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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2001 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. employer identification number)
9410 Key West Avenue, Rockville, Md. 20850-3338
(address of principal executive offices and zip code )
(301) 309-8504
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
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 the 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 number of shares of the registrant's common stock outstanding on January 31,
2002 was 128,328,142.
As of January 31, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant based on the closing price reported on the
National Association of Securities Dealers Automated Quotations System was
approximately $2,395,123,843.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated by reference into Part III of this
Annual Report.
*Excludes 43,183,320 shares of common stock deemed to be held by officers and
directors and stockholders whose ownership exceeds five percent of the shares
outstanding at January 31, 2002. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
1
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. Our
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Factors That May Affect Our Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-K.
OVERVIEW
We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based on
the identification and study of genes. We focus our internal product development
efforts on therapeutic proteins, antibodies, peptides and fusion proteins and we
use collaborations for the development of gene therapy products and small
molecule drugs. We have discovered a large number of genes through our genomics
capabilities and have developed a rapidly evolving product pipeline based on our
discoveries. We have seven products, including three therapeutic proteins, one
antibody and three albumin fusion products that we have advanced into human
clinical trials; two products are awaiting approval from FDA to enter human
clinical trials; a tenth product, a gene therapy product based on a gene we
discovered, has been licensed to Vascular Genetics, Inc. (VGI) and is in human
clinical trials being conducted by VGI; an eleventh product, an enzyme that
lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), was
discovered by GlaxoSmithKline (GSK) as part of our collaboration with GSK and is
also in human clinical trials being conducted by GSK. We have a number of
additional products in preclinical development.
We have extensive capabilities in gene discovery, intellectual property
protection and preclinical and clinical development and have established a
manufacturing capability for the preparation of our proteins and other products
for human studies. We intend to add sales and marketing when appropriate and are
currently adding additional manufacturing capabilities. We have established
strategic partnerships with a number of leading pharmaceutical and biotechnology
companies to leverage our capabilities and gain access to complementary
technologies and sales and marketing infrastructure. Some of these partnerships
provide us with research funding and milestone payments, along with royalty
payments as products are developed and commercialized. We are also entitled to
certain co-promotion, co-development, revenue sharing and other product rights.
We have a growing intellectual property portfolio protecting our genomic
discoveries and product pipeline.
STRATEGY
Our goal is to be an independent, global and fully-integrated
biopharmaceutical company through the discovery, development, manufacture and
commercialization of new gene-based products. As part of our strategy, we intend
to continue to:
- Discover medically useful genes based on our proprietary technology
platform;
- Develop, manufacture and commercialize our gene-based products on our
own and with our strategic partners;
- Establish and enhance strategic alliances to provide access to the
product development, clinical development and marketing expertise of
our partners;
- Expand our technology platform to accelerate our product development
activities;
- Pursue strategic acquisitions to augment our capabilities and provide
access to complementary technologies; and
- Capitalize on and expand our intellectual property portfolio.
2
PRODUCTS
We have discovered a large number of medically useful genes which we are
developing on our own. Currently, seven drugs from our technology are in human
clinical trials including three therapeutic proteins, one antibody and three
albumin fusion proteins. Our therapeutic proteins are: Mirostipen (MPIF-1), a
protein designed to protect cells which develop into white blood cells, red
blood cells and platelets from the toxic effects of chemotherapy, is in Phase II
human clinical trials. Repifermin (KGF-2), a protein designed to speed the
repair of damage to skin and other cells, is in Phase II human clinical trials
for the treatment of venous ulcers and mucositis. BLyS(TM), an immune stimulant,
is in Phase I human clinical trials for the treatment of common variable
immunodeficiency and IgA deficiency. Our antibody is LymphoStat-B(TM) and is in
Phase I human clinical trials in patients with autoimmune disease. We have three
albumin fusion proteins that have been advanced to Phase I human clinical
trials. These are: Albuferon(TM)-(alpha) for the treatment of chronic hepatitis
C and chronic myelogenous leukemia (CML), Albutropin(TM) for the treatment of
adult growth hormone deficiency and Albuleukin(TM) for the treatment of cancer.
We have two products awaiting approval from FDA to enter human clinical trials.
One of these is LymphoRad(131)(TM) is a radioiodinated form of BLyS and is
awaiting FDA clearance to begin Phase I human clinical trials in patients with
multiple myeloma.
Currently, there are two products being developed by partners that are
in human clinical trials. We licensed VEGF-2 to Vascular Genetics, Inc. (VGI)
for gene therapy. These clinical trials were on clinical hold until October
2001, but VGI expects to resume the trials during 2002. GlaxoSmithKline is
evaluating an enzyme that lowers levels of lipoprotein-associated phospholipase
A2 (Lp-PLA2) in Phase I human clinical trials.
We also have a rapidly evolving pipeline of additional products in
preclinical development to treat diseases such as cancer, HIV, hepatitis,
diabetes / metabolism, bone remodeling / osteoporosis, systemic lupus
erythematosus, rheumatoid arthritis and vascular disease.
INDUSTRY BACKGROUND
Every living organism has a unique "genome," a master blueprint of all
the cellular structures and activities required to build and support life. A
genome is a map of the organism's DNA, which is in part comprised of segments
called "genes." Genes contain the specific sequences of information responsible
for particular physiological traits and processes. Each gene is comprised of a
sequence of nucleotides which provide precise genetic instructions to create, or
"express" a protein. Proteins are the primary building blocks of an organism's
physiological characteristics. A typical human cell contains thousands of
different proteins essential to its structure, growth and function. If even one
gene is expressed abnormally, it can severely alter the cell's function and
result in a disease condition.
Throughout the past decade, researchers have focused on discovering
genes and sequencing the human genome to determine the order of nucleotides in a
specific gene, permitting identification of the gene and the protein it produces
using a variety of techniques. For example, scientists have used cDNA libraries,
which contain copies of DNA with only the expressed portion of the gene, in
conjunction with computer software to discern locations of genes within the
genome. Recent advances have made these technologies operate in a
high-throughput manner, causing the discovery of genes to become drastically
more efficient and allowing researchers to focus on the functional aspects of
genes. Understanding the functional aspects of genes allows for the correlation
of those genes to medically relevant conditions. Armed with these data,
researchers can more efficiently develop treatments for conditions of interest.
Gene research facilitates and greatly accelerates the development of a
variety of therapeutic, diagnostic and other products and services. Development
efforts can become more targeted as researchers develop compounds that affect
the specific activity of an expressed gene product. Most therapeutic drugs act
on proteins which cause or contribute to an illness or disorder. As a result,
the identification of proteins through gene research can play an important role
in the development of drugs and drug screens. Proteins themselves can also be
used as drugs. Insulin, which regulates sugar metabolism, is a good example of a
widely known protein drug. The identification of genes that code for proteins
that may be missing or defective can enable the development of therapeutics for
genetic diseases. In addition, identification of genes that may predispose a
person to a particular disease may enable the development of diagnostic tests
for the disease that will permit early diagnosis and more successful treatment.
Genomic research has the potential to make the drug discovery process
dramatically more time and cost efficient, as well as to enable the development
of more targeted drugs.
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OUR STRATEGY
Our goal is to become an independent, global and fully-integrated
biopharmaceutical company through the discovery, development, manufacture and
commercialization of new gene-based products. Our strategy consists of the
following key elements:
- Discover medically useful genes. We intend to continue to discover
medically useful genes using the strengths of our technology platform.
We undertake discovery efforts based on our capabilities in gene
sequencing, transcriptional profiling, creation of gene libraries and
bioinformatics. We study our extensive genomic database for
potentially medically useful genes and focus on discovering their
functions.
- Develop, manufacture and commercialize our products. We seek to
develop clinically the medically useful genes we discover. This may
include using the protein product itself as a drug, using the protein
as a target for a small molecule drug or creating antibodies targeted
at the protein. We also intend to pursue drugs using proprietary
protein fusion technology. This technology may provide longer acting
forms of many important proteins, which may allow us to develop safer,
more effective and more convenient versions of both existing and new
products. We intend to manufacture proteins and commercialize the
drugs we develop on our own or in conjunction with our partners.
- Establish and enhance strategic alliances. We intend to continue to
establish alliances with leading pharmaceutical and biotechnology
companies. These alliances will provide us with access to the
expertise of our partners in areas such as product development,
clinical development and sales and marketing, while allowing our
partners to develop therapeutics based on our technologies. In
addition, these alliances may generate research funding, milestone and
royalty payments that will enable us to continually enhance our
technology platform and to discover and develop new gene-based
products. We may also seek to retain certain co-promotion,
co-development, revenue sharing and other product rights.
- Expand our technology platform. We will continue to invest
considerable resources to expand and enhance our proprietary
technology platform. This will allow us to accelerate our discovery
and product development activities and facilitate the formation of
additional alliances with major biotechnology and pharmaceutical
companies. We also intend to continue to establish collaborations with
leading biotechnology companies to gain access to complementary
technologies for our product development efforts.
- Pursue strategic acquisitions. We intend to continually evaluate
potential acquisitions and joint ventures that would allow us to
augment our technology, product development and commercialization
capabilities, as well as provide access to complementary technological
expertise.
- Capitalize on and expand our intellectual property portfolio. We
vigorously pursue patents to protect our intellectual property and
have developed a strong intellectual property portfolio. We intend to
capitalize on and expand our portfolio as we make further discoveries.
As of March 1, 2002, we had 205 U.S. patents covering human genes and
proteins and had filed U.S. patent applications covering many more
human genes and the proteins they encode.
4
PRODUCTS IN DEVELOPMENT
We have discovered a large number of medically useful genes which we are
developing on our own or with our partners. A number of our and our partners'
products have advanced to various stages of human clinical testing. Moreover, we
have a rapidly evolving pipeline of products in preclinical development.
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PRODUCT INDICATION STATUS CURRENT HGS RIGHTS
- -----------------------------------------------------------------------------------------------------------------------
CLINICAL PROGRAMS
THERAPEUTIC PROTEINS:
Repifermin (KGF-2) Venous ulcers Phase IIb Worldwide, co-development and
co-marketing
with GlaxoSmithKline (GSK)
Mucositis Phase II Worldwide, co-development
and co-marketing with GSK
Ulcerative colitis Phase II Worldwide, co-development
and co-marketing with GSK
Mirostipen (MPIF-1) Adjunct to chemotherapy Phase II Worldwide except Japan (Takeda)
BLyS Common variable immunodeficiency Phase I Worldwide
Immunoglobulin-A (IgA) deficiency Phase I Worldwide
LymphoRad(131) Cancer IND Filed Worldwide
ANTIBODIES:
LymphoStat-B Autoimmune disease Phase I Worldwide
ALBUMIN FUSION PROTEINS:
Albuferon-(alpha) Hepatitis C Phase I Worldwide
(Albumin-Interferon-alpha)
Chronic myelogenous leukemia (CML) Phase I Worldwide
Albutropin Growth hormone deficiency Phase I Worldwide
Albuleukin Cancer Phase I Worldwide
GENE THERAPIES:
VEGF-2 (1)(2) Coronary artery disease Phase II(2) Licensed to Vascular Genetics
Critical limb ischemia Phase II Licensed to Vascular Genetics
SMALL MOLECULE DRUGS:
Lp-PLA2 (SB480848) (1) Atherosclerosis Phase I Under development by GSK
5
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PRODUCT INDICATION STATUS CURRENT HGS RIGHTS
- -------------------------------------------------------------------------------------------------------------------------
PRECLINICAL AND OTHER PROGRAMS
THERAPEUTIC PROTEINS:
FasTR(TM) Hepatitis, autoimmune disease Preclinical Worldwide
A novel interferon (1) Multiple sclerosis, hepatitis, Preclinical Licensed to Schering-Plough
cancer
Osteostat Bone remodeling / Osteoporosis Preclinical Worldwide
GMAD-1 Diabetes / Metabolism Preclinical Worldwide
DP-18 Diabetes / Metabolism Preclinical Worldwide
ANTIBODIES AND PEPTIDES:
CCR5-mAB HIV / AIDS Preclinical Worldwide
LymphoStat-B Rheumatoid arthritis Preclinical Worldwide
TRAIL R1 Receptor Antibody Cancer Preclinical Worldwide
TRAIL R2 Receptor Antibody Cancer Preclinical Worldwide
VEGF-2 Antibody Cancer, vascular disease Preclinical Worldwide
GMAD-2 Diabetes / Metabolism Preclinical Worldwide
FUSION PROTEINS:
Albuferon-(beta) Multiple sclerosis Preclinical Worldwide
Albupoietin(TM) Cancer Preclinical Worldwide
Albugranin(TM) Cancer Preclinical Worldwide
Albulin Diabetes / Metabolism Preclinical Worldwide
Albugon Diabetes / Metabolism Preclinical Worldwide
HGS-B 14 Bone remodeling / Osteoporosis Preclinical Worldwide
Albuthyrin Bone remodeling / Osteoporosis Preclinical Worldwide
Albutonin Bone remodeling / Osteoporosis Preclinical Worldwide
GENE THERAPY:
CTGF-2 (1) Vascular disease Preclinical Licensed to Transgene
TIMP-4 (1) Restenosis Preclinical Licensed to Transgene
VACCINES:
Streptococcus pneumniae (1) Bacterial pneumonia, meningitis and Preclinical Licensed to MedImmune and GSK
otis media
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(1) Drug development costs for these drugs are the sole responsibility of the
licensee.
(2) VEGF-2 trials were released from clinical hold in October 2001 by the
Food and Drug Administration (FDA). See "Risk Factors."
6
CLINICAL PROGRAMS
Repifermin (Keratinocyte Growth Factor-2, KGF-2)
We have shown in animal studies that repifermin speeds the repair of
damage to the cells lining the mouth, throat, gastrointestinal tract and related
tissues and heals serious chronic wounds to the skin. Repifermin may also be
useful in treating a number of other conditions involving injury to skin cells,
including skin ulcers, burns and surgical and other wounds. In addition,
repifermin may be useful in the treatment of mucositis, an injury to the lining
of the mouth and intestinal tract which can be caused by some cancer treatments.
GlaxoSmithKline exercised its co-right option to jointly develop and
commercialize repifermin. We expect to share equally in clinical development
costs for Phase III trials and beyond. We will co-promote repifermin upon
achieving regulatory approvals.
Three Phase I studies to evaluate the safety of repifermin in healthy
volunteers have been completed. In 2000, we completed a Phase II human study of
repifermin for the treatment of chronic venous ulcers, in which repifermin was
shown to be well tolerated and capable of accelerating wound healing by a number
of partial healing parameters. A large Phase II study to determine the safety
and efficacy of repifermin for complete healing of chronic venous ulcers began
in early 2001. Two different Phase II studies were also initiated to evaluate
repifermin in the treatment of mucositis in patients undergoing bone-marrow
transplantation. The results from a mucositis trial relating to repifermin
administration following transplantation were announced in 2001 and indicated
that while repifermin was safe and well tolerated in patients, no evidence was
shown that repifermin was active in reducing the incidence or severity of
mucositis. The mucositis trial relating to repifermin administration prior to
and following transplantation is ongoing. A third Phase II study was also
initiated to evaluate repifermin in the treatment of ulcerative colitis, an
inflammatory bowel disease. The results from the ulcerative colitis trials
showed that repifermin was safe and well-tolerated, but not shown to be
effective. We are continuing to analyze these final results to determine how to
proceed with this indication. The trials are being conducted at leading research
centers in the U.S.
Mirostipen (Myeloid Progenitor Inhibitory Factor-1, MPIF-1)
Myeloid progenitor cells, which develop into white blood cells, red
blood cells and platelets, are destroyed by many forms of cancer chemotherapy,
resulting in a decrease in these cells. We have shown in laboratory and animal
studies that MPIF-1 inhibits the differentiation and growth of certain bone
marrow cells, including myeloid progenitor cells. By preventing the growth of
myeloid progenitor cells during aggressive chemotherapy, it may be possible to
reduce the destruction of these cells and allow the more rapid repopulation of
red and white blood cells in circulation. This, in turn, may reduce the
incidence of serious infection, anemia and coagulation disorders associated with
chemotherapy.
A Phase I study to evaluate MPIF-1 safety in healthy volunteers was
completed in 1998. Two Phase II studies are being conducted to evaluate MPIF-1
in shielding myeloid progenitor cells from the harmful effects of chemotherapy.
These studies tested various doses of MPIF-1 in cancer patients undergoing
chemotherapy treatment for various cancers. Trials are being conducted at
leading cancer research centers in the U.S. and completed enrollment in 2001. We
expect results from the trials to be available in mid-2002.
BLyS (B Lymphocyte Stimulator)
BLyS is a novel immune stimulant. We have shown in laboratory studies
that BLyS stimulates B lymphocytes to produce high levels of antibodies. BLyS
has the potential to improve treatments for certain immune deficiency syndromes.
In addition, BLyS could boost immune systems depleted by organ transplantation,
chemotherapy and bone-marrow transplantation. BLyS could also enhance the
performance of traditional vaccines.
We are currently testing BLyS in patients with common variable
immunodeficiency, a disorder that leaves individuals susceptible to infection.
In February 2001, BLyS received "orphan" drug designation from the FDA for the
treatment of common variable immunodeficiency. A Phase I study with increasing
doses of BLyS is ongoing. For this trial, BLyS had been produced in an insect
cell culture. A Phase I study has also been initiated to evaluate BLyS in the
treatment of Immunoglobulin-A (IgA) deficiency, an immune disorder. In this
trial, we received approval from the FDA to begin manufacturing BLyS in E. coli,
which will allow us to increase production scale to support the needs of the
clinical program, and ultimately, to supply commercial needs.
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LymphoRad(131)
LymphoRad(131) is a radioiodinated form of B-Lymphocyte Stimulator
(BLyS). We have found in preclinical studies that LymphoRad(131) binds to
receptors found on B cells and B-cell tumors, delivering low doses of radiation
that cause cell death. Such studies also showed that treatment with
LymphoRad(131) resulted in inhibition of tumor growth and prolonged survival. In
January 2002, we filed an Investigational New Drug (IND) application for this
drug. Upon receiving clearance from the FDA, we plan to initiate Phase I
clinical trials in patients with multiple myeloma.
LymphoStat-B
LymphoStat-B is the first antibody drug to emerge from our human
antibody drug discovery program. The drug inactivates the B-Lymphocyte
Stimulator protein (BLyS). We have found in laboratory studies that LymphoStat-B
can reverse the immune stimulatory effects of BLyS. Many patients that suffer
from systemic lupus erythematosus and rheumatoid arthritis have elevated levels
of BLyS in their blood or joint fluid. In November 2001, we received approval
from the FDA to proceed with a Phase I clinical trial in patients with systemic
lupus erythematosus and have begun enrollment in this trial.
Fusion Proteins
Using our proprietary recombinant protein fusion technology, we are
genetically fusing proteins to albumin, a very abundant, natural and long-lived
protein in the blood. We have begun Phase I human clinical studies of several
albumin fusion proteins. These include Albuferon-alpha (hepatitis C and chronic
myelogenous leukemia - CML), Albutropin (growth hormone deficiency) and
Albuleukin (cancer).
Albuferon-alpha is created by fusing the gene for a human protein,
interferon alpha, an approved drug, to the human protein, albumin. Based on
preclinical studies, Albuferon-alpha should provide patients infected with
Hepatitis C with longer acting therapeutic activity and may offer an improved
side-effect profile. In March 2001, we received approval from the FDA to proceed
with a Phase I clinical trial in patients with hepatitis C. We have begun
enrolling patients in this trial. We are in the process of initiating a second
trial in patients with chronic myelogenous leukemia (CML).
Albutropin is created by fusing the gene for a human protein, human
growth hormone, an approved drug, to the human protein, albumin. Based on
preclinical studies, Albutropin may offer sustained therapeutic activity, which
is accomplished by using recombinant human albumin as a carrier molecule.
Preclinical data suggest that Albutropin is eliminated from the body fifty times
more slowly than regular growth hormone and is detectable in the blood for at
least a week after dosing. Therefore, Albutropin may offer patients a more
convenient administration schedule when compared to the existing short-acting
therapies. In June 2001, we received approval from the FDA to proceed with a
Phase I clinical trial in adult patients with growth hormone deficiency. We have
begun enrolling patients in this trial.
Albuleukin is created by fusing interleukin-2, a drug approved for
cancer treatment, to the human protein, albumin. Albuleukin is expected to
activate a type of immune cell called a T cell. T cells have the potential to
identify and kill cancer cells. Based on preclinical studies, Albuleukin is
longer-acting and is better tolerated, as compared with interleukin-2 itself. In
January 2002, we received approval from the FDA to proceed with a Phase I
clinical trial in patients with certain types of cancer. We have begun screening
patients in this trial.
VEGF-2 (Vascular Endothelial Growth Factor-2)
Laboratory studies have shown that VEGF-2 promotes the growth of certain
subsets of vascular endothelial cells, which form the lining and surface of
blood vessels. Thus, it may have potential as a treatment for coronary artery
disease and peripheral arterial disease. We have licensed the gene that encodes
VEGF-2 to Vascular Genetics, Inc., a company in which we have approximately a
27% equity position.
Vascular Genetics initiated clinical trials on the use of the VEGF-2
gene in the treatment of critical limb ischemia and refractory coronary artery
disease. In February 2000, these studies were halted in response to questions
raised by the FDA. Three Phase II studies of VEGF-2 were completed prior to the
halt. Results from one trial are available
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and were presented at the American College of Cardiology in March 2000. In
October 2001, the FDA removed these studies from clinical hold. VGI expects to
resume human clinical trials in 2002.
Small Molecule Inhibitor of lipoprotein-associated phospholipase A2 (Lp-PLA2).
In February 2001, GlaxoSmithKline announced the results of human testing
of a small-molecule inhibitor of a gene we discovered, lipoprotein-associated
phospholipase A2 (Lp-PLA2), as a treatment for cardiovascular disease. In
September 2001, we received a $1.0 million payment from GSK in connection with a
development milestone met by GSK during 2001.
PRECLINICAL AND OTHER PROGRAMS
In addition to the products in clinical development, our research and
development efforts have generated numerous other product possibilities, many of
which are in preclinical development. We and our partners are focused on
developing potential products in the following areas:
- Therapeutic Proteins. Therapeutic proteins are human proteins that, in
natural or modified form, have medically useful physiologic or
pharmacologic effects. Therapeutic proteins may be useful for the
treatment of a variety of diseases, including autoimmune,
neurodegenerative and cardio-pulmonary diseases. Therapeutic proteins
currently in broad clinical use include interferon, insulin and human
growth hormone. We have conducted development studies on a number of
potential therapeutic proteins, including MPIF-1, KGF-2 and BLyS. We
have also identified thousands of what we believe to be new secreted
proteins. We are expressing and evaluating these proteins and
assessing their activity using laboratory and animal studies. Current
therapeutic proteins in preclinical development include FasTR, a novel
interferon licensed to Schering-Plough, GMAD-1, DP-18, and Osteostat.
- Antibodies and Peptides. Antibodies and peptides are proteins that
bind in a highly specific manner to molecules, including other
proteins, and distinct sites on cell surfaces called receptors. By
attaching to them, antibodies and peptides can be used to neutralize
specific proteins and block specific receptors. We are undertaking the
development of antibodies and peptides that act on many of our newly
discovered proteins. We have entered into collaborations with Abgenix,
Cambridge Antibody Technology, Dyax and Medarex to enhance our
antibody and peptide development efforts. Antibody-based drugs
currently in broad clinical use include Herceptin, Rituxan and ReoPro.
The antibodies and peptides we are currently developing may be useful
in the treatment of diseases such as systemic lupus erythematosus,
rheumatoid arthritis, cancer and certain viral infections. Current
antibodies in preclinical development include CCR5-mAB, LymphoStat-B
for rheumatoid arthritis, TRAIL R1 Receptor Antibody, TRAIL R2
Receptor Antibody, VEGF-2 Antibody and GMAD-2.
- Fusion Proteins. We are using our recombinant protein fusion
technology to provide longer acting forms of many important proteins
used in the treatment of disease. This technology genetically fuses a
protein to albumin, a very abundant, natural and long-lived protein in
the blood. When albumin is fused to a therapeutic protein, the active
protein is expected to have the longer circulating life of albumin.
Prolonging the activity of the therapeutic protein in this manner may
offer a reduced dosing frequency and could lead to reduced side
effects in patients. Using this technology, we expect to develop
safer, more effective and more convenient protein therapeutics and
biopharmaceuticals for certain diseases, as well as develop
longer-acting forms of many existing proteins. Current fusion proteins
in preclinical development include Albuferon-(beta), Albupoietin,
Albugranin, Albulin, Albugon, HGS-B 14, Albuthyrin and Albutonin.
- Gene Therapy. We believe that our gene discovery technology may
identify genes that can be introduced into the body through the use of
gene therapy. Many diseases are caused by overproduction,
underproduction or defective production of specific proteins. Gene
therapy is an approach to the treatment of disease in which scientists
insert genes into a patient's cells for the purpose of inducing these
cells to produce therapeutic proteins or to replace defective or
missing genes. In other applications, we believe that gene therapy may
induce cells to secrete proteins that enhance the immune system's
ability to recognize and attack a specific disease. Gene therapy might
also allow localized delivery of proteins that cannot reach the
appropriate site through conventional methods of administration. There
are currently no gene therapy products on the market although several
are undergoing clinical trials. We have entered into agreements with
Schering-Plough, Vascular Genetics, Transgene and Vical granting them
the right to use our technologies for gene therapy. Vascular
9
Genetics has conducted gene therapy clinical studies of VEGF-2. These
studies were placed on hold by the FDA in February 2000 and were
released from clinical hold in October 2001. In July 2000, Transgene
selected two genes from our database, CTGF-2 and TIMP-4, as its first
two exclusive gene therapy products, both as a potential treatment for
severe cardiovascular conditions.
- Small Molecule Drugs. We believe that more complete knowledge of genes
and the proteins they express will enable traditional pharmaceutical
companies to design and screen pharmaceutical products in a more
efficient fashion by providing specific targets for drug discovery.
The discovery of new drugs often involves screening a large family of
synthetic and natural products to determine their impact on proteins
expressed by genes. Increasingly, automated biochemical tests that
assess the ability of chemical compounds to bind to and modify the
activity of purified proteins are used to test the efficacy and
selectivity of new drugs. A drug's selectivity is its ability to
affect only the desired protein targets and not other proteins
expressed in the human body. The undesired binding of a drug to other
proteins not detected by a screening test can result in toxicity or
other undesirable side effects. We believe that the genes we discover
may contribute to screening tests by permitting more complete sets of
target proteins to be assembled for a test. GlaxoSmithKline and our
other collaboration partners are currently using proteins expressed by
genes identified by us in a number of screening tests. We may pursue
small molecule drug development on our own or continue to leverage the
expertise of our partners in this area.
- Other. We believe that our genetic data could be applied also to the
development of diagnostic tests and antimicrobial agents and vaccines.
For the development of antimicrobial agents and vaccines, analysis of
the total genome of a microorganism should provide a complete picture
of all genes encoded by the microorganism. With this information, we
believe it may be possible to choose protein candidates that may be
useful as vaccine components or antigens required for the development
of products to enhance the immune system. We also believe that a
high-throughput approach of gene identification may identify new genes
capable of producing antibiotics and other useful secondary
metabolites. In the future we may pursue these developments on our own
or through strategic alliances.
RESEARCH AND DEVELOPMENT CAPABILITIES
Our product development efforts are supported by our extensive research
and development capabilities and are substantially augmented by those of our
partners. We exploit the power of modern computers, automated laboratory
instruments and advances in biology to discover the structure and function of
new genes and to understand their potential medical applications. As part of
this process we cover all stages of development, from the discovery of new human
genes to human clinical trials of the new drugs. We continually seek to upgrade
our technologies and integrate new and more efficient technologies into our
development efforts. We believe this discovery process is responsible for our
success in translating genomic information into new drug candidates.
Our technology platform is based on various methods that we integrate in
a high-throughput fashion to enable the rapid progression from gene discovery to
clinical trials.
- Gene Isolation is the process of deciphering the sequence of a gene.
We believe we have isolated the messenger RNA from more than 95% of
all human genes. Of these, we believe that between 75% and 80% are
fully functional, as they contain all the instructions necessary to
produce an active protein.
- Secreted Protein Identification refers to the elucidation of secreted
proteins which are often involved in disease processes. We believe we
have identified several thousand human genes that encode signaling
proteins. We believe that this collection represents the majority of
human signaling proteins.
- Expression Profiling and Mapping refers to the comparison of messenger
RNA levels in diseased and healthy tissues. Our scientists use gene
chips and proprietary methods to analyze gene expression profiles in a
wide variety of tissues and cells. They also use a variety of
techniques to map chromosome location, which generally allow our
scientists to map any gene within two or three weeks.
- Proteomics is the analysis of proteins correlated with a particular
disease. In this step we map out the physical properties of each
signaling protein. We attempt to determine the molecular weight, amino
acid composition and amino acid sequence of the majority of the newly
discovered signaling proteins.
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- Use of Antibodies. Antibodies are proteins that bind in a highly
specific manner to molecules. Antibodies are used to block the effects
of proteins and to determine the location of a protein in tissues. We
are working to produce antibodies to many of our discovered secreted
proteins.
- High-Throughput Biological Screening. We have developed a reliable
high-speed robotic cloning method to produce each newly discovered
signaling protein for biological studies. To date, we have cloned many
proteins.
- Biological Activity and Specificity. Our scientists can simultaneously
monitor changes in the expression of about 100 representative genes
through the use of an automated, high-throughput biological screening
system. We analyze the activity of the proteins on a wide variety of
different types of cells to assess their specificity of action, or the
range of circumstances in which they act, and the number of
characteristics they can influence. Only proteins that are highly
specific in their activity are selected for further development.
- Animal Models refer to producing animals with the human disease
equivalent. We test proteins that are highly specific in their
activity with animal models of human disease. Where possible, we
compare the results for each tested protein to the best existing
therapy. Proteins which prove to be active in these models are
selected for extensive laboratory studies.
- Preclinical Studies and Manufacturing. In this step we develop
protocols for human testing based on extensive laboratory toxicology
and pharmacokinetic studies. A toxicological study tests whether and
how the therapy could be harmful to humans. Pharmacokinetic studies
analyze how the drug will be absorbed, metabolized and stored by,
distributed throughout and excreted from the body. We are developing
techniques for measuring blood and tissue levels of each protein to
enable measurements within human subjects. We need to develop
manufacturing methods for large-scale production of each protein. We
lease a 127,000 square foot process development and manufacturing
facility to support Phase I, II and III human clinical studies and the
North American launch of novel protein and gene products. We are
currently designing a 405,000 square foot manufacturing facility
adjacent to our current manufacturing facility. We expect this new
leased facility to be ready for occupancy in 2004.
- Clinical Development is the process of conducting human clinical
trials and gaining the necessary approval from regulatory agencies.
The goal of clinical development is to establish the safety and
efficacy of our drugs for the treatment of human disease. Multiple
products discovered by us have advanced to clinical trials for
multiple indications.
- Bioinformatics refers to the use of computers to process, analyze,
store and retrieve biological information. Our high capacity computer
system has been designed for ease of use by research scientists, who
readily access the system through desktop computers. We believe that
our proprietary bioinformatics system is an important asset for the
identification and creation of gene-based product opportunities.
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COLLABORATIVE ARRANGEMENTS
Forming strategic alliances with leading pharmaceutical and
biotechnology companies is a key element of our strategy. We currently have
three major types of collaborations:
- Drug Discovery. These are collaborations in which we provide our drug
discovery capabilities in exchange for access to our partners' drug
development and commercialization expertise as well as research
funding and long-term value creation through potential milestone and
royalty payments. We are also entitled to certain co- promotion,
co-development, revenue sharing and other product rights. Between 1993
and 1997, we entered into major collaborations with GlaxoSmithKline,
Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. These
collaborations ended in June 2001, a period described as the initial
research term, although certain aspects of these arrangements
continue.
- Technology. These are collaborations in which we gain access to our
partners' technology to complement our own drug discovery and
development capabilities in exchange for license fees, potential
milestone and royalty payments as well as equity investments.
- Microbial. These are collaborations in which we provide access to gene
sequence data for specific microbial organisms to biopharmaceutical
companies in exchange for license fees and royalty payments.
A summary of our most important collaborations is provided below:
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YEAR ESTABLISHED PARTNER FOCUS
---------------- ------- -----
DRUG DISCOVERY COLLABORATIONS
1993-97 GlaxoSmithKline Therapeutic proteins, small
molecule drugs, gene therapy
vaccines and diagnostics
1995 Takeda Therapeutic proteins and small
molecule drugs
1996 Schering-Plough Therapeutic proteins, small
molecule drugs and gene therapy
1996 Merck KGaA Therapeutic proteins and small
molecule drugs
1996 Sanofi-Synthelabo Therapeutic proteins and small
molecule drugs
TECHNOLOGY COLLABORATIONS
1997 Vascular Genetics Gene therapy
1998 Affymetrix Bacterial Gene Arrays
1998 Transgene Gene therapy
1999 Abgenix Antibodies
2000 Cambridge Antibody Technology Antibodies
2000 Dyax Antibodies and peptides
2000 Vical Gene therapy
2000 Praecis Small molecule drugs, including peptides
2000 Aventis Behring Albumin fusion technology
2000 Dow Chemical Chelator technology
2001 Medarex Antibodies and diagnostics
2001 MDS Nordion Radiolabeling technology
MICROBIAL COLLABORATIONS
1995-97 MedImmune Infectious agents
1996 Pharmacia Staphylococcus aureus and other
DRUG DISCOVERY COLLABORATIONS
General. We entered into collaboration agreements with GlaxoSmithKline
in May 1993, which we amended in June 1996 and July 1997. The initial term of
these agreements continued through June 2001, which was the conclusion of the
initial research term. Under these agreements, we granted GlaxoSmithKline rights
to develop and commercialize therapeutic and diagnostic products based on human
genes discovered by us in GlaxoSmithKline's field, which is the field of human
and animal health care, including gene therapy vaccines but excluding other gene
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therapy products, antisense products and the use of genes for synthesizing
drugs that were known in May 1993. Pursuant to the collaboration agreements
GlaxoSmithKline initially paid us an aggregate of $125.0 million, of which $55.0
million was allocated to the purchase of shares of our common stock. We and
GlaxoSmithKline jointly entered into collaboration agreements with four
additional pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA and
Sanofi-Synthelabo.
Post-Initial Research Term. The initial research term under our
collaboration agreements with GlaxoSmithKline and the other four collaboration
partners expired on June 30, 2001. At that time, our partners were pursuing
approximately 430 research programs involving approximately 280 different genes
for the creation of small molecule and antibody drugs. They also were developing
approximately 30 therapeutic protein drugs. We cannot assure you that any of
these programs will be continued or result in any approved drugs.
GlaxoSmithKline. We share equally with GlaxoSmithKline any license fees
and product-development milestone payments made under the four additional
collaboration agreements, but we receive all royalty and research support
payments under those agreements. GlaxoSmithKline has granted us royalty
payments, based on net sales of products developed from any of our patents or
technologies that fall within GlaxoSmithKline's field, for any sales made by
GlaxoSmithKline or its licensees. We are also entitled to milestone payments in
connection with the development of these products. In 2001, we received a $1.0
million payment from GlaxoSmithKline for Lp-PLA2 in connection with a
development milestone met by GlaxoSmithKline. We hold an option to co-promote
any products sold by GlaxoSmithKline in the U.S., Canada, Mexico and Europe,
subject to the rights granted to Takeda and other collaborators. If we develop
and market or license to a third party any product in GlaxoSmithKline's field
pursuant to our rights under these agreements, GlaxoSmithKline will usually be
entitled to royalty payments from, or to share in milestone payments and license
fees we receive with respect to, those products.
Our collaboration agreements with GlaxoSmithKline include an option for
GlaxoSmithKline to co-develop and co-commercialize products in GlaxoSmithKline's
field to which we have exclusive development and commercialization rights under
our collaboration agreements with GlaxoSmithKline and for which Schering-Plough
has not exercised its option. In 2000, GlaxoSmithKline exercised its option to
jointly develop and commercialize repifermin. GlaxoSmithKline is also entitled
to royalty payments on and an option to co-promote products outside
GlaxoSmithKline's field sold by us which are based on or incorporate patents or
information developed by GlaxoSmithKline using our human gene technology.
Takeda. GlaxoSmithKline and Takeda entered into a license agreement
relating to the development and sale of products in GlaxoSmithKline's field
based upon rights licensed from us. We are entitled to all royalty payments and
one-half of the milestone payments due from Takeda to GlaxoSmithKline under this
license agreement on sales of products developed by Takeda. We entered into an
option and license agreement with Takeda pursuant to which we granted Takeda an
exclusive option to license rights under our patents and technology in the field
of human health care, other than gene therapy, antisense and diagnostics, in
order to make and sell up to three products in Japan. In consideration of the
grant of the option, Takeda paid us $5.0 million and agreed to pay to us
milestone payments and royalties based on the sale of Takeda products covered by
the option and license agreement. The option period terminates on June 30, 2004.
Takeda has exercised one of its options with the selection of MPIF-1. In 2001,
Takeda selected approximately 100 targets for use in small molecule and antibody
discovery.
Schering-Plough. In June 1996, we entered into a collaboration agreement
with Schering-Plough. Under this agreement, Schering-Plough has the right to use
our human gene technology and biological information developed by us and
GlaxoSmithKline to discover, develop and commercialize products. Schering-Plough
was also granted an option to co-develop and co-commercialize up to two of our
therapeutic protein products to which we have exclusive development and
commercialization rights under our agreements with GlaxoSmithKline. This option
can also be exercised with respect to proteins we elect to license to third
parties. In 2000, Schering-Plough exercised one of its two options with the
selection of a novel interferon discovered by us. We will receive milestones and
royalty payments for any product developed from this protein. Schering-Plough is
obligated to pay license fees, research payments and milestone payments in
connection with the development of products. Schering-Plough has paid us $32.5
million under this agreement. We also have a collaboration with Schering-Plough
related to gene therapy by which Schering-Plough was granted a non-exclusive
license to use our human gene technology to conduct research and an option to
obtain an exclusive license to specific genes in the field of gene therapy.
Schering-Plough has paid us $5.0 million under this second collaboration
agreement.
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Merck KGaA. In July 1996, we entered into a collaboration agreement with
Merck KGaA. Under this agreement, Merck KGaA has the right to use our human gene
technology and biological information developed by us and GlaxoSmithKline to
discover, develop and commercialize products. Merck KGaA is obligated to pay
license fees, research payments, and milestone payments in connection with the
development of products. Merck KGaA has paid us an aggregate of $32.5 million
under this agreement.
Sanofi-Synthelabo. In July 1996, we entered into a collaboration
agreement with Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has
the right to use our human gene technology and biological information developed
by us and GlaxoSmithKline to discover, develop and commercialize products.
Sanofi-Synthelabo is obligated to pay license fees, research payments and
milestone payments in connection with the development of products.
Sanofi-Synthelabo has paid us an aggregate of $22.5 million under this
agreement.
TECHNOLOGY COLLABORATIONS
Antibodies and Peptides
Abgenix. In November 1999, we entered into a collaboration and license
agreement with Abgenix relating to the field of fully human antibody drug
candidates, which was amended in 2001. Pursuant to this agreement, as amended,
we licensed technology from Abgenix that we will use to generate fully human
antibody drug candidates. We will independently develop and seek to
commercialize antibody-based drugs from this collaboration. Abgenix also has an
option to develop and commercialize products derived from our antigens. We and
Abgenix will pay reciprocal milestone and royalty payments for products
developed and commercialized.
Cambridge Antibody Technology (CAT). In August 1999, we entered into an
antibody license agreement with CAT for the development of fully human antibody
therapeutics for up to three of our target human proteins. Pursuant to this
agreement, we have entered into an exclusive license agreement to an anti-BLyS
antibody discovered in collaboration with CAT. Under this 1999 agreement, we
have paid CAT $0.8 million towards the achievement of the first contractual
milestone through the end of 2001. In February 2000, we entered into a broader
agreement with CAT that provides us with the right to use their technology to
develop and sell an unlimited number of fully human antibodies for therapeutic
and diagnostic purposes. Under this 2000 agreement, we paid CAT $12.0 million
for ten years of committed research support. We also plan to combine our
resources to develop and sell a significant number of therapeutic antibody
products. CAT has the right to select up to twenty-four of our proprietary
antigens for preclinical development. We have the option to share clinical
development costs and to share the profits equally with them on up to eighteen
such products. CAT has rights to develop six such products on their own. We are
entitled to clinical development milestone and royalty payments on those six
products. Under the 2000 agreement, we paid CAT $1.0 million in December 2001 to
exercise our option with respect to TRAIL Receptor 1, an antibody product. We
also invested approximately $54.7 million for ordinary shares of CAT. In
November 2000, we sold a portion of our CAT holdings at a gain of approximately
$5.9 million.
Dyax. In February 2000, we entered into a license agreement with Dyax
relating to Dyax' phage display and peptide technology, which was amended in
2001. Under the agreement, as amended, we have the right to use Dyax' phage
display technology to develop an unlimited number of therapeutic and diagnostic
products that we may sell or outlicense. In 2000, we paid Dyax $6.0 million for
the technology license. Through 2001, we have paid $4.7 million for research
support. Over the next year, we will pay Dyax approximately $1.3 million for
committed research support. We will provide milestone and royalty payments to
Dyax on products we develop and sell or will share revenue we receive from
outlicensees. The licensed technologies include Dyax' phage display technology
to create peptide drugs, human monoclonal antibody drugs and in vitro diagnostic
products. In addition, we have the right to require that Dyax perform research
in the fields of protein separation and high-throughput screening technology. We
also have rights to improvements in Dyax' phage display technology.
Praecis. In February 2000, we entered into a collaboration agreement
with Praecis relating to the field of small molecule drugs, including peptides.
Under the agreement, Praecis will screen two of our targets to identify novel
small molecule drugs to combat metabolic disorders and infectious diseases.
Medarex. In July 2001, we entered into a collaboration agreement with
Medarex relating to the creation of fully human antibodies. Under the agreement,
Medarex plans to use its technology to create antibody leads that are specific
for target proteins that we discovered. We have the option to exclusively
license therapeutic and diagnostic
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antibody products and Medarex is entitled to receive license fees, milestone
payments and royalties on any commercial sales of products resulting from the
collaboration.
Gene Therapy
Transgene. In February 1998, we entered into an agreement with Transgene
relating to the field of human gene therapy, including gene therapy vaccines to
the extent it will not conflict with our other collaboration agreements. Under
this agreement, we granted Transgene the right to license exclusively up to 10
genes. We obtained a 10% equity interest in Transgene and certain co-development
and co-marketing rights. Transgene selected two genes from our database, CTGF-2
and TIMP-4, as its first two exclusive gene therapy products. CTGF-2 stimulates
the formation of blood vessels and could be an effective tool in the control of
coronary artery disease. TIMP-4 prevents restenosis, which is the growth of
blood-vessel obstruction following an angioplasty. Our collaboration with
Transgene will end in 2008.
Vical. In February 2000, we entered into a license agreement with Vical
relating to the field of gene therapy. Under this agreement, we licensed
technology from Vical and granted Vical the right to license up to three genes.
The agreement provides for reciprocal royalty payments. Our collaboration with
Vical will end in 2004.
Vascular Genetics. In November 1997, we entered into an agreement with
Vascular Genetics whereby we granted Vascular Genetics an exclusive license in
the field of gene therapy for our VEGF-2 gene. As of December 31, 2001, we held
an approximately 27% equity interest in Vascular Genetics. We are also entitled
to receive up to 10% royalties on net sales.
Fusion Technology
Aventis Behring. In October 2000, we entered into a joint development
and commercialization agreement with Aventis Behring to co-develop and jointly
market an Aventis Behring plasma protein product.
Other
Dow Chemical. In October 2000, we entered into an agreement with Dow
Chemical Company to develop a drug for the treatment of B-cell malignancies.
This agreement combines one of Dow's patented technologies, bifunctional
chelation agents (BFCA) with BLyS, one of our protein discoveries. Dow's BFCA
technology is capable of attaching a variety of radioactive metals to BLyS,
resulting in a "radiolabeled" version of the protein.
MDS Nordion. In October 2001, we entered into an agreement with MDS
Nordion, a unit of MDS Inc., whereby MDS Nordion will manufacture LymphoRad(131)
at a GMP manufacturing suite under construction at its Ottawa, Canada facility.
We will supply MDS Nordion with the targeting protein, B Lymphocyte Stimulator
(BLyS) and MDS Nordion will use a process it developed for us that covalently
binds the radioactive isotope iodine(131) to the BLyS protein.
MICROBIAL COLLABORATIONS
MedImmune. We entered into a collaboration and license agreement with
MedImmune in July 1995, which we amended in March and December 1997. This
agreement is related to the development of drugs based upon certain infectious
agents sequenced by us or The Institute For Genomic Research (TIGR) or as to
which we hold licenses. Programs under this agreement include the creation of
vaccines and immunotherapeutics for non-encapsulated Haemophilus influenzae,
Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori and Borrelia
burgdorferi. MedImmune sub-licensed the Streptococcus pneumoniae vaccine
technology to GlaxoSmithKline. We are entitled to a portion of the payments
received by MedImmune under its sub-license. In 2000, we received $1.0 million
from MedImmune.
Pharmacia. In October 1996, we entered into an agreement with Pharmacia
in which we granted to Pharmacia a nonexclusive license to conduct research and
to make, use and sell products based on genes of Staphylococcus aureus and the
pathogenicity islands of Escherichia coli sequenced by us.
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PATENTS AND PROPRIETARY RIGHTS
Our commercial success depends in large part on our ability to obtain
patent or other intellectual property protection for genes we discover. The
patent protection available to biotechnology firms is highly uncertain and
involves complex legal and factual questions that will determine who has the
right to develop a particular product. There have been, and continue to be,
intensive discussions on the scope of patent protection for both partial gene
sequences and full-length genes. The Patent and Trademark Office issued new
guidelines for patents in 2001 which clarify certain requirements for obtaining
a patent on a gene sequence. The biotechnology patent situation outside the U.S.
is even more uncertain and is currently undergoing review and revision in many
countries. Changes in, or different interpretations of, patent laws in the U.S.
and other countries may result in patent laws that allow others to use our
discoveries or develop and commercialize our products.
As of March 1, 2002, we had filed U.S. patent applications with respect
to many human genes and their corresponding proteins. We have also filed U.S.
patent applications with respect to all or portions of the genomes of eight
infectious microorganisms and one non-infectious microorganism. As of March 1,
2002, we had 205 U.S. patents covering human genes and proteins. The remaining
applications covering full-length genes and their corresponding proteins may not
result in the issuance of any patents. Our applications may not be sufficient to
meet the statutory requirements for patentability in all cases. In certain
instances, we will be dependent upon our collaborators to file and prosecute
patent applications.
Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, TIGR, in collaboration with the National Center for
Biological Information, disclosed full-length DNA sequences which are reportedly
in excess of 35,000 sequences that were assembled from partial gene sequences
available in publicly accessible databases or sequenced at TIGR. In addition,
the Human Genome Project and Celera Genomics Corporation have completed an
initial sequencing of the human genome, and have published papers on this
sequencing in February 2001. All of this public disclosure might limit the scope
of our claims or make unpatentable subsequent patent applications on full-length
genes we file.
Other companies or institutions have filed, and may file patent
applications in the future, which attempt to patent genes similar to those
covered in our patent applications, including applications based on our
potential products. The Patent and Trademark Office would decide which
applications merit a patent and the priority of competing patent claims. Any
patent application filed by a third party may prevail over patent applications
we filed, in which event the third party may require us to stop pursuing a
potential product or to negotiate a royalty arrangement to pursue the potential
product.
Other parties may claim that our potential products infringe their
patents. This risk will increase as the biotechnology industry expands and as
other companies obtain more patents and attempt to discover genes through the
use of high-speed sequencers. Other persons could bring legal actions against us
to claim damages or to stop our manufacturing and marketing of the affected
products. If any of these actions is successful, in addition to demanding
monetary damages, these persons may require us to obtain a license in order to
continue to manufacture or market the affected products. We believe that there
will continue to be significant litigation in our industry regarding patent and
other intellectual property rights. If we become involved in litigation, it
could consume a substantial portion of our resources.
Issued patents may not provide commercially meaningful protection
against competitors. Any issued patent may not provide us with competitive
advantages. Others may challenge our patents or independently develop similar
products that could result in an interference proceeding in the Patent and
Trademark Office. Others may be able to design around our issued patents or
develop products providing effects similar to our products. In addition, others
may discover uses for genes or proteins other than those uses covered in our
patents, and these other uses may be separately patentable. The holder of a
patent covering the use of an invention which we have a patent claim could
exclude us from selling a product for a use covered by its patent.
We rely on trade secret protection to protect our confidential and
proprietary information. We believe we have developed proprietary procedures for
making libraries of DNA sequences and genes. We have not sought patent
protection for these procedures. We have developed a substantial database
concerning genes we have identified. We have taken security measures to protect
our data and continue to explore ways to further enhance the security for our
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data. However, we may not be able to meaningfully protect our trade secrets.
While we have entered into confidentiality agreements with employees and
academic collaborators, we may not be able to prevent their disclosure of these
data or materials. Others may independently develop substantially equivalent
information and techniques.
COMPETITION
We are in a race to identify, establish uses for and patent as many
genes as possible and to commercialize the products we develop. Many of our
potential competitors have substantially greater research and product
development capabilities and financial, scientific, marketing and human
resources. The Human Genome Project and Celera Genomics Corporation have claimed
to have mapped the complete human genome, and have made their findings available
to the public. We face competition from other entities using high-speed gene
sequencers to discover genes, such as Incyte Genomics, Inc. and Celera Genomics
Corporation. We also face competition from entities using more traditional
methods to discover genes related to particular diseases, such as Amgen, Inc.,
Genentech, Inc., Millennium Pharmaceuticals, Inc. and other large biotechnology
and pharmaceutical companies. We expect that competition in our field will
continue to be intense.
Research to identify genes is also being conducted by various institutes
and U.S. and foreign government-financed entities, including British, French,
German and Japanese efforts, as well as numerous smaller laboratories associated
with universities or other not-for-profit entities. In addition, a number of
pharmaceutical and biotechnology companies and government-financed programs are
engaged or have announced the intention to engage in areas of human genome
research similar to or competitive with our focus on gene discovery, and other
companies are likely to enter the field.
We face significant competition in our product development and
commercialization efforts. Although we believe that there are significant
product development opportunities for both us and our collaborators based on our
gene databases, competition exists among us and our collaborators to develop and
commercialize products. In addition, our competitors may succeed in developing
products before we do, obtaining approvals from the FDA or other regulatory
agencies for such products more rapidly than we do, or developing products that
are more effective than those proposed to be developed by us. Similarly, while
we will share any success of our collaborators in identifying and
commercializing products through royalties and co-payment arrangements, our
collaborators face similar competition from other competitors who may succeed in
developing products more quickly, or developing products that are more
effective, than those developed by our collaborators. Certain of these
competitors may be further advanced than us in developing potential products.
Research and development by others may render the products that we or our
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostic tests superior to any therapy or diagnostic test
developed by us or our collaborators. In addition, therapies or diagnostic tests
developed by us or our collaborators may not be preferred to any existing or
newly developed technologies.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products. New drugs and biologics are
subject to regulation under the Federal Food, Drug, and Cosmetic Act. In
addition to being subject to certain provisions of that Act, biologics are also
regulated under the Public Health Service Act. We believe that the
pharmaceutical products developed by us or our collaborators will be regulated
either as biological products or as new drugs. Both statutes and their
corresponding regulations govern, among other things, the testing,
manufacturing, distribution, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs.
In addition, any gene therapy products developed by us will require
regulatory approvals prior to human trials and additional regulatory approvals
prior to commercialization. New human gene therapy products are subject to
extensive regulation by the FDA and the Center for Biological Evaluation and
Research and comparable agencies in other countries. Currently, each human-study
protocol is reviewed by the FDA and, in some instances, the National Institutes
of Health, on a case-by-case basis. The FDA and the National Institutes of
Health have published guidance documents with respect to the development and
submission of gene therapy protocols.
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Obtaining FDA approval has historically been a costly and time-consuming
process. We may not obtain FDA approvals in a timely manner, or at all. We and
our collaborators may encounter significant delays or excessive costs in our
efforts to secure necessary approvals or licenses. Generally, in order to gain
FDA pre-market approval, a developer first must conduct laboratory studies and
animal-model studies to gain preliminary information on an agent's efficacy and
to identify any safety problems. The results of these studies are submitted as a
part of an investigational new drug application, which the FDA must review
before human trials of an investigational drug can start. The investigational
new drug application includes a detailed description of the initial animal
studies and human investigation to be undertaken.
Laboratory studies can take several years to complete, and there is no
assurance that an investigational new drug application based on such studies
will ever become effective so as to permit human testing to begin. A 30-day
waiting period after the receipt of each investigational new drug application is
required by the FDA prior to the commencement of human testing. If the FDA has
not commented on or questioned the investigational new drug application within
this 30-day period, human studies may begin. If the FDA has comments or
questions, it places the studies on clinical hold and the questions must be
answered to the satisfaction of the FDA before human testing may begin.
In order to commercialize pharmaceutical products, we or one of our
collaborators must sponsor and file an investigational new drug application and
be responsible for initiating and overseeing the human studies to demonstrate
the safety and efficacy and, for a biologic product, the potency, which are
necessary to obtain FDA approval of any such products. For our or our
collaborator-sponsored investigational new drug applications, we or our
collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the investigational new drug application. Human trials
are normally done in three phases, although the phases may overlap. Phase I
trials are concerned primarily with the safety and pharmacology of the drug,
involve fewer than 100 subjects and may take from six months to over a year to
complete. Phase II exploratory trials normally involve a few hundred patients,
but in some cases may involve fewer. Phase II trials are designed primarily to
demonstrate safety and preliminary effectiveness in treating or diagnosing the
disease or condition for which the drug is intended. Phase III trials are
expanded trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug and
demonstrate its overall safety and effectiveness. All three phases generally
take three to five years, but may take longer, to complete. Regulations
promulgated by the FDA may shorten the time periods and reduce the number of
patients required to be tested in the case of certain life-threatening diseases
which lack available alternative treatments.
The FDA receives reports on the progress of each phase of testing, and
it may require the modification, suspension, or termination of trials if an
unwarranted risk is presented to patients. If the FDA imposes a clinical hold,
trials may not recommence without FDA authorization and then only under terms
authorized by the FDA. The investigational new drug application process can thus
result in substantial delay and expense. Human gene therapy products (which is
one of the areas in which we are seeking to develop products) are a new category
of therapeutics. Because this is a relatively new and expanding area of novel
therapeutic interventions, there can be no assurance as to the length of the
trial period, the number of patients the FDA will require to be enrolled in the
trials in order to establish the safety, efficacy and potency of human gene
therapy products, or that the data generated in these studies will be acceptable
to the FDA to support marketing approval.
After completion of trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
the Center for Biological Evaluation and Research will require the submission
and approval, depending on the type of biologic, of either a biologic license
application or, in some cases, a product license application and an
establishment license application before commercial marketing of the biologic.
If the product is classified as a new drug, we must file a new drug application
with the Center for Drug Evaluation and Research and receive approval before
commercial marketing of the drug. The new drug application or biologic license
applications must include results of product development, laboratory, animal and
human studies, and manufacturing information. The testing and approval processes
require substantial time and effort and there can be no assurance that the FDA
will accept the new drug application or biologic license applications for filing
and, even if filed, that any approval will be granted on a timely basis, if at
all. In the past, new drug applications and biologic license applications
submitted to the FDA have taken, on average, one to two years to receive
approval after submission of all test data. If questions arise during the FDA
review process, approval can take more than two years.
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Notwithstanding the submission of relevant data, the FDA may ultimately decide
that the new drug application or biologic license application does not satisfy
its regulatory criteria for approval and require additional studies. In
addition, the FDA may condition marketing approval on the conduct or specific
post-marketing studies to further evaluate safety and effectiveness. Rigorous
and extensive FDA regulation of pharmaceutical products continues after
approval, particularly with respect to compliance with current good
manufacturing practices, or cGMPs, reporting of adverse effects, advertising,
promotion and marketing. Discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restrictions on
the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions.
If a developer obtains designation by the FDA of a biologic or drug as
an "orphan" drug for a particular use, the developer may request small grants
from the federal government to help defray the costs of qualified testing
expenses in connection with the development of such drug. Orphan drug
designation may be granted to drugs for rare diseases, typically defined as a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States, and includes many genetic diseases. The first applicant
who has obtained designation of a drug for a particular use as an orphan drug
and then obtains approval of a marketing application for such drug for the
particular use is entitled to marketing exclusivity for a period of seven years,
subject to certain limitations.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation will remain in
effect in the future. In February 2001, BLyS received "orphan" drug designation
from the FDA for the treatment of common variable immunodeficiency.
Moreover, several areas in which we or our collaborators may develop
products involve relatively new technology and have not been the subject of
extensive product testing in humans. The regulatory requirements governing these
products and related testing procedures remain uncertain. In addition, these
products may be subject to substantial review by foreign governmental regulatory
authorities that could prevent or delay approval in those countries. Regulatory
requirements ultimately imposed on our products could limit our ability to test,
manufacture and, ultimately, commercialize our products.
Other. Ethical, social and legal concerns about gene therapy, genetic
testing and genetic research could result in additional regulations restricting
or prohibiting the processes we or our suppliers may use. Federal and state
agencies, congressional committees and foreign governments have expressed
interest in further regulating biotechnology. More restrictive regulations or
claims that our products are unsafe or pose a hazard could prevent us from
commercializing any products.
In addition to the foregoing, state and federal laws regarding
environmental protection and hazardous substances, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act, affect our business. These and other laws govern our
use, handling and disposal of various biological, chemical and radioactive
substances used in, and wastes generated by, our operations. If our operations
result in contamination of the environment or expose individuals to hazardous
substances, we could be liable for damages and governmental fines. We believe
that we are in material compliance with applicable environmental laws and that
our continued compliance therewith will not have a material adverse effect on
our business. We cannot predict, however, how changes in these laws may affect
our future operations.
SOURCES OF SUPPLY
We currently are able to obtain our chemicals and equipment from various
sources, and therefore, have no dependence upon a single supplier. We are
currently dependent upon one manufacturer, MDS Nordion of Ottawa, Canada, for
the radiolabeling of LymphoRad(131), a product for which we have filed an
Investigation New Drug application with the FDA. If we are unable to secure an
adequate supply of this product at commercially reasonable rates, our ability to
continue with the intended human clinical trials would be adversely affected.
MANUFACTURING
We have developed in-house capabilities for the production and
purification of laboratory-produced proteins for use in our research activities,
but do not have any manufacturing facilities licensed to supply materials
suitable for
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commercial sale, or any experience in manufacturing materials suitable for
commercial sale. From time to time, we may depend on third parties for
manufacturing. If we need others to manufacture our products, we will depend on
those third parties to comply with cGMPs, and other regulatory requirements and
to deliver materials on a timely basis. These third parties may not perform
adequately. Any failures by these third parties may delay our development of
products or the submission of these products for regulatory approval.
During 1997 and 1998, we designed and the Maryland Economic Development
Corporation (MEDCO) constructed an 84,000 square foot process development and
manufacturing facility for the preparation of our proteins for human studies.
The facility now comprises approximately 127,000 square feet, including a 43,000
square foot expansion completed in 2000, and is located in the Johns Hopkins
Belward Research Campus near our offices and research laboratories. The original
facility was completed in 1999. We designed the facility to allow for the
production and purification of multiple laboratory-produced proteins. We are
using the facility for production of laboratory and human study supplies of our
therapeutic proteins under cGMP requirements and for process development and
scale-up. The FDA must inspect and license this facility to determine compliance
with cGMP requirements for commercial production. A delay in licensing of the
facility could delay or increase the cost of regulatory approval. We have
entered into long-term lease arrangements with MEDCO for the facility and the
expansion. Under these lease agreements, which we have accounted for as
operating leases, we have the option to purchase the properties, during and at
the end of the lease term. Our option to purchase these facilities is at
declining, pre-determined amounts during the lease term and is approximately
$19.4 million at the end of the lease term. Alternatively, we can vacate the
facilities. We are not contingently liable for any residual value guarantee
associated with these properties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for additional discussion.
Our long-range plan is to establish additional manufacturing
capabilities to allow us to meet our full commercial manufacturing requirements.
We are currently designing a large-scale manufacturing facility to allow for the
production of proteins and antibodies to be used for both clinical and
commercial use. This 405,000 square foot facility will be located adjacent to
the existing process development and manufacturing facility and is expected to
be available for occupancy in 2004. The FDA must inspect and license this
facility to determine compliance with cGMP requirements for commercial
production. A delay in licensing of the facility could delay or increase the
cost of regulatory approval. During 2001, we entered into a seven-year lease
agreement relating to this facility. As part of this agreement, we are required
to maintain collateral with the lending institutions in amounts equal to 100% of
the financed project cost of approximately $226.0 million for the duration of
the lease. Under this lease agreement, which we have accounted for as an
operating lease, we have the option to purchase the property, during and at the
end of the lease term, for approximately $226.0 million. Alternatively, we can
cause the property to be sold to third parties. We are contingently liable for
the residual value guarantee associated with the property in the event the net
sale proceeds are less than the original financed costs of the facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for additional discussion.
While we are expanding our manufacturing capabilities, we may contract
with third party manufacturers or may develop products with partners and take
advantage of such partner's manufacturing capabilities. We may not be able to
successfully establish manufacturing capabilities or manufacture our products
economically or in compliance with cGMPs and other regulatory requirements.
MARKETING
We do not currently have any marketed products. We expect that in the
future we will rely at least partially on collaborators or on third parties with
whom we may contract to market any products that we may develop. Our
collaborators or other third parties may not be successful in marketing our
products. To date, we have collaborated with GlaxoSmithKline, Schering-Plough
and others. However, we also may co-promote or retain North American rights to
certain of our products. If we decide to market products directly, we will incur
significant additional expenditures and commit significant additional management
resources to develop an external sales force in order to implement our marketing
strategy. We may not be able to establish a successful marketing force.
EMPLOYEES
As of March 1, 2002, we had 1,010 full-time employees, of whom 836 were
in research and development, including 153 scientists holding doctoral degrees.
We anticipate hiring approximately 150 additional employees
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during the next six months, including research and development staff, process
development and manufacturing personnel, and medical and regulatory affairs and
strategic marketing staff. None of our employees is covered by a collective
bargaining agreement and we consider relations with our employees to be good.
FACTORS THAT MAY AFFECT OUR BUSINESS
There are a number of important factors that could cause our actual
results to differ materially from those that are indicated by forward-looking
statements. Those factors include, without limitation, those listed below and
elsewhere herein.
BECAUSE OUR BUSINESS STRATEGY IS STILL LARGELY UNTESTED, WE DO NOT KNOW WHETHER
WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS OR TO WHAT EXTENT WE WILL
GENERATE REVENUE.
We do not know whether we can implement our business strategy
successfully because we are in the early stages of development. We initially set
out to find as many genes as possible and are now using that information to
develop medical and pharmacological products. We use automated high-speed
technology to:
- rapidly identify the function of and obtain proprietary rights to a
substantial number of genes; and
- select genes with the greatest potential for the treatment and
diagnosis of human disease.
Nobody has tested our strategy. Other companies first target particular
diseases and try to find cures for them through gene-based therapies. If our
strategy does not result in the development of products that we can sell
profitably, we will be unable to generate revenue.
IF WE ARE UNABLE TO IDENTIFY GENES WITH POTENTIAL VALUE, WE MAY NOT BE ABLE TO
RECOVER OUR INVESTMENT IN OUR GENE DISCOVERY EFFORT.
We invested significant time and resources to isolate and study genes
and determine their functions. We now devote an ever-increasing portion of our
resources to identifying and developing proteins, antibodies and other compounds
for the treatment of human disease. We have recently made substantial capital
expenditures and hired additional personnel to foster these activities. Before
we can commercialize a product, we must rigorously test the product in the
laboratory and complete extensive human studies. We cannot assure you that
expenses for testing and study will yield profitable products or even products
approved for marketing by the FDA. We will incur additional costs to continue
these activities. If we are not successful in identifying products which we can
develop commercially, we may be unable to recover the large investment we make
in research and development.
BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW AND RAPIDLY-EVOLVING
TECHNOLOGIES, WE DO NOT KNOW WHETHER OUR EFFORTS WILL BE SUCCESSFUL.
To date, companies have developed and commercialized relatively few
gene-based products. Our work depends on new, rapidly-evolving technologies and
on the marketability and profitability of innovative products. Commercialization
involves risks of failure inherent in the development of products based on
innovative technologies and the risks associated with drug development
generally. These risks include the possibility that:
- these technologies or any or all of the products based on these
technologies will be ineffective or toxic, or otherwise fail to
receive necessary regulatory clearances;
- the products, if safe and effective, will be difficult to manufacture
on a large scale or uneconomical to market;
- proprietary rights of third parties will prevent us or our
collaborators from exploiting technologies or marketing products;
- third parties will market superior or equivalent products; and
- we may not be able to obtain or exploit new and superior technology
which could render obsolete the technologies we use.
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BECAUSE WE ARE AN EARLY STAGE COMPANY, WE DO NOT KNOW WHETHER WE CAN DEVELOP OUR
BUSINESS OR ACHIEVE PROFITABILITY.
We expect to continue to incur increasing losses and we cannot assure
you that we will ever become profitable. We are in the early stages of
development, and it will be a number of years, if ever, before we are likely to
receive revenue from product sales or royalty payments. We will continue to
incur substantial expenses relating to research and development efforts. We
anticipate that we will increase these efforts as we focus on the laboratory and
human studies that are required before we can sell a product. The development of
our products requires significant further research, development, testing and
regulatory approvals. We may not be able to develop products that will be
commercially successful or that will generate revenue in excess of the cost of
development.
PRODUCT DEVELOPMENT RISKS
BECAUSE WE HAVE LIMITED EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PRODUCTS,
WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO DO SO.
Our ability to develop and commercialize products based on proteins,
antibodies and other compounds will depend on our ability to:
- develop products internally;
- complete laboratory testing and human studies;
- obtain and maintain necessary intellectual property rights to our
products;
- obtain and maintain necessary regulatory approvals related to the
efficacy and safety of our products;
- develop efficient production facilities meeting all regulatory
requirements or enter into arrangements with third parties to
manufacture our products on our behalf; and
- deploy sales and marketing resources effectively or enter into
arrangements with third parties to provide these functions.
Although we have initiated human studies with respect to eight products,
we have limited experience with these activities and may not be successful in
developing or commercializing these or other products.
BECAUSE CLINICAL TRIALS FOR OUR PRODUCTS WILL BE EXPENSIVE AND PROTRACTED AND
THEIR OUTCOME IS UNCERTAIN, WE MUST INVEST SUBSTANTIAL AMOUNTS OF TIME AND MONEY
THAT MAY NOT YIELD VIABLE PRODUCTS.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
product, we must demonstrate through laboratory, animal and human studies that
such product is both effective and safe for use in humans. We will incur
substantial expense for and devote a significant amount of time to these
studies.
The results of preliminary studies do not predict clinical success. A
number of potential drugs have shown promising results in early testing but
subsequently failed to obtain necessary regulatory approvals. Data obtained from
tests are susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. Regulatory authorities may refuse or delay approval
as a result of many other factors, including changes in regulatory policy during
the period of product development.
Completion of clinical trials may take many years. The length of time
required varies substantially according to the type, complexity, novelty and
intended use of the product candidate. Our rate of commencement and completion
of clinical trials may be delayed by many factors, including:
- our inability to manufacture sufficient quantities of materials for
use in clinical trials;
22
- variability in the number and types of patients available for each
study;
- difficulty in maintaining contact with patients after treatment,
resulting in incomplete data;
- unforeseen safety issues or side effects;
- poor or unanticipated effectiveness of products during the clinical
trials; or
- government or regulatory delays.
Seven of our products, mirostipen, repifermin, BLyS, LymphoStat-B,
Albuferon, Albutropin and Albuleukin have advanced to clinical trials. Two
products are awaiting clearance from the FDA to enter human clinical trials. For
all of our trials except the repifermin wound healing trial, only a limited
number of patients is involved. To date, data obtained from these clinical
trials have been insufficient to demonstrate safety and efficacy under
applicable FDA guidelines and are not sufficient to support an application for
regulatory approval without further studies. In two trials of repifermin, the
drug was shown to be safe, but was not shown to be effective. Studies conducted
by us or by third parties on our behalf may not demonstrate sufficient
effectiveness and safety to obtain the requisite regulatory approvals for these
or any other potential products. Regulatory authorities may not permit us to
undertake any additional clinical trials.
BECAUSE THE CLINICAL TESTING OF VEGF-2 MUST RECEIVE FDA APPROVAL BEFORE VGI CAN
RESUME ITS PHASE II TRIALS, THE CLINICAL SUCCESS OF VEGF-2 IS UNCERTAIN.
Clinical trials of VEG-2 by Vascular Genetics were placed on clinical
hold by the FDA in February 2000. These trials were removed from clinical hold
in October 2001. Prior to the hold, four clinical trials of VEGF-2 had been
ongoing. Vascular Genetics announced the completion of three of these trials
because enrollment and treatment were complete. In the fourth study, a majority
of the target patients had been enrolled and treated. During the hold period,
Vascular Genetics provided the FDA with results which were being compiled from
the clinical trials, in addition to providing measurements of the amount of the
VEGF-2 protein in patient blood samples. Vascular Genetics must receive approval
from the FDA before it can initiate additional trials.
The trials of VEGF-2 are being conducted with patients for whom
conventional treatments have been unsuccessful or for whom no conventional
treatment exists. During the course of treatment, these patients could die or
suffer adverse medical effects for reasons that may not be related to VEGF-2.
Deaths in the patient population for the VEGF-2 trial did occur, in both active
and placebo groups, and Vascular Genetics has reviewed the relevant data
regarding these patients and provided an analysis of the reasons for these
deaths to the FDA. These adverse effects may affect the interpretation of the
clinical trial results and the success of the trials. Later clinical trials may
be extensive, expensive and time-consuming. VEGF-2 may never be approved for use
in humans.
BECAUSE NEITHER WE NOR ANY OF OUR COLLABORATION PARTNERS HAVE RECEIVED MARKETING
APPROVAL FOR ANY PRODUCT RESULTING FROM OUR RESEARCH AND DEVELOPMENT EFFORTS,
AND MAY NEVER BE ABLE TO OBTAIN ANY SUCH APPROVAL, WE MAY NOT BE ABLE TO
GENERATE ANY PRODUCT REVENUE.
We have not completed development of any product based on our genetic
research. It is possible that we will not receive FDA marketing approval for any
of our products. Although a number of our potential products have entered
clinical trials, we cannot assure you that any of these products will receive
marketing approval. All the products being developed by our collaboration
partners will also require additional research and development, extensive
preclinical studies and clinical trials and regulatory approval prior to any
commercial sales. In some cases, the length of time that it takes for our
collaboration partners to achieve various regulatory approval milestones may
affect the payments that we are eligible to receive under our collaboration
agreements. We and our collaboration partners may need to successfully address a
number of technical challenges in order to complete development of our products.
Moreover, these products may not be effective in treating any disease or may
prove to have undesirable or unintended side effects, toxicities or other
characteristics that may preclude our obtaining regulatory approval or prevent
or limit commercial use.
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RISKS FROM OUR COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS
OUR PLAN TO USE COLLABORATIONS TO LEVERAGE OUR CAPABILITIES AND TO GROW IN PART
THROUGH THE STRATEGIC ACQUISITION OF OTHER COMPANIES AND TECHNOLOGIES WILL NOT
BE SUCCESSFUL IF WE ARE UNABLE TO INTEGRATE OUR PARTNERS' CAPABILITIES OR THE
ACQUIRED COMPANIES WITH OUR OTHER OPERATIONS OR IF THEY DO NOT MEET OUR
EXPECTATIONS.
As part of our strategy, we intend to continue to evaluate strategic
partnership opportunities and consider acquiring complementary technologies and
businesses. In order for our future collaboration efforts to be successful, we
must first identify partners whose capabilities complement and integrate well
with ours. Technologies to which we gain access may prove ineffective or unsafe.
Our partners may prove difficult to work with or less skilled than we originally
expected. In addition, any past collaborative successes are no indication of
potential future success in this area. In order to achieve the anticipated
benefits of an acquisition, we must integrate the acquired company's business,
technology and employees in an efficient and effective manner. The successful
combination of companies in a rapidly changing biotechnology and genomics
industry may be more difficult to accomplish than in other industries. The
combination of two companies requires, among other things, integration of the
companies' respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished smoothly or
successfully. The difficulties of integration are increased by the necessity of
coordinating geographically separated organizations and addressing possible
differences in corporate cultures and management philosophies. The integration
of certain operations will require the dedication of management resources which
may temporarily distract attention from the day-to-day operations of the
combined companies. The business of the combined companies may also be disrupted
by employee retention uncertainty and lack of focus during integration. The
inability of management to successfully integrate the operations of the two
companies, in particular, to integrate and retain key scientific personnel, or
the inability to successfully integrate two technology platforms, could have a
material adverse effect on our business, results of operations and financial
condition.
BECAUSE WE DEPEND ON OUR COLLABORATION PARTNERS FOR REVENUE, WE MAY NOT BECOME
PROFITABLE IF WE CANNOT INCREASE THE REVENUE FROM OUR COLLABORATION PARTNERS OR
OTHER SOURCES.
We have received all our revenue from payments made under our
collaboration agreements with GlaxoSmithKline and, to a lesser extent, other
agreements. The GlaxoSmithKline collaboration agreement and many of our other
collaboration agreements expired in 2001. None of these collaboration agreements
was renewed. We may not be able to enter into additional collaboration
agreements. We are entitled to certain milestone and royalty payments from the
existing collaborators, but may not receive payments if our collaborators fail
to:
- develop marketable products;
- obtain regulatory approvals for products; or
- successfully market products based on our research.
IF ONE OF OUR COLLABORATORS PURSUES A PRODUCT THAT COMPETES WITH OUR PRODUCTS,
IT MAY HAVE A CONFLICT OF INTEREST AND WE MAY NOT RECEIVE THE MILESTONE OR
ROYALTY PAYMENTS THAT WE EXPECT.
Each of our collaborators is developing a variety of products, some with
other partners. Our collaborators may pursue existing or alternative
technologies instead of products they are developing in collaboration with us.
Our collaborators may also develop products that are similar to or compete with
products they are developing in collaboration with us. If our collaborators
pursue these other products instead of our products, we may not receive
milestone or royalty payments.
FINANCIAL AND MARKET RISKS
BECAUSE OF OUR SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO ADJUST OUR STRATEGY
TO MEET CHANGING CONDITIONS IN THE FUTURE.
As of December 31, 2001, we had long-term obligations of approximately
$504.0 million. We also had future guarantee obligations of approximately $459.4
million under certain facility leases. Our substantial debt and future
24
guarantees will have several important consequences for our future operations.
For instance:
- payments of interest on, and principal of, our indebtedness will be
substantial, and may exceed then current revenues;
- we may be unable to obtain additional future financing for capital
expenditures, acquisitions or general corporate purposes;
- we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and
- we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise.
WE HAVE ENTERED INTO TWO FACILITY LEASE ARRANGEMENTS THAT ARE NOT REQUIRED TO BE
REFLECTED ON OUR BALANCE SHEET BUT THAT CONSTITUTE SIGNIFICANT FINANCIAL
OBLIGATIONS AND POSSIBLE RISKS.
In the fourth quarter of 2001, we entered into two facility leases with
respect to three facilities that are currently in design or under construction
and one previously-constructed facility. We lease these facilities from trusts
controlled by third parties established solely for the transactions. Under
accounting principles generally accepted in the United States, these leases are
treated as operating leases. Economically, we may be responsible for up to
$526.0 million of the cost of these facilities because of guarantees we made in
connection with the leases in the event we default on our obligations under the
leases. These obligations are not required to be reflected as liabilities on our
balance sheet, but are described in footnotes to our financial statements. We
are required to pledge marketable securities as security for our obligations
under the leases and the related documents. As of December 31, 2001, we included
approximately $144.9 million of restricted investments on our balance sheet, of
which approximately $132.1 million was held as restricted investments providing
collateral for our obligations with respect to these facilities. As the
facilities are constructed, we will be required to restrict additional cash or
investments as collateral for our obligations under these leases in order to
reach the full amount of collateralization, which will reduce our working
capital. When the facilities are completed, we expect that we will include
approximately $526.0 million in restricted investments on our balance sheet. If
the value of our pledged investments declines, because of an increase in
interest rates or otherwise, we would need to pledge additional investments
which would further reduce our working capital. The rent under these leases is
based on a floating interest rate, but the trusts at our request can lock in a
fixed interest rate at an interest rate premium. To date, the trusts have fixed
the interest rate for approximately $56.0 million of the financed project cost.
To the extent the trusts do not lock in a fixed interest rate, if interest rates
increase, our rent obligations would also increase. These leases have a term of
seven years. If we desire to remain in the facilities upon lease expiration, we
would need to refinance or buy the facilities at the financed project cost. We
cannot assure you that refinancing will be available on comparable terms, if at
all. Further, in the event the facilities are sold, we have guarantee
obligations which make us responsible to the extent that the value of the
facilities is less than the financed project cost and which reach a maximum
guarantee obligation of approximately $459.4 million if the value of the
facilities declined below approximately 15% of the financed project cost. While
we believe that these leases provide a useful financing mechanism for the
facilities, adverse public perception of such lease arrangements and the
associated risks may cause our stock price to decline. In addition, we
understand that the accounting treatment for these leases may be changed by the
Financial Accounting Standards Board in 2002 and may require us to include these
leased facilities and the related lease obligations on our balance sheet as
assets and liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
IF WE DO NOT OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS, WE MAY
NOT BE ABLE TO CONTINUE TO GROW OUR BUSINESS AND GENERATE ENOUGH REVENUE TO
RECOVER OUR INVESTMENT IN OUR PRODUCT DEVELOPMENT EFFORT.
Since inception we have expended, and will continue to expend,
substantial funds to continue our research and development programs. If we incur
unanticipated expenses or delays in receipt of revenue, we may need additional
financing beyond that which we have projected to fund our operating expenses and
capital requirements. We may not be able to obtain additional financing on
acceptable terms. If we raise additional funds by issuing equity securities, the
new securities may dilute the interests of our existing stockholders.
25
BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE
MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER OR MORE VOLATILE THAN YOU
EXPECTED.
Our stock price, like the stock prices of other emerging and biotechnology
companies, has been highly volatile. During 2001, the closing price of our
common stock has been as low as $28.00 per share and as high as $75.31 per
share. The market price of our common stock could fluctuate widely because of:
- future announcements about our company or our competitors, including the
results of testing, technological innovations or new commercial products;
- regulatory actions and changes in government regulations;
- announcements relating to health care reform;
- our failure to acquire or maintain proprietary rights to the gene
sequences we discover or the products we develop;
- litigation; and
- public concern as to the safety of our products.
The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market price for many emerging and
biotechnology companies. These fluctuations have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
cause the market price of our common stock to be lower or more volatile than
you expected.
INTELLECTUAL PROPERTY RISKS
IF PATENT LAWS OR THE INTERPRETATION OF PATENT LAWS CHANGE, OUR COMPETITORS
MAY BE ABLE TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.
The patent protection available to biotechnology firms is highly uncertain
and involves complex legal and factual questions that will determine who has
the right to develop a particular product. There have been, and continue to
be, intensive discussions on the scope of patent protection for both partial
gene sequences and full-length genes. The Patent and Trademark Office issued
new guidelines for patents in 2001 which clarify certain requirements for
obtaining a patent on a gene sequence. The biotechnology patent situation is
even more uncertain outside the U.S. and is currently undergoing review and
revision in many countries. Changes in, or different interpretations of,
patent laws in the U.S. and other countries may result in patent laws which
allow others to use our discoveries or develop and commercialize our products.
IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, OUR COMPETITORS
MAY OBTAIN RIGHTS TO AND COMMERCIALIZE THE DISCOVERIES WE ATTEMPTED TO PATENT.
Our pending applications covering full-length genes and their corresponding
proteins may not result in the issuance of any patents. As of March 1, 2002,
we had filed patent applications for many human genes and their corresponding
proteins and all or portions of genomes of eight infectious microorganisms and
one non-infectious microorganism. As of that date, we had only 205 U.S.
patents covering human genes and proteins. Our applications may not be
sufficient to meet the statutory requirements for patentability in all cases.
As a result, we may not obtain enforceable patents on genes we may want to
commercialize.
IF INFORMATION ABOUT THE GENES WE DISCOVER IS PUBLISHED BY OTHERS BEFORE WE
APPLY FOR PATENT PROTECTION, WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION,
WHICH WOULD ENABLE OTHERS TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.
Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, The Institute for Genomic Research, or TIGR, in
collaboration with the National Center for Biological Information, disclosed
full-length DNA sequences
26
which are reportedly in excess of 35,000 sequences that were assembled from
partial gene sequences available in publicly accessible databases or sequenced
at TIGR. In June 2000, the Human Genome Project and Celera Genomics
Corporation completed an initial sequencing of the human genome and published
papers on this sequencing in February 2001. These public disclosures might
limit the scope of our claims or make unpatentable subsequent patent
applications on full-length genes we file. Any publication of sequence
information may prevent us from obtaining patent protection for some genes in
which we may have a scientific or commercial interest.
IF OTHERS FILE PATENT APPLICATIONS OR OBTAIN PATENTS SIMILAR TO OURS, THEN THE
PATENT AND TRADEMARK OFFICE MAY DENY OUR PATENT APPLICATIONS, OR OTHERS MAY
RESTRICT THE USE OF OUR DISCOVERIES.
Other companies or institutions have filed, and may file in the future,
patent applications which attempt to patent genes similar to those covered in
our patent applications. The Patent and Trademark Office will decide which
applications merit a patent and the priority of competing patent claims. Any
patent application filed by a third party may prevail over patent applications
we filed, in which event the third party may require us to stop pursuing a
potential product or to negotiate a royalty arrangement to pursue the
potential product.
IF OUR POTENTIAL PRODUCTS CONFLICT WITH PATENTS THAT COMPETITORS, UNIVERSITIES
OR OTHERS HAVE OBTAINED, THEN WE MAY BE UNABLE TO COMMERCIALIZE THOSE
PRODUCTS.
Other parties may claim that our products infringe their patents. This risk
will increase as the biotechnology industry expands and as other companies
obtain more patents and attempt to discover genes through the use of
high-speed sequencers. Other persons could bring legal actions against us to
claim damages or to stop our manufacturing and marketing of the affected
products. If any of these actions are successful, in addition to demanding
monetary damages these persons may require us to obtain a license in order to
continue to manufacture or market the affected products. We believe that there
will continue to be significant litigation in our industry regarding patent
and other intellectual property rights. If we become involved in litigation,
it could consume a substantial portion of our resources.
BECAUSE ISSUED PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, OUR COMPETITORS
MAY BE ABLE TO COMMERCIALIZE PRODUCTS SIMILAR TO THOSE COVERED BY OUR ISSUED
PATENTS.
Issued patents may not provide commercially meaningful protection against
competitors and may not provide us with competitive advantages. Other parties
may challenge our patents or independently develop similar products which
could result in an interference proceeding in the Patent and Trademark Office.
Others may be able to design around our issued patents or develop products
providing effects similar to our products. In addition, others may discover
uses for genes or proteins different from uses covered in our patents, and
these other uses may be separately patentable. If another party holds a patent
on the use of an invention, even if we hold the patent on the invention
itself, that other party could prevent us from selling any product that
involves the use.
WE RELY ON OUR COLLABORATION PARTNERS TO SEEK PATENT PROTECTION FOR THE
PRODUCTS THEY DEVELOP BASED ON OUR RESEARCH.
Much of our future revenue may be derived from royalty payments from our
collaboration partners. These partners face the same patent protection issues
that we and other biotechnology firms face. As a result, we cannot assure you
that any product developed by our collaboration partners will be patentable,
and therefore, we may never receive any royalty payments. We also rely on our
collaboration partners to effectively prosecute their patent applications.
Their failure to obtain or protect necessary patents could also result in a
loss of royalty revenue to us.
IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, OTHERS MAY BE ABLE TO USE OUR
SECRETS TO COMPETE MORE EFFECTIVELY.
We may not be able to adequately protect our trade secrets. We rely on
trade secret protection to protect our confidential and proprietary
information. We believe that we have developed proprietary procedures for
making libraries of DNA sequences and genes. We have not sought process patent
protection for these procedures. We have also developed a substantial database
of genes we have identified. While we have entered into confidentiality
agreements with employees and academic collaborators, we may not be able to
prevent their disclosure of these data or materials. Others may independently
develop substantially equivalent information and techniques.
27
REGULATORY RISKS
BECAUSE WE ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT REGULATORY
REQUIREMENTS, WE MAY BE UNABLE TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS
IN A TIMELY MANNER.
Our products are subject to the extensive and evolving regulatory approval
process of the FDA and comparable agencies in other countries. The regulation
of new products is extensive, and the required process of laboratory testing
and human studies is lengthy and expensive. We may not obtain FDA approvals in
a timely manner, or at all. We and our collaborators may encounter significant
delays or excessive costs in our efforts to secure necessary approvals or
licenses. Even if we obtain FDA regulatory approvals, the FDA extensively
regulates manufacturing, labeling, distributing, marketing, promotion and
advertising after product approval. Moreover, several areas in which we or our
collaborators may develop products involve relatively new technology and have
not been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures are
still being determined. In addition, these products may be subject to
substantial review by foreign governmental regulatory authorities which could
prevent or delay approval in those countries. Regulatory requirements imposed
on our products could limit our ability to test, manufacture and, ultimately,
commercialize our products.
NEGATIVE PUBLIC OPINION AND INCREASED REGULATORY SCRUTINY OF GENE THERAPY AND
GENETIC RESEARCH MAY LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS.
Ethical, social and legal concerns about gene therapy, genetic testing and
genetic research could result in additional regulations restricting or
prohibiting the processes we or our suppliers may use. In recent years, gene
therapy studies, including studies of VEGF-2, have come under increasing
scrutiny which has delayed ongoing and may delay future clinical trials and
regulatory approvals. Federal and state agencies, congressional committees and
foreign governments have expressed interest in further regulating
biotechnology. More restrictive regulations or claims that our products are
hazardous could prevent us from commercializing any products.
BECAUSE WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WE MAY BE
UNABLE TO CONDUCT OUR BUSINESS IN THE MOST ADVANTAGEOUS MANNER.
State and federal laws regarding environmental protection, hazardous
substances and human health and safety affect our business. The use of
hazardous substances in our operations exposes us to the risk of accidental
releases. If our operations result in contamination of the environment or
expose individuals to hazardous substances, we could be liable for damages and
fines. Future changes to environmental, health and safety laws could cause us
to incur additional expense or restrict our operations.
INDUSTRY RISKS
MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER CAPABILITIES AND RESOURCES
AND MAY BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS BEFORE WE DO.
We are in a race to establish uses for and patent as many genes as possible
and to bring to market the products we develop. Many of our potential
competitors have substantially greater research and product development
capabilities and financial, scientific, marketing and human resources. The
Human Genome Project and Celera Genomics Corporation have claimed to have
mapped the complete human genome, and have made their findings available to
the public at no cost. We face competition from other entities using
high-speed gene sequencers to discover genes, such as Incyte Genomics, Inc.
and Celera Genomics Corporation. We also face competition from entities using
more traditional methods to discover genes related to particular diseases,
such as Amgen, Inc., Genentech, Inc., Millennium Pharmaceuticals, Inc. and
other large biotechnology and pharmaceutical companies. We expect that
competition in our field will continue to be intense.
Our competitors include parties conducting research to identify genes and
human genome research similar to or competing with our focus on gene
discovery, including:
- institutes, such as those sponsored by the U.S. government and the
governments of Great Britain, France, Germany and Japan;
28
- small laboratories associated with universities or other not-for-profit
organizations;
- pharmaceutical and biotechnology companies; and
- government-financed programs.
These competitors may:
- succeed in identifying genes or developing products earlier than we do;
- obtain approvals from the FDA or other regulatory agencies for products
more rapidly than we do;
- develop treatments or cures that are more effective than those we propose
to develop; or
- acquire similar gene sequencing machines and engage in the automated
sequencing of genes.
The other risks of competition include the following:
- research and development by others may make our products, or the products
we and our collaborators may develop, obsolete or uneconomical;
- consumers may prefer existing or newly developed technologies to any
product we develop; and
- other companies use the same gene sequencing machines we use, in some
cases for business purposes that compete with our business.
IF WE LOSE OR ARE UNABLE TO ATTRACT KEY MANAGEMENT OR OTHER PERSONNEL, WE MAY
EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT.
We depend on our senior executive officers as well as key scientific and
other personnel. Only a few of our key personnel are bound by employment
agreements, and those with employment agreements are bound only for a limited
period of time. Our employment agreement with Dr. William A. Haseltine, our
Chairman of the Board and Chief Executive Officer, expires in February 2003.
Although Dr. Haseltine's employment agreement automatically extends for
additional one year terms, either party can terminate the agreement four
months prior to the end of the applicable term. If Dr. Haseltine decides to
terminate his employment with us, this termination could delay the
commercialization of our products or prevent us from becoming profitable.
Further, we have not purchased key-man life insurance on any of our executive
officers or key personnel, and therefore may not have adequate funds to find
acceptable replacements for them. Competition for qualified employees is
intense among pharmaceutical and biotechnology companies, and the loss of
qualified employees, or an inability to attract, retain and motivate
additional highly skilled employees required for the expansion of our
activities, could hinder our ability to complete human studies successfully
and develop marketable products.
IF THE HEALTH CARE SYSTEM OR REIMBURSEMENT POLICIES CHANGE, THE PRICES OF OUR
POTENTIAL PRODUCTS MAY FALL OR OUR POTENTIAL SALES MAY DECLINE.
In recent years, officials have made numerous proposals to change the
health care system in the U.S. These proposals included measures that would
limit payments for or prohibit certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. Government and
other third-party payors increasingly attempt to contain health care costs by
limiting both coverage and the level of reimbursement of newly approved health
care products. In some cases, they may also refuse to provide any coverage of
uses of approved products for disease indications other than those for which
the FDA has granted marketing approval. Governments may adopt future
legislative proposals and federal, state or private payors for health care
goods and services may take action to limit their payments for goods and
services. In certain foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. Any of these events could limit our ability to
commercialize our products successfully.
29
OTHER RISKS RELATED TO OUR BUSINESS
BECAUSE WE DEPEND ON A SINGLE MANUFACTURER FOR THE RADIOLABELING OF
LYMPHORAD(131), WE MAY BE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF THIS PRODUCT
AT COMMERCIALLY ACCEPTABLE RATES.
We are currently dependent upon one manufacturer, MDS Nordion, for the
radiolabeling of LymphoRad(131), a product for which we have filed an
Investigation New Drug application with the FDA. If we are unable to secure an
adequate supply of this product at commercially reasonable rates, our ability
to continue with the intended human clinical trials would be adversely
affected.
BECAUSE WE CURRENTLY HAVE NO PROVEN MANUFACTURING CAPACITY CAPABLE OF
PRODUCING PRODUCTS FOR SALE, WE MAY HAVE TO RELY ON THIRD PARTIES TO
MANUFACTURE OUR PRODUCTS, AND WE MAY BE UNABLE TO OBTAIN REQUIRED QUANTITIES
ECONOMICALLY.
We currently do not have any manufacturing facilities that have produced
materials for commercial sale or any experience in manufacturing materials
suitable for commercial sale. If we need others to manufacture our products,
we will have to depend on those third parties to comply with current good
manufacturing practices, known as cGMPs, and other regulatory requirements and
to deliver materials on a timely basis. These third parties may not perform
adequately. Any failures by these third parties may delay our development of
products or their submission for regulatory approval.
During 1997 and 1998, we designed and MEDCO constructed a
process-development and manufacturing facility for the preparation of our
proteins for human studies. MEDCO completed an expansion of this facility in
2000. In 2001, we began to design a large-scale manufacturing facility
adjacent to the existing process development and manufacturing facility. This
405,000 square foot facility is being designed to enable us to produce
commercial quantities of our therapeutic proteins and antibodies. This
facility will cost approximately $226.0 million to complete and is expected to
open in 2004. The FDA must inspect and license these facilities to determine
compliance with cGMP requirements before any commercial production can occur.
A delay in the licensing of these facilities could delay or increase the cost
of regulatory approval. We may not be able to successfully establish
manufacturing capabilities and manufacture our products economically or in
compliance with cGMPs and other regulatory requirements.
BECAUSE WE CURRENTLY HAVE NO MARKETING CAPABILITY, WE MAY BE UNABLE TO
COMMERCIALIZE OUR PRODUCTS.
We currently do not have any products that are ready to be marketed. We
expect that in the future we may rely on collaborators or on third parties to
market any products that we may develop. These collaborators or other third
parties may not be successful in marketing our products. However, we may also
co-promote or retain U.S. marketing rights to our products. If we decide to
market products directly, we will incur significant additional expenditures
and commit significant additional management resources to develop an external
sales force and implement our marketing strategy. We may not be able to
establish a successful marketing force.
BECAUSE WE MAY DEPEND ON OTHER THIRD PARTIES TO CONDUCT LABORATORY TESTING AND
HUMAN STUDIES, WE MAY ENCOUNTER DELAYS IN OR LOSE SOME CONTROL OVER OUR
EFFORTS TO DEVELOP PRODUCTS.
We may be dependent on third-party research organizations to design and
conduct our laboratory testing and human studies. If we are unable to obtain
any necessary testing services on acceptable terms, we may not complete our
product development efforts in a timely manner. If we rely on third parties
for laboratory testing and human studies, we may lose some control over these
activities and become too dependent upon these parties. These third parties
may not complete testing activities on schedule or when we request.
OUR CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS PLAN COULD DISCOURAGE
ACQUISITION PROPOSALS, DELAY A CHANGE IN CONTROL OR PREVENT TRANSACTIONS THAT
ARE IN YOUR BEST INTERESTS.
Provisions of our certificate of incorporation and bylaws, as well as
Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent a change in control of our company that you as a stockholder may
consider favorable and may be against your best interest. We have also adopted
a rights plan, or "poison pill," that may discourage, delay or prevent a
change in control. Our certificate of incorporation and bylaws contain
30
provisions that:
- authorize the issuance of up to 20,000,000 shares of "blank check"
preferred stock that could be issued by our board to increase the number
of outstanding shares and discourage a takeover attempt;
- classify the directors of our board with staggered, three-year terms,
which may lengthen the time required to gain control of our board of
directors;
- limit who may call special meetings of stockholders; and
- establish advance notice requirements for nomination of candidates for
election to the board or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
31
ITEM 2. PROPERTIES
We currently lease and occupy approximately 677,000 square feet of
laboratory and office space in ten buildings in Rockville, Maryland. Our leased
space includes approximately 415,000 square feet of laboratory space,
approximately 203,000 of manufacturing space secured through long-term leases
and approximately 59,000 square feet of administrative office space.
In addition, several construction projects are underway that will
significantly increase our square footage under lease as follows:
APPROXIMATE
SIZE ANTICIPATED
PROJECT (SQUARE FEET) OCCUPANCY DATE
------- ----------- --------------
Research building 73,000 2003
Laboratory and office campus 624,000 2003
Large-scale manufacturing
facility 405,000 2004
For additional discussion of the financing of these three facilities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
We anticipate that the construction of the laboratory and office campus
will enable us to continue to expand our operations in close proximity to one
another. We believe that our properties are generally in good condition, well
maintained, suitable and adequate to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders, held on May 23, 2001, the following
proposals were approved.
Affirmative Votes
Votes Withheld
---------------- -----------------
TERMS EXPIRING IN 2004
Jurgen Drews, M.D. 101,999,504 10,435,534
James B. Wyngaarden, M.D. 111,637,197 797,841
The following proposals were approved at our Annual Meeting of Shareholders:
Affirmative Negative
Votes Votes Abstentions
----------- ------------ -------------
1. Amendment to the Company's Restated
Certificate of Incorporation (Fifth)
to increase the Company's authorized
common stock from 250,000,000 to
400,000,000 shares. 110,654,968 1,654,693 125,377
2. Amendment of the 2000 Stock Incentive Plan. 63,646,004 26,338,481 130,138
Ratification of the selection of Ernst &
Young, LLP as independent auditors for the
3. fiscal year ending December 31, 2001. 112,248,096 131,299 55,642
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER'S MATTERS
Our common stock has been traded on the NASDAQ National Market System
under the symbol HGSI since December 2, 1993. The following table presents the
quarterly high and low closing prices as quoted by NASDAQ, restated to reflect
two two-for-one stock splits, paid in the form of stock dividends on January
28, 2000 and October 5, 2000.
2000 HIGH LOW
First Quarter $112.63 $34.56
Second Quarter $ 75.93 $27.63
Third Quarter $ 89.91 $60.41
Fourth Quarter $100.94 $58.50
2001 HIGH LOW
First Quarter $ 67.81 $40.38
Second Quarter $ 75.31 $39.19
Third Quarter $ 58.80 $28.00
Fourth Quarter $ 47.28 $30.88
As of January 31, 2002, there were approximately 774 holders of record of our
common stock. We have never declared or paid any cash dividends. We do not
anticipate declaring or paying cash dividends for the foreseeable future, in
part because existing contractual agreements prohibit such dividends. Instead,
we will retain our earnings, if any, for the future operation and expansion of
our business.
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We present below our selected consolidated financial data for the
years ended December 31, 2001, 2000 and 1999, and as of December 31, 2001 and
2000 which have been derived from the audited consolidated financial
statements included elsewhere herein and should be read in conjunction with
such consolidated financial statements and the accompanying notes. We present
below our selected financial data for the years ended December 31, 1998 and
1997, and as of December 31, 1999, 1998 and 1997 which have been derived from
audited financial statements not included herein. The results of operations of
prior periods are not necessarily indicative of results that may be expected
for any other period. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 1. Business." Per
share data has been restated to reflect two two-for-one stock splits, paid in
the form of stock dividends on January 28, 2000 and on October 5, 2000.
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Revenue-research and
development collaborative
contracts:
Third parties............... $ 10,250 $ 19,500 $20,280 $27,030 $25,605
Related parties............. 2,568 2,568 4,244 2,568 -
------- ------- ------ ------ ------
Total revenue.................... 12,818 22,068 24,524 29,598 25,605
------- ------- ------ ------ ------
Costs and expenses:
Research and development:
Direct expenditures.......... 146,276 91,456 60,607 47,006 39,893
Purchased in-process
research and development... - 134,050 - - -
Payments under research
services agreement......... - - - - 6,247
------- ------- ------ ------ ------
Total research and
development................ 146,276 225,506 60,607 47,006 46,140
General and administrative...... 38,714 27,083 14,838 14,370 11,113
------- ------- ------ ------ ------
Total costs and expenses.......... 184,990 252,589 75,445 61,376 57,253
------- ------- ------ ------ ------
Income (loss) from operations.. (172,172) (230,521) (50,921) (31,778) (31,648)
Net interest income............... 81,228 40,147 8,977 11,047 10,500
Charge for impaired investment.... (22,314) - - - -
Debt conversion expenses.......... (3,894) (50,818) - - -
Other income...................... - 5,861 - - -
Equity in income (loss) in joint
venture......................... - - - (2,226) -
------- ------- ------ ------ ------
Income (loss) before taxes and
cumulative effect of change in
accounting principle (1)......... (117,152) (235,331) (41,944) (22,957) (21,148)
Provision for income taxes....... - 225 225 225 245
------- ------- ------ ------ ------
Net income (loss) before
cumulative effect of change in
accounting principle (1) ......... (117,152) (235,556) (42,169) (23,182) (21,393)
Cumulative effect of change in
accounting principle (2).......... - (8,250) - - -
------- ------- ------ ------ ------
Net income (loss) (1) ............ $(117,152) $(243,806) $(42,169) $(23,182) $(21,393)
======= ======= ====== ====== ======
34
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Net income (loss) per share
before cumulative effect of
change in accounting principle,
basic and diluted (1) (3)...... $ (0.92) $ (2.12) $ (0.46) $ (0.26) $ (0.25) (4)
Cumulative effect of change in
accounting principle........... - (0.08) - - -
-------- -------- ------- -------- --------
Net income (loss) per share,
basic and diluted (1) (3)...... $ (0.92) $ (2.20) $ (0.46) $ (0.26) $ (0.25) (4)
======== ======== ======= ======== ========
Pro forma amounts assuming the
accounting change is applied
retroactively:
Net income (loss) .............. N/A (5) $(235,556) $(42,169) $ (24,182) $ (20,393)
======== ======= ======== ========
Net income (loss) per share,
basic and diluted............... N/A (5) $ (2.12) $ (0.46) $ (0.27) $ (0.24)
======== ======= ======== ========
OTHER DATA:
Ratio of earnings
to fixed charges ............. - - - - -
Coverage deficiency (1)......... $ (117,152) $(235,331) $(41,944) $ (22,957) $ (21,148)
======== ======== ======= ======== ========
AS OF DECEMBER 31,
------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents,
short-term and restricted
investments (6)................ $1,689,311 $1,774,640 $466,192 $188,516 $211,794
Total assets (7) ............... 1,865,004 1,948,525 527,725 244,247 236,232
Total debt and capital lease,
less current portion ......... 503,970 (7) 533,146 326,336 1,780 2,224
Retained deficit................ (481,831) (364,679) (120,873) (78,704) (55,522)
Total stockholders' equity...... 1,304,463 1,362,955 169,068 208,848 223,254
- ------------------------------------------------------------------------------
(1) For 2001, amounts include non-recurring charges aggregating $26,208
arising from a charge for impaired investment and debt conversion expenses
of $22,314, or $0.18 per share, and $3,894, or $0.03 per share,
respectively. For 2000, amounts include non-recurring charges aggregating
$184,868 arising from purchased in-process research and development and
debt conversion expenses of $134,050, or $1.21 per share, and $50,818, or
$0.46 per share, respectively.
(2) The cumulative effect of change in accounting principle is a one-time,
non-cash charge relating to our implementation of Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 was issued by the Securities and
Exchange Commission (SEC) in December 1999. SAB 101 provides guidance
related to revenue recognition policies based on interpretations and
practices followed by the SEC. The impact of our implementation of SAB 101
was to defer revenue recognition for certain portions of the revenue we
previously recognized under our collaborative agreements into future
accounting periods. For further discussion, see Note B of the notes to our
consolidated financial statements included herein.
(3) Restated to reflect two two-for-one stock splits paid in the form of a
stock dividend on January 28, 2000 and on October 5, 2000.
(4) The net loss per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share. For further discussion of net loss per share, see
Note B of the notes to our consolidated financial statements included
herein.
35
(5) Pro forma presentation of the accounting change is not applicable for
fiscal year 2001 as the change was implemented in 2000, retroactive to
January 1, 2000.
(6) "Cash, cash equivalents, short-term and restricted investments" for 2001,
2000, 1999, 1998 and 1997 includes $144,901, $12,332, $11,637, $6,749 and
$6,582, respectively of restricted investments relating to certain
operating leases.
(7) "Total assets" for 2001, 2000, 1999, 1998 and 1997 includes $144,901,
$12,332, $11,637, $6,749 and $6,582, respectively, of restricted
investments relating to certain operating leases. "Total debt and capital
lease, less current portion" for 2001 does not include any operating lease
obligations under various facility and equipment lease arrangements. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for additional
discussion.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based
on the identification and study of genes. We focus our internal product
development efforts on therapeutic proteins, antibodies, peptides and fusion
proteins and we use collaborations for the development of gene therapy
products and small molecule drugs. We have discovered a large number of genes
through our genomics capabilities and have developed a rapidly evolving
product pipeline based on our discoveries.
We have seven products, including three therapeutic proteins, one antibody
and three albumin fusion products that we have advanced into human clinical
trials; two products are awaiting approval from FDA to enter human clinical
trials; a tenth product, a gene therapy product based on a gene we discovered,
has been licensed to Vascular Genetics, Inc. (VGI) and is in human clinical
trials being conducted by VGI; an eleventh product, an enzyme that lowers levels
of lipoprotein-associated phospholipase A2 (Lp-PLA2), was discovered by
GlaxoSmithKline (GSK) as part of our collaboration with GSK and is also in human
clinical trials being conducted by GSK. We have a number of additional products
in preclinical development.
We have extensive capabilities in gene discovery, intellectual property
protection and preclinical and clinical development and have established a
manufacturing capability for the preparation of our proteins, antibodies and
fusion proteins for human studies. We intend to add sales and marketing as
appropriate and are currently adding additional manufacturing capabilities. We
have established strategic partnerships with a number of leading pharmaceutical
and biotechnology companies to leverage our capabilities and gain access to
complementary technologies and sales and marketing infrastructure. Some of these
partnerships provide us with research funding and milestone payments, along with
royalty payments as products are developed and commercialized. We are also
entitled to certain co-promotion, co-development, revenue sharing and other
product rights.
We have not received any product sales revenue or royalties from product
sales and do not anticipate revenues from product sales or from royalties on
product sales in the next several years. From inception through December 31,
2001, we have received (1) $70.0 million in revenue, $55.0 million in equity
payments and $1.0 million in a milestone payment pursuant to our collaboration
agreements with GlaxoSmithKline, (2) payments of $87.5 million from additional
collaboration partners and (3) an aggregate of $60.8 million from other
collaborators, including common stock from Transgene S.A. valued at $25.7
million, $16.0 million from Pioneer Hi-Bred International, Inc., $9.0 million
from Pharmacia & Upjohn Company, $5.0 million from Schering-Plough (in
addition to certain payments received from Schering-Plough pursuant to our
additional collaboration partner agreements), $3.0 million from F. Hoffmann-La
Roche, $1.1 million from OraVax Merieux Co. and Merieux OraVax S.N.C., and
$1.0 million from MedImmune. To date, we have received all of our revenue from
payments made under our collaboration agreements with GlaxoSmithKline and, to
a lesser extent, other agreements. The GlaxoSmithKline collaboration agreement
and many of our other collaboration agreements expired in 2001 and will only
generate additional milestone and royalty payments if our collaborators
successfully develop drugs based on our technology. We may not receive any of
these payments and may not be able to enter into additional collaboration
agreements.
We expect that our revenue sources for at least the next several years may
be limited to interest income, payments under various collaboration agreements
to the extent milestones are met, payments from the sale of product rights and
other payments from other collaborators and licensees under existing or future
arrangements, to the extent that we enter into any future arrangements. We
expect to continue to incur substantial expenses relating to our research and
development efforts, which are expected to increase relative to historical
levels as we focus on preclinical and clinical trials required for the
development of therapeutic protein, antibody and fusion protein product
candidates. As a result, we expect to incur continued and increasing losses
over the next several years unless we are able to realize additional revenues
under existing or new collaboration agreements. The timing and amounts of such
revenues, if any, cannot be predicted with certainty and will likely fluctuate
sharply. Results of operations for any period may be unrelated to the results
of operations for any other period. In addition, historical results should not
be viewed as indicative of future operating results.
37
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Actual results could differ materially from
those estimates. The items in our financial statements requiring significant
estimates and judgments are as follows:
We carry our cash, cash equivalents, investments, other assets, accounts
payable and accrued expenses and other accrued expenses at their respective
fair values. Our other assets include deferred financing costs relating to our
convertible subordinated notes. We are amortizing these costs over the life of
the notes and, in the event the notes are converted to equity, we would
reclassify the unamortized deferred financing costs to equity. We periodically
monitor these fair values to determine if impairment write-downs are required.
We lease various real properties under operating leases that generally
require us to pay taxes, insurance and maintenance. Two of our operating leases
are commonly referred to as "synthetic leases". A synthetic lease is a form of
off-balance sheet financing under which an unrelated third party funds 100% of
the costs for the acquisition and/or construction of the property and leases the
asset to the lessee, and at least 3% of the third party funds represent risk
equity. Our synthetic leases are treated as operating leases for accounting
purposes and financing leases for tax purposes. While we recently entered into
these synthetic leases, we will periodically review the fair values of the
properties being leased or constructed in order to determine potential
accounting ramifications. Changes in the equity participation of the third
parties could affect the classification of this lease from operating to
financing. In that event, we would include both the cost and debt associated
with the properties on our consolidated balance sheet. Additionally, under these
leases we also provide a residual value guarantee which guarantees the lessor
that the residual value of the leased assets will be at least equal to a
specified amount at lease termination.
Revenue from non-refundable upfront license fees where we continue
involvement through an obligation to provide access to our technology is
recognized ratably over the period of obligation. Deferred revenues related to
these obligations are recognized on a straight-line basis over the life of the
obligation.
Revenue associated with performance milestones is recognized based on the
achievement of the milestones, as defined in the respective agreements.
Research and development expenses include related salaries, contractor
fees and allocated facility costs. Such costs are charged to research and
development expense as incurred.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues. We had revenues of $12.8 million and $22.1 million for the
years ended December 31, 2001 and December 31, 2000, respectively. The 2001
revenue consisted of the recognition of $9.2 million in license fees and
additional payments from collaborations with Schering-Plough, Sanofi-Synthelabo,
and Merck KGaA, the recognition of $2.6 million from the collaboration with
Transgene, S.A. and $1.0 million in a milestone payment from GlaxoSmithKline.
The 2000 revenue consisted of $18.5 million in license fees and additional
payments from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck
KGaA, the recognition of $2.6 million from the collaboration with Transgene,
S.A., and $1.0 million in license revenue from MedImmune. In 2000, the Company
implemented Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101
impacts the Company's revenues pertaining to its collaborative agreements with
Schering-Plough, Sanofi-Synthelabo, and Merck KGaA for both 2000 and 2001. See
Note B of the Notes to Consolidated Financial Statements for additional
discussion.
Expenses. Research and development expenses increased to $146.3 million
for the year ended December 31, 2001 from $91.5 million for the year ended
December 31, 2000, excluding the $134.1 million charge for Purchased in-process
research and development in 2000. We expect to continue to incur substantial
expenses relating to our research and development efforts, which expenses are
expected to increase relative to historical levels as we focus on preclinical
and clinical trials required for the development of our protein, antibody and
fusion product candidates.
38
RESULTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 (CONTINUED)
We track our research and development expenditures by type of cost incurred -
preclinical, clinical and manufacturing costs.
Our preclinical costs increased to $79.3 million for the year ended
December 31, 2001 from $58.3 million for the year ended December 31, 2000.
This increase is due primarily to expanded activities, including toxicology
studies, needed to support our investigational new drug filings that were made
or will be made in the future, along with expanded activities in the area of
antibody development, including increased outside collaboration costs and
milestone payments.
Our clinical costs increased to $27.8 million for the year ended
December 31, 2001 from $11.1 million for the year ended December 31, 2000.
This increase is due primarily to the cost of continuing ongoing trials from
2000 along with the cost of filing, initiating and sustaining new trials that
began in 2001. We had seven drugs in eleven human clinical trials ongoing as
of December 31, 2001 compared to four drugs in six human clinical trials
ongoing as of December 31, 2000.
Our manufacturing costs increased to $39.2 million for the year ended
December 31, 2001 from $22.1 million for the year ended December 31, 2000.
This increase is due to the increased production activities within our process
development and manufacturing facilities needed to support our increased
clinical activities.
Purchased in-process research and development expense of $134.1
million for the year ended December 31, 2000 relates to the acquisition of
Principia Pharmaceutical Corporation on September 8, 2000. This amount
represents that portion of the $135.1 million purchase price allocated to
in-process research and development. See Note C of the Notes to Consolidated
Financial Statements for additional discussion.
General and administrative expenses increased to $38.7 million for the
year ended December 31, 2001 from $27.1 million for the year ended December
31, 2000 to support the increase in our activities. The increase also resulted
from increased market research costs in connection with our expanding clinical
activities and higher legal expenses associated with filing and prosecuting a
larger number of patent applications relating to genes and proteins we
discovered. Patent expenses will continue to increase as additional
applications are filed and existing applications are prosecuted in the United
States and internationally.
Interest income was $105.9 million for the year ended December 31,
2001 compared to $62.2 million for the year ended December 31, 2000 due to
higher average cash and short-term investment balances. While we had higher
average cash balances, the yield on our investments was 6.1% for the year
ended December 31, 2001 as compared to 6.7% for the year ended December 31,
2000. Our average cash balance decreased during 2001 as a result of our net
loss and capital expenditures in 2001, partially offset by proceeds from the
issuance of stock pursuant to our stock option and employee stock purchase
plans. Interest expense increased for the year ended December 31, 2001 in
comparison to the year ended December 31, 2000 due primarily to a full year of
interest expense in 2001 relating to the issuance of $525.0 million of
convertible subordinated notes during the first quarter of fiscal 2000
partially offset by a reduction in interest expense associated with
previously-issued convertible subordinated notes that were converted to equity
during the first quarter of fiscal 2000.
Charge for impaired investment of $22.3 million for the year ended
December 31, 2001 relates to the reduction made to the carrying value in our
equity investment in Transgene, S.A. We reduced the carrying value of this
investment to $3.4 million from $25.7 million due to an impairment that we
deemed to be other-than-temporary. See Note D of the Notes to Consolidated
Financial Statements for additional discussion.
Debt conversion expenses decreased to $3.9 million for the year ended
December 31, 2001 from $50.8 million for the year ended December 31, 2000. The
debt conversion expenses of $3.9 million relate primarily to the second
quarter of 2001 conversion of $25.0 million aggregate principal of 5%
convertible subordinated notes due 2007 into equity. The debt conversion
expenses of $50.8 million relate to the first quarter of 2000 conversion costs
of $318.3 million aggregate principal amount of convertible subordinated notes
into equity. We converted $118.3
39
RESULTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 (CONTINUED)
million of our $125.0 million aggregate principal amount of 5 1/2% notes due
2006 into common stock at a cost of $20.8 million, substantially all of which
was paid in the form of common stock. In addition, we converted all of our
$200.0 million aggregate principal amount of 5% notes due 2006 into common
stock at a cost of $30.0 million, all of which was paid in cash. See Note I of
the Notes to Consolidated Financial Statements for additional discussion.
Other income of $5.9 million for the year ended December 31, 2000
relates to the gain realized on the sale of 290,000 ordinary shares of our
investment in Cambridge Antibody Technology. See Note D of the Notes to
Consolidated Financial Statements for additional discussion.
Cumulative effect of a change in accounting principle of $8.3 million
for the year ended December 31, 2000 relates to our implementation of SAB 101.
Net Income (Loss). We recorded a net loss of $117.2 million, or $0.92
per share, for the year ended December 31, 2001 compared to a net loss of $243.8
million, or $2.20 per share, for the year ended December 31, 2000. The decreased
loss for 2001 compared to 2000 reflects the absence of Purchased in-process
research and development expense of $134.1 million, or $1.21 per share,
reduction of debt conversion expenses, an increase in net interest income and
the affect of the cumulative effect of a change in accounting principle
recognized in 2000, partially offset by the charge for impaired investment,
decreased revenue and the increase in manufacturing operations, increased
investment in the development of preclinical and clinical drug candidates, and
increased general and administrative activities. Excluding the charge for
impaired investment incurred in 2001, the charges for debt conversion expenses
for both 2001 and 2000, the Purchased in-process research and development and
the cumulative effect of a change in accounting principle incurred in 2000, our
net loss would have been $90.9 million, or $0.72 per share for the year ended
December 31, 2001, compared to $50.7 million, or $0.46 per share for the year
ended December 31, 2000.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues. We had revenues of $22.1 million and $24.5 million for the
years ended December 31, 2000 and December 31, 1999, respectively. The 2000
revenue consisted of $18.5 million in license fees and additional payments
from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA,
the recognition of $2.6 million from the collaboration with Transgene, S.A.,
and $1.0 million in license revenue from MedImmune. The 1999 revenue consisted
of $18.5 million in license fees and additional payments from collaborations
with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA, the recognition of
$4.2 million from the collaborations with Transgene, S.A. and Pharmacia, and
$1.8 million in other revenue. SAB 101 impacted the Company's revenues
pertaining to its collaborative agreements with Schering-Plough,
Sanofi-Synthelabo, and Merck KGaA for 2000. See Note B of the Notes to
Consolidated Financial Statements for additional discussion.
Expenses. Research and development expenses increased to $91.5 million
for the year ended December 31, 2000 from $60.6 million for the year ended
December 31, 1999, excluding the $134.1 million charge for Purchased in-process
research and development in 2000. We track our research and development
expenditures by type of cost incurred - preclinical, clinical and manufacturing
costs.
Our preclinical costs increased to $58.3 million for the year ended
December 31, 2000 from $41.2 million for the year ended December 31, 1999.
This increase is due primarily to expanded activities, including toxicology
studies, needed to support our investigational new drug filings that were made
or will be made in the future, along with expanded activities in the area of
antibody development, including increased outside collaboration costs.
Our clinical costs increased to $11.1 million for the year ended
December 31, 2000 from $5.4 million for the year ended December 31, 1999. This
increase is due primarily to the cost of expanding our clinical trials in 2000
compared to the prior year. We had four drugs in six human clinical trials
ongoing as of December 31, 2000 compared to two drugs in four human clinical
trials ongoing as of December 31, 1999.
Our manufacturing costs increased to $22.1 million for the year ended
December 31, 2000 from $14.0 million for the year ended December 31, 1999.
This increase is due to a full year of operations for our process
40
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
development and manufacturing facility in 2000, compared to 1999, when the
facility commenced operations in the second quarter of 1999.
Purchased in-process research and development expense of $134.1
million for the year ended December 31, 2000 relates to the acquisition of
Principia Pharmaceutical Corporation on September 8, 2000.
General and administrative expenses increased to $27.1 million for the
year ended December 31, 2000 from $14.8 million for the year ended December
31, 1999 to support the increase in our activities. The increase also resulted
from higher legal expenses associated with filing and prosecuting a larger
number of patent applications relating to genes and proteins we discovered.
Interest income was higher for the year ended December 31, 2000
compared to the year ended December 31, 1999 due to higher average cash
balances. In addition, the yield on our investments was 6.7% for the year
ended December 31, 2000 as compared to 5.3% for the year ended December 31,
1999. Our average cash balance increased during 2000 as a result of the
placement of two convertible subordinated note offerings during 2000, totaling
$525.0 million and a public offering of common stock which raised net proceeds
of $912.7 million. Interest expense increased for the year ended December 31,
2000 in comparison to the year ended December 31, 1999 due primarily to the
issuance of $525.0 million of convertible subordinated notes during the first
quarter of fiscal 2000.
We had debt conversion expenses of $50.8 million for the year ended
December 31, 2000 but no debt conversion expenses in 1999.
Other income of $5.9 million for the year ended December 31, 2000
relates to the gain realized on the sale of 290,000 ordinary shares of our
investment in Cambridge Antibody Technology. See Note D of the Notes to
Consolidated Financial Statements for additional discussion.
Cumulative effect of a change in accounting principle of $8.3 million
for the year ended December 31, 2000 relates to our implementation of SAB 101.
As a result of the implementation of SAB 101, the Company recorded a charge of
$8.3 million as a cumulative effect of a change in accounting principle,
retroactive to January 1, 2000. See Note B of the Notes to Consolidated
Financial Statements for additional discussion.
Net Income (Loss). We recorded a net loss of $243.8 million, or $2.20
per share, for the year ended December 31, 2000 compared to a net loss of
$42.2 million, or $0.46 per share, for the year ended December 31, 1999. The
difference in results for the years ended December 31, 2000 and 1999 is
primarily due to the $134.1 million, or $1.21 per share, charge for purchased
in-process research and development, the $50.8 million, or $0.46 per share, of
debt conversion expenses, the $8.3 million, or $0.08 per share, charge for the
cumulative effect of a change in accounting principle, higher operating
expenses, and reduced collaboration partner revenues, offset by higher net
interest income. Excluding the impact of the charge for purchased in-process
research and development, debt conversion expenses, and the cumulative effect
of a change in accounting principle, our net loss would have been $50.7
million, or $0.46 per share, compared to a net loss of $42.2 million, or $0.46
per share, for the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $1.5 billion at December 31, 2001 as
compared to $1.7 billion at December 31, 2000. The decrease in working capital
is due to our net loss and capital expenditures, along with an increase in our
restricted investments, partially offset by proceeds from the issuance of
common stock. Our restricted investments totaled approximately $144.9 million
and $12.3 million at December 31, 2001 and 2000, respectively. Our restricted
investments will increase to approximately $541.0 million by 2004 assuming the
full amount of $450.0 million of lease financing is used for construction
activities and our other collateral obligations remain in place. We will be
required to maintain this collateral in the form of restricted investments
until 2008, at which time all or a portion of the collateral may be used to
satisfy our residual value guarantees under the leases or to exercise our
options to acquire the related properties. As a result, this increase in
restricted investments will reduce our working capital.
41
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We expect to continue to incur substantial expenses relating to our
research and development efforts, which expenses are expected to increase
relative to historical levels as we focus on preclinical and clinical trials
required for the development of an increasing number of therapeutic protein,
antibody and fusion protein product candidates. At December 31, 2001, we had
outstanding commitments for construction and equipment purchases totaling
approximately $16.3 million.
The amounts of expenditures that will be needed to carry out our
business plans are subject to numerous uncertainties, which may adversely
affect our liquidity and capital resources. We are proceeding with numerous
clinical trials, including one multi-year repifermin trial involving over 500
patients. We have several Phase I and Phase II trials underway and expect to
initiate additional trials each year. Completion of these trials may extend
several years or more, but the length of time generally varies considerably
according to the type, complexity, novelty and intended use of the drug
candidate. We estimate that the completion periods for our Phase I, Phase II
and Phase III trials could span one year, one to two years and two to four
years, respectively. The duration and cost of our clinical trials are a
function of numerous factors such as the number of patients to be enrolled in
the trial, the amount of time it takes to enroll them and the number of
clinical sites to be engaged in the trial.
We identify our potential drug candidates by conducting numerous
preclinical studies. We may conduct multiple clinical trials to cover a
variety of indications for each drug candidate. Based upon the results from
our trials, we may elect to discontinue clinical trials for certain
indications or certain drugs in order to concentrate our resources on more
promising drug candidates. For example, in 2001, we announced that the results
from our ulcerative colitis trials showed that our drug candidate, repifermin
was safe and well-tolerated, but not shown to be effective. We are continuing
to analyze the results to determine how to proceed with this indication.
We are advancing many drug candidates, including therapeutic proteins,
antibodies and fusion proteins, in part, to diversify the risks associated
with our research and development spending. In addition, our manufacturing
plants have been designed to enable multi-product manufacturing capability.
Accordingly, we believe our future financial commitments, including
preclinical, clinical or manufacturing, are not substantially dependent on any
single drug candidate. Should we be unable to sustain a multi-product drug
pipeline, our dependence on the success of one or a few drug candidates would
increase.
We must receive FDA approval to advance each of our products through
each phase of clinical testing. Moreover, we must receive FDA regulatory
approval to commercially launch any of our products. In order to receive such
approval, the FDA must conclude that our clinical data establish safety and
efficacy. We cannot be certain that we will establish sufficient safety and
efficacy data to receive regulatory approval for any of our drugs.
In addition, part of our business plan includes collaborating with
others. For example, GlaxoSmithKline ("GSK") is conducting human clinical
trials of an enzyme discovered by GSK as part of our collaboration with GSK,
that lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), as a
treatment for cardiovascular disease. We have no control over the progress or
completion of these trials. While we received a $1.0 million payment from GSK
in connection with a development milestone met by GSK during 2001, we cannot
forecast with any degree of certainty the likelihood of receiving future
milestone or royalty payments. We also cannot forecast with any degree of
certainty whether any of our current or future collaborations will affect our
drug development efforts and therefore, our capital and liquidity
requirements.
Because of the uncertainties discussed above, the costs to advance our
research and development projects are difficult to estimate and may vary
significantly. We expect that our existing funds and interest income will be
sufficient to fund our operations for the next several years. Our future
capital requirements and the adequacy of our available funds will depend on
many factors, including scientific progress in our research and development
programs (including our preclinical and clinical product development
activities), the magnitude of those programs, the ability to establish
collaborative and licensing arrangements, the cost involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and competing
technological and market developments. There can be no assurance that any
additional financing required in the future will be available on acceptable
terms, if at all.
42
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our future liquidity and capital resources will be affected by our
contractual obligations. These obligations are summarized below:
Payments Due by Period (dollars in thousands)
---------------------------------------------------------------
One year Two to three Four to five After five
CONTRACTUAL OBLIGATIONS Total or less years years years
---------------------------------------------------------------
Long-term debt.................. $503,912 $444 $448 $3,120 $499,900
Capital lease obligation....... 743 241 502 - -
Operating leases (1) (2)....... 191,647 16,057 37,365 41,692 96,533
Unconditional purchase obligations (3)... 19,850 19,600 250 - -
Long-term collaboration obligations (4).. - - - - -
---------------------------------------------------------------
Total contractual cash obligations (5).. $716,152 $36,342 $38,565 $44,812 $596,433
===============================================================
(1) Certain of our current or future lease payments are based upon
currently applicable interest rates. See additional discussion of these
facility leases below.
(2) Certain of our operating leases contain residual value guarantees
relating to two facility leases described below.
(3) Our unconditional purchase obligations relate primarily to commitments
for capital expenditures, consisting primarily of laboratory space
build-out and equipment.
(4) Because we cannot forecast with any degree of certainty whether any of
our current collaborations will require us to make future milestone or
royalty payments, we have excluded these amounts from the above table.
(5) For additional discussion of our debt obligations and lease
commitments, see Notes I and J of the Notes to the Consolidated
Financial Statements.
During 2001, we entered into two seven-year lease agreements (the
"October 2001 lease" and the "November 2001 lease") relating to research,
manufacturing, and administrative space either acquired or under construction by
two trusts controlled by third parties established solely for that purpose. As
part of these agreements, we are required to maintain collateral, in the form of
restricted investments, in amounts equal to 100% of the financed project cost
for the duration of the leases.
Under these lease agreements, which we have accounted for as operating
leases, we have the option to purchase the properties, during and at the end
of the lease terms, at an aggregate amount of approximately $526.0 million.
Alternatively, we can cause the properties to be sold to third parties. We are
contingently liable for the residual value guarantee associated with each
property in the event the net sale proceeds are less than the original
financed costs of the facilities. The residual value guarantee for the October
2001 lease and the November 2001 lease is approximately $64.6 million and
$394.8 million, respectively, assuming the full amount of the financings is
used for construction activities.
The October 2001 lease relates to a research and development complex
adjacent to our current corporate campus. We are leasing this property for seven
years from a trust established solely for this purpose by Allfirst Bank. The
trust is leasing the property from the Maryland Economic Development Corporation
("MEDCO"), which is the owner of the property. The cost of the existing property
along with a building currently under construction is approximately $76.0
million. We are required to maintain collateral in the form of marketable
securities equal to 100% of the financed project cost with the lending
institution for the duration of the lease. The rent under this lease is
currently based on a floating interest rate, but the trust can lock in a fixed
interest rate at any time at our request. To the extent the trust does not lock
in a fixed interest rate, if interest rates increase, our rent obligations would
also increase. If interest rates decrease, our rent obligations would decrease.
As of December 31, 2001, the trust had fixed the interest rate on $56.0 million
at approximately 4.5%. The remaining $20.0 million is floating based primarily
on the seven-day LIBOR rate, which was approximately 1.98%, as of December 31,
2001.
We have a residual value guarantee of 85% of the total financed cost
at lease termination. In the event of our default, we are responsible for 100%
of the total financed cost of the project. Although the trust is responsible
for servicing and repaying the debt and equity financings to various parties,
we have made the residual value guarantee to the trust. This trust was
established solely for this one lease. In the event the trust defaults to the
lender
43
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
or in the event the trust is terminated, we have the right to cure the default
or exercise our option to acquire the property. At any time during the lease
term, we have the option to purchase legal and/or beneficial interest in the
project for 100% of the lease balance plus any unpaid indemnity amounts.
The November 2001 lease relates to the construction of our research
and development and administrative main campus and a large-scale manufacturing
facility. We will lease these properties for approximately five years, following
an estimated two-year construction period, from a trust established solely for
this purpose by BancBoston Leasing Investment, Inc. and First Union National
Bank. The trust has entered into agreements with BancBoston and First Union to
provide financing for construction of the properties in the aggregate amount of
$450.0 million. We are required to maintain collateral in the form of marketable
securities equal to 100% of the financed project cost with the lending
institutions for the duration of the lease. The rent under these leases is
currently based on a floating interest rate, but the trust can lock in a fixed
interest rate at any time at our request. To the extent the trust does not lock
in a fixed interest rate, if interest rates increase, our rent obligations would
also increase. If interest rates decrease, our rent obligations would decrease.
At December 31, 2001, the floating interest rate based primarily on short-term
commercial paper was approximately 1.86%.
We have retained ownership of the land for the main campus component
of this project. We have entered into a ground lease with the trust for the
land at fair market value rates. Thereafter, rent will be reduced to a nominal
amount. We will record these lease payments on our balance sheet as deferred
rental income over the two-year construction period and then amortize this
deferral over the remaining term (approximately five years).
We have a residual value guarantee of 87.74% of the total financed
cost at lease termination. In the event of default, we are responsible for
100% of the total financed cost of the project. During the construction
period, we have a residual value guarantee of 89.9% of the financed cost
incurred. Although the trust is responsible for servicing and repaying the
debt and equity financings to various parties, we have made the residual value
guarantee to the trust. This trust was established solely for this one lease.
In the event the trust defaults to the lender or in the event the trust is
terminated, we have the right to cure the default or exercise our option to
acquire the property. At any time during the lease term, we have the option to
purchase legal and/or beneficial interest in the project for 100% of the lease
balance plus any unpaid indemnity amounts.
We understand that the accounting treatment for these leases may be
changed by the Financial Accounting Standards Board in 2002. In that event, we
may be required to include these leased facilities and the related lease
obligations on our balance sheet as assets and liabilities.
Our commitments, and their expiration dates are as follows:
Amount of Commitment Expiration per Period
Other Commercial Commitments (dollars in thousands)
-------------------------------------------------------------------
Total Amounts One year or Two to Four to After five
Committed less three years five years years
-------------------------------------------------------------------
Lines of credit.......................... $ - $ - $ - $ - $ -
Standby letters of credit................ - - - - -
Guarantee - October 2001 lease (1)....... 47,600 - - - 47,600
Guarantee - November 2001 lease (2)...... 15,013 - - - 15,013
Standby repurchase obligations........... - - - - -
Other commercial commitments............. - - - - -
-------------------------------------------------------------------
Total commercial commitments............. $62,613 $ - $ - $ - $62,613
===================================================================
(1) The guarantee of 85.0% included above is based upon the loaned amount
of $56.0 million as of December 31, 2001. Our guarantee will increase
to approximately $64.6 million when we reach the full $76.0 million
financed cost of the project at the end of the construction period.
(2) The construction-period guarantee of 89.9% included above is based
upon a financed cost incurred of approximately $16.7 million as of
December 31, 2001. Our post-construction guarantee will be 87.74% of
financed project costs and will increase to approximately $394.8
million when we reach the full $450.0 million financed cost of the
project at the end of the construction period.
44
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As of December 31, 2001, we had net operating loss carryforwards for
federal income tax purposes of approximately $477.6 million, which expire, if
unused, by the year 2021. We also have available research and development tax
credit and other tax credit carryforwards of approximately $25.0 million, the
majority of which will expire, if unused, by the year 2021.
Our funds may be invested in U.S. Treasuries, government agency
obligations, high grade debt securities and various money market instruments
rated "A" or better. Such investments reflect our policy regarding the
investment of liquid assets, which is to seek a reasonable rate of return
consistent with an emphasis on safety, liquidity and preservation of capital.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements contained in "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The forward-looking statements are based on
our current intent, belief and expectations. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict. Actual results may differ
materially from these forward-looking statements because of our unproven
business model, dependence on new technologies, uncertainty and timing of
clinical trials, ability to develop and commercialize products, dependence on
collaborators for services and revenue, substantial indebtedness, intense
competition, uncertainty of patent and intellectual property protection,
dependence on key management, uncertainty of regulation of products,
dependence on key suppliers, the impact of future alliances or transactions
and other risks that may be described in this filing and our other filings
with the Securities and Exchange Commission. Existing and prospective
investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of today's date. We undertake no obligation to
update or revise the information contained in this announcement whether as a
result of new information, future events or circumstances or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. Our investment portfolio can be comprised of low-risk
U.S. Treasuries, government agency obligations, high-grade debt having a
rating of at least an "A" rating and various money market instruments. The
short-term nature of these securities, which currently have an average term of
approximately eighteen months, significantly decreases the risk of a material
loss caused by a market change. We believe that a hypothetical 100 basis point
adverse move (increase) in interest rates along the entire interest rate yield
curve would adversely affect the fair value of our cash, cash equivalents and
short-term and restricted investments by approximately $25.3 million, or
approximately 1.5% of the aggregate fair value of $1.69 billion, at December
31, 2001. For these reasons, and because these securities are almost always
held to maturity, we believe we do not have significant exposure to market
risks associated with changes in interest rates related to our debt securities
held as of December 31, 2001. We believe that any market change related to our
investment securities held as of December 31, 2001 is not material to our
consolidated financial statements. However, given the short-term nature of
these securities, a general decline in interest rates would adversely affect
the interest income from our portfolio as securities mature and are replaced
with securities having a lower interest rate.
The facility leases we entered into during the fourth quarter of 2001
require us to maintain minimum levels of restricted investments as collateral
for these facilities. By 2004, we expect our restricted investments for these
leases to be approximately $526.0 million. We are also required to maintain
approximately $15.0 million in restricted investments with respect to our
process development and manufacturing facility leases. Although the market value
for these investments may rise or fall as a result of changes in interest rates,
we will be required to maintain this level of restricted investments in both a
rising or declining interest rate environment.
The rent under certain of these facility leases is based on a floating
interest rate. We can direct MEDCO or the trusts which own certain of the
facilities and lease them to us to lock in a fixed interest rate. As of
December 31, 2001, such a fixed rate for seven years would be approximately
5.46% compared to the floating rate as of December 31, 2001 of approximately
2.0%. If interest rates increase, our rent obligations would also increase,
which would adversely affect our operating expenses.
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
As of December 31, 2001, the carrying values of our equity investments
in Transgene, Cambridge Antibody Technology (CAT) and Ciphergen were
approximately $3.4 million, $38.7 million and $1.7 million, respectively. Our
investments in Transgene and Ciphergen are subject to equity market risk. Our
investment in CAT is denominated in pounds sterling and is subject to both
foreign currency risk as well as equity market risk.
In 2001, we reduced the carrying value of our equity investment in
Transgene to $3.4 million from $25.7 million due to an impairment of the value
of the investment that we deemed to be other-than-temporary. See Note D of the
Notes to Consolidated Financial Statements for additional discussion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 - F-31.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate herein by reference the information concerning directors
and executive officers in our Notice of Annual Stockholders' Meeting and Proxy
Statement to be filed within 120 days after the end of our fiscal year (the
"2002 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
We incorporate herein by reference the information concerning executive
compensation to be contained in the 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
We incorporate herein by reference the information concerning security
ownership of certain beneficial owners and management to be contained in the
2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate herein by reference the information concerning certain
relationships and related transactions to be contained in the 2002 Proxy
Statement.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Annual Report:
(1) Index to Consolidated Financial Statements
PAGE
NUMBER
------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets at December 31, 2001 and 2000... F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999............................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999............................ F-6
Notes to Consolidated Financial Statements.................. F-8
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not
required.
(3) Exhibits
Exhibit No.
- -----------
3.1* Certificate of Incorporation of the Registrant (Filed as
Exhibit 3.1 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1993, Exhibit 3.3 to the Form 10-K for the
fiscal year ended December 31, 1997, Exhibit 3.1 to the Form
8-K filed December 16, 1999 and Exhibit 3.1 to the Form 10-Q
filed July 31, 2001).
3.2* By-laws of the Registrant (Filed as Exhibit 3.2 to the
Registrant's Form 10-Q filed August 3, 2000).
4.1* Form of Common Stock certificate. (Filed as Exhibit 4.1 to the
Registrant's Form S-3 Registration Statement, as amended
(Commission File No. 333-45272), filed September 6, 2000).
4.2* Rights Agreement between the Registrant and American Stock
Transfer & Trust Company, as Rights Agent, dated as of May 20,
1998 (Filed as Exhibit 4 to the Registrant's Form 8-K filed
May 28, 1998.)
4.3* Indenture dated as of June 25, 1999 between the Registrant and
The Bank of New York, as trustee, including the form of 5 1/2%
Convertible Subordinated Notes due 2006 (Filed as Exhibit 4.1
to the Registrant's Form 8-K filed June 28, 1999).
4.4* Indenture dated as of February 1, 2000 between the Registrant
and The Bank of New York, as trustee, including the form of
5% Convertible Subordinated Notes due 2007 (Filed as Exhibit
4.1 to the Registrant's Form 8-K filed February 2, 2000).
47
4.5* Indenture dated as of March 10, 2000 between the Registrant
and The Bank of New York, as trustee, including the form of 3
3/4% Convertible Subordinated Notes due 2007 (filed as Exhibit
4.1 to the Registrant's Form 8-K filed March 13, 2000).
10.1* Stock Purchase and Restriction Agreement, dated December 31,
1992, between the Registrant and William A. Haseltine, Ph.D.
(Filed as Exhibit 10.15 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No.
33-69850), originally filed October 1, 1993).
10.2* Employment Agreement, dated February 25, 1997, with William A.
Haseltine, Ph.D. (Filed as Exhibit 10.44 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1996).
10.3* Restricted Stock Purchase Agreement, dated May 18, 1993,
between the Registrant and William A. Haseltine, Ph.D. (Filed
as Exhibit 10.24 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993).
10.4* Promissory Note, dated March 4, 1994, given by William A.
Haseltine, Ph.D. to the Registrant (Filed as Exhibit 10.58 to
the Registrant's Form 10-K for the fiscal year ended December
31, 1993).
10.5* First Allonge to Promissory Note, dated December 16, 1994,
given by William A. Haseltine, Ph.D. to the Registrant (Filed
as Exhibit 10.65 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994).
10.6* Pledge Agreement, dated March 4, 1994, between William A.
Haseltine, Ph.D. and Registrant (Filed as Exhibit 10.59 to the
Registrant's Form 10-K for the fiscal year ended December 31,
1993).
10.7* First Amendment to Pledge Agreement, dated December 16, 1994,
between William A. Haseltine, Ph.D. and Registrant (Filed as
Exhibit 10.67 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994).
10.8* Employment Agreement, dated October 1992, with Craig A. Rosen,
Ph.D. (Filed as Exhibit 10.17 to the Registrant's Form S-1
Registration Statement, as amended (Commission File No.
33-69850), originally filed October 1, 1993).
48
10.9* Restricted Stock Purchase Agreement, dated April 21, 1993,
between the Registrant and Craig A. Rosen, Ph.D. (Filed as
Exhibit 10.22 to the Registrant's Form S-1 Registration
Statement, as amended (Commission File No. 33-69850),
originally filed October 1, 1993).
10.10* 2000 Stock Incentive Plan (Filed as Exhibit A to the
Registrant's Definitive Proxy Statement on Schedule 14A filed
April 18, 2001).
10.11* Principia Pharmaceutical Corporation 1999 Equity Compensation
Plan (Filed as Exhibit 4.6 to the Registrant's Registration
Statement on Form S-8, File No. 333-46298, filed September 21,
2000).
10.12* 2000 Employee Stock Purchase Plan (Filed as Exhibit B to the
Registrant's Definitive Proxy Statement on Schedule 14A filed
April 24, 2000).
10.13* $4,000,000 Maryland Industrial Development Financing Authority
Taxable Variable Rate Demand Economic Development Revenue
Bonds dated December 21, 1994 (Filed as Exhibit 10.90 to the
Registrant's Form 10-K for the fiscal year ended December 31,
1994).
10.14* Lease Agreement between Maryland Economic Development
Corporation and Human Genome Sciences, Inc., dated December 1,
1997 (Filed as Exhibit 10.67 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997).
10.15* Lease Agreement between Maryland Economic Development
Corporation and Human Genome Sciences, Inc. dated December 1,
1999 (Filed as Exhibit 10.43 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1999).
49
10.16 Participation Agreement between Human Genome Sciences, Inc.,
Genome Statutory Trust 2001A, Wells Fargo Bank Northwest, N.A.,
BancBoston Leasing Investments Inc., First Union National Bank
and the other parties named therein dated November 7, 2001.
10.17 Appendix A to Participation Agreement dated November 7, 2001.
10.18 Lease Agreement between Genome Statutory Trust 2001A and Human
Genome Sciences, Inc. dated November 7, 2001.
10.19 Construction Agency Agreement between Genome Statutory Trust
2001A and Human Genome Sciences, Inc. dated November 7, 2001.
10.20 Security Agreement between EagleFunding Capital Corporation,
Fleet Securities, Inc., Fleet National Bank, First Union
National Bank, BancBoston Leasing Investments Inc., Genome
Statutory Trust 2001A and Human Genome Sciences, Inc. dated
November 7, 2001.
10.21 Fleet National Bank Liquid Collateral Agreement between Human
Genome Sciences, Inc., Genome Statutory Trust 2001A, Fleet
National Bank and the other parties identified therein. An
identical Liquid Collateral Agreement was entered into between
First Union National Bank, Human Genome Sciences, Inc., Genome
Statutory Trust 2001A and the other parties identified therein.
10.22 Lease Agreement between Wells Fargo Bank Northwest, National
Association as Trustee under Trust Agreement and Human Genome
Sciences, Inc. dated October 25, 2001.
10.23 Cash Collateral Pledge Agreement between Human Genome Sciences,
Inc., Allfirst Bank and Allfirst Trust Company National
Association dated October 25, 2001.
10.24 Guarantee by Human Genome Sciences, Inc. as Guarantor in favor
of Allfirst Bank, as Agent dated October 25, 2001.
10.25 Amendment No. 1 dated March 29, 2002 to Lease Agreement between
Wells Fargo Bank Northwest, National Association as Trustee
under Trust Agreement and Human Genome Sciences, Inc. dated
October 25, 2001.
10.26 Amendment No. 1 dated March 29, 2002 to Guarantee by Human
Genome Sciences, Inc. as Guarantor in favor of Allfirst Bank, as
Agent dated October 25, 2001.
50
12.1 Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- -------------------------------------------------------------------------------
* Incorporated by reference.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on July 6, 2001 announcing the
expiration of the initial research term of our human gene
therapeutic consortium.
51
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.
HUMAN GENOME SCIENCES, INC.
BY: /S/ William A. Haseltine, Ph.D.
--------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer
Dated: April 1, 2002
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 and the dates indicated:
Signature Title Date
--------- ----- ----
/S/William A. Haseltine, Ph.D. Chairman of the Board and April 1, 2002
- ------------------------------ Chief Executive Officer
William A. Haseltine, Ph.D. (principal executive officer)
/S/Craig A. Rosen, Ph.D. Executive Vice President, April 1, 2002
- ------------------------ Research and Development and
Craig A. Rosen, Ph.D. Director
/S/Steven C. Mayer Senior Vice President and April 1, 2002
- ------------------ Chief Financial Officer
Steven C. Mayer (principal financial and
accounting officer)
/S/ Richard J. Danzig Director April 1, 2002
- ---------------------
Richard J. Danzig
/S/ Jurgen Drews, M.D. Director April 1, 2002
- ----------------------
Jurgen Drews, M.D.
/S/ Richard C. Holbrooke Director April 1, 2002
- ------------------------
Richard C. Holbrooke
/S/ Robert Hormats Director April 1, 2002
- ------------------
Robert Hormats
/S/ Max Link, Ph.D. Director April 1, 2002
- -------------------
Max Link, Ph.D.
52
/S/ Alan G. Spoon Director April 1, 2002
- -----------------
Alan G. Spoon
/S/Laura D'Andrea Tyson, Ph.D. Director April 1, 2002
- ------------------------------
Laura D'Andrea Tyson, Ph.D.
/S/ James Barnes Wyngaarden, M.D. Director April 1, 2002
- ---------------------------------
James Barnes Wyngaarden, M.D.
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Report of Ernst & Young LLP, Independent Auditors ........................................................ F-2
Consolidated Balance Sheets at December 31, 2001 and 2000 ................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ............... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 ..... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ............... F-6
Notes to Consolidated Financial Statements ............................................................... F-8
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of Human Genome
Sciences, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Human Genome
Sciences, Inc. at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note B of Notes to Consolidated Financial Statements, in 2000
the Company changed its method of accounting for revenue recognition in
accordance with guidance provided in Securities and Exchange Commission Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
/s/ Ernst & Young LLP
McLean, Virginia
February 12, 2002
F-2
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
2001 2000
--------------- ----------------
ASSETS (dollars in thousands, except for
share and per share amounts)
Current assets:
Cash and cash equivalents ..................................................... $ 88,319 $ 493,867
Short-term investments ........................................................ 1,456,091 1,268,441
Prepaid expenses and other current assets ..................................... 3,988 9,290
----------- -----------
Total current assets ...................................................... 1,548,398 1,771,598
Long-term investments .............................................................. 43,824 93,337
Property, plant and equipment (net of accumulated depreciation and amortization) ... 101,282 38,567
Restricted investments ............................................................. 144,901 12,332
Other assets ....................................................................... 26,599 32,691
----------- -----------
TOTAL ASSETS .............................................................. $ 1,865,004 $ 1,948,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................................. $ 444 $ 729
Current portion of capital lease obligation ................................... 241 --
Accounts payable and accrued expenses ......................................... 32,915 18,317
Accrued payroll and related taxes ............................................. 5,600 3,820
Deferred revenues ............................................................. 2,568 11,818
----------- -----------
Total current liabilities ................................................. 41,768 34,684
Long-term debt, net of current portion ............................................. 503,468 533,146
Capital lease obligation, net of current portion ................................... 502 --
Deferred revenues .................................................................. 12,839 15,407
Other liabilities .................................................................. 1,964 2,333
----------- -----------
Total liabilities ......................................................... 560,541 585,570
----------- -----------
Stockholders' Equity:
Preferred stock - $0.01 par value; shares authorized - 20,000,000 at December
31, 2001 and 2000; no shares issued ......................................... -- --
Common stock - $0.01 par value; shares authorized - 400,000,000 and
250,000,000 at December 31, 2001 and 2000, respectively; shares issued
128,278,407 and 125,192,544 at December 31, 2001 and 2000,
respectively ................................................................ 1,283 1,252
Additional paid-in capital .................................................... 1,753,235 1,698,384
Unearned portion of compensatory stock options ................................ (294) (192)
Accumulated other comprehensive income (loss) ................................. 32,070 28,190
Retained deficit .............................................................. (481,831) (364,679)
----------- -----------
Total stockholders' equity ................................................ 1,304,463 1,362,955
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 1,865,004 $ 1,948,525
=========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part hereof.
F-3
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
(dollars in thousands, except for share and per share amounts)
Revenue - research and development collaborative contracts:
Third parties ......................................... $ 10,250 $ 19,500 $ 20,280
Related parties ....................................... 2,568 2,568 4,244
------------- ------------- -------------
Total revenue .................................... 12,818 22,068 24,524
------------- ------------- -------------
Costs and expenses:
Research and development:
Direct expenditures .............................. 146,276 91,456 60,607
Purchased in-process research and development .... -- 134,050 --
------------- ------------- -------------
Total research and development ................... 146,276 225,506 60,607
General and administrative .............................. 38,714 27,083 14,838
------------- ------------- -------------
Total costs and expenses ............................ 184,990 252,589 75,445
------------- ------------- -------------
Income (loss) from operations ................................ (172,172) (230,521) (50,921)
Interest income .............................................. 105,866 62,235 13,307
Interest expense ............................................. (24,638) (22,088) (4,330)
Charge for impaired investment ............................... (22,314) -- --
Debt conversion expenses ..................................... (3,894) (50,818) --
Other income ................................................. -- 5,861 --
------------- ------------- -------------
Income (loss) before taxes and cumulative effect of change in
accounting principle ...................................... (117,152) (235,331) (41,944)
Provision for income taxes ................................... -- 225 225
------------- ------------- -------------
Income (loss) before cumulative effect of change in accounting
principle ................................................. (117,152) (235,556) (42,169)
Cumulative effect of change in accounting principle .......... -- (8,250) --
------------- ------------- -------------
Net income (loss) ............................................ $ (117,152) $ (243,806) $ (42,169)
============= ============= =============
Basic and diluted net income (loss) per share:
Before cumulative effect of change in accounting principle ... $ (0.92) $ (2.12) $ (0.46)
Cumulative effect of change in accounting principle .......... -- (0.08) --
------------- ------------- -------------
Basic and diluted net income (loss) per share ................ $ (0.92) $ (2.20) $ (0.46)
============= ============= =============
Weighted average shares outstanding, basic and diluted ....... 126,990,788 110,929,292 92,051,988
============= ============= =============
Pro forma amounts assuming the accounting change is applied
retroactively:
Net income (loss)........................................ $ (235,556) $ (42,169)
============= =============
Net income (loss) per share, basic and diluted........... $ (2.12) $ (0.46)
============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part hereof.
F-4
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
Unearned
Portion of Accumulated
Common Stock Additional Compensatory Other Retained
---------------------- Paid-In Stock Comprehensive Earnings
Shares Amount Capital Options Income (Loss) (Deficit) Total
------------ ------- ------------ ------------ ------------- ------------ ----------
Balance - December 31, 1998 90,988,752 $ 910 $ 284,853 $ (110) $ 1,899 $ (78,704) $ 208,848
Comprehensive income (loss):
Net loss -- -- -- -- -- (42,169) (42,169)
Unrealized loss on investments -- -- -- -- (11,880) -- (11,880)
------------
Comprehensive income (loss) (54,049)
Exercises relating to employee
stock option plan 2,291,604 23 14,073 -- -- -- 14,096
Warrants exercised 29,900 -- -- -- -- -- --
Compensatory stock options issued 4,000 -- 398 (398) -- -- --
Compensatory stock options earned -- -- -- 173 -- -- 173
------------ ------- ------------ ------- ------------ ------------ ------------
Balance - December 31, 1999 93,314,256 933 299,324 (335) (9,981) (120,873) 169,068
Comprehensive income (loss):
Net loss -- -- -- -- -- (243,806) (243,806)
Unrealized gain on investments -- -- -- -- 38,171 -- 38,171
------------
Comprehensive income (loss) (205,635)
Issuance of common stock pursuant
to the public offering
(net of expenses) 12,650,000 127 912,531 -- -- -- 912,658
Issuance of common stock pursuant to
conversion of convertible
subordinated notes 15,158,568 151 328,197 -- -- -- 328,348
Issuance of common stock pursuant to
acquisition of Principia
Pharmaceutical Corporation 1,582,204 16 134,752 -- -- -- 134,768
Exercises relating to employee stock
option plan 2,480,240 25 23,506 -- -- -- 23,531
Warrants exercised 7,276 -- 1 -- -- -- 1
Compensatory stock options issued -- -- 73 (73) -- -- --
Compensatory stock options earned -- -- -- 216 -- -- 216
------------ ------- ------------ ------- ------------ ------------ ------------
Balance - December 31, 2000 125,192,544 1,252 1,698,384 (192) 28,190 (364,679) 1,362,955
Comprehensive income (loss):
Net loss -- -- -- -- -- (117,152) (117,152)
Unrealized gain on investments -- -- -- -- 3,880 -- 3,880
------------
Comprehensive income (loss) (113,272)
Issuance of common stock pursuant to
conversion of convertible
subordinated notes 782,167 8 32,153 -- -- -- 32,161
Exercises of 2,284,752 and 18,944
options relating to employee
stock option and stock purchase
plans, respectively 2,303,696 23 22,371 -- -- -- 22,394
Compensatory stock options issued -- -- 327 (327) -- -- --
Compensatory stock options earned -- -- -- 225 -- -- 225
------------ ------- ------------ ------- ------------ ------------ ------------
Balance - December 31, 2001 128,278,407 $ 1,283 $ 1,753,235 $ (294) $ 32,070 $ (481,831) $ 1,304,463
============ ======= ============ ======= ============ ============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part hereof.
F-5
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (117,152) $ (243,806) $ (42,169)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Accrued interest on short-term and restricted investments .......... 1,016 (17,562) (795)
Depreciation and amortization ...................................... 13,237 10,400 7,102
Charge for impaired investment ..................................... 22,314 -- --
Purchased in-process research and development ...................... -- 134,050 --
Inducement costs paid in the form of common stock .................. 3,875 19,433 --
Cumulative effect of change in accounting principle ................ -- 8,250 --
Gain on sale of long-term investment ............................... -- (5,861) --
Loss due to disposal and write-down of property, plant
and equipment.................................................... 382 35 45
Compensation expense related to stock options ...................... 225 216 173
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ....................... 4,450 (4,146) 1,105
Other assets .................................................... 3,034 (14,638) (2,059)
Accounts payable and accrued expenses ........................... 5,866 8,513 1,926
Accrued payroll and related taxes ............................... 1,780 1,356 (20)
Deferred revenues ............................................... (11,818) (2,568) (4,265)
Other liabilities ............................................... (369) 1,879 118
----------- ----------- -----------
Net cash provided by (used in) operating activities ................ (73,160) (104,449) (38,839)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment ................... (64,110) (18,539) (10,796)
Purchase of short-term investments and marketable securities ........... (1,315,776) (1,196,064) (210,646)
Proceeds from sale and maturities of short-term investments
and marketable securities .......................................... 1,155,866 226,905 100,967
Purchase of long-term investments ...................................... -- (54,744) --
Proceeds from sale of long-term investment ............................. -- 15,368 --
Acquisition, net of acquired cash ...................................... -- 875 --
----------- ----------- -----------
Net cash provided by (used in) investing activities ................ (224,020) (1,026,199) (120,475)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, (net of expenses) ............ -- 508,701 315,250
Repayment of long-term debt ............................................ (1,368) (520) (444)
Restricted investments ................................................. (129,394) (695) (4,888)
Proceeds from issuance of common stock (net of expenses) ............... 22,394 936,190 14,096
----------- ----------- -----------
Net cash provided by (used in) financing activities ................ (108,368) 1,443,676 324,014
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... (405,548) 313,028 164,700
Cash and cash equivalents - beginning of year .............................. 493,867 180,839 16,139
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR .................................... $ 88,319 $ 493,867 $ 180,839
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................... $ 22,795 $ 41,736 $ 3,780
Income taxes ....................................................... $ 75 $ 200 $ 250
F-6
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
(DOLLARS IN THOUSANDS):
In December 2001, the Company entered into a capital lease for computer
equipment with an aggregate value of $763, with thirty-six monthly payments of
$23 of principal and interest. No lease payments were made in 2001.
In June 2001, the Company converted $25,000 of 5% Convertible Subordinated Notes
Due 2007 into common stock and incurred $3,875 in inducement costs paid in the
form of common stock as an inducement to convert. In addition, the Company
reclassified $673 of unamortized debt financing costs associated with these
notes to stockholders' equity as part of the conversion.
During 2001, the Company converted an aggregate of $3,595 of 5 1/2% Convertible
Subordinated Notes Due 2006 into common stock and incurred $19 in inducement
costs paid in the form of cash as an inducement to convert. In addition, the
Company reclassified $78 of unamortized debt financing costs associated with
these notes to stockholders' equity as part of the conversion.
In January 2000, the Company converted $118,285 of 5 1/2% Convertible
Subordinated Notes Due 2006 into common stock and incurred $19,433 in inducement
costs paid in the form of common stock as an inducement to convert. In addition,
the Company reclassified $3,470 of unamortized debt financing costs associated
with these notes to stockholders' equity as part of the conversion.
In March 2000, the Company converted $200,000 of 5% Convertible Subordinated
Notes Due 2006 into common stock. In connection with this conversion, the
Company made a $30,000 cash "make-whole" payment. In addition, the Company
reclassified $6,000 of unamortized debt financing costs associated with these
notes to stockholders' equity as part of the conversion.
The accompanying Notes to Consolidated Financial Statements
are an integral part hereof.
F-7
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE A) - THE COMPANY
Human Genome Sciences, Inc. (the "Company") was incorporated and commenced
operations on June 26, 1992. The Company is a leader in the genomics and
biopharmaceutical industry focused on therapeutic product development and
functional analysis of genes using its proprietary technology platform. The
Company discovers, develops and intends to commercialize novel compounds for
treating and diagnosing human disease based on the identification and study of
genes. The Company focuses its internal product development efforts on
therapeutic proteins, antibodies, peptides and fusion proteins and uses
collaborations for the development of gene therapy products and small molecule
drugs. The Company has discovered a large number of genes through its genomics
capabilities and has developed a rapidly evolving product pipeline based on its
discoveries. The Company's revenues are currently derived from license fees and
research payments under collaboration agreements. The Company does not yet
generate any revenues from product sales.
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Human Genome
Sciences, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents.
The Company classifies its short-term investments into the categories:
"held-to-maturity" and "available-for-sale," each of which has different
accounting treatment. Investments in securities that are classified as
available-for-sale and have readily determinable fair values are measured at
fair market value in the balance sheets, and unrealized holding gains and losses
for these investments are reported as a separate component of stockholders'
equity until realized. Debt securities classified as held-to-maturity securities
are carried at amortized cost. See Note D, Investments, for additional
information.
Investment Risk
The Company has invested its cash in obligations of the U.S. Government and in
high-grade corporate debt securities and various money market instruments. The
Company's investment policy limits investments to certain types of instruments
issued by institutions with credit ratings of "A" or better, and places
restrictions on maturities and concentration by type and issuer.
Investments
Investments in which the Company has the ability to exercise significant
influence over the investee, but less than a controlling voting interest, are
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's share of the investee's earnings or losses are
included in operations, to the extent the
F-8
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments (continued)
Company has an investment or receivable from the investee company recorded as an
asset plus the amount of any continuing commitment to fund the investee.
The Company's investment in Ciphergen Biosystems, Inc. ("Ciphergen") was
accounted for under the cost method during the year ended December 31, 1999 and
for the three months ended March 31, 2000 and June 30, 2000 because the Company
owned a less than a 20% equity interest, did not have significant influence and
the market value of the investees' common stock was not readily determinable
(i.e., a privately held company). On September 29, 2000, Ciphergen successfully
completed an initial public offering of its common stock. As of that date, the
Company has accounted for its investment in Ciphergen as an available-for-sale
security.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets as follows:
Laboratory equipment....................... 3 - 10 years
Computers and EDP equipment................ 3 years
Furniture and office equipment............. 3 - 5 years
Leasehold improvements..................... lesser of the lease term or the
useful life
Impairment of Long-Lived Assets
Periodically, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("SFAS
No. 121").
Fair Value of Financial Instruments
The carrying amounts for the Company's cash and cash equivalents, investments,
other assets, accounts payable and accrued expenses and other accrued expenses
reflected in the consolidated balance sheet at December 31, 2001 approximate
their respective fair values.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees ("APB No.
25") and has provided the pro forma disclosures of net loss and net loss per
share in accordance with SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") using the fair value method. Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant between the
fair value of the Company's stock and the exercise price of the option and is
recognized ratably over the vesting period of the option. The Company accounts
for equity instruments issued to nonemployees in accordance with SFAS No. 123
and EITF 96-18, Accounting for Equity Instruments that are issued to other than
employees for acquiring, or in conjunction with selling goods or services. See
Note K, Stockholders' Equity, for further information.
Revenue Recognition
Collaborative research and development agreements provide for periodic license
fees, research payments, additional payments and milestone payments. License
fees, research payments, and additional payments are recognized ratably
F-9
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued)
over the term of the agreement or as milestones are achieved. Payments received
in advance of work performed are recorded as deferred revenue.
The Company previously recognized nonrefundable fees for certain arrangements
entered into during 1996 as revenue when payments became due and when all
significant contractual obligations of the Company relating to the fees had been
fulfilled. Effective January 1, 2000, the Company changed its method of
accounting for nonrefundable fees related to these certain arrangements to
recognize such fees monthly over the term of the related research collaboration
agreement. The Company believes the change in accounting principle is required
based on interpretations provided in Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). See Change in Accounting Principle within Note B for additional
discussion.
Research and Development
Research and development costs are charged to expense as incurred.
Financing Costs Related to Long-term Debt
Costs associated with obtaining long-term debt are deferred and amortized over
the term of the related debt.
Patent Application Costs
Patent application costs are charged to expense as incurred.
Net Income (Loss) Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share, which
requires the Company to present basic and fully diluted earnings per share. The
Company's basic and fully diluted loss per share are calculated by dividing the
net loss by the weighted average number of shares of common stock outstanding
during all periods presented.
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires unrealized gains or
losses on the Company's available-for-sale short-term securities, and on the
Company's long-term investments in Transgene S.A., Cambridge Antibody Technology
and Ciphergen Biosystems to be included in other comprehensive income.
Comprehensive income (loss) included unrealized gains (losses) on the following:
Unrealized Gain (Loss)
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
---- ---- ----
Available-for-sale short-term investments.. $ 27,904 $ 8,781 $ (2,361)
Transgene ................................. (9,032) (5,313) (9,519)
Cambridge Antibody Technology ............. (39,352) 32,854 --
Ciphergen Biosystems ...................... (1,129) 1,849 --
Available-for-sale restricted investments.. 3,175 -- --
-------- -------- --------
Subtotal .............................. (18,434) 38,171 (11,880)
Impairment loss relating to investment in
Transgene ............................. 22,314 -- --
-------- -------- --------
Total unrealized gain (loss) .......... $ 3,880 $ 38,171 $(11,880)
======== ======== ========
F-10
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (Loss) (continued)
During the fourth quarter of 2001, the Company recorded an impairment charge
relating to its investment in Transgene in the amount of $22,314 and reversed
the previously-recorded unrealized loss relating to this investment. As a
result, the Company had an adjusted cost of $3,365 as determined by the market
value of Transgene's publicly-traded common stock as of December 31, 2001 and no
unrealized loss as of this same date. See Note D, Investments, for additional
discussion.
Change in Accounting Principle
During the fourth quarter of 2000, the Company implemented SAB 101. SAB 101
provides guidance related to revenue recognition based on interpretations and
practices followed by the SEC. SAB 101 requires revenues to be recognized
ratably over the life of a contract period whereas previously, the Company
generally recognized revenue as non-refundable cash payments were made assuming
no significant obligations remained. It requires companies to report any changes
in revenue recognition as a cumulative effect of a change in accounting
principle at the time of implementation in accordance with APB No. 20,
Accounting Changes.
Historically, the Company has recognized non-refundable license fees, research
payments, additional payments and milestone payments in connection with
collaboration agreements when the revenue is earned in accordance with the
applicable performance requirements and/or contractual terms. This revenue
recognition policy was applicable to certain multi-year agreements the Company
entered into with Schering-Plough, Sanofi-Synthelabo and Merck KGaA during 1996
(the "1996 Agreements"). The Company recognized revenue under these agreements
when it had performed all significant obligations and the customer was obligated
to pay. The Company generally considered any remaining performance obligation,
such as maintaining access to its genomic databases, as insignificant. However,
SAB 101 provides guidance that indicates revenue recognition over the
collaboration term is generally the required treatment for all fees, regardless
of the significance of remaining performance obligations.
As a result of the implementation of SAB 101, the Company recorded a charge of
$8,250, or $0.08 per share, as a cumulative effect of a change in accounting
principle, retroactive to January 1, 2000. This amount represents that portion
of revenue recognized in 1999 for which the contract periods of the 1996
Agreements extended into 2000. The implementation of SAB 101 had no effect on
the Company's revenue for the year ended December 31, 2000. Had the change in
accounting been adopted as of January 1, 1999, the Company's loss for the year
ended December 31, 1999 would have increased by $8,250, or $0.09 per share. As a
result of the implementation of SAB 101, the Company had additional deferred
revenue as of December 31, 2000 in the amount of $8,250. The Company recorded
this amount as revenue ratably over the first two quarters of 2001.
Pro forma financial information presented in the Consolidated Statements of
Operations was calculated assuming the accounting change was applied
retroactively to the periods presented.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations ("SFAS No. 141") and No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"), effective for the fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with these pronouncements. Other
intangible assets will continue to be amortized over their useful lives. The
Company does not expect adoption of SFAS No. 141 or 142 to have a material
effect on its financial condition, results of operations or liquidity.
F-11
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (continued)
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supercedes SFAS No. 121 and APB No. 30, Reporting the
Results of Operations. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company does not expect adoption of SFAS No. 144 to
have a material effect on its financial condition, results of operations or
liquidity.
Sources of Supply
The Company is currently able to obtain its chemicals and equipment from various
sources, and therefore, has no dependence upon a single supplier. The Company is
currently dependent upon one manufacturer, MDS Nordion of Ottawa, Canada, for
the radiolabeling of LymphoRad(131), a product for which the Company has filed
an Investigation New Drug application with the FDA. No assurance can be given
that the Company will be able to continue to obtain commercial quantities of
this product at costs that are not economically prohibitive.
Reclassifications
Certain balances have been reclassified to conform to 2001 presentation.
(NOTE C) - ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION
On September 8, 2000, the Company acquired all of the outstanding shares of
capital stock of Principia Pharmaceutical Corporation ("Principia") from its
stockholders. The cost of the acquisition was $135,071, including fees and
expenses. The purchase price was paid with 1,582,204 shares of the Company's
Common Stock. The Company valued the shares of the Company's common stock at
$82.23 per share, which the Company estimates as the fair market value of its
common stock on the acquisition date. The consolidated financial statements
include the results of operations of Principia since the date of acquisition. In
addition, the Company issued 49,364 incentive stock options at a
weighted-average exercise price of $0.91 to replace the Principia options that
were outstanding as of the date of the acquisition. The options were valued at
approximately $4,000 using the Black-Scholes option-pricing model.
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets and liabilities acquired at
their estimated fair values as of the date of acquisition. Of the purchase
price, $521 was allocated to Principia's net assets, and the remainder was
allocated as follows:
Purchased In-Process Research & Development................. $ 134,050
Assembled Workforce......................................... $ 500
The charge of $134,050 for Purchased In-Process Research & Development was
recorded as an expense in the Company's results of operations for the year ended
December 31, 2000. The Purchased In-Process Research & Development was analyzed
through an independent third-party valuation using the expected cash flow
approach to valuation.
The Company's unaudited pro forma consolidated condensed statements of
operations information for the year ended December 31, 2000 and 1999, assuming
the acquisition of Principia was effected at the beginning of each period, and
including the one-time write-off of the Purchased In-Process Research and
Development, are summarized as follows:
F-12
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE C) - ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION (CONTINUED)
Year Ended December 31,
---------------------------------------
2000 1999
------------------ -----------------
Revenue ....................................... $22,068 $24,524
Net loss ...................................... $(247,068) $(44,587)
Weighted average shares outstanding,
basic and diluted.......................... 112,378,738 93,634,192
Net income (loss) per share,
basic and diluted ......................... $(2.20) $ (0.48)
This pro forma information does not purport to be indicative of the results
which may have been obtained had the acquisition been consummated at the date
assumed.
During the first quarter of 2001, the Company announced its decision to relocate
Principia's operations from Norristown, Pennsylvania to the Company's Rockville,
Maryland location. As a result, the Company recorded a one-time charge of
approximately $1,950 in unit closure costs in the first quarter of 2001. Because
most of the Principia employees chose not to relocate, this one-time charge
included a write-off of $427, representing the remaining book value of the
Assembled Workforce. During 2001, the Company incurred approximately $341 in
personnel relocation costs which were charged to the consolidated statement of
operations. As of December 31, 2001, the unit closure reserve had a balance of
approximately $1,250.
(NOTE D) - INVESTMENTS
Investments, including accrued interest, at December 31, 2001 and 2000 were as
follows:
December 31, 2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
------------------ ---------- ---------- ---------- ----------
U.S. Treasury and agencies ............ $ 246,338 $ 6,629 $ (234) $ 252,733
Corporate debt securities ............. 1,175,080 28,967 (689) 1,203,358
---------- ---------- ---------- ----------
Subtotal - Short-term investments.. 1,421,418 35,596 (923) 1,456,091
---------- ---------- ---------- ----------
Investment in Transgene, S.A. ......... 3,365 -- -- 3,365
Investment in Cambridge Antibody
Technology ........................ 45,237 -- (6,498) 38,739
Investment in Ciphergen Biosystems .... 1,000 720 -- 1,720
---------- ---------- ---------- ----------
Subtotal - Long-term investments... 49,602 720 (6,498) 43,824
---------- ---------- ---------- ----------
Cash and cash equivalents ............ 29,081 -- -- 29,081
U.S. Treasury and agencies ............ 20,692 827 (15) 21,504
Corporate debt securities ............. 91,953 2,418 (55) 94,316
---------- ---------- ---------- ----------
Subtotal - Restricted investments.. 141,726 3,245 (70) 144,901
---------- ---------- ---------- ----------
Total ............................. $1,612,746 $ 39,561 $ (7,491) $1,644,816
========== ========== ========== ==========
F-13
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE D) - INVESTMENTS (CONTINUED)
December 31, 2000
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
------------------ ---------- ---------- ---------- ----------
U.S. Treasury and agencies ............ $ 157,688 $ 1,200 $ (18) $ 158,870
Corporate debt securities ............. 1,103,984 7,775 (2,188) 1,109,571
---------- ---------- ---------- ----------
Subtotal - Short-term investments.. 1,261,672 8,975 (2,206) 1,268,441
---------- ---------- ---------- ----------
Investment in Transgene, S.A. ......... 25,679 -- (13,282) 12,397
Investment in Cambridge Antibody
Technology ........................ 45,237 32,854 -- 78,091
Investment in Ciphergen Biosystems .... 1,000 1,849 -- 2,849
---------- ---------- ---------- ----------
Subtotal - Long-term investments... 71,916 34,703 (13,282) 93,337
---------- ---------- ---------- ----------
Restricted investments - cash and
cash equivalents ................. 12,332 -- -- 12,332
---------- ---------- ---------- ----------
Total ............................. $1,345,920 $ 43,678 $ (15,488) $1,374,110
========== ========== ========== ==========
During the fourth quarter of 2001, the Company determined that its investment in
Transgene, S.A. had incurred an other-than-temporary impairment, and
accordingly, made an adjustment to the carrying value of this asset. As a
result, the amortized cost for this investment has been reduced by $22,314 from
$25,679 to $3,365, which was the fair market value of the investment as of
December 31, 2001. The adjustment of $22,314 has been recorded as a charge in
the consolidated statement of operations.
During 2001, the Company entered into two seven-year lease agreements (the
"October 2001 lease" and the "November 2001 lease") relating to research,
manufacturing, and administrative space either acquired or under construction by
two trusts established solely for that purpose. The total financed cost of the
facilities covered under the October 2001 lease and the November 2001 lease is
approximately $76,000 and $450,000, respectively. By the conclusion of the
construction period, the Company will be required to restrict investments equal
to the full amount of the financed project costs, approximately $526,000 as
collateral for the duration of the leases, assuming the full amount of the
leases is used for construction purposes. In addition, the Company's restricted
investments as collateral for the existing process development and manufacturing
facility are $12,787 as of December 31, 2001 and with accrued interest, increase
to $15,000, bringing the total collateral requirements of the Company to
$541,000. At December 31, 2001, the Company had pledged $144,901 in connection
with these leases, which is classified as restricted investments on the
consolidated balance sheet.
The following table summarizes maturities of our investment securities at
December 31, 2001:
Short-term Investments Restricted Investments
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Less than one year ..... $ 175,499 $ 177,978 $ 51,667 $ 52,000
Due in one to two years. 521,822 536,085 46,825 48,644
Due in three to five
years ............... 712,125 729,969 40,517 41,484
Due after five years ... 11,972 12,059 2,717 2,773
---------- ---------- ---------- ----------
Total ............... $1,421,418 $1,456,091 $ 141,726 $ 144,901
========== ========== ========== ==========
F-14
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE D) - INVESTMENTS (CONTINUED)
The Company's short-term investments include mortgage-backed securities with an
aggregate cost of $174,610 and an aggregate fair value of $177,679 at December
31, 2001. The Company's restricted investments include mortgage-backed
securities with an aggregate cost of $13,464 and an aggregate fair value of
$13,796 at December 31, 2001. These securities have no single maturity date and
accordingly, have been allocated on a pro rata basis to each maturity range
based on each maturity range's percentage of the total value.
The Company's gross proceeds, realized gains and realized losses from its
investments are as follows:
Year Ended December 31,
------------------------------------
2001 2000 1999
---- ---- ----
Gross proceeds.......... $ 709,975 $ 15,368 --
Realized gains.......... $ 6,622 $ 5,861 --
Realized losses......... $ (146) -- --
In 2001, the realized gains and losses relate to the Company's short-term
investments and are included in interest income in the consolidated statement of
operations. In 2000, the realized gain relates to the Company's sale of 290,000
ordinary shares of Cambridge Antibody Technology in November 2000 and is
included in other income in the consolidated statement of operations. These
ordinary shares were included in the Company's April 2000 purchase of 1,670,000
ordinary shares of CAT for the sterling equivalent of approximately $54,744,
which gave the Company an equity stake of approximately six percent in CAT. In
November 2000, the Company sold 290,000 ordinary shares for approximately
$15,368, realizing a gain of approximately $5,861. As of December 31, 2001, the
Company adjusted the investment of the remaining 1,380,000 ordinary shares to
the current market value of $38,739 with an offsetting debit of $6,498 to
accumulated other comprehensive income within the Company's stockholders' equity
section of the balance sheet. Gross proceeds and realized gains and losses on
all other sales of investments for 2000 and 1999 were immaterial. The cost of
securities sold is based on the specific identification method.
(NOTE E) - COLLABORATION AGREEMENTS
Agreements with SmithKline Beecham Corporation (now GlaxoSmithKline Corporation)
In May 1993, the Company entered into a collaboration agreement as amended ("SB
Collaboration Agreement"), providing SmithKline Beecham Corporation ("SB"), now
GlaxoSmithKline Corporation ("GSK"), a first right to develop and market
products in human and animal healthcare ("SB Products"), based upon human genes
identified by the Company. In return, GSK has paid $126,000 to the Company since
1993. Approximately $55,000 was allocated to the purchase price of 5,406,952
shares of common stock with the balance of $71,000 recognized from license fees,
option rights and milestone payments. In addition, the Company is entitled to
(1) royalties on the net sales of SB Products, (2) product development progress
payments and (3) the option to co-promote up to 20% of any product developed by
SB under the collaboration agreement.
In June 1996, the SB Collaboration Agreements were substantially amended (the
"SB Amendment") to allow the Company and SB together to enter into collaboration
agreements with additional pharmaceutical companies ("Collaboration Partners")
in certain pre-specified areas ("the SB Field"). The SB Amendment restricted the
Company from entering into further collaborations in the SB Field during the
initial research term, which expired in June 2001.
The SB Amendment provides that GSK and the Company share equally in any license
fee payments paid by the Collaboration Partners and that the Company will
receive all royalties and research payments paid by the Collaboration Partners.
F-15
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)
Agreements with SmithKline Beecham Corporation (now GlaxoSmithKline Corporation)
(continued)
In 2001, the Company received a $1,000 payment from GSK in connection with a
development milestone met by GSK during the year.
Other Collaboration Agreements in the SB Field
In June 1995, the Company entered into an Option and License Agreement with
Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted
an exclusive option to license rights under the Company's patents and technology
in the field of human healthcare (other than gene therapy, antisense and
diagnostics) to make and sell a limited number (equal to the number of
collaboration partners other than SB and Takeda with which the Company enters
into collaboration agreements in the SB Field) of products in Japan. In
consideration of the grant of the option, Takeda paid the Company $5,000, which
was recognized as revenue by the Company in 1995, and agreed to pay to the
Company royalties based on the sale of Takeda products covered by the Option and
License Agreement and certain milestone payments.
In June 1996, the Company and SB entered into collaboration agreements
("Additional Collaboration Partner Agreements") with Schering Corporation and
Schering-Plough Ltd. ("Schering-Plough"), Sanofi-Synthelabo S.A., and Merck KGaA
("Merck"), (collectively "Additional Collaboration Partners"). The Additional
Collaboration Partner Agreements provide the Additional Collaboration Partners
the rights and licenses to access the Company's human gene technology, as well
as biological information developed by the Company and SB prior to, and in the
case of the Company, after the effective date of such Agreement, to discover,
develop and commercialize products based upon or derived from such Company
technology in the SB Field (other than diagnostics and animal healthcare). The
Additional Collaboration Partners are obligated to pay license fees, research
payments, milestone payments and royalties in connection with the agreements.
The initial research term expired in June 2001. The Company received aggregate
license fees and research payments due under the Additional Collaboration
Partner Agreements in the amount of $87,500, paid in equal installments over a
five-year period, beginning in 1996. The Company has recognized revenue of
$9,250, $17,500 and $17,500 in license fees and additional payments during 2001,
2000 and 1999, respectively, related to the Additional Collaboration Partner
Agreements. In 2000, the Company implemented SAB 101. SAB 101 impacted the
Company's revenues pertaining to these agreements for 2001 and 2000. See Note B,
Summary of Significant Accounting Policies, for additional discussion.
Post-Initial Research Term
The initial research term under the collaboration agreements with
GlaxoSmithKline and the other four collaboration partners expired on June 30,
2001. As of June 30, 2001, the Company's partners were pursuing approximately
430 research programs involving approximately 280 different genes for the
creation of small molecule and antibody drugs. They also were developing
approximately 30 therapeutic protein drugs. The Company cannot provide any
assurance that any of these programs will be continued or result in any approved
drugs.
Collaborative Agreements Outside of the SB Field
During 1996, the Company entered into several collaborative agreements with an
initial aggregate research value of $33,000. These collaboration partners
included Pioneer Hi-Bred International, Inc., Pharmacia & Upjohn Company,
Schering-Plough Ltd. and F. Hoffman-La Roche, Ltd. The Company received no
payments and did not recognize any revenues in 2001 pursuant to these
agreements. For fiscal years 2000 and 1999, respectively, the Company received
payments of $1,000 from these collaborators in each year and recognized revenue
of $1,000 and $2,600 pursuant to these agreements. In addition, the Company
received $1,000 in revenue in 2000 from MedImmune, Inc. pursuant to a 1995
license and royalty agreement.
F-16
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)
Collaborative Agreements Outside of the SB Field (continued)
In March 1998, the Company entered into a gene therapy collaboration agreement
with Transgene, S.A. ("Transgene"), of Strasbourg, France. Under this agreement,
the Company received a 10% equity interest in Transgene valued at $25,679 based
on Transgene's initial public offering ("IPO") share price in exchange for
giving Transgene the right to develop and co-market gene therapy products from
10 genes selected by Transgene from the Company's database. The Company
initially recorded its investment in Transgene at the IPO price with an
offsetting entry to deferred revenue. The Company is recognizing the $25,679 of
revenue from this transaction over the shorter of the ten-year term of the
agreement or prorated upon the selection of genes by Transgene. The Company
recognized $2,568 as revenue in fiscal years 2001, 2000 and 1999.
In August 1999, the Company entered into a collaborative agreement with
Cambridge Antibody Technology Ltd. ("CAT") of Melbourn, United Kingdom to
jointly pursue the development of fully human monoclonal antibody therapeutics.
Under the agreement, CAT will conduct research to identify fully human,
monoclonal antibodies specific for the Company's proprietary proteins. CAT will
receive milestone payments from the Company in connection with the development
of any such antibodies as well as royalty payments on the Company's net sales of
such licensed product following regulatory approval. During 2000 and 1999, the
Company paid CAT a total of $62 and $313, respectively, towards the achievement
of the first contractual milestone. In addition, during 2000, the Company paid
$375 based on the achievement of the first milestone pursuant to this agreement.
The agreement provides for additional payments to CAT for each product relating
to the achievement of milestones corresponding to the regulatory approval
process. In the event of the achievement of other milestones or successful
product launch, the Company would be obligated to pay CAT additional
compensation and royalties. Subject to early termination under certain
circumstances, this agreement will expire on the later of the expiration date of
certain CAT patents or ten years after the date of first commercial sale of a
product licensed by the Company.
In December 1999, the Company entered into a collaborative agreement, which was
amended in 2001, with Abgenix, Inc. ("ABX"), of Fremont, California to exchange
technology to identify novel human antibody drug candidates for development and
commercialization. The Company has the right to use ABX's proprietary technology
to generate fully human antibody drug candidates. In addition, ABX has a future
option to develop and commercialize products derived from the Company's pool of
novel human antibody drug candidates. Under this reciprocal agreement, depending
upon which party's product moves through the regulatory approval process, the
Company or ABX would be obligated to the other for milestone payments for each
therapeutic product or each diagnostic product along with royalties in the event
of a successful product launch. Subject to early termination under certain
circumstances, this agreement will expire on the last of each party's royalty
obligations.
In February 2000, the Company entered into a second agreement with Cambridge
Antibody Technology. The ten-year agreement provides the Company with rights to
use CAT technology to develop and sell an unlimited number of fully human
antibodies for therapeutic and diagnostic purposes. The Company also has rights
to use CAT antibody technology for the use and sale of research tools, for which
the Company will pay CAT a share of revenues received. The Company will also pay
CAT clinical development milestones and royalties based on product sales. The
Company and CAT also plan to combine resources to develop and sell therapeutic
antibody products. CAT has the right to select up to twenty-four of the
Company's proprietary antigens for laboratory development. The Company has the
option to share clinical development costs and to share the profits equally with
CAT on up to eighteen such products. CAT has rights to develop six such products
on its own. The Company is entitled to clinical development milestones and
royalty payments on the products developed by CAT. In December 2001, the Company
exercised an option to enter into an exclusive development partnership with CAT
relating to a fully human monoclonal antibody and paid $1,000 to CAT in
accordance with the terms of this agreement.
In March 2000, the Company paid $12,000 in licensing fees to CAT, which includes
research support at CAT for ten years to help CAT develop the Company's human
antibody products. The Company has capitalized this cost and is
F-17
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)
Collaborative Agreements Outside of the SB Field (continued)
amortizing it on a straight-line basis of ten years. The unamortized amount of
this research support was $9,800 and $11,000 as of December 31, 2001 and 2000,
respectively.
In March 2000, the Company entered into a multi-year agreement with Dyax
Corporation ("Dyax"), which was amended in July 2001. The agreement, as amended,
provides the Company with rights to use Dyax's technology for ten years to
develop an unlimited number of therapeutic and diagnostic products which the
Company may elect to market itself or to out-license. The amended agreement also
modifies the existing collaborative terms and now requires the Company to make
minimum quarterly payments of $250 to Dyax in exchange for research services to
be provided to the Company through the first quarter of 2003. The Company will
also pay Dyax clinical development milestones and royalties based on product
sales. In 2000, the Company paid $6,000 to Dyax for the technology license,
which the Company has capitalized and is amortizing on a straight-line basis
over five years, which is the term of the collaboration agreement. The
unamortized amount of this license fee was $3,900 and $5,100 as of December 31,
2001 and 2000, respectively. The Company paid $2,623 and $2,075 in support
payments during 2001 and 2000, respectively.
The Company's other ongoing technology collaborations as of December 31, 2001
are as follows:
Collaborator Area Year Initiated
------------ ---- --------------
Vical Incorporated Gene Therapy 2000
Praecis Pharmaceuticals Metabolic Disorders and Infectious 2000
Diseases
Aventis-Behring, L.L.C. Plasma Proteins 2000
Dow Chemical Chelator technology 2000
Medarex, Inc. Human Antibody Therapeutics and 2001
Diagnostics
MDS Nordion Clinical Manufacture of 2001
Radioiodinated Drug
During 2001, the Company paid an aggregate of $942 in research services to
certain of the above collaborators. No payments for research services were paid
to these collaborators in 2000 or 1999. While future license or royalty payments
may occur in the future in connection with these collaborations, no license or
royalty payments were made or received during 2001, 2000 or 1999.
F-18
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE F) - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as follows:
December 31,
-----------------------
2001 2000
---- ----
Laboratory equipment ................................ $ 38,593 $ 31,075
Computers and EDP equipment ......................... 14,293 10,502
Furniture, transportation and office equipment....... 3,224 921
Leasehold improvements .............................. 27,413 20,958
Construction in progress ............................ 56,671 7,294
-------- --------
140,194 70,750
Less: accumulated depreciation and amortization ..... 38,912 32,183
-------- --------
$101,282 $ 38,567
======== ========
The Company entered into a capital lease for computer equipment in 2001. The
capital lease is included in the Computer and EDP equipment amount above, at a
cost of $763 and accumulated amortization of $21 as of December 31, 2001.
Amortization expense for this equipment is included in depreciation and
amortization within the consolidated statements of cash flows.
(NOTE G) - OTHER ASSETS
Other assets are comprised of the following:
December 31,
----------------------
2001 2000
---- ----
Deferred financing costs, net of accumulated
amortization of $4,175 and $2,081, as of
December 31, 2001 and 2000, respectively... $11,404 $14,437
Prepaid research services ................... 10,300 11,000
License fee ................................. 3,900 5,100
Note receivable from Officer ................ 891 891
Assembled Workforce, Principia, net of
accumulated amortization of $42 as of
December 31, 2000 ........................ -- 458
All other assets ............................ 104 805
------- -------
$26,599 $32,691
======= =======
Deferred financing costs were incurred in connection with the Company's four
convertible subordinated debt offerings during fiscal 2000 and 1999. During the
first quarter of 2000, the Company completed the private placement of $225,000
of 5% Convertible Subordinated Notes due 2007 and $300,000 of 3 3/4% Convertible
Subordinated Notes due 2007. Debt issuance costs for the total $525,000 of Notes
amounted to approximately $16,305, representing primarily underwriting fees of
approximately 3% of the gross amount of notes, and are being amortized on a
straight-line basis which approximates an effective interest method over the
life of the Notes.
F-19
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE G) - OTHER ASSETS (CONTINUED)
During 1999, in connection with the private placement of $125,000 of 5 1/2%
Convertible Subordinated Notes due 2006 and $200,000 of 5% Convertible
Subordinated Notes due 2006, the Company incurred financing costs of
approximately $10,174, representing primarily underwriting fees of 3% of the
gross amount of notes issued. These costs were being amortized on a
straight-line basis over the life of the Notes. However, in January 2000, the
Company completed a tender offer to substantially all of the holders of the
5 1/2% Convertible Subordinated Notes due 2006, which resulted in a
reclassification of $3,470 of unamortized deferred financing costs associated
with these Notes to stockholders' equity. In March 2000, the Company announced
and completed the call of its $200,000 5% Convertible Subordinated Notes due
2006. As a result, the Company reclassified $6,000 of remaining unamortized debt
financing costs to stockholders' equity as part of the conversion.
During 2001, the Company converted an aggregate of $28,595 of convertible
subordinated notes to common stock. In addition, the Company reclassified $751
of unamortized debt financing costs associated with these notes to stockholders'
equity as part of the conversion. See Note I, Long-Term Debt, for additional
discussion.
See Note E, Collaboration Agreements, for discussion of prepaid research
services and license fees relating to Cambridge Antibody Technology and Dyax
Corporation, respectively. Prepaid research services also includes $500 paid to
MDS Nordion that will be amortized over an eighteen-month period beginning in
2002 in connection with future services to be provided to the Company.
The Company holds a note receivable from an officer of $891 that is due on
demand and does not bear interest. The note is collateralized by shares of the
Company's common stock owned by the officer that have a market value of at least
200% of the outstanding balance of the note.
See Note C, Acquisition of Principia Pharmaceutical Corporation, for discussion
of Principia Assembled Workforce and the write-off of this asset in 2001.
(NOTE H) - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
December 31,
----------------------
2001 2000
--------- --------
Accrued interest ............... $ 7,531 $ 8,151
Fixed asset purchases........... 11,747 2,733
Professional fees .............. 7,546 4,142
Other accrued expenses.......... 6,091 3,291
------- -------
$32,915 $18,317
======= =======
F-20
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE I) - LONG-TERM DEBT
The components of long-term debt are as follows:
December 31,
December 31, -----------------------
Debt 2001 Interest Rates Maturities 2001 2000
---- ------------------- ---------- ---- ----
MIDFA 1.84% December 2003 $ 892 $ 1,336
5.5% Convertible Subordinated Notes 5.50% June 2006 3,120 6,715
5.0% Convertible Subordinated Notes 5.00% February 2007 199,900 224,900
3.75% Convertible Subordinated Notes 3.75% March 2007 300,000 300,000
GE Capital Corporation 12.60% Repaid June 2001 -- 924
-------- --------
503,912 533,875
Less current portion 444 729
-------- --------
$503,468 $533,146
======== ========
Annual maturities of all long term debt are as follows:
2002 $ 444
2003 448
2004 --
2005 --
2006 3,120
2007 and thereafter 499,900
--------
$503,912
========
In December 1994, the Company entered into a loan agreement with Maryland
Industrial Development Financing Authority ("MIDFA"). Major leasehold
improvements were financed with the proceeds of a $4,000 taxable variable rate
bond issue (the "Bonds") from MIDFA. The Company is required to make annual
payments of $444 commencing December 1995 plus interest at a variable rate of
interest (1.84% at December 31, 2001 and 6.57% at December 31, 2000), to the
trustee on behalf of the bondholders which is equal to the interest and
principal requirements on the bonds. The variable rate is equal to 50 basis
points plus the higher of the yield equivalent of the average 30-day or 90-day
commercial paper rate. Under certain circumstances, the rate may be adjusted
either upward or downward but in no event in excess of 10 basis points above or
below the rate determined above. MIDFA has entered into an indenture with the
Trustee whereby the Trustee has obtained an irrevocable letter of credit on
behalf of the bondholders.
Required monthly principal payments of $37 plus interest are deposited into a
bond fund. The interest is disbursed monthly to the bondholders. Principal is
repaid to the bondholders at the rate of $444 annually with a final payment of
$448 on December 1, 2003. The Company deposited $502, $559 and $561 of principal
and interest into the bond fund during the years ended December 31, 2001, 2000
and 1999, respectively.
In connection with the loan agreement, the Company entered into an irrevocable
Letter of Credit Agreement with a bank for the account of the Company and in
favor of the trustee in the initial amount of $4,067, which expires on December
15, 2003. Concurrently, the Company entered into a Collateral Pledge Agreement
with the bank. The Company is required to maintain 43% of the outstanding
principal amount of the Bonds (50% is required under certain circumstances) with
the bank as Collateral for the Letter of Credit. Pursuant to the Collateral
Pledge Agreement at December 31, 2001 and 2000, the Company had $1,164 and
$1,123, respectively, on deposit with the bank, which is included in Restricted
Investments in the consolidated balance sheets. The pledge collateral will be
released upon the payment and performance in full of the Company's Letter of
Credit obligations. The agreement
F-21
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE I) - LONG-TERM DEBT (CONTINUED)
contains covenants with respect to tangible net worth, cash and cash equivalents
and investment securities, as well as other covenants, and prohibits the payment
of cash dividends.
During the second quarter of 1999, the Company completed the private placement
of $125,000 of 5 1/2% Convertible Subordinated Notes due June 2006 convertible
into common stock at $13.05 per share. In January 2000, the Company concluded an
offer to the holders of its $125,000 aggregate principal amount of 5 1/2% Notes
to convert their notes into common stock. As an inducement to convert, the
Company offered its 5 1/2% Note holders an additional one hundred and eighty
dollars per thousand dollars of principal amount of the 5 1/2% Notes, payable in
the Company's common stock. This inducement was in addition to the 76.6284
shares issuable for each thousand dollars of principal amount of 5 1/2% Notes
convertible at $13.05 per share. As a result of the conversions, the Company
converted $118,285 of 5 1/2% Notes to common stock and issued a total of
9,572,208 shares of common stock, including a total of 508,244 shares of common
stock issued as an inducement to convert. In the first quarter of fiscal 2000,
the Company recorded a one-time charge of $20,818, including $19,433 in
inducement costs associated with this conversion. In addition, the Company
reclassified $3,470 of unamortized debt financing costs to stockholders' equity
as part of the conversion. During 2001, holders of $3,595 of these 5 1/2% Notes
voluntarily converted their Notes into 275,477 shares of common stock. In
addition, the Company reclassified $78 of unamortized debt financing costs to
stockholders' equity as part of the conversions. Total remaining debt issuance
costs were approximately $111 and $213, of which $40 and $46 had been amortized
as of December 31, 2001 and 2000, respectively.
During the fourth quarter of 1999, the Company completed the private placement
$200,000 of 5% Convertible Subordinated Notes due December 2006, convertible
into common stock at $35.8125 per share. In March 2000, the Company announced
and completed the call of its $200,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2006. All of the holders of the notes
converted their notes into common stock at a price of $35.8125 per share, which
is equivalent to 27.9232 shares of common stock per one thousand dollars of
principal amount of notes. As a result of the conversion, the Company issued
5,584,584 shares of common stock to the holders of these Notes. In addition, the
Company made a "make-whole" payment of one hundred and fifty dollars per one
thousand dollars of principal amount of notes, which resulted in a one-time
charge to earnings of $30,000. In addition, the Company reclassified $6,000 of
unamortized debt financing costs to stockholders' equity as part of the
conversion.
During the first quarter of 2000, the Company completed the private placement of
$225,000 of 5% Convertible Subordinated Notes due 2007 ("5% Notes") and $300,000
of 3 3/4% Convertible Subordinated Notes due 2007 ("3 3/4% Notes"). The 5% Notes
and the 3 3/4% Notes are convertible into common stock at $56.25 and $109.50 per
share, respectively. Debt issuance costs for the total $525,000 of Notes
amounted to approximately $16,305, including accrued expenses, of which $2,035
had been amortized as of December 31, 2000. During 2000, holders of $100 of
these 5% Notes voluntarily converted their Notes into 1,776 shares of common
stock. During 2001, holders of $25,000 of these 5% Notes voluntarily converted
their Notes into 506,690 shares of common stock. In addition, the Company
reclassified $673 of unamortized debt financing costs to stockholders' equity as
part of the conversions. Total remaining debt issuance costs were approximately
$15,468 and $16,299, of which $4,135 and $2,035 had been amortized as of
December 31, 2001 and 2000, respectively
In connection with the Company's acquisition of Principia Pharmaceutical
Corporation ("Principia") in the third quarter of 2000, the Company acquired
equipment debt to GE Capital Corporation. As of the date of Principia's
acquisition, the unpaid debt was approximately $1,000. Because this debt carried
an interest rate of 12.6%, the Company repaid the remaining amount of this debt
during 2001.
F-22
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE J) - COMMITMENTS AND OTHER MATTERS
Leases
The Company leases office and laboratory premises and equipment pursuant to
operating leases expiring at various dates through 2021. The leases contain
various renewal options. Minimum annual rentals are as follows:
Operating Capital
Year Ending December 31, Leases Lease
---------------------------------- --------------- ---------
2002 $ 16,057 $ 241
2003 15,730 255
2004 21,635 247
2005 21,297 -
2006 20,395 -
2007 and thereafter 96,533 -
------ -----
$ 191,647 743
=======
Current portion under capital lease 241
-----
Long-term obligation under capital lease $ 502
=====
During 1997 and 1999, the Company entered into two long-term leases expiring
January 1, 2019 for a process development and manufacturing facility aggregating
127,000 square feet and built to the Company's specifications. Annual base rent
under the leases is $3,765. Pursuant to the terms of these leases, the Company
had security deposits of $12,787 and $12,332 as of December 31, 2001 and 2000,
respectively, on deposit with the financing bank which is included in Restricted
Investments in the consolidated balance sheets. The security deposit will
accrue interest up to a total security deposit of $15,000. Any amounts over
$15,000 will be released to the Company. The security deposit will be released
at the end of the lease term. The lease agreements contain covenants with
respect to tangible net worth, cash and cash equivalents and investment
securities, as well as other covenants. The leases require additional security
deposit if the Company does not meet its covenants. The Company has an option,
but not an obligation, to purchase these facilities during the lease term at
various prices or at the end of the lease term for an aggregate price of
approximately $19,400.
During 2001, the Company entered into two seven-year lease agreements (the
"October 2001 lease" and the "November 2001 lease") relating to research,
manufacturing, and administrative space the Company either acquired or has under
construction by two trusts established solely for that purpose. The total
financed cost of the facilities anticipated to be covered under the October 2001
lease and the November 2001 lease is approximately $76,000 and $450,000,
respectively. Rent obligations for the October 2001 lease began in 2001, while
rent obligations for the November 2001 lease do not begin until the end of the
construction period, which is currently anticipated as 2004. The Company's rent
obligations will approximate the lessor's debt service costs. With respect to
the Company's rent for October 2001 lease, as of December 31, 2001, the trust
had fixed the interest rate on $56,000 at approximately 4.5%. The remaining
$20,000 is floating based primarily on the seven-day LIBOR rate, which was
approximately 1.98%, as of December 31, 2001.
The Company's operating lease commitments include minimum annual rentals for
these leases and have been computed using either the locked-in interest rate or
the applicable floating interest rate as of December 31, 2001. Over the life of
these leases, an aggregate rent obligation of approximately $65,816 has been
included in the Company's total operating lease commitment.
F-23
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE J) - COMMITMENTS AND OTHER MATTERS (CONTINUED)
Leases (continued)
With respect to the November 2001 lease, the Company has retained ownership of
the land for the main campus component of this project. The Company has entered
into a ground lease with the trust for the land at fair market value rates.
Thereafter, rent will be reduced to a nominal amount. The Company will record
these lease payments on its balance sheet as deferred rental income over the
two-year construction period and then amortize this deferral over the remaining
term (approximately five years).
Under these lease agreements, which the Company has accounted for as operating
leases, the Company has the option to purchase the properties, during or at the
end of the lease terms, at an aggregate amount of approximately $526,000.
Alternatively, the Company can cause the properties to be sold to third parties.
The Company is contingently liable for the residual value guarantee associated
with each property up to an aggregate amount of $459,430, assuming the full
amount of the leases is used for construction activities.
With respect to the October 2001 lease, the Company has a residual value
guarantee of 85% of the total financed cost at lease termination. In the event
of the Company's default, the Company is responsible for 100% of the total
financed cost of the project. Although the trust is responsible for servicing
and repaying the debt and equity financings to various parties, the Company has
made the residual value guarantee to the trust. In the event the trust defaults
to the lender or in the event the trust is terminated, the Company has the right
to cure the default or exercise its option to acquire the property. At any time
during the lease term, the Company has the option to purchase legal and/or
beneficial interest in the project for 100% of the lease balance plus any unpaid
indemnity amounts.
With respect to the November 2001 lease, the Company has a residual value
guarantee of 87.74% of the total financed cost at lease termination. In the
event of default, the Company is responsible for 100% of the total financed cost
of the project. During the construction period, the Company has a residual value
guarantee of 89.9% of the financed cost incurred. Although the trust is
responsible for servicing and repaying the debt and equity financings to various
parties, the Company has made the residual value guarantee to the trust. In the
event the trust defaults to the lender or in the event the trust is terminated,
the Company has the right to cure the default or exercise its option to acquire
the property. At any time during the lease term, the Company has the option to
purchase legal and/or beneficial interest in the project for 100% of the lease
balance plus any unpaid indemnity amounts.
In connection with the October 2001 lease, the Company must maintain minimum
levels of unrestricted cash, cash equivalents and marketable securities. In
connection with the November 2001 lease, the Company must maintain minimum
levels of unrestricted cash, cash equivalents and marketable securities and
certain debt ratios.
The Company has entered into leases for office and laboratory space which
provide for certain rent abatement and rent escalations on each anniversary of
the lease commencement date. For financial reporting purposes, rent expense is
charged to operations on a straight-line basis over the term of the lease,
resulting in a liability for deferred rent of $2,439 and $2,705 at December 31,
2001 and 2000, respectively.
Certain other leases provide for escalation for increases in real estate taxes
and certain operating expenses, as well as various renewal terms.
Rent expense aggregated $14,713, $8,352 and $7,210 for the years ended December
31, 2001, 2000 and 1999, respectively.
Capital Expenditures
At December 31, 2001 and 2000, the Company had commitments for capital
expenditures, consisting primarily of laboratory space and equipment, of
approximately $16,300 and $3,637, respectively.
F-24
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE J) - COMMITMENTS AND OTHER MATTERS (CONTINUED)
401(k) Plan
The Company has adopted a 401(k) pension plan available to eligible full-time
employees. The Company made contributions of $857, $600 and $446 to the plan for
the years ended December 31, 2001, 2000 and 1999, respectively.
(NOTE K) - STOCKHOLDERS' EQUITY
Common Stock and Preferred Stock
On May 23, 2001, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation (Fifth) which increased the
Company's authorized common stock to 400,000,000 from 250,000,000 shares. In
addition, the Company's stockholders approved an amendment to the 2000 Stock
Incentive Plan which established a limit on the number of shares of common stock
that may be issued with respect to awards granted each year. For 2001, 2002 and
2003, this limit will be equal to five percent of the outstanding common stock
as of the end of the preceding fiscal year. Shares that are available for a
given year but not subject to awards granted in that year will be carried
forward ("Carryover Shares") to the following year. After 2003, only the carried
forward shares and the shares that are returned to the pool of available shares
due to award forfeitures, will be available for issuance. Following stockholder
approval on May 23, 2001, five percent of the outstanding common stock as of
December 31, 2000, or 6,259,627 shares, were reserved for issuance under the
2000 Plan.
On January 5, 2000, the Company's Board of Directors approved a two-for-one
stock split to be effected in the form of a stock dividend payable to
stockholders of record as of January 14, 2000. On January 28, 2000, the Company
effected the two-for-one stock split.
On September 12, 2000, the Company's Board of Directors approved a two-for-one
stock split to be effected in the form of a stock dividend payable to
stockholders of record as of September 28, 2000. On October 5, 2000, the Company
effected the two-for-one stock split.
On November 1, 2000, the Company completed a public offering of its common stock
by issuing 12,650,000 shares at an aggregate value of $948,750, or $75.00 per
share. Stock issuance costs for the offering amounted to approximately $36,092.
The Company received net proceeds of $912,658.
All share, per share and common stock amounts presented in the financial
statements and related footnotes for all periods presented have been restated to
reflect the two two-for-one stock splits effected during 2000.
Stock Option Plans
The Company has stock option plans under which options to purchase shares of the
Company's common stock may be granted to employees, consultants and directors at
a price no less that the fair market value on the date of grant. At December 31,
2001, the total authorized number of shares under all plans was 40,372,299. The
vesting period of the options is determined by the Board of Directors and is
generally four years. All options expire after ten years from the date of grant.
The Company issued 10,000, 2,600 and 48,000 options to non-employees during the
years ended December 31, 2001, 2000 and 1999, respectively. The fair value of
these options is being amortized to expense over the service period.
F-25
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE K) - STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock and Preferred Stock (continued)
Option transactions during 2001, 2000 and 1999 are summarized as follows:
Year Ended December 31,
---------------------------------------------------------------------------
2001 2000 1999
----------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ----------- ----------- ----------- ----------
Outstanding at beginning of year 21,503,182 $31.49 17,234,972 $14.10 14,325,352 $ 8.46
Options granted 6,751,719 44.06 7,070,139 65.99 5,568,472 24.94
Options exercised (2,284,752) 9.50 (2,480,240) 9.49 (2,291,604) 6.15
Options canceled or expired (1,269,382) 56.81 (321,689) 27.42 (367,248) 7.95
---------- -------- --------
Outstanding at end of year 24,700,767 35.63 21,503,182 31.49 17,234,972 14.10
========== ========== ==========
Options exercisable at end of year 9,223,400 24.67 6,583,926 12.96 5,379,516 10.32
========= ========= =========
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life (In Exercise Number Exercise
Range of Exercise Price Outstanding Years) Price Exercisable Price
- ----------------------- ----------- --------------- ---------- ----------- ----------
$ 0.05 to $ 5.50 195,155 2.6 $ 3.81 195,155 $ 3.81
$ 5.51 to $ 8.63 5,759,910 6.1 7.40 3,949,614 7.33
$ 8.64 to $ 17.50 709,135 7.1 10.20 330,768 10.09
$17.51 to $ 32.74 5,563,028 6.8 26.32 2,901,952 25.71
$32.75 to $ 41.25 4,336,072 9.7 38.46 134,679 37.50
$41.26 to $ 64.48 2,189,567 9.3 49.70 195,891 49.70
$64.49 to $ 75.00 4,941,521 8.9 66.19 1,152,576 66.15
$75.01 to $110.00 1,006,379 8.0 79.80 362,765 79.49
--------- ---------
24,700,767 7.8 35.63 9,223,400 24.67
========== =========
Employee Stock Purchase Plan
During 2000, the Company's stockholders approved the establishment of an
Employee Stock Purchase Plan that qualifies under Section 423 of the Internal
Revenue Code and permits substantially all employees to purchase shares of
common stock. Participating employees may purchase common stock through
payroll deductions at the end of each participation period at a purchase price
equal to 85% of the lower of the fair market value of the common stock at the
beginning or the end of the participation period. Common stock reserved for
future employee purchases under the plan aggregated 481,056 and 500,000 shares
as of December 31, 2001 and 2000, respectively. Common stock
F-26
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE K) - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (continued)
issued under this plan totaled 18,944 in 2001. Under the plan, eligible
employees may purchase shares of common stock on certain dates and at certain
prices as set forth in the plan.
The Company applies APB No. 25 in accounting for its stock option plans and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. Had compensation cost for the Company's stock option plans
been determined based upon the fair value at the grant date for awards under
the plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in 2001, 2000 and 1999 would have been approximately
$242,615, $300,569 and $78,202, respectively, or $1.91, $2.71 and $0.85 per
share, respectively. The weighted-average fair value of the stock options
granted during 2001, 2000 and 1999 is estimated as $31.26, $57.08 and $15.65
per share, respectively. The weighted-average fair value of the employee stock
purchase plan rights granted during 2001 is estimated as $23.71 per share.
These weighted average fair values were determined based on the Black-Scholes
option-pricing model with the following assumptions:
Year Ended December 31,
2001 2000 1999
---- ---- ----
Expected life:
Stock options 6.0 years 6.0 years 6.0 years
Employee stock purchase plan 1.0 year - -
Interest rate 4.49% 5.21% 6.71%
Volatility 79% 111% 62%
Dividend yield 0% 0% 0%
The effect of applying SFAS No. 123 on 2001, 2000 and 1999 pro forma net loss
and net loss per share as stated above is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and the (2) fair value of
additional stock options in future years.
Options available for future grant were 4,691,650 at December 31, 2001.
(NOTE L) - PREFERRED SHARE PURCHASE RIGHTS
On May 20, 1998, the Company adopted a Shareholder Rights Plan which provided
for the issuance of rights to purchase shares of Junior Participating
Preferred Stock, par value $0.01 per share (the "Preferred Shares"), of the
Company. Under the Shareholder Rights Plan, the Company distributed one
preferred share purchase right (a "Right") for each outstanding share of
common stock, par value $0.01 (the "Common Shares"), of the Company. The
Rights were distributed on June 26, 1998 to stockholders of record on May 27,
1998.
Each Right entitles the holder to purchase from the Company one
four-thousandth of a Preferred Share at a price of $250 per one
four-thousandth of a Preferred Share, subject to adjustment. The rights become
exercisable ten business days after any party acquires or announces an offer
to acquire beneficial ownership of 15% or more of the Company's Common Shares.
In the event that any party acquires 15% or more of the Company's Common
Stock, the Company enters into a merger or other business combination, or if a
substantial amount of the Company's assets are sold after the time that the
Rights become exercisable, the Rights provide that the holder will receive,
upon exercise, shares of the common stock of the surviving or acquiring
company, as applicable, having a market value of twice the exercise price of
the Right.
F-27
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE L) - PREFERRED SHARE PURCHASE RIGHTS (CONTINUED)
The Rights expire May 20, 2008, and are redeemable by the Company at a price
of $0.00025 per Right at any time prior to the time that any party acquires
15% or more of the Company's Common Shares. Until the earlier of the time that
the Rights become exercisable, are redeemed or expire, the Company will issue
one Right with each new Common Share issued.
(NOTE M) - INCOME TAXES
The Company provides for income taxes using the liability method. The
difference between the tax provision and the amount that would be computed by
applying the statutory Federal income tax rate to income before taxes is
attributable to the following:
Year Ended December 31,
------------------------------------------
2001 2000 1999
---- ---- ----
Federal income tax provision at 34%......... $(39,832) $(82,818) $(14,261)
Debt conversion expenses for which no tax
benefit is available.................... 1,504 19,626 -
Stock option deduction for which no book
benefit is available...................... (32,794) (47,539) (2,900)
Purchased in-process R&D for which no tax
benefit is available.................... - 51,770 -
Net operating loss adjustment............... - (6,347) 2,969
State taxes, net of federal tax benefit..... (5,412) (12,211) (2,001)
Foreign taxes............................... - 149 1,344
Tax credits, principally for research and
development............................... (6,552) (8,900) (3,274)
Other....................................... 100 (1,141) 96
Increase in valuation allowance on deferred 82,986 87,636 18,252
tax asset............................... ------ ------ ------
$ - $ 225 $ 225
========= ======== ========
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
CURRENT LONG-TERM
ASSET/(LIABILITY ASSET/(LIABILITY)
---------------- -----------------
December 31, 2001
Net operating loss carryforward......................... $ - $ 184,445
Research and development and other tax credit
carryforwards........................................... - 24,968
Deferred revenue........................................ 991 3,967
Depreciation............................................ - 1,523
Reserves and accruals................................... 1,585 3,408
Loss on impaired investment............................. - 8,618
Other................................................... 196 1,132
--------- ----------
2,772 228,061
Less valuation allowance................................ (2,772) (228,061)
--------- ----------
$ - $ -
========= ==========
F-28
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE M) - INCOME TAXES (CONTINUED)
CURRENT LONG-TERM
ASSET/(LIABILITY ASSET/(LIABILITY)
---------------- ----------------
December 31, 2000
Net operating loss carryforward......................... $ - $ 112,143
Research and development and other tax credit
carryforwards......................................... - 18,417
Deferred revenue........................................ 4,901 5,950
Depreciation............................................ - 2,564
Reserves................................................ - 860
Other................................................... 960 2,061
---------- ----------
5,861 141,995
Less valuation allowance................................ (5,861) (141,995)
---------- ----------
$ - $ -
========== ==========
The Company recognized a valuation allowance to the full extent of its
deferred tax assets since the likelihood of realization of the benefit cannot
be determined. Not included in the above schedule of deferred tax assets and
liabilities is a deferred tax liability associated with unrealized gains on
investments of $12,385 and $10,887 at December 31, 2001 and 2000,
respectively. This liability is currently shown as a component in the
consolidated statements of stockholders' equity.
Provision for income taxes is comprised of the following:
Year Ended December 31,
-------------------------------------
2001 2000 1999
---- ---- ----
Current:
Federal.................................... $ - $ - $ -
State...................................... - - -
Foreign taxes.............................. - 225 225
Deferred...................................... - - -
------- ------- -------
$ - $225 $225
======= ==== ====
The Company has available tax credit carryforwards of approximately $25,000,
which expire, if unused, from the year 2008 through the year 2021. The Company
has net operating loss carryforwards for federal income tax purposes of
approximately $477,600 which expire, if unused, from the year 2010 through the
year 2021. The Company's ability to utilize these NOLs may be limited under
Internal Revenue Code Section 382. The tax benefit of approximately $232,500
of net operating losses related to stock options will be credited to equity
when the benefit is realized through utilization of the net operating loss
carryforwards.
(NOTE N) - INVESTMENT IN VASCULAR GENETICS, INC.
In November 1997, the Company entered into an agreement with three other
parties to form Vascular Genetics, Inc. ("VGI"), to pursue the development and
commercialization of gene therapy products for the treatment of vascular
diseases. As a result of the November 1997 agreement and other transactions
since that time, as of December 31, 2001, the Company holds a significant
minority equity interest in VGI of 27%. The Company also holds certain
preemptive rights that will permit retention of the Company's ownership
position under some circumstances in the event of a future financing by VGI.
In addition, the Company has the option to purchase 100% of VGI's common stock
at fair market value upon receiving the approval of two-thirds of the
shareholders. The Company will earn
F-29
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE N) - INVESTMENT IN VASCULAR GENETICS INC. (CONTINUED)
royalties on net sales from products developed and commercialized by VGI or by
a party granted a sublicense by VGI. Royalty rates are competitive and
increase as specified sales targets are reached. In 1998, the Company loaned
$600 to VGI of which the Company forgave $100 in 1998. The Company has
appointed two directors to the Board of Directors of VGI.
During 1999, the Company provided manufacturing services and product to VGI in
connection with a manufacturing agreement. At December 31, 2000, the Company's
receivable balance due from VGI was $1,532. Based upon VGI's uncertain
financial condition, the Company decided to fully reserve the receivable
balance from VGI as of December 31, 2000. During 2001, the Company provided no
manufacturing or research services to VGI nor did the Company receive any
payments from VGI. The Company has no carrying value for its investment in VGI
at December 31, 2001.
(NOTE O) - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share:
Year Ended December 31,
------------------------------------------------
2001 2000 1999
---- ---- ----
Numerator:
Net loss before cumulative effect of
change in accounting principle................. $ (117,152) $ (235,556) $ (42,169)
Cumulative effect of change in
accounting principle........................... - (8,250) -
---------- ----------- -----------
Net loss........................................ $ (117,152) $ (243,806) $ (42,169)
=========== =========== ===========
Denominator:
Denominator for basic and diluted
earnings per share - weighted-average shares.... 126,990,788 110,929,292 92,051,988
=========== =========== ===========
Net loss per share, basic and diluted:
Net loss per share before cumulative
effect of change in accounting principle........ $ (0.92) $ (2.12) $ (0.46)
Cumulative effect of change in
accounting principle............................ - (0.08) -
---------- ----------- -----------
Net loss per share............................... $ (0.92) $ (2.20) $ (0.46)
=========== =========== ===========
F-30
HUMAN GENOME SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(NOTE P) - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 2001 and 2000 is presented in the
following tables:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
Revenue........................................... $ 5,267 $ 5,267 $ 1,642 $ 642
Income (loss) from operations..................... (35,112) (40,896) (44,977) (51,187)
Net income (loss) (1)............................. (13,007) (24,024) (24,879) (55,242)
Net income (loss) per share, basic and diluted.... (0.10) (0.19) (0.19) (0.43)
2000
Revenue........................................... $ 5,267 $ 5,267 $ 6,267 $ 5,267
Income (loss) from operations..................... (20,263) (22,960) (157,528) (29,770)
Net income (loss) before cumulative effect of
change in accounting principle (2).............. (64,273) (16,368) (148,909) (6,006)
Cumulative effect of change in accounting
principle....................................... (8,250) - -
------ ------ ------ ------
Net income (loss) (2)............................. (72,523) (16,368) (148,909) (6,006)
======== ======== ========= =======
Basic and diluted net income per share before
cumulative effect of change in accounting
principle (2)................................... $ (0.62) $ (0.15) $ (1.35) $ (0.05)
Cumulative effect of change in the accounting
principle....................................... (0.08) - - -
------ ------ ------ ------
Net income (loss) per share, basic and diluted (2) $ (0.70) $ (0.15) $ (1.35) $ (0.05)
====== ====== ====== ======
(1) The Company's results for the fourth quarter of 2001 include a
non-recurring charge of $22,314, or $0.17 per share, relating to an
impairment charge recognized in connection with the Company's investment
in Transgene, S.A.
(2) The Company's results for the first and third quarters of 2000 include
non-recurring charges relating to debt conversion expenses of $50,818, or
$0.49 per share, and purchased in-process research and development of
$134,050, or $1.21 per share, respectively.
F-31