 30, 1998 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 notes thereon) and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included in Item 7.
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Research revenue............... $ 20,999,598 $ 14,732,054 $ 6,628,624 $ 1,294,500 $ 600,000
Genetic testing revenue........ 2,210,983 504,045 -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues............... 23,210,581 15,236,099 6,628,624 1,294,500 600,000
Costs and expenses:
Research and development....... 23,002,340 18,580,229 12,990,566 5,161,978 3,008,487
Selling, general and
administrative.............. 11,807,023 8,755,217 2,525,814 1,788,247 1,154,541
Genetic testing cost of revenue 1,391,368 340,461 -- -- --
------------ ------------ ------------ ------------ ------------
Total expenses............... 36,200,731 27,675,907 15,516,380 6,950,225 4,163,028
------------ ------------ ------------ ------------ ------------
Operating loss............... (12,990,150) (12,439,808) (8,887,756) (5,655,725) (3,563,028)
Other income (expense):
Interest income.............. 3,223,683 3,414,379 3,173,749 458,353 273,689
Interest expense............. (32,681) (66,661) (97,414) (71,011) --
Other........................ 2,113 (114,190) (86,052) -- 12,564
------------ ------------ ------------ ------------ ------------
Net loss................... ($9,797,035) ($9,206,280) ($5,897,473) ($5,268,383) ($3,276,775)
============ ============ ============ ============ ============
22
Net loss per share........ ($1.05) ($1.03) ($0.78) ($1.19) ($0.81)
Weighted average shares
outstanding............. 9,289,481 8,903,918 7,608,548 4,427,095 4,021,870
AS OF JUNE 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents and
marketable investment
securities................. $53,109,493 $63,077,439 $70,002,780 $16,140,935 $5,678,356
Working capital.............. 21,806,290 38,796,960 41,665,513 13,784,051 5,265,234
Total assets................. 67,391,972 76,063,331 79,607,497 19,744,451 6,722,784
Notes payable less current
portion.................... -- 128,844 471,640 780,261 --
Net stockholders' equity...... 57,481,013 66,178,975 70,185,747 16,256,165 6,288,919
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 tests. The Company has
been unprofitable since its inception and, for the year ended June 30, 1998, the
Company had a net loss of $9,797,035 and as of June 30, 1998 had an accumulated
deficit of $33,944,427.
In April 1995, the Company commenced a five-year collaborative research and
development arrangement with Novartis Corporation ("Novartis"). This
collaboration may provide the Company with an equity investment, research
funding and potential milestone payments of up to $60,000,000. In March 1998,
the Company and Novartis discovered the CHD1 gene, a novel gene that may play an
important role in cardiovascular disease. The gene discovery represents a
significant milestone in the Novartis-Myriad research collaboration and
triggered a $500,000 milestone payment from Novartis to the Company. The
Company is entitled to receive royalties from sales of therapeutic products sold
by Novartis. The Company recognized, in addition to the $500,000 milestone
payment, $6,916,088 in revenue under this agreement for the year ended June 30,
1998.
In September 1995, the Company commenced a five-year collaborative research
and development
23
arrangement with Bayer Corporation ("Bayer"). This collaboration may provide the
Company with an equity investment, research funding and potential milestone
payments of up to $71,000,000. In November 1997, the Company announced an
expansion of its collaborative research and development arrangement with Bayer.
The expanded collaboration may provide the Company with additional research
funding and potential milestone payments of up to $54,000,000 or a total
potential of up to $125,000,000. The Company is entitled to receive royalties
from sales of therapeutic products sold by Bayer. The Company recognized
$8,083,510 in revenue under this agreement for the year ended June 30, 1998.
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. In January 1998, the Company
announced the introduction of CardiaRisk(TM) which may assist physicians both in
(i) identifying which hypertensive patients are at a significantly increased
risk of developing cardiovascular disease and (ii) identifying which patients
are likely to respond to low salt diet therapy and antihypertensive drug
therapy. The Company, through its wholly owned subsidiary Myriad Genetic
Laboratories, Inc., recognized genetic testing revenues, primarily from
BRACAnalysis(TM), of $2,210,983 for the year ended June 30, 1998.
In April 1997, the Company commenced a three-year collaborative research
and development arrangement with Schering Corporation ("Schering"). The three-
year term may be extended for two additional one-year periods. This
collaboration may provide the Company with an equity investment, license fees,
research funding and potential milestone payments totalling up to $60,000,000.
In October 1997, the Company announced that Schering had licensed the
therapeutic rights to the MMAC1 gene under such agreement. The MMAC1 gene has
been associated with advanced cancers of the brain, prostate, breast, kidney,
and skin. To date, the Company has recognized milestone payments totalling
$2,500,000 from Schering associated with the MMAC1 gene. The Company is
entitled to receive royalties from sales of therapeutic products sold by
Schering. The Company recognized, in addition to the $2,500,000 milestone
payment, $3,000,000 in revenue under this agreement for the year ended June 30,
1998.
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 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 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, 1998 and 1997.
Research revenues for the Company's fiscal year ended June 30, 1998
increased $6,267,544 from the prior year to $20,999,598. The increase was
attributable primarily to the achievement of certain research milestones with
Novartis and Schering and the Company's new and expanded corporate research
collaboration agreements with Schering and Bayer. During the year ended June
30, 1998, the Company recognized $3,000,000 in research milestones consisting of
$500,000 from Novartis and $2,500,000 from Schering. During the same period,
the Company recognized $3,000,000 in research funding from Schering under an
agreement initiated 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 $2,210,983 were recognized in the fiscal year
ended June 30, 1998, an increase of 339% or $1,706,938 over the prior year. The
test for genetic predisposition to breast and ovarian cancer was launched by the
Company in October 1996 and the test for heart disease and hypertension risk was
launched by the Company in January 1998. Sales and marketing efforts since that
time have given rise to the increased revenues for
24
the fiscal year ended June 30, 1998. There can be no assurance, however that
genetic testing revenues will continue to increase at the historical rate.
Research and development expenses for the year ended June 30, 1998
increased to $23,002,340 from $18,580,229 for the prior year. This increase was
primarily due to an increase in research activities as a result of progress in
the Company's collaborations with Novartis, Bayer and Schering as well as those
programs funded by the Company. 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 expenses related to milestones achieved by
its academic collaborators. 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 fiscal year ended June
30, 1998 increased $3,051,806 from the year ended June 30, 1997. The increase
was primarily attributable to costs associated with the ongoing promotion of
BRACAnalysis(TM) and the launch of CardiaRisk(TM), including the expansion of
the Company's internal sales staff from 8 to 33 employees. Additionally, the
Company expended significant amounts in the defense of its intellectual
property, including the successful settlement of legal actions with OncorMed.
The increase is also a result of additional administrative, marketing and
education personnel, market research activities, educational material
development, 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, 1998 decreased to $3,223,683
from $3,414,379 or 5.6% for the prior year. The Company has been able to
maintain its cash reserves at a relatively constant level as a result of its
ongoing collaborative research agreements, entering new collaborative
agreements, achieving research milestones, and sales of its genetic tests. As a
result, interest income has not changed significantly from the prior year.
Interest expense for the year ended June 30, 1998, amounting to $32,681, was due
entirely to borrowings under the Company's equipment financing facility.
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 the University of Texas M.D. Anderson
Cancer Center 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 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
25
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $7,028,883 during the fiscal year
ended June 30, 1998 as compared to $6,581,534 used during the prior fiscal year.
Trade receivables were established on a broad basis during fiscal year 1998 and
amounted to $471,327 as a result of the Company allowing terms for payment for
its genetic tests. In the prior fiscal year only a selected number of
institutions were allowed payment terms while a majority of tests were prepaid
by the customer. Non-trade receivables decreased $177,914 during the fiscal
year ended June 30, 1998, primarily as a result of the Company receiving
reimbursement of certain legal fees which the Company incurred but were the
responsibility of one of the Company's collaborative partners. Prepaid expenses
decreased $179,581 during the year ended June 30, 1998. The decrease is
primarily the result of less royalties being paid in advance by the Company.
Other assets increased $941,405 during the current fiscal year. The majority of
this increase was the result of capitalized costs associated with the Settlement
and Patent License Agreement entered into by the Company and OncorMed. These
assets include a purchased customer list and patent rights. Accounts payable
and accrued expenses increased by $3,346,712 during the fiscal year ended June
30, 1998 as a result of increased accruals for unbilled work provided by the
Company's research collaborators, unbilled legal fees, and the Company's efforts
to better control cash flows. Deferred revenue, representing the difference in
collaborative payments received and research revenue recognized, decreased
$2,977,312 during the year ended June 30, 1998.
The Company's investing activities used cash of $2,681,493 in the year
ended June 30, 1998 and provided cash of $13,134,547 in the year ended June 30,
1997. Investing activities were comprised primarily of capital expenditures for
research equipment, office furniture, and facility improvements and marketable
investment securities. During the year ended June 30, 1998, the Company shifted
a portion of its investment in marketable securities to cash and cash
equivalents from longer term investments in order to provide for ongoing
corporate expenditures.
Financing activities provided $229,647 during the year ended June 30, 1998.
The Company reduced the amount of principal owing on its equipment financing
facility by $342,797. Payments on the financing facility were offset by
proceeds of $572,444 from the exercise of options and warrants during the
period. Financing activities provided $4,287,070 during the year ended June 30,
1997. During the year ended June 30, 1997, proceeds
26
received by the Company of $4,595,728 from the exercise of options and warrants
and proceeds from Schering's equity investment were offset by payments by the
Company of $308,658 to reduce principal owing on its equipment financing
facility.
The Company anticipates that its existing capital resources, including the
net proceeds of its October 1995 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations.
During fiscal 1998, the Company completed an initial review ("Phase I") of
its information and non-information technology systems. This review included
its existing and planned computer software and hardware. The Company has made an
initial determination, based on its Phase I review, that the costs and/or
consequences associated with the Year 2000 issue are not expected to have a
material effect on its business, operations or future financial condition.
A second, more in-depth analysis ("Phase II") is currently ongoing.
Internally, Phase II will include the testing of internally developed systems.
Although the internal portion of Phase II just recently commenced, and is not
expected to be completed until the end of calendar year 1998, the Company
presently believes that with modifications to existing software and conversions
to new software and systems, the Year 2000 Issue will not pose significant
operational problems for its computer and other information systems. If
required, the Company will utilize both internal and external resources to
reprogram, or replace, and test the software and systems for Year 2000
modifications. Externally, Phase II of the Company's preparations for the Year
2000 Issue will consist of soliciting and obtaining certification of Year 2000
compliance from third-party software vendors and determining the readiness of
its significant suppliers and customers.
If such modifications, conversions and/or replacements are not made, are
not completed timely, or if any of the Company's suppliers or customers do not
successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company could experience
delays in receiving or sending its genetic testing products that would increase
its costs and that could cause the Company to lose business and even customers
and could subject the Company to claims for damages. Problems with the Year
2000 Issue could also result in delays in the Company invoicing its genetics
testing customers or in the Company receiving payments from them. In addition,
the Company's research and development efforts which rely heavily on the storage
and retrieval of electronic information could be interrupted resulting in
significant delays in discovering genes, the loss of current collaborations, and
the impairment of the Company's ability to enter into new collaborations. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time. In the extreme, such problems could bring the Company to
a standstill.
27
While management has not yet specifically determined the costs associated
with its Year 2000 readiness efforts, monitoring and managing the Year 2000
Issue will result in additional direct and indirect costs to the Company. Direct
costs include potential charges by third-party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. Such costs have not been material to date. Both
direct and indirect costs of addressing the Year 2000 Issue will be charged to
earnings as incurred.
After evaluating its internal compliance efforts as well as the compliance
of third parties as described above, the Company will develop during 1999
appropriate contingency plans to address situations in which various systems of
the Company, or of third parties with which the Company does business, are not
year 2000 compliant. Some risks of the Year 2000 Issue, however, are beyond the
control of the Company and its suppliers and customers. For example, no
preparations or contingency plan will protect the Company from a downturn in
economic activity caused by the possible ripple effect throughout the entire
economy caused by the Year 2000 Issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy
are to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and
maturities of three years or less, with a maximum average maturity of 12 months.
These securities are classified either as available-for-sale or held-to-
maturity. Available-for-sale securities are recorded on the balance sheet at
fair market value with unrealized gains or losses reported as a separate
component of stockholders' equity. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts. 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 establishes 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.
The securities held in the Company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of June 30, 1998, the Company has determined that in the event of
a hypothetical ten percent increase in interest rates, the resulting decrease in
fair market value of the Company's marketable investment securities would be
insignificant to the financial statements as a whole.
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
28
successful genetic testing business; difficulties inherent in developing genetic
tests once genes have been discovered; the Company's limited experience in
operating a genetic testing laboratory; the Company's limited marketing and
sales experience and the risk that tests which the Company has or may develop
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 health care 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 disclosed throughout this Annual Report on Form
10-K.
29
ITEM 8. FINANCIAL STATEMENTS
MYRIAD GENETICS, INC.
Index to Financial Statements Number
----------------------------- ------
Independent Auditors' Report........................................ F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997............ F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1998, 1997 and 1996...................................... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, 1997 and 1996...................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996...................................... F-7
Notes to Consolidated Financial Statements.......................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
30
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 "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 1998
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 1998 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 1998 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 1998 Annual Meeting of Stockholders.
31
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
AND (2) Statement Schedules" at 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)$T -- 1992 Employee, Director and Consultant Stock Option Plan as
amended and restated September 11, 1997 (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)
32
(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)
(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
or p16) (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 or p16) (Filed as
Exhibit 10.23)
(10.24)* -- Research Agreement between the Registrant and California
Institute of Technology, dated June 3, 1994 (MTS1 or p16) (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)Y@ -- 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)Y -- 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)Y -- 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)Y@ -- 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)
33
(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)(S)@-- Collaborative Research and License Agreement among the
Registrant, Schering Corporation and Schering-Plough, Ltd.,
dated April 22, 1997 (Prostate and Other Cancers) (Filed as
Exhibit 10.36)
(10.37)(S) -- Standstill Agreement between the Registrant and Schering
Corporation, dated April 22, 1997 (Filed as Exhibit 10.37)
(10.38)(S) -- Stock Purchase Agreement for Common Stock between the Registrant
and Schering Corporation, dated April 22, 1997 (Filed as Exhibit
10.38)
(10.39)(P)@-- Standard Research Agreement between the Company and Valley
Mental Health dated September 1, 1997 (central nervous system
disorders) (Filed as Exhibit 10.1)
(10.40)(P) -- International Swap Dealers Association, Inc. Master Agreement
("ISDA Master Agreement") between the Registrant and Swiss Bank
Corporation, London Branch dated October 8, 1997 (Filed as
Exhibit 10.2)
(10.41)(P) -- Schedule to ISDA Master Agreement between the Registrant and
Swiss Bank Corporation, London Branch dated October 8, 1997
(Filed as Exhibit 10.3)
(10.42)(P) -- Confirmation for Contract A entered into pursuant to ISDA Master
Agreement between the Registrant and Swiss Bank Corporation,
London Branch dated October 8, 1997 (Filed as Exhibit 10.4)
(10.42)(P) -- Confirmation for Contract B entered into pursuant to ISDA Master
Agreement between the Registrant and Swiss Bank Corporation,
London Branch dated October 8, 1997 (Filed as Exhibit 10.5)
(10.43)%@ -- Amendment and Supplement to Collaborative Research and License
Agreement dated November 19, 1997 between Bayer Corporation and
the Registrant (Filed as Exhibit 10.1)
(10.44) -- Lease Agreement-Research Park Building Phase II, dated March 6,
1998, between the Research Park Associated VI, by its general
partner, the Boyer Company, L.C. and the Registrant
(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.
Y 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
34
31, 1996.
(S)Previously filed and incorporated herein by reference from the Form 10-K
for the period ending June 30, 1997.
(P)Previously filed and incorporated herein by reference from the Form 10-Q
for the period ending September 30, 1997.
% Previously filed and incorporated herein by reference from the Form 10-Q
for the period ending December 31, 1997.
T Previously filed and incorporated herein by reference from the Company's
Registration Statement filed on Form S-8, effective November 25, 1997, File
No. 333-40961.
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, 1998.
35
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 22, 1998.
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 22, 1998
_______________________
PETER D. MELDRUM Officer and Director
(principal executive officer)
By: /s/ Jay M. Moyes Vice President of Finance September 22, 1998
_______________________
JAY M. MOYES (principal financial and
accounting officer)
By: /s/ John J. Horan Chairman of the Board September 23, 1998
_______________________
JOHN J. HORAN
By: /s/ Walter Gilbert Vice Chairman of the Board September 22, 1998
_______________________
WALTER GILBERT, PH.D.
By: /s/ Mark H. Skolnick Director September 22, 1998
_______________________
MARK H. SKOLNICK, PH.D.
By: /s/ Arthur H. Hayes, Jr. Director September 22, 1998
_______________________
ARTHUR H. HAYES, JR., M.D.
By: /s/ Dale A. Stringfellow Director September 23, 1998
_________________________
DALE A. STRINGFELLOW, PH.D.
By: /s/ Alan J. Main Director September 23, 1998
_________________________
ALAN J. MAIN, PH.D.
By: /s/ Michael J. Berendt Director September 23, 1998
_________________________
MICHAEL J. BERENDT, PH.D.
36
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
August 14, 1998
F-1
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------------
ASSETS 1998 1997
------ ------------ -----------
Current assets:
Cash and cash equivalents $ 14,595,034 24,075,763
Marketable investment securities (note 2) 16,267,156 23,552,315
Prepaid expenses 266,679 446,260
Trade accounts receivables, less allowance for doubtful
accounts of $66,000 in 1998 $-0- in 1997 471,327 183,166
Nontrade receivables 117,053 294,967
------------ -----------
Total current assets 31,717,249 48,552,471
------------ -----------
Equipment and leasehold improvements:
Equipment 16,049,721 13,124,937
Leasehold improvements 2,288,241 2,075,308
------------ -----------
18,337,962 15,200,245
Less accumulated depreciation and amortization 5,902,926 3,189,724
------------ -----------
Net equipment and leasehold improvements 12,435,036 12,010,521
Long-term marketable investment securities (note 2) 22,247,303 15,449,360
Other assets 992,384 50,979
------------ -----------
$ 67,391,972 76,063,331
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,121,279 2,559,035
Accrued liabilities 1,938,722 1,154,254
Deferred revenue (note 9) 2,722,115 5,699,427
Current portion of notes payable (note 3) 128,843 342,796
------------ -----------
Total current liabilities 9,910,959 9,755,512
Notes payable, less current portion (note 3) - 128,844
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 and outstanding 9,337,501 shares in 1998 and
9,222,552 shares in 1997 93,375 92,226
Additional paid-in capital 91,907,034 91,605,739
Fair value adjustment on marketable investment securities 1,477 5,382
Deferred compensation (576,446) (1,376,980)
Accumulated deficit (33,944,427) (24,147,392)
------------ -----------
Net stockholders' equity 57,481,013 66,178,975
------------ -----------
$ 67,391,972 76,063,331
============ ===========
See accompanying notes to consolidated financial statements.
F-2
MYRIAD GENETICS, INC.,
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
------------------------------------------
1998 1997 1996
----------- ----------- ----------
Research revenue (note 9) $ 20,999,598 14,732,054 6,628,624
Genetic testing revenue 2,210,983 504,045 -
----------- ----------- ----------
Total revenues 23,210,581 15,236,099 6,628,624
Costs and expenses:
Research and development expense 23,002,340 18,580,229 12,990,566
Selling, general, and administrative expenses 11,807,023 8,755,217 2,525,814
Genetic testing cost of revenue 1,391,368 340,461 -
------------ ----------- ----------
Total costs and expenses 36,200,731 27,675,907 15,516,380
------------ ----------- ----------
Operating loss (12,990,150) (12,439,808) (8,887,756)
Other income (expense):
Interest income 3,223,683 3,414,379 3,173,749
Interest expense (32,681) (66,661) (97,414)
Other 2,113 (114,190) (86,052)
------------ ----------- ----------
3,193,115 3,233,528 2,990,283
------------ ----------- ----------
Net loss $ (9,797,035) (9,206,280) (5,897,473)
============ =========== ==========
Basic and diluted loss per share $ (1.05) (1.03) (.78)
============ =========== ==========
Basic and diluted weighted average shares outstanding 9,289,481 8,903,918 7,608,548
============ =========== ==========
See accompanying notes to consolidated financial statements.
F-3
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Fair value
adjustment
Preferred stock Common stock Additional on Deferred Accum- Net stock-
---------------------- ------------------ paid-in investment compen- ulated holders'
Shares Amount Shares Amount capital securities sation deficit equity
----------- -------- --------- ------ ---------- ---------- ----------- ----------- ----------
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
Issuance of
series D
preferred
stock for
cash, net of
expenses 588,236 5,882 - - 9,976,864 - - - 9,982,746
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 - - - 48,956,210
Issuance of
common stock
for cash
upon exercise of
options and
warrants - - 176,413 1,764 216,039 - - - 217,803
Issuance of
common stock
for cash - - 1,598 16 36,658 - - - 36,674
Deferred
compensation
related to
grant of stock
options - - - - 1,080,000 - (1,080,000) - -
Amortization
of deferred
compensation - - - - - - 701,487 - 701,487
Fair value
adjustment on
marketable
investment
securities - - - - - (67,865) - - (67,865)
Net loss - - - - - - - (5,897,473) (5,897,473)
----------- -------- --------- ------ ----------- ------- ---------- ----------- ----------
Balances at
June 30, 1996 - $ - 8,702,215 $87,022 87,015,215 (67,865) (1,907,513) (14,941,112) 70,185,747
F-4
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Fair
value
adjustment
Addit- on Net
Preferred stock Common stock ional marketable Deferred Accum- 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 - $ - 386,007 $ 3,860 625,802 - - - 629,662
warrants
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
F-5
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Fair
value
adjustment
Addit- on Net
Preferred stock Common stock ional marketable Deferred Accum- 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 - $ - 105,704 $ 1,057 393,128 - - - $394,185
Issuance of
common stock
for cash - - 9,245 92 178,167 - - - 178,259
Amortization
of deferred
compensation - - - - - - 530,534 - 530,534
Forfeiture
of deferred
compensation - - - - (270,000) - 270,000 - -
Fair value
adjustment
on marketable
investment
securities - - - - - (3,905) - - (3,905)
Net loss - - - - - - - (9,797,035) (9,797,035)
Balances at --------- --------- ----------- -------- ------------ --------- ---------- ----------- ----------
June 30, 1998 - $ - 9,337,501 $ 93,375 91,907,034 1,477 (576,446) (33,944,427) 57,481,013
========= ========= =========== ======== ============ ========= ========== =========== ==========
See accompanying notes to consolidated financial statements.
F-6
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
-------------- ------------ -----------
Cash flows from operating activities:
Net loss $ (9,797,035) (9,206,280) (5,897,473)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,272,936 2,505,479 1,618,390
Loss on sale of equipment 14,856 68,762 73,436
Loss (gain) on sale of investment securities (16,969) 45,428 30,791
Bad debt expense 66,000 - -
Increase in trade receivables (354,161) (183,166) -
Decrease (increase) in prepaid expenses 179,581 (357,837) 115,387
Decrease (increase) in nontrade receivables 177,914 (215,901) 68,265
Decrease (increase) in other assets (941,405) (9,283) 9,781
Increase in accounts payable and accrued expenses 3,346,712 733,213 539,857
Increase (decrease) in deferred revenue (2,977,312) 38,051 4,861,376
-------------- ------------ -----------
Net cash provided by (used in) operating activities (7,028,883) (6,581,534) 1,419,810
-------------- ------------ -----------
Cash flows from investing activities:
Proceeds from sale of equipment 4,133 68,424 39,375
Capital expenditures (3,185,906) (4,727,121) (6,414,240)
Purchase of investment securities held-to-maturity (117,237,699) (111,098,966) (460,727,571)
Maturities of investment securities held-to-maturity 117,100,138 127,713,265 427,043,548
Purchase of investment securities available-for-sale (723,380,886) (471,745,972) (161,476,655)
Sale of investment securities available-for-sale 724,018,727 472,924,917 142,550,121
-------------- ------------ -----------
Net cash provided by (used in) investing activities (2,681,493) 13,134,547 (58,985,422)
-------------- ------------ -----------
Cash flows from financing activities:
Payments of notes payable (342,797) (308,658) (277,877)
Net proceeds from issuance of common stock 572,444 4,595,728 49,210,687
Net proceeds from issuance of preferred stock - - 9,982,746
-------------- ------------ -----------
Net cash provided by financing activities 229,647 4,287,070 58,915,556
-------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents (9,480,729) 10,840,083 1,349,944
Cash and cash equivalents at beginning of year 24,075,763 13,235,680 11,885,736
-------------- ------------ -----------
Cash and cash equivalents at end of year $ 14,595,034 24,075,763 13,235,680
============== ============ ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Interest paid $ 32,681 66,678 97,414
Supplemental Disclosures of Noncash Investing and Financing Activities
- ----------------------------------------------------------------------
Increase (decrease) in additional paid-in capital as a result of forfeitures
and the recording of deferred compensation $ (270,000) - 1,080,000
Accounts payable incurred for construction-in-progress - - 810,108
Fair value adjustment on investment securities (charged) credited to
stockholders' equity (3,905) 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, 1998, 1997, and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Organization and Business Description
-------------------------------------
Myriad Genetics, Inc. (the Company) is 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 Companyis 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 $9,979,106 and $21,017,125 at June 30, 1998 and
1997, respectively, consist of short-term securities. 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.
(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-8
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 Common and Common Equivalent Share
-----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). SFAS 128 became effective for financial statements
with interim and annual periods ending after December 15, 1997.
Accordingly, the Company has adopted SFAS 128.
SFAS 128 establishes a different method of computing earnings (loss)
per common and common-equivalent share than was previously required
under the provisions of Accounting Principles Board Opinion No. 15.
SFAS 128, requires the presentation of basic and diluted earnings
(loss) per share. Basic is the amount of net income (loss) for the
period available to each share of common stock outstanding during the
reporting period. Diluted earnings per share is the amount of net
income (loss) for the period available to each share of common stock
outstanding during the reporting period and to each share that would
have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
In calculating earnings (loss) per common and common-equivalent share
the net income (loss) and the weighted average common and common-
equivalent shares outstanding were the same for both the basic and
diluted calculation.
For the years ended June 30, 1998, 1997, and 1996, there were
antidilutive common stock equivalents of 2,068,720, 1,390,917, and
1,366,212, respectively. Accordingly, these common stock equivalents
were not included in the computation of diluted earnings per share,
for the years presented, but may be dilutive to future basic and
diluted earnings per share.
(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
--------------------------------
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
establishes 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 1997 and 1996
consolidated financial statements to conform with classifications
adopted in 1998.
(k) Fair Value Disclosure
---------------------
At June 30, 1998, the book value of the Company's financial
instruments approximates fair value except as disclosed in note 2.
(l) Stock-Based Compensation
------------------------
The Company has 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
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Other Assets
------------
Other assets are comprised of a purchased customer list, patent, and
security deposits. The customer list and patent were acquired in
fiscal year 1998. Amortization of the customer list and patents are
computed using the straight-line method over the estimated useful
lives of the related assets, which range from four to nine years. On
an ongoing basis, management reviews the valuation of the customer
list and patent to determine possible impairment by comparing the
carrying value to undiscounted estimated future cash flows from the
related assets.
(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, 1998
and 1997, were as follows:
Gross Gross
unrealized unrealized
Amortized holding holding
cost gains losses Fair value
----------- ---------- ---------- ----------
At June 30, 1998
Held-to-maturity:
U.S. government obligations $13,605,683 1,140 (21,591) 13,585,232
Corporate bonds and notes 7,856,801 910 (10,113) 7,847,598
----------- ------ ---------- ----------
$21,462,484 2,050 (31,704) 21,432,830
=========== ===== ========== ==========
Available-for-sale:
U.S. government obligations $ 3,806,744 1,460 - 3,808,204
Domestic bank obligations 1,009,885 740 - 1,010,625
Foreign bank obligations 7,021,725 1,469 (602) 7,022,592
Mortgage-backed securities 979,672 - (3,577) 976,095
Corporate bonds and notes 4,050,440 3,157 (1,170) 4,052,427
Certificate of deposit 182,032 - - 182,032
----------- ------ ---------- ----------
$17,050,498 6,826 (5,349) 17,051,975
=========== ===== ========== ==========
F-11
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Marketable Investment Securities (continued)
--------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding
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 6,395,864 - (25,754) 6,370,110
----------- ------ -------- ----------
$21,324,923 1,467 (65,482) 21,260,908
=========== ===== ======= ==========
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
=========== ===== ======= ==========
Maturities of debt securities classified as available-for-sale and held-to-
maturity are as follows at June 30, 1998. (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 $ 7,651,580 7,641,557
Due after one year through five years 13,810,904 13,791,273
----------- ----------
$21,462,484 21,432,830
=========== ==========
Available-for-sale:
Due within one year $ 8,613,783 8,615,576
Due after one year through five years 8,436,715 8,436,399
----------- ----------
$17,050,498 17,051,975
=========== ==========
F-12
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, 1998 are
$128,843, payable in fiscal 1999. 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.
(4) Leases
------
The Company leases office and laboratory space under three noncancelable
operating leases. Future minimum lease payments under these leases as of
June 30, 1998 are as follows:
Fiscal year ending:
1999 $ 1,466,752
2000 1,619,021
2001 1,585,749
2002 1,585,749
2003 1,585,749
Thereafter 6,955,467
-----------
$15,853,787
===========
Rental expense was $1,282,308 in 1998, $1,014,931 in 1997, and $433,000
in 1996.
(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 2,000,000 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 1,758,262 shares have been granted as of June 30, 1998 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. Amortization expense was $530,534,
$530,533, and $701,487 for the years ended June 30, 1998, 1997, and 1996,
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:
1998 1997 1996
---------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------ --------- ------ --------- ------ ---------
Options outstanding at
beginning of year 1,334,707 $17.08 1,288,925 $ 8.48 968,957 $ 3.10
Plus options granted 492,600 19.82 486,156 28.82 415,266 19.38
Less:
Options exercised 81,740 3.91 373,329 1.69 80,346 1.98
Options canceled or
expired 103,090 18.67 67,045 18.17 14,952 5.67
--------- --------- ---------
Options outstanding at
end of year 1,642,477 $18.47 1,334,707 $17.08 1,288,925 $ 8.48
========== ========= =========
Weighted - average fair
value of options
granted during the year $12.01 19.04 12.48
The following table summarizes information about fixed stock options
outstanding at June 30, 1998:
Options outstanding Options exercisable
--------------------------------------- -----------------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
Range of at remaining average at average
exercise June 30, contractual exercise June 30, exercise
prices 1998 life price 1998 price
- -------------- ----------- ----------- --------- ---------- ---------
$ .028 - 7.00 476,684 5.8 $ 4.90 374,454 $ 4.42
15.00 - 25.00 769,710 9.1 21.42 128,649 24.41
26.00 - 40.25 396,083 8.9 29.06 79,831 29.31
--------- -------
.028 - 40.25 1,642,477 7.9 18.47 582,934 12.24
========= =======
F-14
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Stock-Based Compensation (continued)
------------------------
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
loss per share would have been changed to the following pro forma amounts:
1998 1997 1996
----------- ----------- ----------
Net loss As reported $ 9,797,035 $ 9,206,280 $5,897,473
Pro forma 13,590,274 10,837,607 6,052,988
Basic and diluted
loss per share As reported 1.05 1.03 0.78
Pro forma 1.46 1.22 0.80
The pro forma net loss reflects only options granted in 1998, 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 1998, 1997, and 1996, respectively:
risk-free interest rates of 5.5 percent, 6.4 percent, and 6.4 percent;
expected dividend yields of 0 percent for all years; expected lives of 5.6
years, 5.5 years, and 5.2 years; and expected volatility of 63 percent, 70
percent, and 70 percent.
(6) Common and Preferred 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 of which
26,243 are still outstanding as of June 30, 1998.
In October 1997, the Company entered into an arrangement with Swiss Bank
Corporation, London Branch (SBC) under which the Company simultaneously
purchased and sold call options on its own common stock resulting in a
payment of $100,000 to the Company, which has been recorded in the
accompanying balance sheet as additional paid-in capital. The capped call
option purchased by the Company (Contract A) gives the Company the right,
at option expiration, to (i) purchase 400,000 shares of its own stock at a
strike price of $32.25 or (ii) receive a cash settlement in an amount equal
to the difference between the strike price and the lesser of the market
price at the exercise date or the cap price of $40.50.
F-15
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Common and Preferred Stock (continued)
--------------------------
The call option sold by the Company (Contract B) gives SBC the right, at
option expiration, to purchase 400,000 shares of newly issued Myriad common
stock, subject to the effectiveness of a registration statement, at a
strike price of $40.50. Alternatively, the Company may elect to cash
settle, or net share settle the option. It is management's intent to cash
settle Contract A, and if the market price exceeds $40.50 at the options
expiration date, to settle Contract B through the issuance of Myriad stock.
If both contracts are exercised, the Company may receive up to $19,500,000,
or $48.75 per share. Both call options will expire in December 1998.
SBC has advised the Company that it has engaged, and may engage, in
transactions, including buying and selling shares of the Company's common
stock, to offset its risk relating to the options. Purchases and sales
could affect the market price of the Company's common stock.
(7) License Agreements
------------------
The Company has entered into license agreements with certain organizations
and 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 $730,000, issued 28,416 shares of common stock, and granted 14,286
stock options. The Company is also required to make future payments
totaling $15,000 and may make milestone payments of $725,000 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-16
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes
------------
There was no income tax expense in 1998, 1997, or 1996 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, 1998 and
1997, are presented below:
1998 1997
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 16,737,000 11,857,000
Research and development credits 905,000 264,800
Accrued expenses 366,000 186,800
Unearned revenue 1,015,000 2,118,000
------------ -----------
Total gross deferred tax assets 19,023,000 14,426,600
Less valuation allowance (17,545,000) (13,426,600)
------------ -----------
Net deferred tax assets 1,478,000 1,000,000
Deferred tax liability - equipment,
principally due to differences
in depreciation 1,478,000 1,000,000
------------ -----------
Total gross deferred tax liability 1,478,000 1,000,000
------------ -----------
Net deferred tax liability $ - -
============ ===========
The net change in the total valuation allowance for the years ended June
30, 1998 and 1997, was an increase of $4,118,400 and $7,288,300,
respectively. Of the subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets as of June 30, 1998,
approximately $4,997,000 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, 1998, the Company had total tax net operating losses of
approximately $44,872,000 and total research and development credit
carryforwards of approximately $905,000, 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.
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.
F-17
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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
$3,000,000 and $750,000 has been received and recognized as revenue in 1998
and 1997, respectively. 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, of which $2,500,000 was received
and recognized as revenue in 1998. 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. In November 1997, the Company expanded one of
these agreements. Under the agreements, the Company may receive up to
$184,500,000. 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 $61,500,000
in annual research funding paid quarterly in advance for five years of
which $34,500,000 has been received. The Company recognized $14,999,598,
$9,982,054, and $6,338,624 as revenue relating to these agreements in 1998,
1997, and 1996, respectively. The Company may also receive up to
$106,000,000 upon achievement of specified milestones of which $500,000 was
received and recognized as revenue in 1998. 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.
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 BRCA1 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 1998 and
1997, and $50,000 was recognized as revenue in 1996. The contract also
provides for the receipt of milestone payments of $1,160,000 of which
$240,000 was received and recorded as revenues in 1996. The Company is also
entitled to receive a specified royalty of net sales from any resulting
products.
Because the Company has granted therapeutic rights to its collaborative
licensees as described above, the success of the programs is partially
dependent upon the efforts of the licensees. Each of the above agreements
may be terminated early. If any of the licenses terminates the above
agreements, such termination may have a material adverse effect on the
Company's operations.
F-18
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 $273,851, $205,866, and $100,461 in
1998, 1997, and 1996, 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, 1998, 15,508 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 June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information. These statements, which are effective for periods
beginning after December 15, 1997, expand or modify disclosures and,
accordingly, will have no impact on the Company's reported financial
position, results of operations, or cash flows.
F-19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
(10.44) -- Lease Agreement-Research Park Building Phase II, dated March 6,
1998, between the Boyer Research Park Associates VI, by its general
partner, the Boyer Company, L.C. and the Registrant
(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