Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: AUGUST 31, 1995
OR
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from to .
---------- ----------------
Commission file number: 0-10824
GENOME THERAPEUTICS CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (617) 893-5007
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of
2
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of November 27, 1995 was approximately $86,753,315.
The number of shares outstanding of the registrant's common stock as
of November 27, 1995 was 13,695,085.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for use at its Special
Meeting of Shareholders in lieu of an Annual Meeting to be held on February 16,
1996 (the "Proxy Statement") are incorporated by reference into Part III of
this Report.
Exhibit Index appears on Page 48.
2
3
PART I
Item 1. BUSINESS
OVERVIEW
Genome Therapeutics Corporation ("GTC" or "the Company") is a leader
in the field of genomics--the sequencing, discovery and characterization of
genes. The Company's objective is to identify gene targets which can be used
to develop novel therapeutic, vaccine, and diagnostic products for commercially
important diseases. The Company uses its proprietary high-throughput
sequencing technology to sequence the genomes of infectious organisms and uses
its positional cloning and cDNA sequencing technologies to discover and
characterize genes that cause or predispose individuals to common diseases.
The Company believes that the identification of biologically relevant genes
from infectious organisms and the identification of human disease genes will
facilitate the development of highly specific and effective antibiotics,
therapeutics, diagnostics, and vaccines. The Company's current pathogen
sequencing development programs include: Helicobacter pylori ("H. pylori"),
Mycobacterium tuberculosis ("M. tuberculosis"), and Staphylococcus aureus
("Staph."). The Company has sequenced the genome of H. pylori, and in August
1995, the Company entered into a strategic alliance with Astra AB to develop
pharmaceutical, vaccine, and diagnostic products effective against
gastrointestinal infections or other disease caused by H. pylori. The Company
also has development programs to identify and characterize the human disease
genes associated with fascioscapulohumeral muscular dystrophy, prostate cancer,
benign prostatic hypertrophy ("BPH"), and manic depression.
The Company intends to leverage its genomic technologies --
high-throughput sequencing, positional cloning, cDNA comparative sequencing and
bioinformatics -- to identify therapeutic, vaccine and diagnostic products for
commercial development. The Company intends to focus its resources in two
principal areas, the discovery and characterization of human disease genes, and
the sequencing of the genomes of particular pathogens. The Company believes
that there is a significant market opportunity for novel antibiotics, other
therapeutic products, vaccines and diagnostics based on genetic targets
identified through genomics.
SCIENTIFIC BACKGROUND
A genome is defined as the total genetic content of an organism and
generally consists of DNA, a chemically complex material made-up of four
different nucleotides, the building blocks of DNA. These nucleotides are:
adenine (A), guanine (G), cytosine (C), and thymine (T). The sequence in which
these nucleotides are linked together in a molecule of DNA determines the
informational content of the genes, the elements which
3
4
define the inherited characteristics of an organism. The specific DNA sequence
of a gene is generally translated through messenger RNA (mRNA), an intermediary
molecule, into a protein product. A defect in a gene which leads to the
over-production, improper function, or absence of a single protein molecule may
cause an imbalance in the organism's complex cellular system and result in
disease or death of that organism.
The human genome consists of 23 pairs of DNA sequences or chromosomes.
These chromosomes contain approximately 100,000 human genes spread over about
three billion nucleotides. Human genes are found in the chromosomes as
interrupted sequences, i.e, there are coding regions of DNA, called exons,
which are separated from each other by non-coding regions of DNA called
introns. The number of exons found in human genes can be quite large as can be
the distance between exons. The DNA sequence of a human gene is transcribed
into a mRNA molecule which is processed to contain only the uninterrupted exon
sequences. The mRNA molecule is, in turn, translated into a protein product.
The function of the majority of human DNA is unknown. By contrast, genomes of
pathogenic bacteria generally consist of a single chromosome which contains
several thousand genes spread over millions of nucleotides. With rare
exceptions, the genes in pathogens are uninterrupted and their genomes consist
mainly of genes and regulatory elements.
There are various technologies used in the discovery of genes
including:
Sequencing
Sequencing is the process of identifying genes through the
determination of the order or sequence of nucleotides in DNA fragments.
Sequencing the genome of a pathogen is an efficient and cost effective way of
discovering all of the genes contained within that organism. However, given
the size of the human genome and because only a small portion of the human
genome contains gene sequences, large-scale sequencing of complementary copies
of messenger RNA molecules made in a test tube (often referred to as cDNA), is
a more practical way to identify human genes.
Biology
Knowing the DNA sequence of a gene allows one to predict the primary
chemical sequence of the resulting protein molecule. Such information,
however, does not necessarily allow one to identify the role or function that a
given protein or gene plays in the biological processes of an organism. As a
first approach to determining the function of a gene, databases are searched to
determine whether proteins with similar sequences have been identified before
and whether the function of such proteins is known. The presence of specific
sequences within the gene and, hence, structural motifs within the gene
product, also helps to indicate the function of the genes and resulting
protein. Further experiments are generally needed to determine and confirm the
function of a newly identified gene and
4
5
its protein product. Expression of the gene in a recombinant system and
purification of the resulting protein product provide ample material for study
in vitro and in vivo. With human genes, elimination of the homologous gene in
an animal can create a model system for determining the biochemical role of the
gene product and, if the gene is responsible for causing an important disease,
the pathophysiology of the disease. Such animal models can also be used for
testing possible pharmaceutical approaches for treating a disease in man.
Bacterial pathogens are more amenable to such biological experiments
since the total number of genes contained in their genomes is significantly
less than that found in humans. Thus, knock-out experiments, in which the
function of a particular gene is disrupted by the random or targeted
interruption of the wild-type gene sequence, can be used to identify which
genes are required for the survival of a pathogen within its human host. Such
biologically relevant genes then become candidate targets for the development
of therapeutic molecules for treating infections caused by the pathogen. Since
there are approximately 100,000 genes in the human genome, biological evidence
that a gene is involved in causing a disease must be obtained in a more
efficient manner than is possible with bacterial pathogens. Such evidence is
generally obtained by positional cloning.
Positional Cloning
In positional cloning, genetic mapping is first used to identify the
region on a particular chromosome where the disease causing gene is located.
Genetic mapping involves using genetic markers, called DNA probes, which detect
regions of DNA that vary in sequence content from individual to individual.
The position of these DNA sequences on a chromosome, as detected by the DNA
probes, constitutes a genetic linkage map of that chromosome. By following the
inheritance patterns of these DNA markers in families in which a particular
disease is segregating and looking for the co-inheritance of DNA markers and
the disease, the chromosomal location of a gene responsible for causing or
predisposing an individual to that disease can be determined.
Such a search is generally done genome-wide with a set of DNA markers
that span the genome and are separated from each other by an approximately
equal genetic distance. The regions which are initially examined generally are
those regions which contain genes that are viewed as candidates for causing or
predisposing an individual to the disease.
Once specific chromosomal locations have been mapped, a physical map
of the relevant chromosomal region(s) is constructed. Libraries containing
random clones of large genomic DNA fragments are examined to find those clones
which contain pieces of DNA fragments from each relevant chromosomal region.
The aligning of these DNA clones, so that the resulting order represents how
these DNA fragments are related to each other in the genome, is called physical
mapping. These clones, which constitute the physical map, can then be used to
identify the genes which are contained within that chromosomal region. These
genes can be isolated in the form of cDNA clones by using
5
6
special cloning vectors which trap the exons contained within genomic DNA.
Alternatively or in combination with exon trapping, the genomic DNA can be
sequenced and computer algorithms used to predict the exons which are contained
within that genomic DNA. Such information can then be used to search cDNA
libraries for clones which contain these presumed exons. Each identified gene
becomes a candidate for causing the disease. Proof of such involvement is
sought by determining the sequence of such genes in individuals with the
diseases and comparing it to the sequence of that gene from healthy
individuals. DNA sequence differences, which are only found in individuals who
have inherited the disease, are taken as proof that the gene which contains
these differences is responsible for causing that disease.
Bio-informatics
The Company's gene discovery programs create significant challenges in
data management, data analysis, data storage, data retrieval and data security.
GTC has developed a proprietary bio-informatics system that integrates the vast
amount of data generated in a manner in which the important scientific
information can be distilled. Genetic Data are collected from various sources
both within and outside the company and are configured in relational databases
for use by the scientists.
COMPANY TECHNOLOGY
A genomic approach to drug discovery represents a change from
traditional scientific approaches. Historically, most drug discovery has been
based on random screening of candidate drug compounds to determine their impact
on diseases. A molecular genetic approach allows scientists to first identify
the genetic target causing a particular disease and then develop drugs to treat
the root cause of the disease. In that process GTC uses the following genomic
technologies:
High-throughput Multiplex Sequencing
Gene sequencing involves determining the order of the nucleotides in a
DNA fragment. The increasing demand to sequence DNA can be best met by systems
that are high-throughput and can be applied on a large scale. GTC uses a
proprietary high-throughput sequencing process called "computer-assisted,
multiplex sequencing". Multiplex sequencing is a sequencing process whereby
individual DNA samples are mixed together and then processed as mixtures. At
the end of the sequencing process, the individual sequences are decoded from
this mixture by hybridizing with oligonucleotide probes that are complementary
to the unique tags which surround each DNA sequence in the cloning vector. The
Company used multiplex sequencing to sequence the H. pylori genome in 1994.
The H. pylori genome is approximately 1.7 million nucleotides long. The
Company is using multiplex sequencing to sequence other pathogens it believes
offer commercial potential.
6
7
The Company has obtained an exclusive worldwide license from Harvard
University to use the multiplex sequencing technology for commercial
applications. Under this license, the Company paid Harvard a nonrefundable
license fee of $100,000 and must pay Harvard royalties based on license fees,
royalties and other income received by the Company in respect of sublicenses
granted by the Company, products sold that include the multiplex sequencing
technology, and services performed that utilize the multiplex sequencing
technology. In addition, the Company must pay Harvard minimum annual royalties
ranging from $5,000 in 1995 to $35,000 in 1998.
Positional Cloning: The Company uses positional cloning in its
efforts to discover human disease-related genes. Starting with a disease
target, the Company identifies families in which the disease occurrence in
individuals within a family is substantially higher than in the general
population. Having identified such families, the Company begins collecting
blood samples from the members of these families. Once the samples are
collected, the Company uses its high-throughput, multiplex genotyping
technology to facilitate the processing of the DNA samples. Genotyping is the
process of using DNA probes to determine the genetic composition of specific
regions on each chromosome of each family member. After the samples have been
analyzed, linkage analysis is performed to determine which genetic marker(s) is
inherited along with the disease which is segregating within the family. The
product of that analysis is the determination of the specific chromosomal
region(s) of the genome linked to the disease. Then, the Company constructs a
physical map of that region and uses exon trapping and DNA sequencing
technologies to clone the gene responsible for the disorder.
cDNA Comparative Sequencing: The Company is also using cDNA
sequencing to identify human disease genes. This technology is another means
of identifying genes and involves the study of human diseased tissues at
various stages of disease development in comparison to healthy tissues. Prior
to sequencing genes, the Company first extracts expressed mRNA from tissues in
normal and diseased states and then prepares a "library" which consists of cDNA
derived from representative samples of the mRNA that is expressed from the
genes of a particular tissue. Once the libraries are made, GTC uses its
high-throughput sequencing capability to identify the genes expressed in those
different samples. The Company supplements this technology with differential
display technology in order to rapidly identify differently expressed genes.
This technology is being used in the Company's prostate cancer and benign
prostatic hypertrophy development projects.
Bio-informatics: The rapid gene discovery capability of the Company
is substantially enhanced by its expertise in bio- informatics.
Bio-informatics is the use of computer software and complex databases to
process, store, retrieve and analyze data that is generated in genetic mapping
and large-scale DNA sequencing. The Company was a pioneer in developing rapid,
efficient methods of organizing and analyzing the vast quantities of data
obtained from constructing genetic linkage maps. The Company used
7
8
such software to develop the first genetic linkage map of the entire human
genome which appeared in a landmark publication in the journal CELL in 1987.
Computer-assisted multiplex sequencing allows the high-throughput sequencing of
pieces of human genes as well as the subsequent computer analysis of each of
these gene sequences so that they can be compared to genes with known functions
in order to predict the biological function of the newly discovered gene. The
Company's database and outside databases are checked to compare known sequences
to the newly identified sequence in order to try to determine whether the newly
identified sequence is similar to a known protein. If information is found in
either database indicating that it does correspond to a known sequence,
scientists may infer a likely function for the protein product of the newly
discovered gene.
The Company is continuing the refinement of its existing
bio-informatics tools through the integration of new hardware and software.
The Company is currently improving proprietary software to integrate GTC's
database, outside gene databases, sequence data from production and biological
experiments from the laboratory benches into a network which can provide
interactive analysis for our scientists. This will enable our scientists to
perform motif profile searches to define functional groupings and it will also
help our scientists in the identification of transcriptionally coupled genes,
operons, promoters, regulatory elements, etc. The Company is also using its
interactive software to do real-time genomic subtraction. Genomic subtraction
is the comparative analysis of genomes of different organisms in order to
identify genes and protein sequences which are similar.
STRATEGY
The Company's objective is to identify gene targets which can be used to
develop novel therapeutic, vaccine and diagnostic products for commerically
important diseases. The Company intends to focus its resources in two
principal areas, the discovery and characterization of human disease genes, and
the sequencing of the genomes of particular pathogens. The Company intends to
achieve its objective through the following strategies:
Sequencing of Pathogens - In the pathogen area, the Company's
development strategy is to identify and sequence the genomes of pathogens
representing significant commercial opportunity. In particular, the Company
believes that pathogens that have exhibited resistance to existing antibiotics
may offer unique opportunities for new therapeutic and vaccine products based
on the genomic information of such pathogens. The Company intends to enter
into strategic partnerships with pharmaceutical companies in order to develop
vaccine and therapeutic products based on the genomic information of the
pathogens. The Company has recently sequenced the genome of the H. pylori
bacterium and entered into a collaborative agreement with Astra Hassle AB for
the development of therapeutic, diagnostic and vaccine products effective
against gastrointestinal and any other disease caused by H. pylori. The
Company believes its pathogen sequencing programs will
8
9
permit the Company to generate royalty revenue sooner than its human gene
discovery efforts.
Discovery of Human Disease Genes - In human gene discovery, the
Company plans to obtain exclusive rights to collections of DNA samples from
relevant family resources in order to identify and then characterize genes
responsible for targeted human diseases. The Company intends to seek
collaborations with clinicians and academic researchers in order to obtain
these rights. Once the family resources are obtained, the Company believes its
experience and its multiplex genotyping, multiplex sequencing and bio-
informatics technology will permit the Company to speed the gene discovery
process. The Company intends to seek strategic alliances in order to
commercialize therapeutic products based on the human disease genes discovered.
When appropriate, based on market size, projected development costs and other
factors, the Company plans to retain certain rights related to the human
disease genes the Company identifies. The Company plans to increase spending
on its human gene discovery programs.
Strategic Alliances - The Company's strategy is to seek pharmaceutical
companies and other corporate partners active in the Company's areas of
research for the development of therapeutic products and vaccines based on the
Company's genomic discoveries. This strategy will allow the Company to focus
its resources on its pathogen sequencing and human gene discovery efforts. If
successful, this strategy will also permit the Company to benefit from the
commercialization of the therapeutic products and vaccines developed, without
expending the substantial costs required to develop and commercialize
therapeutic and vaccine products. Typically, the Company will exclusively
license to its partner all rights to therapeutic products and vaccines (and,
depending upon the gene, diagnostic products) developed based on the particular
genetic database licensed by the Company. In return, the Company will seek a
combination of upfront license fees, research funding, milestone payments and
royalty payments on product sales.
Government Grants and Contracts - The Company also plans to continue to
seek government grants and research contracts for research related to the
Company's technology and its development programs. These research grants permit
the Company to continue to improve its genomics technology and to develop an
experienced labor pool. These grants also have the effect of lowering the
Company's overhead expenses.
9
10
RESEARCH PROGRAMS
Pathogen Programs
Therapies for the treatment of infectious diseases represent a
sizeable market opportunity. The Company believes that information derived
from identifying and characterizing the genes of pathogens may lead to the
development of antibacterial and antifungal products that can overcome the
resistance exhibited by many pathogens to currently available therapies. The
Company is currently conducting development programs targeted at H. pylori, M.
tuberculosis, and Staph. The Company intends to initiate development programs
against other pathogens depending upon such factors as projected commercial
potential, effectiveness of current therapies, status of programs initiated by
the Company's competitors and projected development costs, which are often
directly related to the complexity of the genome of the target pathogen.
Helicobacter pylori - H. pylori is the bacterium responsible for
causing peptic ulcers in 80% of ulcer patients. H. pylori can cause an
infection that leads to either a duodenal or gastric ulcer. Peptic ulcer
disease is a chronic inflammatory condition of the stomach and duodenum that
affects as many as 5% of the population of the world at some time in their
lives. The disease has relatively low mortality but results in substantial
human suffering and high economic costs. Studies have also linked H. pylori
with development of certain stomach cancers. Using its proprietary
high-throughout multiplex sequencing technology, the Company sequenced the
genome of H. pylori. Under an agreement signed with Astra Hassle AB, the
Company is identifying the genes critical to the survival of the organism and,
through a research collaboration, is endeavoring to develop therapeutics to
address the clinical need created by H. pylori infections. See "Collaborative
Agreements -- Pharmaceutical Company Collaborations".
Mycobacterium tuberculosis - M. tuberculosis is the pathogen
responsible for causing tuberculosis. The bacteria attacks patches of tissue
in the lungs, killing cells and making breathing difficult. Left untreated,
the damage from infection prevents proper functioning of the lung and the
patient suffocates. As strains of tuberculosis have become resistant to the
drugs that have long controlled the infection, tuberculosis has once again
become a deadly disease. There are approximately 10 million cases of active
tuberculosis worldwide resulting in approximately 3 million deaths annually,
the largest number of annual deaths caused by any single organism. Using its
large-scale multiplex sequencing technology, the Company, with financial
support from its DNA sequencing technology grant, has completed the sequencing
of numerous, large contiguous segments of mycobacterial genomic DNA. Within
the 1.6 million base-pairs of mycobacterial DNA sequenced, the Company has
identified over 1200 full-length genes. The Company has filed patent
applications for a broad family of related mycobacterial genes.
10
11
Staphylococcus aureus - Staph. is a bacterium involved in hospital
acquired infections (nosocomial) and can enter a patient's blood stream through
wounds, burns or surgical incisions. The antibiotic vancomycin is currently
the only effective antibiotic for the treatment of methycilllin resistant
Staph. infections. Between 60,000 and 80,000 patients in the United States die
each year of causes related to infections they acquire in hospitals, and more
than half of those deaths are connected with antibiotic-resistant bacteria.
Using its high-throughput sequencing capability, the Company is currently
sequencing the genome of the Staph. bacterium.
Gene Discovery Programs
GTC has initiated programs to identify genes that are responsible for
human disorders either through positional cloning strategies or through a
multifaceted approach incorporating both comparative gene sequencing and
positional cloning. The Company's current human disease gene discovery
programs include prostate cancer and benign prostatic hypertrophy, manic
depressive illness, and fascioscapulohumeral muscular dystrophy ("FSHD"). The
Company is also conducting preliminary research regarding osteoporosis and
asthma. The Company's decision to initiate more significant research programs
for these diseases, to undertake other gene discovery research programs will be
based, among other factors, on the commercial opportunity, the availability of
relevant DNA and family resources, the status of competitors' programs, and
projected development costs. With the exception of FSHD, the Company currently
targets common diseases with complex etiologies that are most likely due to
defects in more than a single gene. The status of these programs are described
below.
FSHD - FSHD is a form of muscular dystrophy characterized by muscular
weakness and atrophy initially concentrated in the face and shoulder girdle.
It is a rare disease in that only one in 20,000 people is affected by this
disorder. A single gene responsible for FSHD has been mapped to the tip of the
long arm of chromosome 4. GTC has further refined this chromosomal region and
has determined the DNA sequence of an approximately 60,000 base pair region
that spans the disease locus. Based on the DNA sequence, several candidate
genes have bene identified. Further efforts are underway to evaluate these
candidates in affected individuals and normal controls.
Prostate Cancer and Benign Prostatic Hypertrophy - Prostate cancer is
the most commonly diagnosed cancer in males and the second most common cause of
death. Approximately 200,000 new cases are diagnosed per year, with 40,000
deaths. BPH, a common disease in men, causes lower urinary tract obstructive
symptoms and results from the slow growth of prostatic tissue. It is non- life
threatening but can have a significant effect on the quality of life. GTC has
initiated a multifaceted program to identify genes for these disorders
including efforts to clone a tumor suppresser gene on chromosome 10, to develop
gene expression profiles in normal and disease tissue, and to identify
appropriate
11
12
families exhibiting early onset (<55 years of age) of prostate cancer for
subsequent genetic mapping efforts.
To date, a putative tumor suppressor gene for prostate cancer has been
localized to a refined region on the long arm of chromosome 10 based on loss of
heterozygosity observed in DNA isolated from tumors versus peripheral blood
samples. A high resolution physical map of the region is currently being
constructed. Using these developing resources, a large scale sequencing effort
is in progress to determine the DNA sequence of a set of clones which span the
region. In parallel experiments, several putative genes in the region have
been identified through exon trapping techniques. Efforts to further
characterize these genes are underway.
Gene expression profiles have been initiated by constructing cDNA
libraries from normal prostate, prostatic tumors, and from tissue exhibiting
BPH. High throughput DNA sequencing efforts are in progress. GTC is also
supplementing this approach with differential display technologies which
utilize reverse transcription coupled with polymerase chain reaction to rapidly
identify differentially expressed genes.
Manic depressive illness - Manic depressive illness is a serious
neuropsychiatric disorder characterized by alternating mood swings of mania and
depression. It affects approximately one percent of the United States
population. GTC has been collaborating with key academic researchers at the
National Institute of Mental Health to conduct a genome wide search for DNA
markers associated with this disorder in several Old Order Amish pedigrees.
This population is especially valuable since it represents a relatively
genetically isolated community with a small number of founders in the 1800's.
Strict pressures against substance abuse also facilitate accurate disease
diagnoses. The Company has completed a genome wide scan at 15-20 cM intervals
and three candidate regions have been identified. Further efforts to evaluate
and refine these candidate regions for subsequent gene identification efforts
are in progress.
COLLABORATIVE AGREEMENTS
Pharmaceutical Company Collaborations
Astra AB - In August 1995, the Company entered into a collaboration
agreement with Astra Hassle AB ("Astra") to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infection or any other
disease caused by H. pylori. Under the terms of the agreement, the Company
granted Astra exclusive access to its H. pylori genomic sequence database and
agreed to undertake certain research efforts in exchange for a minimum of
approximately $11 million and up to $22 million in license fees, expense
allowances, research funding and milestone payments. The agreement grants
Astra exclusive worldwide rights to make, use and sell products based on the
Company's H. pylori technology and requires Astra to provide research funding
to the Company over
12
13
a period of two and one-half years to further develop and annotate the
Company's H. pylori genomic sequence database, identify therapeutic and vaccine
targets and develop appropriate biological assays. Research under the
agreement will be directed by a Joint Management Committee and a Joint Research
Committee, each consisting of representatives from both parties. The Company
has received approximately $5 million in license fees, expense allowances and
research funding under the Astra agreement through November 1995. The Company
will also be entitled to receive royalties on Astra's sale of any products (i)
protected by the claims of patents licensed exclusively to Astra by the Company
pursuant to the agreement, or (ii) the discovery of which was enabled in a
significant manner by the genomic data base licensed to Astra by the Company.
Government Collaboration
The Company has a number of grants and contracts from various agencies
of the Federal government which represent an important element of the Company's
research and development programs. These research grants permit the Company to
continue to improve its genomics technology and to develop an experienced labor
pool. These grants also have the effect of lowering the Company's overhead
expenses. Under the agreements, the Company has exclusive rights to any
commercial applications of technology developed, including all gene
discoveries, inventions, and technology improvements created or discovered
under such research. However, the government retains certain rights to
practice such technology. See "Patent and Proprietary Rights". The scope of
the research covered by the grants and contracts encompasses technology
development, sequencing production, technology automation projects and
positional cloning projects. Since 1990, the Company has received over $37
million in funding from the government. Listed below are the major grants and
contracts on which the Company is currently working:
Term
Award of
Project Date Project Value
------- ---- ------- -----
Genome Sequencing Center August, 1994 3 yrs. $10.4M
Microbial Genome Sequencing December, 1994 3 yrs. $3.0M
Physical Map of Chromosome 10 May, 1994 3 yrs. $1.9M
Gene Expression (NINDS) December, 1993 3 yrs. $1.5M
FSHD September, 1994 3 yrs. $1.0M
These grants and research contracts are subject to appropriation by
Congress each year.
13
14
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will be dependent in part on its
ability to obtain patent protection on genes, or products based on genes,
discovered by it. The current criteria for obtaining patent protection for
partially sequenced genes and for genes whose functions have not been
characterized are unclear. The Company's current strategy is to apply for
patent protection upon the identification of a gene and to apply for expanded
patent protection once the function of the gene has been characterized.
However, there can be no assurance that the Company will be able to obtain
patent protection on such genes, and even if such patents are issued, the scope
of the coverage or protection provided by any such patents is uncertain. In
addition, there can be no assurance that any patents, if issued, will provide
protection against any competitors, will provide the Company with competitive
advantages, or will not be challenged by others. The Company has filed patent
applications with respect to a number of genes of the H. pylori and M.
tuberculosis bacteria, however, there is no assurance that any patents will
issue in respect of such applications. The Company has not yet filed any
patent applications on human genes.
There are an estimated 100,000 genes in the human genome and the
Company believes that virtually all such genes will be identified, albeit
largely without known function, within two to three years. A number of groups
are attempting to rapidly identify and patent gene fragments and full length
genes whose functions have not been characterized, as well as fully
characterized genes. There is substantial uncertainty regarding the
patentability of gene fragments and genes without known function. There have
been recent proposals for review of the appropriateness of patents on gene
fragments and genes. The Congressional Office of Technology Assessment has
announced that it is conducting a review of this area with a particular focus
on the patentability of gene fragments. The United States Patent and Trademark
Office initially rejected a patent application by the National Institutes of
Health on certain partial gene sequences. To the extent any patents issue on
such partial or full length genes, the risk increases that the potential
products of the Company or its strategic partners may give rise to claims that
such products infringe the patents of others. Such groups could bring legal
actions against the Company or its strategic partners claiming damages and
seeking to enjoin drug development efforts or the manufacturing or marketing of
the affected products. If any such actions are successful, in addition to any
potential liability for damages, the Company or its strategic partners could be
required to obtain a license in order to continue to manufacture or market the
affected products. These can be no assurance that the Company or its strategic
partners would prevail in any such action or that any license required under
any such patent would be made available upon commercially acceptable terms.
The Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's management and financial resources.
14
15
In addition, publication of information concerning genes prior to the
time the Company applies for patent protection based on the full-length gene
could adversely affect the Company's ability to obtain patent protection with
respect to genes identified by it. Washington University is currently
identifying genes through partial sequencing pursuant to funding provided by
Merck & Co., Inc. and depositing the partial sequences identified in a public
database.
Under the Company's government grants and research contracts, the
government has a statutory right under certain circumstances (including
inaction on the part of the Company or its licensees to achieve practical
application of the invention or a need to alleviate public health or safety
concerns not reasonably satisfied by the Company or its licensees) to grant to
other parties licenses under any inventions developed based on research funded
by the government.
The Company also relies on trade secret protection for its
confidential and proprietary information. The Company believes it has
developed proprietary technology for gene discovery, including proprietary
multiplex sequencing technology, multiplex genotype technology and its
bio-informatics system. The Company has not sought patent protection for this
technology although the Company's licensor with respect to the multiplex
sequencing technology has filed for patent protection of such technology.
Additionally, the Company is developing a database of DNA samples that it has
analyzed. The Company has taken security measures to protect its data and is
in the process of exploring ways to further enhance the security for its data.
There can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information. In addition,
while the Company has entered into proprietary information agreements with its
employees, consultants and advisors, there can be no assurance that these
agreements will provide meaningful protection for the Company's proprietary
information in the event of unauthorized use or disclosure of such information.
In addition, there can no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its trade secrets.
COMPETITION
Competition among entities attempting to identify the genes
responsible for human diseases is intense and is expected to increase. The
Company will face competition from pharmaceutical and biotechnology companies
both in the United States and abroad. In addition, significant research to
identify and sequence genes is being conducted by universities, other
non-profit research institutions and United States and foreign
government-sponsored entities. A number of entities are attempting to identify
rapidly and patent randomly sequenced human genes and the genome of other
organisms. Certain entities are utilizing positional cloning to identify and
characterize genes. Any one of these companies or other entities may discover
and establish a competitive advantage in one or
15
16
more development programs which the Company has commenced. The Company also
faces competition from these and other entities in gaining access to DNA
samples used in its research and development programs.
The Company believes that its ability to compete is dependent, in
part, upon its ability to create and maintain scientifically advanced
technology, the speed with which it can identify and characterize the genes
involved in targeted complex diseases, its ability to rapidly sequence the
genomes of selected pathogens, its strategic partners' ability to
develop and commercialize pharmaceutical products based upon the Company's gene
discoveries, as well as its ability to attract and retain qualified personnel,
obtain patent protection or otherwise develop proprietary technology or
processes and secure sufficient capital resources for the expected substantial
time period between technological conception and commercial sales of products
based upon the Company's gene discoveries.
Many of the Company's competitors have substantially greater research
and product development capabilities and financial, scientific, marketing and
human resources than the Company. These competitors may succeed in identifying
genes or developing products earlier than the Company or its strategic
partners, obtaining authorization from the FDA for such products more rapidly
than the Company or its strategic partners, or developing products that are more
effective than those proposed to be developed by the Company or its strategic
partners. Any potential products based on genes identified by the Company will
face competition both from companies developing gene-based products and from
companies developing other forms of treatment for particular diseases targeted
by the Company. Certain of the Company's and its strategic partners'
competitors may be further advanced than the Company in identifying genes and
developing potential products that may compete with potential products of the
Company or its strategic partners. There can be no assurance that research and
development by others will not render the products which the Company or its
strategic partners may seek to develop obsolete or uneconomical or result in
treatments or cures superior to any other therapy developed by the Company or
its strategic partners, or that any therapy developed by the Company or its
strategic partners will be preferred to any existing or newly developed
technologies.
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products which may be developed by the Company or a strategic
partner of the Company. The nature and the extent to which such regulation may
apply to the Company or its strategic partners will vary depending on the nature
of any such pharmaceutical products. Virtually all of the Company's or its
strategic partners' pharmaceutical products will require regulatory approval by
governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical
16
17
and clinical testing and other approval procedures by the FDA in the United
States and similar health authorities in foreign countries. Various federal
and, in some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources.
Generally, in order to gain FDA pre-market approval, a company first
must conduct pre-clinical studies in the laboratory and in animal model systems
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 ("IND"), which the FDA must review before
human clinical trials of an investigational drug can start. In order to
commercialize any products, the Company or its strategic partner will be
required to sponsor and file an IND and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety, efficacy and potency
that are necessary to obtain FDA approval of any such products. Clinical trials
are normally done in three phases and generally take two to five years, but may
take longer, to complete. After completion of clinical trials of a new
product, FDA marketing approval must be obtained. If the product is classified
as a new drug, the Company or its strategic partner will be required to file a
New Drug Application ("NDA") and receive approval before commercial marketing
of the drug. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. NDAs submitted to the FDA can take, on average, two
to five years to receive approval. If questions arise during the FDA review
process, approval can take more than five years. Even if FDA regulatory
clearances are obtained, a marketed product is subject to continual review, and
later 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. For marketing outside the United States, the
Company will also be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. The specific
regulatory requirements with which the Company or its strategic partners will
have to comply may change due to the matters of therapies based on genome
information.
The Company also intends to develop diagnostic products based upon
genes that it identifies. The diagnostic products to be developed by the
Company or its strategic partners are likely to be regulated by the FDA as
devices rather than drugs. The nature of the FDA requirements applicable to
such diagnostic devices depends on their classification by the FDA. A
diagnostic device developed by the Company or a strategic partner would most
likely be classified as a Class III device, requiring pre-market
17
18
approval. Obtaining pre-market approval involves the costly and time-consuming
process, comparable to that for new drugs, of conducting pre-clinical studies,
obtaining an investigational device exemption to conduct clinical tests, filing
a pre-market approval application, and obtaining FDA approval.
Guidelines for the regulation of recombinant DNA research have been
adopted by the City of Waltham, Massachusetts, where the Company's recombinant
DNA research and development activities are currently conducted. Under the
ordinance, which was passed by the Waltham City Council in 1981, a private
company engaged in recombinant DNA research must agree to abide by guidelines
promulgated by the National Institutes of Health for recombinant DNA research
and must provide Waltham with certain additional information.
The Company's research and development activities involve the
controlled use of hazardous materials, chemicals and various radioactive
materials. The Company is subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could exceed the resources of the
Company.
HUMAN RESOURCES
As of August 31, 1995, the Company had 105 full-time employees, of
whom 93 were engaged in research, development and production activities, and 12
in general and administrative functions. Eighteen of the Company's employees
hold Ph.D. degrees and 25 others hold other advanced degrees.
The Company provides its employees with opportunities for internal and
external interaction with scientific professionals through consultation with
scientific advisory consultants, technical meetings and scientific
collaborations and publications in leading scientific journals.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
excellent. The Company believes that its compensation and other employee
benefit plans are competitive, and key scientific and management personnel have
been or will be offered an equity participation opportunity which the Company
believes to be necessary to attract and retain such personnel.
Item 2. PROPERTIES
18
19
The Company's research and development activities are conducted at
facilities located at 100 Beaver Street and 1365 Main Street, Waltham,
Massachusetts. The Company has leased approximately 14, 000 square feet of
space at 1365 Main Street under a lease expiring December 31, 1997 with the
option for a five-year renewal. The Company's executive offices and additional
labs are located at 100 Beaver Street, Waltham, Massachusetts, where the
Company has leased approximately 23,305 square feet of space under a lease
expiring July 1999 with the option for a five-year renewal.
During fiscal 1995, the Company incurred aggregate rental costs,
excluding maintenance, taxes and utilities, for all facilities of approximately
$411,000. The aggregate minimum rental cost to be paid in fiscal 1996 is
expected to be approximately $411,000.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
19
20
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market
System (ticker symbol "GENE"). The table below sets forth the range of high
and low quotations for each fiscal quarter of the Company during 1995 and 1994
as furnished by the National Association of Securities Dealers Quotation
System.
1995 1994
High Low High Low
---- --- ---- ---
First Quarter 2 11/16 1 13/16 2 7/16 1 1/4
Second Quarter 2 7/8 1 1/2 5 1/8 2
Third Quarter 6 1/4 2 1/2 3 1/8 1 3/4
Fourth Quarter 8 5/8 5 1/8 3 1 3/4
As of November 27, 1995 there were approximately 1,489 shareholders of
record of the Company's Common Stock.
The Company has not paid any dividends since its inception and
presently anticipates that all earnings, if any, will be retained for
development of the Company's business and that no dividends on its Common Stock
will be declared in the foreseeable future. Any future dividends will be
subject to the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions.
20
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended August 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Government Research $ 7,014,280 $ 6,077,346 $ 5,021,975
Contract Research, License Fees and Royalties 3,923,944 314,428 361,494
Product and Service 37,217 85,559 893,083
Total $ 11,207,103 $ 6,618,917 $ 6,450,340
Net Income ( Loss) $ 585,204 $ (1,078,718) $ (3,481,857)
Per Common Share $ 0.05 $ (0.10) $ (0.33)
Weighted Average Common and Common Equivalent Shares 12,961,734 11,097,224 10,668,628
Cash, Cash Equivalents and Short-term Investments $ 8,226,776 $ 4,122,506 $ 3,915,306
Working Capital 5,498,782 3,244,260 3,264,454
Total Assets 11,528,674 5,910,682 5,288,691
Shareholders' Equity $ 7,238,503 $ 4,224,555 $ 3,676,333
For the Year Ended August 31, 1992 1991
- --------------------------------------------------------------------------------------------
Revenues:
Government Research $ 4,210,053 $ 2,193,245
Contract Research, License Fees and Royalties 121,348 22,720
Product and Service 792,225 6,763,636
Total $ 5,508,336 $ 9,119,707
Net Income ( Loss) $ (2,078,711) $ (1,687,095)
Per Common Share $ (0.19) $ (0.16)
Weighted Average Common and Common Equivalent Shares 10,662,551 10,659,249
Cash, Cash Equivalents and Short-term Investments $ 7,144,140 $ 9,040,913
Working Capital 5,768,331 8,779,828
Total Assets 9,354,613 10,790,253
Shareholders' Equity $ 7,081,311 $ 9,109,330
No dividends on Common Stock have been declared or paid by the Company since its
organization
21
22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corporation ("GTC" or "the Company") is a leader
in the field of genomics--the sequencing, discovery and characterization of
genes. The Company's objective is to identify gene targets which can be used
to develop novel therapeutic, vaccine, and diagnostic products for commercially
important diseases. The Company uses its proprietary high-throughput
sequencing technology to sequence the genomes of infectious organisms and uses
its positional cloning and cDNA sequencing technologies to discover and
characterize genes that cause or predispose individuals to common diseases.
The Company believes that the identification of biologically relevant genes
from infectious organisms and the identification of human disease genes will
facilitate the development of highly specific and effective antibiotics,
therapeutics, diagnostics, and vaccines. The Company's current pathogen
sequencing development programs include: H. pylori, M. tuberculosis, and Staph.
The Company has sequenced the genome of H. pylori, and in August 1995, the
Company entered into a strategic alliance with Astra AB to develop
pharmaceutical, vaccine, and diagnostic products effective against
gastrointestinal infections or other disease caused by H. pylori. The Company
also has development programs to identify and characterize the human disease
genes associated with fascioscapulohumeral muscular dystrophy, prostate cancer,
BPH, and manic depression. In connection with the Astra agreement, the Company
received a $3.5 million nonrefundable payment on August 31, 1995.
The Company has incurred significant losses since inception. The results of
operations have fluctuated from period to period and may continue to fluctuate
in the future based upon the timing and composition of funding under existing
and new collaborative agreements. The Company is subject to risks common to
companies in its industry including development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations and the need for additional funding.
Results of Operations
REVENUE
Total revenues increased 69% from $6,619,000 in fiscal 1994 to $11,207,000 in
fiscal 1995 and increased 3% from $6,450,000 in fiscal 1993 to $6,619,000 in
fiscal 1994. Government research revenue increased 15% from $6,077,000 in
fiscal 1994 to $7,014,000 in fiscal 1995 and increased 21% from $5,022,000 in
fiscal 1993 to $6,077,000 in fiscal 1994. The increase in government research
revenue in fiscal 1995 is primarily attributable to a 3-year $10 million grant
from the National Institutes of Health
22
23
awarded in August 1994 as well as increased levels of funding under existing
government grants and contracts. The Company's government grants and contracts
research funding as of August 31, 1995 was $5,400,000. These grants are
typically funded annually and are subject to appropriation by Congress each
year.
Contract research, license fees and royalties increased from $314,000 in fiscal
1994 to $3,924,000 in fiscal 1995 primarily due to a $3.5 million payment
received from Astra AB in August 1995. Contract research, license fees and
royalties remained relatively unchanged in fiscal 1994 as compared to fiscal
1993. Product and service revenue significantly decreased after fiscal 1993
due to the sale by the Company of its diagnostic testing business in June 1993.
Interest income increased 64% from $142,000 in fiscal 1994 to $232,000 in
fiscal 1995, and interest income decreased 19% from $174,000 in fiscal 1993 to
$142,000 in fiscal 1994. The changes in interest income reflect the
fluctuations in interest rates as well as the increase in funds available for
investment in fiscal 1995 as a result of the Company's sale of common stock in
a private placement in March 1995.
COSTS AND EXPENSES
Total costs and expenses increased 38% from $7,698,000 in fiscal 1994 to
$10,622,000 in fiscal 1995 and decreased 22% from $9,932,000 in fiscal 1993 to
$7,698,000 in fiscal 1994. Cost of government and contract research includes
primarily payroll and related costs, laboratory supplies and overhead expenses
which include facilities and equipment expenses. The cost of government
research increased 25% from $5,144,000 in fiscal 1994 to $6,414,000 in fiscal
1995 and increased 14% from $4,528,000 in fiscal 1993 to $5,144,000 in fiscal
1994. The increase in cost of government research in fiscal 1995 and 1994 is
due primarily to increases in payroll and related costs associated with the
increase in government research revenue as well as an increase in overhead
expenses associated with the expansion of the Company's facilities. Cost of
government research, as a percentage of government contract revenue, was 91% in
fiscal 1995, 85% in fiscal 1994 and 90% in fiscal 1993. Cost of government
research, as a percentage of government research revenue fluctuates based upon
the nature of the government contracts and grants as well as changes in the
Company's overhead structure.
Cost of contract research increased from $89,000 in fiscal 1994 to $231,000 in
fiscal 1995 and decreased from $197,000 in 1993 to $89,000 in fiscal 1994. The
changes in cost of contract research are primarily due to fluctuations in the
level of contract research activity. Cost of product and service significantly
decreased after fiscal 1993 due to the sale of the diagnostic testing business
in June 1993.
Research and development expenses increased 350% from $276,000 in fiscal 1994
to $1,244,000 in fiscal 1995 and increased 22% from $226,000 in fiscal 1993 to
$276,000 in
23
24
fiscal 1994. The increase in research and development expenses in fiscal 1995
and 1994 is primarily related to expenses incurred to sequence H. pylori, prior
to entering into the strategic alliance with Astra AB in August 1995. The
increase consisted primarily of payroll and related expenses, laboratory
supplies, and overhead expenses. The Company expects to increase investment in
company sponsored research and development in fiscal 1996, particularly with
respect to its human gene discovery programs.
Selling general and administrative expenses increased 25% from $2,176,000 in
fiscal 1994 to $2,730,000 in fiscal 1995 and decreased 22% from $2,802,000 in
fiscal 1993 to $2,176,000 in fiscal 1994. The increase in selling, general and
administrative expenses in fiscal 1995 is primarily due to increases in payroll
and related expenses, facilities expenses and other corporate expenses. The
decrease in selling, general and administrative expenses in fiscal 1994 is due
primarily to the sale of the diagnostics business in 1993 and cost cutting
actions taken by the Company in 1994 to preserve cash resources.
The Company sold all of the assets used in its diagnostics testing business to
Dianon Systems, Inc. in 1993 for $1.0 million. The Company recorded a loss of
$637,000 in fiscal 1993 on the sale of this business.
Liquidity and Capital Resources
The Company has funded its operation primarily through cash flows from
operations (including deferred contract revenue and accrued expenses),
borrowings under capital leases, the sale of equity securities, the utilization
of tax net operating loss carryforwards, and from existing cash resources. In
March 1995, the Company received net proceeds of approximately $2,403,000 from
the private sale of common stock and warrants and the exercise of stock
options. During fiscal 1994, the Company received net proceeds of
approximately $1,601,000 from the private sale of common stock and the exercise
of certain stock options. In fiscal 1995, the Company utilized approximately
$1,100,000 of net operating loss carryforwards.
As of August 31, 1995, the Company had cash, cash equivalents, short term
investments and restricted cash of approximately $9,011,000 (of which
approximately $784,000 is restricted in connection with certain capital lease
obligations) and working capital of approximately $5,499,000. The Company has
various capital lease line arrangements under which it can finance up to
$2,500,000 of certain office and laboratory equipment and leasehold
improvements. The Company is required to maintain certain financial ratios,
including minimum levels of tangible net worth, debt to tangible net worth,
maximum loss, and minimum restricted cash balances. At August 31, 1995, the
Company had approximately $494,000 available under its capital lease
arrangements.
The Company's operating activities provided cash of approximately $2,693,000 in
fiscal 1995. The Company's operating activities utilized cash of approximately
$639,000 and
24
25
$3,252,000 in fiscal 1994 and 1993, respectively. Net cash provided in fiscal
1995 was composed primarily of deferred contract revenue, accrued expenses, and
operating income. Cash utilized in fiscal 1994 and 1993 was composed primarily
of the Company's operating loss. Deferred revenue represents amounts received
in advance of revenue recognition by the Company and may fluctuate based upon
the timing of the achievement of certain milestones by the Company and payments
from customers.
The Company's investing activities provided cash of approximately $6,000 in
fiscal 1995. The Company's investing activities have used cash of
approximately $1,550,000 in each of the fiscal years 1994 and 1993 to fund
cash used for operating activities.
Financing activities provided approximately $2,074,000 and $1,410,000 in fiscal
1995 and 1994, respectively, primarily due to the proceeds from the sale of
equity securities and warrants, net of payments of capital lease obligations.
Financing activities used approximately $451,000 in fiscal 1993 primarily due
to the payment of capital lease obligations.
The Company currently anticipates $1,500,000, of capital equipment purchases
during fiscal 1996 consisting primarily of bioinformatics hardware, lab
equipment and general equipment. Capital expenditures totaled $1,438,000
during fiscal 1995. The Company expects to increase its internally funded
research and development in fiscal 1996.
The Company believes that its capital resources are adequate to meet its
working capital needs through fiscal 1997. There can be no assurance, however,
that changes in the Company's plans or other events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company expects to seek additional funding through public or private
financing or collaborative or other arrangements with corporate partners. There
can be no assurance, however, that additional financing will be available from
any of these sources or will be available on terms acceptable to the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by Item 8 are set
forth at the pages indicated in Item 14 (a) below.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
26
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included under the captions
"Election of Directors" and "Executive Officers" in the Proxy Statement, and is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included under the caption
"Executive Compensation" in the Proxy Statement, and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included under the caption
"Certain Transactions" in the Proxy Statement, and is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS REPORTS ON FORM
8-K
(a) (1) (2) Financial Statements and Financial Statement Schedule
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" appearing on page 32.
(3) Exhibits
Exhibit No. Description
- ----------- -----------
3 Restated Articles of Organization and By-laws (1)
3.1 Amendment dated January 5, 1982 to Restated Articles of
Organization (2)
26
27
3.2 Amendment dated January 24, 1983 to Restated Articles of
Organization (3)
3.3 Amendment dated January 17, 1984 to Restated Articles of
Organization (4)
3.4 Amendment dated October 20, 1987 to the By-laws (8)
3.5 Amendment dated December 9, 1987 to Restated Articles of
Organization (9)
3.6 Amendment dated October 16, 1989 to the By-laws (11)
3.7 Amendment dated January 24, 1994 to Restated Articles of
Organization (15)
3.8 Amendment dated August 31, 1994 to Restated Articles of
Organization (15)
4 Series B Restricted Stock Purchase Plan (3)
10.1 Research Agreement with The Dow Chemical Company dated May 21,
1980 (1)
10.2 Research Agreement with The Dow Chemical Company dated August
19, 1981 (1)
10.3 1981 Amended Stock Option Plan and Form of Stock Option
Certificate (1)
10.4 Incentive Stock Option Plan and Form of Stock Option
Certificate (1)
10.5 1984 Stock Option Plan and Form of Stock Option Certificate
(5)
10.6 Collaborative Research Incentive Savings Plan (6)
10.7 Amendment dated November 4, 1986 to the Collaborative Research
Incentive Savings Plan dated March 1, 1985 (7)
10.8 Stock Option Agreement with Mr. Lawrence Levy (8)
10.9 Form of Amendment to the 1981 Incentive Stock Option Plan (8)
10.10 Stock Option Agreement with Mr. Mark Friedman (10)
10.11 1988 Stock Option Plan and Form of Stock Option Certificate
(10)
10.12 Stock Option Agreement with Dr. Rothchild (11)
27
28
10.13 Agreement with Health Sciences Research Institute (Hoken
Kagaku Kenkyojyo) (12)
10.14 1991 Stock Option Plan and Form of Stock Option Certificate
(13)
10.15 Lease dated November 17, 1992 relating to certain property in
Waltham, Massachusetts (14)
10.16 Lease dated June 3, 1993 relating to certain property in
Waltham, Massachusetts (14)
10.17 License Agreement with President and Fellows of Harvard
College (14)
10.18 Agreement with Becton Dickinson and Company (14)
10.19 Employment Agreement with Robert J. Hennessey (14)
10.20 Agreement with Immuno-Cor Inc. dated September 13, 1993 (14)
10.21 Agreement with DIANON Systems, Inc. (14)
10.22 Lease Amendment dated August 1, 1994 relating to certain
property in Waltham, MA (15)
10.23 Consulting Agreement with Dr. Philip Leder (15)
10.24 1993 Stock Option Plan and Form of Stock Option Certificate
(15)
10.25 Stock and Warrant Purchase Agreement among the Company and
certain purchasers named therein dated March 20, 1995 (16)
10.26 Registration Rights Agreement among the Company and certain
purchasers named therein dated March 20, 1995 (16)
10.27 Form of Warrant Certificate issued pursuant to the Stock and
Warrant Purchase Agreement (16)
10.28 Agreement between the Company and Astra Hassle AB dated August
31, 1995 (16)
23. Consent of Independent Public Accounts (16)
28
29
FOOTNOTES
(1) Filed as exhibits to the Company's Registration Statement on Form S-1
(No. 2-75230) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 27, 1982 and incorporated herein by reference.
(3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 26, 1983 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 25, 1984 and incorporated herein by reference.
(5) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1984 and incorporated herein by reference.
(6) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
(7) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1986 and incorporated herein by reference.
(8) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1987 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 28, 1987 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1988 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1989 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1990 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1992 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1993 and incorporated herein by reference.
29
30
(15) Filed as an Exhibit of the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1994 and incorporated herein by reference.
(16) Filed herewith.
(b) Reports on Form 8-K
No reports filed on Form 8-K during the quarter ended August 31, 1995.
30
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Genome Therapeutics Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on November
28, 1995.
GENOME THERAPEUTICS CORPORATION
By /s/ ROBERT J. HENNESSEY
-----------------------
Robert J. Hennessey
Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated as of November 28, 1995.
Signature Title
- ---------------------- -----
/s/ROBERT J. HENNESSEY Chairman, President; Chief
- ---------------------- Executive Officer
Robert J. Hennessey
/s/ORRIE M. FRIEDMAN Director
- ----------------------
Orrie M. Friedman
/s/PHILIP LEDER Director
- ----------------------
Philip Leder
/s/LAWRENCE LEVY Director
- ----------------------
Lawrence Levy
/s/DONALD J. MCCARREN Director
- ----------------------
Donald J. McCarren
Director
- ----------------------
Steven M. Rauscher
/s/FENEL M. ELOI Vice President, Treasurer; and Chief
- ---------------------- Financial Officer (Principal Financial
Fenel M. Eloi and Accounting Officer)
31
32
GENOME THERAPEUTICS CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and
Financial Statement Schedules
Page
Report of Independent Public Accountants 33
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1995 and 1994 34
Consolidated Statements of Operations for the years ended 35
August 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1995, 1994, and 1993 36
Consolidated Statements of Cash Flows for the years ended
August 31, 1995, 1994, and 1993 37
Notes to Consolidated Financial Statements
38
Financial Statement Schedules:
Schedule II: Valuation and Qualifying Accounts 47
Schedules not included herein are omitted for the reason that they are not
applicable or that the required information appears in the Consolidated
Financial Statements or Notes thereto.
32
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corporation:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corporation (a Massachusetts corporation) and subsidiaries as of
August 31, 1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genome Therapeutics Corporation
and subsidiaries as of August 31, 1995, and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts,
October 4, 1995
33
34
CONSOLIDATED BALANCE SHEETS
August 31,
--------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 5,886,184 $ 1,114,162
Short-term Investments 2,340,592 3,008,344
Accounts Receivable (less allowances for doubtful accounts
of $-0- and $229,000 in 1995 and 1994, respectively) 360,793 391,151
Unbilled Costs 259,005 229,045
Prepaid Expenses and Other Current Assets 50,140 22,386
------------ ------------
Total Current Assets 8,896,714 4,765,088
------------ ------------
Equipment and Leasehold Improvements, at Cost:
Laboratory and Scientific Equipment 1,464,987 752,482
Leasehold Improvements 1,597,069 1,446,236
Office Equipment and Furniture 903,946 532,656
Construction in Progress 206,103 173,186
------------ ------------
4,172,105 2,904,560
Less Accumulated Depreciation 2,451,632 2,120,146
------------ ------------
1,720,473 784,414
Restricted Cash 784,471 94,674
Other Assets 127,016 266,506
------------ ------------
TOTAL ASSETS $ 11,528,674 $ 5,910,682
============ ============
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 409,282 $ 450,854
Accrued Expenses 1,736,569 838,595
Deferred Contract Revenue 774,048 37,991
Current Maturities of Capital Lease Obligations 478,033 193,388
------------ ------------
Total Current Liabilities 3,397,932 1,520,828
------------ ------------
Capital Lease Obligations, Net of Current Maturities 892,239 165,299
Commitments (Note 6)
Shareholders' Equity:
Common Stock, $.10 Par Value ---Authorized--- 35,000,000 shares; Issued
and Outstanding--- 13,476,135 shares in 1995 and 11,778,946
in 1994 1,347,613 1,177,894
Series B Restricted Stock, $.10 Par Value - Issued
and Outstanding ---- 57,512 shares in 1995 and 1994 5,751 5,751
Additional Paid-in Capital 41,138,147 38,905,080
Accumulated Deficit (35,174,225) (35,759,429)
Deferred Compensation (1,817) (27,775)
Installment Receivable from Sale of Series B Restricted Stock (76,966) (76,966)
------------ ------------
Total Shareholders' Equity 7,238,503 4,224,555
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,528,674 $ 5,910,682
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
34
35
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31,
---------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
REVENUES:
Government Research $ 7,014,280 $ 6,077,346 $ 5,021,975
Contract Research, License Fees and Royalties 3,923,944 314,428 361,494
Interest Income 231,662 141,584 173,788
Product and Service 37,217 85,559 893,083
---------------------------------------------------
Total Revenues 11,207,103 6,618,917 6,450,340
---------------------------------------------------
COSTS AND EXPENSES:
Cost of Government Research 6,414,148 5,144,071 4,527,595
Cost of Contract Research 231,174 89,184 196,788
Research and Development 1,244,427 276,024 225,747
Selling, General and Administrative 2,729,504 2,175,910 2,801,633
Cost of Product and Service 2,646 12,446 1,543,407
Loss on Sale of Diagnostics Business 0 0 637,027
---------------------------------------------------
Total Costs and Expenses 10,621,899 7,697,635 9,932,197
---------------------------------------------------
Net Income (Loss) $ 585,204 ($ 1,078,718) ($ 3,481,857)
===================================================
NET INCOME (LOSS) PER COMMON SHARE:
Primary $ 0.05 ($ 0.10) ($ 0.33)
===================================================
Fully Diluted $ 0.04 -- --
===================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 12,961,734 11,097,224 10,668,628
===================================================
Fully Diluted 13,036,741 -- --
===================================================
The accompanying notes are an integral part of the consolidated financial
statements.
35
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series B Additional
Common Stock Restricted Stock Paid-in
Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Balance at August 31, 1992 10,664,166 $1,066,416 57,512 $5,751 $37,440,631
Exercise of Stock Options 29,000 2,900 2,900
Amortization of Deferred Compensation
Cancellation of Stock Options (30,469)
Net Loss
- ----------------------------------------------------------------------------------------------------------
Balance at August 31, 1993 10,693,166 1,069,316 57,512 5,751 37,413,062
Exercise of Stock Options 84,276 8,428 138,779
Amortization of Deferred Compensation
Sale of Common Stock and Warrants 1,001,504 100,150 1,353,239
Net Loss
- ----------------------------------------------------------------------------------------------------------
Balance at August 31, 1994 11,778,946 1,177,894 57,512 5,751 38,905,080
Exercise of Stock Options 244,166 24,417 394,982
Amortization of Deferred Compensation
Sale of Common Stock and Warrants 1,453,023 145,302 1,838,085
Net Income
- ----------------------------------------------------------------------------------------------------------
Balance at August 31, 1995 13,476,135 $1,347,613 57,512 $5,751 $41,138,147
- ----------------------------------------------------------------------------------------------------------
Installment
Receivable Total
Accumulated Deferred From Sale Shareholders'
Deficit Compensation of Stock Equity
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Balance at August 31, 1992 $(31,198,854) $(155,667) $(76,966) $7,081,311
Exercise of Stock Options 5,800
Amortization of Deferred Compensation 71,079 71,079
Cancellation of Stock Options 30,469 0
Net Loss (3,481,857) (3,481,857)
- ------------------------------------------------------------------------------------------------------
Balance at August 31, 1993 (34,680,711) (54,119) (76,966) 3,676,333
Exercise of Stock Options 147,207
Amortization of Deferred Compensation 26,344 26,344
Sale of Common Stock and Warrants 1,453,389
Net Loss (1,078,718) (1,078,718)
- ------------------------------------------------------------------------------------------------------
Balance at August 31, 1994 (35,759,429) (27,775) (76,966) 4,224,555
Exercise of Stock Options 419,399
Amortization of Deferred Compensation 25,958 25,958
Sale of Common Stock and Warrants 1,983,387
Net Income 585,204 585,204
- ------------------------------------------------------------------------------------------------------
Balance at August 31, 1995 $(35,174,225) $(1,817) $(76,966) $7,238,503
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
36
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31,
-------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 585,204 $(1,078,718) $(3,481,857)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
Loss on Sale of Assets 0 0 637,027
Depreciation and Amortization 350,230 205,889 325,591
Deferred Compensation 25,958 26,344 49,306
Changes in Assets and Liabilities:
Accounts Receivables 30,358 223,233 (141,691)
Unbilled Costs (29,960) (86,281) 25,284
Prepaid Expenses (30,854) 36,077 6,338
Other Assets 3,100 34,650 (39,200)
Accounts Payable 124,568 176,178 (127,331)
Accrued Expenses 897,974 (128,912) (197,305)
Deferred Contract Revenue 736,057 (47,289) (308,537)
----------- ----------- -----------
Total Adjustments 2,107,431 439,889 229,482
----------- ----------- -----------
Net Cash Provided by (Used in)
Operating Activities 2,692,635 (638,829) (3,252,375)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Short-term Investments (5,332,248) (4,985,970) (5,422,374)
Proceeds from Short-term Investments 6,000,000 4,000,000 3,400,000
Increase in Restricted Cash (689,797) (94,674) 0
Purchases of Equipment and Leasehold Improvements (97,016) (191,907) (158,657)
(Increase) Decrease in Other Assets 124,687 (277,398) 0
Payments for Net Assets Acquired 0 0 (268,500)
Proceeds from Sale of Assets 0 0 901,297
----------- ----------- -----------
Net Cash Provided by (Used in) Investing
Activities 5,626 (1,549,949) (1,548,234)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Common Stock and Warrants 1,983,387 1,453,389 0
Proceeds from Exercise of Stock Options 419,399 147,207 5,800
Payments on Capital Lease Obligations (329,025) (190,588) (456,399)
----------- ----------- -----------
Net Cash Provided by (Used in) Financing
Activities 2,073,761 1,410,008 (450,599)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 4,772,022 (778,770) (5,251,208)
Cash and Cash Equivalents at Beginning of Year 1,114,162 1,892,932 7,144,140
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,886,184 $ 1,114,162 $ 1,892,932
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid during Period $ 85,759 $ 19,482 $ 44,100
=========== =========== ===========
Supplemental Schedule of Non-cash Investing Activities:
Property and Equipment Acquired under Capital Leases $ 1,340,611 $ 264,379 $ 318,151
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Genome Therapeutics Corporation (the Company) was formerly known as
Collaborative Research, Inc. Its mission is to translate the discoveries of the
Human Genome Project into significant commercial breakthroughs in human
medicine. The Company is devoting substantially all of its efforts towards
research and development and raising capital. The Company is subject to risks
common to companies in its industry including development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations and the need for additional funding.
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany accounts have been
eliminated in consolidation.
REVENUE RECOGNITION
Substantially all of the Company's research and contract revenues are derived
from government grants and various contract arrangements. Research revenues are
recognized as earned under grants, cost plus fixed fee contracts and fixed price
contracts. Milestone payments from collaborative research and development
arrangements are recognized when they are achieved. License fees are recognized
as earned. Unbilled costs represent revenue recognized prior to billing.
Deferred contract revenue represents amounts received prior to revenue
recognition. Royalty revenue is recorded as earned.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are depreciated over their estimated useful
lives using the straight-line method. The estimated useful life for leasehold
improvements is the lesser of the term of the lease or the estimated useful life
of the assets. Equipment and all other depreciable assets' useful lives vary
from three to ten years.
38
39
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during the year using the treasury method. Net loss per share is
computed by dividing the net loss by the weighted average number of common
shares outstanding during the year.
RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform with the
current year's presentation.
2. CASH EQUIVALENT AND SHORT-TERM INVESTMENTS:
The Company applies Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). The Company considers all highly liquid investments with original
maturities of three months or less at the time of acquisition to be cash
equivalents . Cash equivalents consist of money market funds, repurchase
agreements and debt securities at August 31, 1995. Cash equivalents consist of
money market funds and repurchase agreements at August 31, 1994. The Company has
$784,471 and $94,674 in restricted cash at August 31, 1995 and 1994,
respectively, in connection with certain capital lease obligations. (See Note
7).
The Company's portfolio of investments are marketable securities classified as
held-to-maturity (recorded at amortized cost). Marketable securities consisted
of commercial paper and medium-term notes at August 31, 1995 and 1994 with an
average maturity of six months. Realized gains and losses on the sale of
marketable securities for the year ended August 31, 1994 and 1995 were not
material.
3. INCOME TAXES:
The Company applies Statement of Financial Accounting Standard No. 109, ("SFAS
109"),"Accounting for Income Taxes". SFAS 109 requires the Company to recognize
deferred tax assets and liabilities for expected future tax consequences of
events that have been recognized in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. SFAS 109 requires deferred tax assets and
liabilities to be adjusted when the tax rates or other provisions of the income
39
40
tax laws change. The effect of the adoption of SFAS 109 was not material to the
Company's financial statements.
At August 31, 1995, the Company had net operating loss and tax credit
carryforwards of approximately $35,007,000 and $1,120,000, respectively,
available to reduce federal taxable income and federal income taxes,
respectively, if any. Net operating loss carryforwards and credits are subject
to review and possible adjustments by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in the ownership interest of
significant shareholders over a three-year period in excess of 50%. In the year
ended August 31, 1995, the Company utilized approximately $1,100,000 of net
operating loss carryforwards to offset taxable income.
The net operating loss carryforwards and tax credits expire approximately as
follows:
Net Operating Research Tax Credit Investment Tax
Expiration Date Loss Carryforwards Carryforwards Credit Carryforwards
- ---------------------------------------------------------------------------------------
1997 $ - $ 80,000 $103,000
1998 6,108,000 208,000 90,000
1999 5,039,000 273,000 143,000
2000 3,829,000 84,000 75,000
2001 4,812,000 24,000 3,000
2002-2010 15,219,000 - 37,000
----------------------------------------------------------
$35,007,000 $669,000 $451,000
----------------------------------------------------------
The components of the deferred tax assets recognized in the Company's balance
sheet at the respective dates are as follows:
August 31,
1995 1994
- ---------------------------------------------------------------------------
Net operating loss carryforwards $ 12,699,000 $ 12,357,000
Research and development credits 669,000 669,000
Investment tax credits 451,000 414,000
Other, net 1,167,000 526,000
-------------------------------
$ 14,986,000 $ 13,966,000
Valuation allowance (14,986,000) (13,966,000)
-------------------------------
$ -0- $ -0-
-------------------------------
40
41
The valuation allowance has been provided due to the uncertainty surrounding the
realization of the deferred tax assets.
4. OTHER ASSETS:
Other assets consist of the following:
August 31,
1995 1994
- ---------------------------------------------------------------------------------
Intangible assets (net of accumulated amortization
of $25,695 and $10,892, respectively) $ 48,110 $105,525
Deposits 78,906 60,981
Other -0- 100,000
----------------------
$127,016 $266,506
----------------------
Intangible assets consist of licenses and patents. Intangible assets are
recorded at cost and are amortized over their expected useful life of five years
using the straight-line method.
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
August 31,
1995 1994
- --------------------------------------------------------------------------------
Payroll and related expenses $ 630,290 $ 330,654
Severance 326,723 -0-
Employee relocation 230,468 -0-
License and other fees 283,971 227,391
All other 265,117 280,550
-----------------------------
$1,736,569 $ 838,595
-----------------------------
41
42
6. COMMITMENTS:
At August 31, 1995, the Company has operating leases for office and laboratory
facilities which expire on July 31, 1999. Minimum lease payments under the
leases at August 31, 1995 are as follows:
1996 $ 613,094
1997 619,405
1998 567,499
1999 534,895
----------
$2,334,893
----------
Rental expense was approximately $411,000, $208,000, and $296,000 in the years
ended August 31, 1995, 1994, and 1993, respectively. Rental expense for the year
ended August 31, 1994 was offset by approximately $100,000 of sublease rental
income.
7. CAPITAL LEASE OBLIGATIONS:
The Company has various capital lease line arrangements under which it can
finance up to $2,500,000 of certain office and laboratory equipment. These
leases are payable in thirty-six monthly installments. The interest rate ranges
from prime (8.75% at August 31, 1995) plus 1.5% to 11.42%. The Company is
required to maintain certain restricted cash balances, as defined (see Note 2).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth, debt to tangible net
worth and maximum loss. The Company has $493,711 available under these various
capital lease agreements at August 31, 1995.
Additionally, in connection with its facilities lease, the Company issued a
$100,000 note payable in September 1994 to its lessor to finance leasehold
improvements. The note bears interest at 9% and is payable in sixty monthly
payments of $2,076.
42
43
Future minimum lease commitments at August 31, 1995, are as follows:
1996 $ 589,644
1997 587,276
1998 354,272
1999 40,135
----------
Total minimum lease payments 1,571,327
Less-Amount representing interest (201,055)
----------
Present value of total minimum
lease payments 1,370,272
Less-Current portion (478,033)
----------
$ 892,239
----------
8. SHAREHOLDERS' EQUITY:
PRIVATE PLACEMENT
On March 20 1995, the Company completed a private placement of 850,000 shares of
common stock at $2.43 per share resulting in proceeds of approximately
$2,000,000 net of issuance costs. In connection with the private placement, the
Company issued warrants to purchase 1,020,000 shares of common stock at a
exercise price of $2.43 per share. These warrants were exercised on July 18,
1995 and resulted in the net issuance of 603,023 shares of common stock. The net
issuance represents the excess fair market value of the shares purchasable
pursuant to the warrants on the date of exercise over the total exercise price
of such warrants.
SERIES B RESTRICTED STOCK
The Company has designated 625,000 shares of common stock as Series B Restricted
Stock ("Series B Stock") and issued 57,512 shares of Series B Stock in exchange
for a subscription receivable. In the event of liquidation, holders of common
stock are entitled to receive, prior to and in preference to any distribution of
the Company's assets to the holders of Series B Stock, the greater of: (a) $5.00
per share; or (b) an amount per share equal to ten (10) times the amount which,
after such distribution, would remain available for distribution to holders of
the Series B Stock. After such preferential distribution, the remaining assets,
if any, of the Company would be distributed ratably to the holders of common
stock and Series B Stock.
43
44
STOCK OPTIONS
The Company adopted the 1988, 1991 and 1993 stock option plans for key employees
and consultants. Under these plans, the stock option committee may grant options
to purchase up to 1,750,000 of the Company's common shares. The purchase price
and vesting schedule applicable to each option grant is determined by the stock
option committee. Under separate agreements, the Company has granted directors
and certain consultants of the Company options to purchase common stock. In
addition, the Company has granted stock options under the 1981 and 1984 stock
option plans, and non-statutory stock option plan. No further options may be
granted under any of these plans.
The Company records deferred compensation when stock options are granted at an
exercise price per share which is less than the fair market value of the grant.
Deferred compensation is recorded in an amount equal to the excess of the fair
value per share over the exercise price times the number of options granted.
Deferred compensation will be recognized as an expense over the vesting period
of the underlying options. Compensation expense included in the statement of
operations was approximately $26,000, $26,000 and $71,000 for the year ended
August 31, 1995, 1994 and 1993, respectively.
There were 139,650 common shares available for future grants at August 31, 1995
under existing stock option plans. The following is a summary of all stock
option activity .
1995 1994 1993
- --------------------------------------------------------------------------------
Options shares:
Granted 355,275 970,100 1,791,350
Exercised (244,166) (84,276) (29,000)
Cancelled (70,624) (108,288) (157,798)
---------- ---------- -----------
Outstanding at August 31 3,540,187 3,499,702 2,722,166
---------- ---------- -----------
Price range of outstanding options
at end of period $.20-$8.00 $.20-$8.00 $.20-$11.94
Price range of exercised options
during period $.81-$4.00 $.88-$2.94 $.20
44
45
9. INCENTIVE SAVINGS PLAN 401(k):
The Company maintains an incentive savings plan (the "Plan") for the benefit of
all employees, as defined. Matching contributions are made to the Plan by the
Company at a rate of 50% for the first 2% of salary and 25% for the next 4% of
salary, limited to the first $50,000 of annual salary. On November 4, 1986, the
Company granted to each active employee one hundred (100) shares, or a pro rated
amount, of its common stock. The Company contributed $43,533, $43,233 and
$36,315 to the Plan for 1995, 1994 and 1993, respectively.
10. COLLABORATION AGREEMENT
Astra AB - In August 1995, the Company entered into a collaboration
agreement with Astra Hassle AB ("Astra") to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infection or any other
disease caused by H. pylori. Under the terms of the agreement, the Company
granted Astra exclusive access to its H. pylori genomic sequence database and
agreed to undertake certain research efforts in exchange for a minimum of
approximately $11 million and up to $22 million in license fees, expense
allowances, research funding and milestone payments. The agreement grants Astra
exclusive worldwide rights to make, use and sell products based on the Company's
H. pylori technology and requires Astra to provide research funding to the
Company over a period of two and one-half years to further develop and annotate
the Company's H. pylori genomic sequence database, identify therapeutic and
vaccine targets and develop appropriate biological assays. Research under the
agreement will be directed by a Joint Management Committee and a Joint Research
Committee, each consisting of representatives from both parties. In August 1995,
the Company received $4,269,000, of which $3,500,000 was recorded as a
nonrefundable license fee and capital allowance which is included in contract
research, license fees and royalties on the accompanying consolidated statement
of operations and $769,000 was recorded as deferred revenue on the accompanying
consolidated balance sheet. The Company will also be entitled to receive
royalties on Astra's sale of any products (i) protected by the claims of patents
licensed exclusively to Astra by the Company pursuant to the agreement, or (ii)
the discovery of which were enabled in a significant manner by the genomic data
base licensed to Astra by the Company.
11. LOSS ON SALE OF DIAGNOSTIC TESTING BUSINESS:
On June 27, 1993, the Company sold all of the assets of its diagnostic testing
business to Dianon Systems, Inc. for $1.0 million. The transaction resulted in a
non-recurring loss of $.6 million.
45
46
12. HARVARD LICENSE AGREEMENT:
On November 12, 1993, the Company entered into an agreement with Harvard Medical
School for an exclusive worldwide license for commercial applications of their
patented multiplex sequencing technology. Under this agreement, the Company had
paid a nonrefundable license fee of $100,000, of which $50,000 can be credited
against future royalties. In addition, the Company must pay minimum royalties
ranging from $5,000 in 1995 to $35,000 in 1998. During 1995, the Company
incurred a royalty expense of $100,000, of which $50,000 was credited against
prepaid royalties. The Company may terminate this agreement upon 90 days notice.
46
47
Schedule II
Genome Therapeutics Corporation and Subsidiaries
Valuation and Qualifying Accounts
For the Years Ended August 31, 1995, 1994 and 1993
Reserves for Doubtful Accounts
Balance, August 31, 1992 $ 74,390
Additions charged to expense 124,992
Write-off of uncollecticible accounts, net (20,800)
---------
Balance, August 31, 1993 $ 178,582
=========
Additions charged to expense 59,102
Write-off of uncollecticible accounts, net (8,418)
---------
Balance, August 31, 1994 $ 229,266
=========
Additions charged to expense 0
Write-off of uncollecticible accounts, net (229,266)
---------
Balance, August 31, 1995 $ 0
=========
47
48
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
10.25 Stock and Warrant Purchase Agreement among the Company
and certain purchasers of the Company's Common Stock
and warrants dated March 20, 1995
10.26 Registration Rights Agreement among the Company and
certain purchasers named therein dated March 20, 1995
10.27 Form of Warrant issued pursuant to the Stock and
Warrant Purchase Agreement
10.28 Agreement between the Company and Astra Hassle AB
dated August 31, 1996
23 Consent of Arthur Anderson LLP
27 Financial Data Schedule