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2925
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
--- ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: AUGUST 31, 1996
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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
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GENOME THERAPEUTICS CORP.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (617) 398-2300
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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
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 25, 1996 was approximately $129,258,765.
The number of shares outstanding of the registrant's common stock as of
November 25, 1996 was 17,503,230.
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 7,
1997 are incorporated by reference into Part III.
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PART I
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Item 1. BUSINESS
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OVERVIEW
Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the
field of genomics -- the identification and characterization of genes. The
Company has over ten years of experience in positional cloning, having served as
one of the primary researchers under genome programs sponsored by the United
States government, and has developed numerous techniques and tools that are
widely used in this field. GTC's commercial gene discovery strategy capitalizes
on its pioneering work in genomics by applying its high-throughput sequencing
technology and positional cloning, its experience and skills in pathogen
functional genomics and its bioinformatics capabilities. The two areas of focus
are: the discovery and characterization of (i) genes of pathogens that are
responsible for many serious diseases and (ii) human disease genes. The Company
believes that its genomic discoveries may lead to the development of novel
therapeutics, vaccines and diagnostic products by it and its strategic partners.
In 1995, the Company entered into two corporate collaborations in connection
with its pathogen gene discovery programs, an agreement with Astra and an
agreement with Schering-Plough.
SCIENTIFIC BACKGROUND
Human disease is caused by a variety of factors, including genetic
defects, pathogens and environmental factors, with many of the most common
life-threatening and chronic diseases believed to have a genetic basis. Genes,
which define the inherited characteristics of an organism, are found in all
living cells (e.g., human, animal and pathogen cells). Each gene codes for a
specific protein that performs a specific function in the body, such as the
production of insulin. In humans, a defect in a gene, or the absence of a
critical gene, may lead to overproduction, underproduction, improper function or
absence of a protein resulting in the onset of disease or an undesirable
physical condition. Genetic defects can be inherited or can accumulate during
the lifetime of an individual. Human diseases caused by pathogens also have a
genetic foundation in that specific genes in the pathogen are required for that
organism to survive and infect its human host.
The genetic content of an organism consists of DNA, a chemically complex
material comprised of four different nucleotides (adenine, guanine, cytosine,
and thymine) which are the building blocks of DNA. The sequence in which these
nucleotides are linked together in a molecule of DNA determines the
informational content of genes. The entire genetic content of an organism,
including humans, is referred to as its genome.
The human genome consists of 23 pairs of chromosomes. These chromosomes
contain approximately 100,000 human genes distributed over approximately three
billion nucleotides. Human genes are found in the chromosomes as coding regions
of DNA ("exons") interrupted by non-coding regions of DNA ("introns"). The
number of exons found in human genes can be quite large as can be the distance
between exons. The function of the majority of human DNA is unknown. The DNA
sequence of a human gene is transcribed into a messenger RNA molecule ("mRNA")
which is processed to contain only the exon sequences. The information in the
mRNA molecule is, in turn, translated into a protein product.
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Genomes of pathogens are significantly less complex than the human genome
and generally consist of a single chromosome containing several thousand genes
distributed over millions of nucleotides. The majority of DNA in pathogens
typically is comprised of genes as uninterrupted DNA sequences.
Proteins expressed by genes are the targets of most current drugs. As a
result, the identification of human disease genes and the protein product of
these genes may lead to new therapeutics and diagnostic tests. In the case of
diseases caused by pathogens, the identification of the biologically important
genes of the pathogen may lead to the development of new drugs and vaccines to
combat the pathogen. Moreover, because of the simpler nature of the genomes of
pathogens relative to the human genome, efforts to identify and characterize
pathogen genes may lead to product development candidates more quickly than
human gene discovery efforts. The two principal technologies currently being
used to discover genes are sequencing and positional cloning.
Sequencing
Sequencing is the process of identifying genes through the determination
of the order or sequence of nucleotides in DNA fragments. In recent years,
high-throughput procedures, such as those being employed by the Company, have
been developed which now enable sequencing to be performed on a larger scale and
with greater speed than was previously possible.
There are generally two ways of applying high-throughput sequencing to
discover genes: random discovery and targeted discovery. In random discovery,
high-throughput sequencing is used to identify the genes in a genome without
regard to the function of the genes. In targeted discovery, high-throughput
sequencing is used to identify the genes in a specific chromosomal region or
tissue after the region or the tissue has been implicated in or associated with
a specific disease.
High-throughput sequencing offers a practical way of randomly identifying
all of the genes in a pathogen because the genomes of pathogens consist of
relatively small numbers of uninterrupted gene sequences. In contrast, the human
genome is very large with only small portions of the DNA containing genes which
are present as interrupted DNA sequences. As a result, although high-throughput
sequencing of the DNA in a particular chromosomal region is used in human gene
discovery, sequencing of all of the DNA in the human genome is not a practical
means to identify large numbers of human genes. Instead, several groups are
randomly discovering large numbers of human genes by sequencing expressed copies
of genes, which contain only exons and are called cDNA, which they synthesize
from mRNA.
Although random discovery permits the rapid identification of pathogen and
human genes, it generally does not provide an understanding of the function of a
gene or of the gene's role in a particular disease. Any determination of
function, or "characterization," of randomly discovered genes is dependent on
the detection of structural similarities, or homology, existing between the
protein product of such sequenced genes and genes with a known function.
Targeted gene discovery by high-throughput sequencing of human DNA
typically is applied as part of positional cloning (described below) after a
specific chromosomal region has been identified which is believed to contain a
particular gene. In this targeted gene discovery procedure, the entire
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chromosomal region is sequenced in an effort to identify, from all the genes
present in that region, the one gene located in that region which is responsible
for causing the specific disease.
Another type of targeted gene discovery involves the use of
high-throughput sequencing of cDNA to identify genes believed to cause or
maintain a particular disease. In this procedure, which is referred to as
"comparative gene expression," mRNA present in healthy and diseased tissues is
converted into cDNA and then sequenced to identify the genes whose protein
product is present in each. Candidate genes responsible for causing or
maintaining the disease are identified by comparing which genes are expressing
or producing their protein product and at what level this expression is
occurring in both the healthy and diseased tissue.
Positional Cloning
Positional cloning is the process of analyzing disease inheritance
patterns to identify the genes responsible for causing human disease. The first
step in positional cloning is the identification of individual families or
genetically homogeneous populations in which the occurrence of the disease in
individuals within such families or populations is substantially higher than in
the general population. Blood samples are collected from individuals within the
family or population to provide DNA to be used to identify the region on a
particular chromosome where the disease-causing gene is located. This process is
referred to as "genetic linkage mapping."
In genetic linkage mapping, DNA probes are used to detect genetic markers,
regions of DNA that vary in sequence content from person to person. The position
of these genetic markers on a chromosome, as detected by the DNA probes,
constitutes a genetic linkage map of the chromosome. The chromosomal regions
which are initially examined are those regions which have been identified as
containing genes that are likely candidates for causing or predisposing an
individual to the disease. Because only a limited number of human genes have
been mapped to date, most genetic mapping is done genome-wide with a set of DNA
probes that span the genome. By following the inheritance patterns of genetic
markers and looking for the coinheritance of the genetic markers and the
disease, the gene responsible for causing or predisposing an individual to that
disease can be located within a specific chromosomal region. Using additional
DNA probes, the chromosomal region containing the targeted disease gene can be
narrowed to a region consisting of approximately 1,000,000 to 3,000,000
nucleotides in size containing between approximately 30 and 100 genes.
Next, libraries comprised of large DNA fragments are examined to find
those fragments which contain pieces of DNA from the relevant chromosomal
region. The aligning of these DNA fragments so that their resulting order
represents how these DNA fragments are related to each other in the relevant
chromosomal region is called physical mapping. The physical map of the relevant
chromosomal region can then be used to identify the genes which are contained
within the region. These genes can be identified in two ways. First, "exon
trapping" is used, whereby individual exons within this chromosomal region can
be isolated and then used to obtain a complete copy of the gene from a cDNA
library. Alternatively or in combination with exon trapping, the DNA of the
chromosomal region can be sequenced using high-throughput procedures and,
through the use of special computer software, the exons which are contained
within the chromosomal region can be predicted. This sequencing information is
then used to search cDNA libraries for DNA fragments which contain these
presumed exons.
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Each gene identified through this process is a candidate for causing the
disease. By determining the sequence of these genes in individuals with the
disease and comparing it to the sequence of that gene from healthy individuals,
the gene involved in the disease can be identified. DNA sequence differences,
which are only found in individuals who have inherited the disease, identify the
gene which is believed to be responsible for causing the disease.
COMPANY TECHNOLOGY
The Company applies its proprietary technologies and know-how in
high-throughput sequencing and positional cloning in its gene discovery
programs. In its pathogen programs, the Company uses its high- throughput
sequencing capabilities to sequence the genomes of pathogens. In its human gene
discovery programs, the Company combines its proprietary positional cloning
capabilities, together with its high-throughput sequencing capabilities, in its
efforts to identify and characterize human genes associated with disease. Both
the Company's pathogen and human genomics programs utilize substantial
bioinformatics skills to identify genes, tentatively assign them a likely
function, and possibly select genes as targets for drug and vaccine development.
In its pathogen program, the Company has fully developed functional genomics and
drug discovery skills, including drug discovery target validation (via gene
"knock-outs") and high-throughput drug discovery assay development. A similar
set of functional genomics and drug discovery skills is currently being built in
the Company's human genomics program.
High-Throughput Sequencing
GTC uses an automated process using DNA sequencers, robotics and computers
to sequence and analyze genes in its discovery research programs. The Company
has reduced its reliance on the multiplex sequencing technology as its primary
means to sequence DNA and has transitioned to the use of automated,
high-throughput fluorescent-based sequencers.
Using its sequencing technology, the Company has randomly sequenced the
genomes of H. pylori, Staph. aureus, Streptococcus pneumoniae, and portions of
the genomes of other pathogens. The Company has also sequenced a 60,000
nucleotide region of human chromosome 4 thought to contain the gene responsible
for FSHD and a 40,000 nucleotide region on human chromosome 10 which was
subsequently determined by a third party to contain the gene responsible for a
type of thyroid cancer.
Positional Cloning
The Company has over 10 years of experience in various aspects of
positional cloning. GTC was one of the pioneers in the use of genetic linkage
mapping and developed numerous techniques and tools that are widely used in the
positional cloning field. GTC has considerable experience in identifying genetic
markers for specific chromosomal regions. This ability is needed when additional
genetic markers are required to narrow the size of the chromosomal region
believed to contain the disease gene. The Company also has several libraries of
large DNA fragments arranged in a format which facilitates the isolation of DNA
fragments from a specific chromosomal region. These libraries are used to
develop physical maps of chromosomal regions thought to contain disease genes.
In addition, the Company uses specialized tools to trap the exons present in
large DNA fragments. These tools are used to isolate exons from the genes
present in chromosomal regions believed to contain disease genes.
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Bioinformatics
The process of identifying and characterizing genes generates vast amounts
of data which must be organized and managed. Such data result from genetic
linkage and physical mapping, DNA sequencing and biological experiments
performed on identified genes. The use of computers, software and databases to
track, process, store, retrieve and analyze data generated by genomic research
is referred to as "bioinformatics," which is an emerging subspecialty of
genomics and a key capability of any participant in the field. Because of its
early work in large-scale genetic linkage analysis, GTC was one of the first
companies to develop significant bioinformatics capabilities.
The Company continually refines its bioinformatics systems. The Company
currently is focusing these efforts in four areas: upgrading and standardizing
its bioinformatics hardware and software; developing enhanced data management
systems; expanding its software engineering capabilities; and expanding its
resources in computational molecular biology. These enhancements are expected to
result in more effective data management by allowing for higher-throughput
sequencing, providing for smooth integration of laboratory automation,
supporting more rapid analyses and comparison of genomic data and facilitating
the identification of gene targets for the development of therapeutic, vaccine
and diagnostic products. As part of its enhancement of its bioinformatics
capabilities, the Company continues to increase the number of its bioinformatics
personnel.
Functional Genomics (Pathogen)
Once the genome of a pathogen has been sequenced, the Company uses its
bioinformatics expertise and the information in its proprietary and public
databases to identify and locate the genes within the genome and assign features
to the genes which helps identify their likely function. Relying on these
assigned functions and using the criteria for the product to be developed (drug
or vaccine; narrow or broad spectrum), the Company examines sequences form the
genomes of various pathogens in its proprietary and public databases and from
human cDNAs and the entire genome of Saccharomyces cerevisiae (bakers yeast) to
select genes as potential targets for drug or vaccine development
The criteria used for selecting gene targets against which small molecules
(drugs) will be developed include such features as essentiality, uniqueness, and
assayability. The gene should be essential for the survival of the organism. The
gene or its protein product should have novel biochemistry or special
characteristics to make it unique to the organism(s) against which the drug is
to be active. In order to reduce possible side effects, such genes should be
absent or have little homology to genes found in humans. The gene or its protein
product should have general features which make it possible to construct
high-throughput screening assays.
If protein or polypeptide vaccines are to be developed, then the criteria
used for selecting gene targets include such features as whether the protein
product is likely to be secreted or found on the cell surface or in the membrane
of the organism or shows homology to a major antigen in other organisms.
For small molecule targets , the transition from bioinformatics to
functional genomics begins by demonstrating that the gene is essential for the
viability or virulence of the organism. That is, is the gene required for the
survival of the organism on a culture plate (in vitro) or in an animal model (in
vivo). To determine the essentiality of a gene, the Company has developed
high-throughput techniques for either directly or randomly inactivating, i.e.
"knocking-out", specific genes within the genome of a
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pathogen. After targets have been validated for their biological relevance, the
Company then develops screening assays for these targets. These assays include
conventional biochemical assays in which the gene target is over-expressed in a
recombinant host and the protein product is purified and used to develop a
non-cellular, high-throughput assay. Assay systems for gene targets of unknown
function include the construction of an over or under-expressing strain for use
in high-throughput bio- or genetic whole cell assays.
For vaccine targets, functional genomics begins with the demonstration
that the gene product is not subject to significant antigenic variation between
strains or under different growth conditions. Gene targets are then
over-expressed in a recombinant host, and the resulting protein product is
purified for testing in an appropriate animal model.
Functional Genomics (Human)
In many cases, the protein products of a gene or genes causing a human
disease are pharmaceutically not suitable as drug discovery targets. Therefore,
new targets need to be identified, based on a thorough understanding of the
gene's functions, including interaction with other proteins and genes. Thus, in
order to bridge the gap between gene discovery and drug discovery target
identification, the Company has created a new department of Functional Genomics.
This department will focus on new technologies to accelerate the functional
analysis of important disease genes, including high-throughput signaling pathway
analyses in mammalian and non-mammalian systems, gene knock-outs and
transgenics. This will be complemented with high-throughput drug discovery assay
development skills which are already implemented in the Company's pathogen
program.
GTC STRATEGY
The Company's objective is to use its sequencing, positional cloning,
functional genomics and bioinformatics capabilities to identify gene targets for
the development of novel therapeutic, vaccine and diagnostic products in
collaboration with pharmaceutical and biotechnology company partners. The
Company is using the following strategies to achieve this objective:
Sequencing of Pathogens
Over the past four years, the Company has devoted a significant portion of
its resources to, and obtained considerable experience in, sequencing the
genomes of pathogens. The Company has randomly sequenced the genomes of H.
pylori, Staph. aureus, Streptococcus pneumoniae, and portions of the genomes of
other disease-causing pathogens. The Company plans to continue to identify and
characterize genes of these and other pathogens for which the Company believes
new or improved therapeutic, vaccine or diagnostic products represent a
significant commercial opportunity. In particular, the Company plans to focus
its efforts on pathogens where the incidence of antibiotic resistance or other
factors limit the use or efficacy of currently available therapies, creating a
need for novel antibiotics and vaccines. The Company believes its pathogen gene
discovery programs will lead to product development candidates more quickly than
human gene discovery efforts.
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Discovery of Human Disease Genes
In the human gene discovery area, the Company plans to build on its decade
of experience and knowledge in positional cloning, genotyping, sequencing and
bioinformatics capabilities by obtaining exclusive rights to collections of DNA
samples from relevant family resources in order to map, identify and
characterize genes responsible for selected human diseases. The Company actively
seeks collaborations with clinicians and academic researchers to obtain these
rights. The Company believes that access to these family and other resources
will bolster its existing human gene discovery programs and enable it to
initiate additional programs directed at human genes associated with significant
diseases.
Strategic Collaborations
The Company continues to seek strategic collaborations with pharmaceutical
and biotechnology companies for the development and commercialization of
products based on the Company's genomic discoveries. This strategy is designed
to provide the Company access to the scientific and product development
expertise of its partners and permit the Company to benefit from the
commercialization of products based on the Company's gene discoveries without
incurring the substantial costs required for pharmaceutical product development
and commercialization. The Company generally expects to license (either
exclusively or non-exclusively) to its partners most rights to therapeutic
products and vaccines (and, depending upon the gene, diagnostic products) which
may be developed from the particular genetic database licensed-out by the
Company. In exchange, the Company generally expects to receive a combination of
up-front license fees, research funding, milestone payments and royalty payments
on product sales. To date, the Company has entered into two collaborations
relating to pathogens, one with Astra for the development of therapeutic,
diagnostic and vaccine products effective against gastrointestinal infections
and other diseases caused by H. pylori, and one with Schering-Plough providing
for the use by Schering-Plough of the genomic sequence of Staph. aureus to
identify new gene targets for the development of antibiotics and vaccines
effective against drug resistant infectious organisms.
Government Grants and Contracts
The Company has served as one of the primary researchers under genomic
programs sponsored by the United States government and actively seeks to
continue its participation in government sponsored genomics research programs.
These programs add to the Company's genomics technology base and increase the
number and enhance the expertise of its scientific personnel. From January 1991
through August 1996, the United States government awarded the Company grants and
contracts providing for aggregate payments over their terms of approximately $37
million. Moreover, subject to certain rights of the government, under most of
these programs the Company becomes the owner of any resulting discoveries or
inventions.
Non-Exclusive Database Subscriptions
GTC has recently developed a database of genomic information from over a
dozen pathogens and fungi, PathoGenome[Trademark]. This database is available
through non-exclusive subscriptions to pharmaceutical and other drug discovery
companies. Together with the sequence modules, GTC will
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offer some functional genomics modules which would allow for exclusive
collaborations. As of November 27, 1996, the Company had not sold any
subscriptions to the PathoGenome[Trademark] database.
Drug Development Programs
In order to maximize the commercial utilization of novel drug discovery
targets derived from GTC's genomics approach, our alliance strategy with
pharmaceutical companies will be complemented by internal drug discovery
programs. These internal drug discovery efforts will initially be focused on the
Pathogen area, since GTC has extensive expertise in this field based on our
existing pharmaceutical alliances. The non-exclusive business strategy of the
PathoGenome[Trademark] database allows GTC to choose its own drug discovery
targets. The Company's internal programs will include drug discovery target
validation through gene knock-outs, protein expression and purification,
development of high-throughput assays, and -- via external collaborations --
lead compound identification and lead optimization. In the second phase of the
Company's drug development program, the expertise from the Pathogen drug
discovery efforts will be transferred to select targets derived from its Human
Genetics and Functional Genomics Program.
GENE DISCOVERY PROGRAMS
The Company is currently conducting gene discovery programs directed at
both pathogen genes and human disease genes. The factors the Company considers
in determining whether to initiate these programs include the projected
commercial potential, the effectiveness of current therapies, the likelihood of
attracting a pharmaceutical or biotechnology company as a collaborator, the
status of competitive programs and anticipated development costs.
Pathogen Programs
Antibiotics are the standard therapy for bacterial and fungal infections.
During the twelve month period ended August 1996, approximately 300 million
prescriptions for antibiotics were written in the United States for such
infections and approximately $7 billion was expended in the United States for
oral and injectable antibiotics. The approximately 100 antibiotics in use in the
United States today are primarily variations of a small number of original
antibiotic compounds. In the past decade, a growing number of infections have
been caused by pathogens which are becoming resistant to an increasing number of
currently available antibiotics. This problem of growing resistance to
antibiotics is particularly problematic in the approximately 6,500 acute care
hospitals in the United States in which approximately 2.1 million patients each
year develop infections. Examples of pathogens that have exhibited resistance to
a number of current antibiotics include Staph., M. tuberculosis, Streptococcus
pneumonia, and Enterococcus. To date, the primary response of pharmaceutical
companies to the resistance problem has been to modify existing antibiotics.
However, in many cases, the pathogens that are the targets of these antibiotics
have further mutated, often quite rapidly, and thereby developed resistance to
the modified antibiotics. The Company believes that the development of novel
antibiotics and vaccines based on new pathogen targets identified using genomic
information may be less prone to the rapid development of resistance than
antibiotics that are only modified versions of existing drugs.
Helicobacter pylori. H. pylori is the pathogen believed responsible for causing
90% of duodenal peptic ulcers, the most common type of ulcer, and 70% of gastric
peptic ulcers. Peptic ulcer disease is a chronic inflammatory condition of the
stomach and duodenum. Although frequently asymptomatic, all
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persons infected by H. pylori have chronic gastric inflammation (gastritis). It
is estimated that approximately 4.5 million people suffer from active peptic
ulcers each year, and approximately 500,000 new cases are diagnosed annually in
the United States. Approximately 600,000 patients are hospitalized each year in
the United States for peptic ulcer disease. Serious complications occur in
approximately one-third of these cases, including intestinal obstruction, upper
gastrointestinal hemorrhage and perforation. Further, each year over 6,000
deaths in the United States are directly caused by ulcer disease, and peptic
ulcers are a contributing factor in an additional 11,000 deaths. Approximately
10% of the population in the United States will develop peptic ulcer disease
during their lifetimes. Studies have also linked H. pylori with the development
of certain stomach cancers and coronary heart disease.
The most common medication for treating peptic ulcers are anti-secretory
drugs, such as H2 antagonists (e.g., Tagamet and Zantac), and proton pump
inhibitors (e.g., Prilosec[Trademark]). Although anti-secretory drugs reduce
ulcer symptoms by inhibiting gastric acid secretion, they do not eradicate the
H. pylori which is the primary cause of the disease. In 1994, the market for
such drugs for the treatment of ulcers totaled approximately $7 billion
worldwide. An approach being developed to treat recurrent peptic ulcer
disease recognizes the role of H. pylori and involves the administration of
antibiotics, often in combination with bismuth or anti-secretory drugs. The
most effective antibiotic treatments may be complicated by the need to treat
for prolonged periods with multiple drugs, by side effects and problems with
patient compliance, by relapses if treatment is interrupted, and by the
development of antibiotic-resistant strains of the bacteria.
Using its sequencing technology, the Company completed the random
sequencing of the genome of a clinical isolate of H. pylori in December 1994.
Under its agreement with Astra, the Company is identifying the genes critical to
the survival of H. pylori and proteins on the surface of the bacterium that are
believed to be likely targets for therapeutic products and vaccines,
respectively. See "Collaborative Agreements -- Pharmaceutical Company
Collaborations."
Staphylococcus aureus. Staph. is the most common cause of skin, wound and blood
infections. Staph. infections are typically treated with antibiotics. The
percentage of Staph. isolates resistant to penicillin and certain other
antibiotics increased from 2.4% in 1975 to 29% by 1991. Moreover, clinical
isolates of Staph. exist which are resistant to all known antibiotics other than
vancomycin. Vancomycin resistance has appeared in Enterococcus, a pathogen
related to Staph., which has raised the possibility that untreatable strains of
Staph. could appear. Using its high-throughput sequencing capabilities, the
Company has randomly sequenced the genome of a clinical isolate of
methicillin-resistant Staph. Under its agreement with Schering-Plough, the
Company is using the sequence of Staph. aureus to identify and validate gene
targets for the development of new small molecules to treat pathogens which have
become resistant to current antibiotics.
Mycobacterium tuberculosis. M. tuberculosis is the pathogen responsible for
causing tuberculosis. The clinical manifestations of tuberculosis include:
pulmonary tuberculosis, the most highly infectious form; tuberculous meningitis,
the major form causing mortality in children; and disseminated tuberculosis of
bone or other internal organs, forms increasingly found in AIDS patients where
it causes chronic wasting and debilitation. Approximately one-third of the
world's population is infected with M. tuberculosis, but harbors the pathogen in
an inactive form. Such individuals have a 10% lifetime risk of developing the
disease. The fatality rate of untreated tuberculosis is between 40% and 60%.
Each year, there are an estimated 8 million new cases of tuberculosis worldwide
and 2.9 million deaths from the disease, making tuberculosis the leading cause
of death in the world from a single pathogen. While the disease is primarily
associated with the developing world, tuberculosis is not uncommon in
immuno-
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compromised patients, including cancer and AIDS patients. In the United States,
outbreaks of infection have occurred in health care workers and residents of
homeless shelters and prisons.
The primary treatment for tuberculosis is the use of antibiotics. A
problem of effectively treating tuberculosis with antibiotics is compliance with
the long drug treatment regimens, often as long as six months. In addition,
strains of M. tuberculosis have become resistant to isoniazid and rifampicin,
two principal antibiotics used to treat tuberculosis. M. bovis vaccine, the most
widely used vaccine in the world, protects against disseminated tuberculosis and
tuberculosis meningitis in children. However, in clinical trials this vaccine
has been shown to be only partially effective against pulmonary tuberculosis in
adults.
Using its high-throughput sequencing technology, the Company has sequenced
over 800,000 bases of the genome of M. tuberculosis, which the Company estimates
represents approximately 20% of the total genome of this pathogen. See
"Collaborative Agreements--Government Collaborations."
HUMAN GENE DISCOVERY PROGRAMS
GTC has initiated a variety of programs to identify human genes that are
responsible for various diseases. In some of these programs, the Company is
using positional cloning strategies, while in others it is employing a
multi-faceted approach incorporating positional cloning and comparative gene
expression. The Company's current primary human gene discovery programs are
directed at asthma, cancer, osteoporosis and neuropsychiatric disorders.
Asthma. Asthma is a significant health problem that affects approximately 5% of
the U.S. population. Both twin and family studies suggest a strong genetic
component in the etiology of the disease. Despite a clear genetic contribution
to the disease, no consistent mode of inheritance has been observed, suggesting
that multiple genetic factors as well as environmental influences play a role.
The Company has initiated a research program to use positional cloning
strategies to identify genes involved in the etiology of asthma. Newly
identified asthma genes will facilitate the development of superior diagnostics
and novel therapeutic agents. This program is being conducted in collaboration
with a leading academic asthma research center which provides access to
appropriate family resources and clinical insight to asthma pathophysiology.
Osteoporosis. Osteoporosis is a major health problem that affects roughly 50% of
post-menopausal women and nearly 25% of elderly men. In the U.S. alone, there
are in excess of 1.3 million osteoporotic bone fractures per year. As defined by
low bone mineral density, both twin and family studies suggest a strong genetic
component to the disease. The Company has initiated a research program to
identify genes involved in the etiology of osteoporosis. Given the complex
nature of this disorder, and the lack of information about biochemical defects
involved, the Company is using a multi-faceted approach including positional
cloning and comparative gene expression strategies to identify osteoporosis
genes. The Company expects the identification of genes regulating bone density
and disease progression will significantly influence the development of
diagnostic tests and the discovery of novel therapeutic agents.
Prostate Cancer. Cytogenetic studies suggest the presence of tumor suppressor
genes on human chromosome 10 involved in prostate, endometrial and breast
cancer. The Company is employing a variety of mapping and gene identification
technologies to clone these cancer genes. Candidate tumor
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variety of mapping and gene identification technologies to clone these cancer
genes. Candidate tumor suppressor genes will be analyzed functionally to
dissect signal transduction pathways to facilitate identification of drug
discovery targets.
Other Programs. The Company is also conducting preliminary research on
schizophrenia and manic depressive illness. These neuropsychiatric disorders
affect large numbers of people in the U.S. and throughout the world and are
believed to have a genetic basis. The Company is currently evaluating various
family resources for research on these diseases and may expand its research in
this area.
COLLABORATIVE AGREEMENTS
An important part of the Company's strategy is to pursue strategic
collaborations with pharmaceutical and biotechnology companies for the
development and commercialization of products based on the Company's genomic
discoveries. The Company also plans to continue to seek government grants and
research contracts related to the Company's technology and research programs.
Pharmaceutical Company Collaborations
Astra. In August 1995, the Company entered into a collaboration agreement with
Astra to develop pharmaceutical, vaccine and diagnostic products effective
against gastrointestinal infections or any other disease caused by H. pylori.
The Company granted Astra exclusive access to the Company's H. pylori genomic
sequence database and exclusive worldwide rights to make, use and sell products
based on the Company's H. pylori technology. The agreement also provides for a
four-year research collaboration to further develop and annotate the Company's
H. pylori genomic sequence database, identify therapeutic and vaccine targets
and develop appropriate biological assays. This research is being directed by a
Joint Management Committee and a Joint Research Committee, each consisting of
representatives from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain product
development milestones, up to approximately $22 million (and possibly a greater
amount if more than one product is developed under the agreement) in license
fees, expense allowances, research funding and milestone payments. Of such fees,
$500,000 are creditable against any future royalties payable to GTC by Astra
under the agreement. The Company received approximately $8.0 million in
license fees, expense allowances and research funding under the Astra agreement
through August 31, 1996. For the Company's fiscal years ended August 31, 1995
and 1996, revenue recognized by the Company under its agreement with Astra
accounted for approximately 31% and 21%, respectively, of the Company's total
revenue. Astra is obligated to provide funding for the research program for a
minimum of two and one-half years; Astra may terminate the research
collaboration at any time after the second year on six months' notice.
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 database licensed to Astra by
the Company. GTC has the right under certain circumstances to convert Astra's
license to a nonexclusive license in the event Astra is not actively pursuing
commercialization of the licensed technology.
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Schering-Plough. In December 1995, the Company entered into a collaboration and
license agreement with Schering-Plough providing for the use by Schering-Plough
of the genomic sequence of Staph. aureus to identify new gene targets for
development of antibiotics effective against drug-resistant infectious
organisms. As part of this agreement, the Company granted Schering-Plough
exclusive access to certain of the Company's genomic sequence databases. The
Company also granted Schering-Plough a non-exclusive license to use the
Company's bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to microbial survival and to develop
biological assays to be used by Schering- Plough in screening natural product
and compound libraries to identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in research funding and milestone payments. Subject to
the achievement of additional product development milestones and
Schering-Plough's election to extend the research collaboration, Schering-Plough
has agreed to pay the Company up to an additional approximately $40.5 million
(inclusive of the $10.3 million referred to in the previous sentence) in
research funding and milestone payments. The Company received approximately $7.9
million in up-front license fees, research funding and milestone payments
through August 31, 1996. For the Company's fiscal year ended August 31, 1996,
revenue recognized by the Company under its agreement with Schering-Plough
accounted for approximately 37% of the Company's total revenue.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. GTC has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan GTC desires to enter into a collaboration with a third party with respect
to the development or sale of any compounds which are targeted against, as their
primary indication, the pathogen that is the principal subject of the Company's
agreement with Schering-Plough. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, GTC retained the rights to make, use, and sell diagnostic products
developed based on the Company's genomic database licensed to Schering-Plough or
the technology developed in the course of the research program.
Government Collaborations
Since 1989, the Company has been awarded a number of grants and contracts
by various agencies of the United States government pursuant to the government's
genomics programs. The scope of the research covered by the grants and contracts
encompasses technology development, sequencing production, technology automation
projects and positional cloning projects. Among other things, these grants and
contracts have provided significant funds for the Company's M. tuberculosis,
FSHD and manic depressive illness gene discovery programs. These grants and
contracts represent an important aspect of the Company's strategy because they
add to the Company's genomics technology and enable the Company to increase the
number and enhance the expertise of its scientific personnel.
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Under the Company's government grants, the Company has, subject to certain
rights of the government described below, exclusive ownership rights to any
commercial applications of inventions first reduced to practice under the
grants, including all gene discoveries and technology improvements created or
discovered. The Company is strongly encouraged under certain of the government
grants to make data and materials resulting from the research public within 180
days from the date such data and materials are developed. Under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
inventions developed solely by the Company under the contracts. The government
also retains certain rights, described below under the caption "Patents and
Proprietary Technology", to the inventions first reduced to practice by the
Company under the government grants and contracts. The Company currently has two
principal government research contracts, one with the National Institute of
Neurological Disorders and Stroke relating to the preparation of DNA samples for
sequencing, the isolation of DNA fragments and genotyping, and one with the NIMH
relating to the identification of genes responsible for manic depressive
illness. See "Patent and Proprietary Technology" and "Human Gene Discovery
Programs -- Other Programs."
The Company's government grants and research contracts include both
cost-plus-fixed-fee arrangements and fixed price contracts. Under
cost-plus-fixed-fee arrangements, the Company receives reimbursement of its
direct costs associated with the research, a portion of its indirect or overhead
costs as well as fees in excess of such costs. The amount of overhead
reimbursement varies with each contract. Under fixed price contracts, the
Company agrees to perform a particular research plan for an agreed upon payment.
From January 1991 through August 1996, the United States government
awarded the Company grants and contracts providing for aggregate payments over
their terms of approximately $37 million. These grants and research contracts
are typically funded annually and are subject to the appropriation by the United
States Congress of funding in each year. In addition, funding under these grants
and contracts may be discontinued or reduced at any time by the United States
Congress. For the Company's fiscal year ended August 31, 1996, the Company
recognized revenue under its government collaborations of $6.8 million which
accounted for approximately 32% of the Company's total revenue.
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 biological functions have not been characterized are
unclear. The Company's current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous sequences. Where the biological function of a gene or gene fragment
has not been characterized at the time of filing a patent application, the
Company intends to supplement such patent filing as soon as additional
information with respect to the biological function of such gene or gene
fragment is available. However, there can be no assurance that the Company will
be able to obtain patent protection on such genes or gene fragments, 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, will provide protection for any
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therapeutic, vaccine or diagnostic products based on the Company's gene
discoveries or will not be successfully challenged by others. Furthermore,
others have filed and are likely to file in the future patent applications which
have not yet been published covering genes or protein sequences similar or
identical to the Company's. No assurance can be given that any such patent
application will not have priority over patent applications filed by the Company
or that any patent applications filed by the Company will result in issued
patents.
There have been, and continue to be, intensive discussions on the scope of
patent protection for both gene fragments and full-length genes. In November
1995, the PTO scheduled a hearing and requested public comment on the patenting
of a complete genome of an organism as well as the patenting of human gene
fragments. Although the PTO canceled the hearings and request for comments, they
may be rescheduled at a future date. There can be no assurance that these or
other proposals will not result in changes in, or interpretations of, the patent
laws which will adversely affect the Company's patent position.
The PTO issued new Utility Guidelines in July 1995 that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics. While the guidelines do not require clinical efficacy data
for issuance of patents for human therapeutics, the guidelines have been issued
only recently and there can be no assurance that the PTO's interpretations of
such guidelines, and any changes to such interpretations will not delay or
adversely affect the Company's or its collaborators' ability to obtain patent
protection. The biotechnology patent situation outside the United States is even
more uncertain and is currently undergoing review and revision in many
countries.
The Company has filed patent applications and will continue to do so with
respect to a number of full length genes and corresponding proteins and partial
genes resulting from its pathogens program. The Company plans to file foreign
counterparts of these U.S. applications within the appropriate time frames.
These applications seek to protect these full length and partial gene sequences
and corresponding proteins, as well as equivalent sequences, such as
substantially homologous sequences, and products derived therefrom and uses
therefor. These applications also identify possible biological functions for the
genes and gene fragments based in part on a comparison to genes or gene
fragments included in public databases but do not contain any laboratory or
clinical data with respect to such biological functions.
Under the Company's government grants and contracts, the government has a
statutory right to practice or have practiced, and, 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 first reduced to practice
under the government grants and contracts. In addition, under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
technology developed solely by the Company under the contracts. Under the
Company's CRADA with the NIH, any inventions or discoveries made in whole or in
part by NIH researchers are the property, either solely or jointly with the
Company, of NIH, and the Company has the right to negotiate with the NIH to
obtain an exclusive license to such inventions and discoveries. The Company is
also strongly encouraged under certain government grants to make data and
materials resulting from the research public within 180 days from the date such
data and materials are developed. If this requirement results in premature
publication
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of the Company's discoveries and inventions, the Company's ability to obtain
patent protection for such discoveries and inventions may be adversely affected.
The Company also relies on trade secret protection for its confidential
and proprietary information. There can be no assurance that the Company can
maintain adequate protection for its 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. Moreover, there can be 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
The Company faces intense competition both with respect to its human gene
and pathogen gene discovery programs. There is a finite number of genes in the
human genome and the Company believes virtually all of such genes will be
identified within two to three years albeit largely without known function. The
Company also believes that the primary genes that cause or predispose
individuals to most common diseases will be identified and characterized within
five to eight years. In addition, the Company believes that the genomes of many
commercially important pathogens will be sequenced within two to three years.
Competitors of the Company include 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 commercial, scientific and
governmental entities are attempting to sequence human genes and the genomes of
other organisms. Other entities are utilizing positional cloning to identify and
characterize human disease genes. Certain of the Company's competitors' human
gene programs are more advanced than the Company's and any one of these
companies or other entities may discover and establish a competitive advantage
in one or more pathogen development programs which the Company has commenced.
The Company also faces competition in its human gene discovery programs in
gaining access to family DNA samples for use in positional cloning.
The Company believes that its ability to compete is dependent, in part,
upon its ability to create and maintain advanced technology, the speed with
which it can identify and characterize the genes involved in human diseases, the
Company's ability to rapidly sequence the genomes of selected pathogens, its
collaborators' ability to develop and commercialize therapeutic, vaccine and
diagnostic 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 greater research and product
development capabilities and financial, scientific, marketing and human
resources than the Company. These competitors may succeed in identifying or
sequencing genes or developing products earlier than the Company or its
collaborators, obtaining authorization from the FDA for such products more
rapidly than the Company or its
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collaborators or developing products that are more effective than those proposed
to be developed by the Company or its collaborators. 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 diagnosis or treatment for the particular diseases targeted by the
Company. There can be no assurance that products developed by others will not
render the products which the Company or its collaborators may seek to develop
obsolete or uneconomical or result in diagnoses, treatments or cures superior to
any products developed by the Company or its collaborators, or that any product
developed by the Company or its strategic collaboration 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 development, manufacturing and
marketing of any products which may be developed by the Company or its
collaborators. The nature and the extent to which such regulation may apply to
the Company or its collaborators will vary depending on the nature of any such
products. Virtually all of the Company's or its collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic and vaccine products are
subject to rigorous preclinical 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 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.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Products based on the
Company's technologies could potentially fall into all three categories.
Generally, in order to gain FDA pre-market approval of a new drug or biological
product, 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 a drug or biologic can commence. In order
to commercialize any products, the Company or its collaborators 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 are likely to take a number of years 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 collaborators will be required to file a New Drug Application
("NDA") and receive approval before commercial marketing of the drug. If the
product is classified as a biologic (e.g., a vaccine), the Company or its
collaborator will be required to file a product license application and an
establishment license application ("ELA") and receive approval of both before
commercial marketing of the product can take place. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approvals will be granted on a timely basis, if at all.
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
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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. In addition, biologic products may be subject to batch
certification and lot release requirements. To the extent that any of the
Company's products involve recombinant DNA technology, additional layers of
government regulation and review are possible. For marketing outside the United
States, the Company will also be subject to FDA export regulations and 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 Company or its collaborators may also develop diagnostic products
based upon the human or pathogen genes that the Company identifies. The Company
believes that the diagnostic products to be developed by the Company or its
collaborators are likely to be regulated by the FDA as devices rather than drugs
or biologics. 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 collaborator would most likely be classified as a
Class III device, requiring pre-market approval. Obtaining pre-market approval
involves the costly and time-consuming process, comparable to that for new drugs
or biologics, of conducting pre-clinical studies, obtaining an investigational
device exemption to conduct clinical tests, filing a pre-market approval
application, and obtaining FDA approval. Again, there can be no assurance that
any approval will be granted on a timely basis, if at all.
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,
federal and local 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.
MANUFACTURING AND MARKETING
The Company does not generally expect to directly manufacture or market
products in the near term. However, the Company may, in the future, consider
taking such actions if it believes they are appropriate under the circumstances.
The Company has no recent experience in developing pharmaceutical products or in
manufacturing or marketing products. The Company may not have the resources to
develop or to manufacture or market by itself any products based on genes
identified by it. In the event the Company decides to establish a manufacturing
facility, the Company will require substantial additional funds and will be
required to hire and train significant additional personnel and comply with the
extensive "good manufacturing practice" regulations applicable to such a
facility. In addition, if any products produced at the Company's facilities were
regulated as biologics, the Company would be required to file and obtain
approval of an ELA for its facilities.
HUMAN RESOURCES
As of August 31, 1996, the Company had 176 full-time employees, of whom
155 were engaged in research and development activities, and 21 in general and
administrative functions. Twenty-eight of the Company's employees hold Ph.D.
degrees and 44 others hold other advanced degrees.
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None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.
FACILITIES
The Company's executive offices and its 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. On July 29,
1996, the Company negotiated an amendment to its current lease of 100 Beaver
Street, giving it access to the entire building (approximately 80,000 sq. ft.)
in two phases. The new lease expires on November 15, 2006, subject to the right
of the Company to extend the lease for two consecutive five-year periods.
During fiscal 1996, the Company incurred aggregate rental costs, excluding
maintenance, taxes and utilities, for all facilities of approximately $472,000.
The aggregate minimum rental cost to be paid in Fiscal 1997 is expected to be
approximately $1,400,000.
Item 3. LEGAL PROCEEDINGS
-----------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
None.
PART II
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Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
--------------------------------------------------------------------
MATTERS
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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 1996 and 1995 as
furnished by the National Association of Securities Dealers Quotation System.
1996 1995
High Low High Low
---- --- ---- ---
First Quarter 8 1/2 6 5/8 2 11/16 1 13/16
Second Quarter 15 7 2 7/8 1 1/2
Third Quarter 15 8 1/2 6 1/4 2 1/2
Fourth Quarter 12 1/8 6 1/8 8 5/8 5 1/8
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As of November 25, 1996, there were approximately 1,382 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.
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended August 31, 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Revenues:
Collaborative research, license fees,
product, service and royalties $ 952,991 $ 1,254,577 $ 399,987 $ 3,961,161 $12,675,836
Government research 4,170,635 5,021,975 6,077,346 7,014,280 6,795,393
Interest income 384,710 173,788 141,584 231,662 1,785,164
Total $ 5,508,336 $ 6,450,340 $ 6,618,917 $11,207,103 $21,256,393
Net income (loss) $(2,078,711) $(3,481,857) $(1,078,718) $ 585,204 $ 1,920,710
Net income (loss) per common share $ (0.19) $ (0.33) $ (0.10) $ 0.05 $ 0.11
Weighted average common and common
equivalent shares 10,662,551 10,668,628 11,097,224 12,961,734 18,129,794
Cash, cash equivalents, restricted cash
and long and short-term marketable securities $ 7,144,140 $ 3,915,306 $ 4,311,854 $ 9,011,247 $53,768,562
Working capital 5,768,331 3,264,454 3,244,260 5,498,782 25,904,641
Total assets 9,354,613 5,288,691 5,910,682 11,528,674 63,279,017
Shareholders' equity $ 7,081,311 $ 3,676,333 $ 4,224,555 $ 7,238,503 $54,312,758
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS OVERVIEW
------------------------------
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues have been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the genomic sequence of a specific pathogen that the Company
is sequencing to identify new gene targets for the development of novel
antibiotics.
The Company will not receive significant product revenues on a sustained
basis until such time, if any, at which products based on the Company's research
efforts are commercialized. The Company's product development strategy is to
enter into collaborations with pharmaceutical and biotechnology companies
whereby these corporate partners will provide most of or all of the financial
and other resources required to complete the development and to commercialize
products based on the Company's genomics research in exchange for a variety of
license and milestone payments, research support and royalties. In order for a
product to be commercialized based on the Company's research, it will be
necessary for the collaborators to conduct preclinical tests and clinical
trials, obtain regulatory clearances and make manufacturing, distribution and
marketing arrangements. Accordingly, the Company does not expect to receive
royalties based on product revenues for many years.
For fiscal 1994, 1995, and 1996, the Company expended $5,522,000,
$7,892,000 and $14,074,000, respectively, on research and development, of which
$5,144,000, $6,414,000 and $6,150,000, respectively, was sponsored by the United
States government. As of August 31, 1996, the Company had outstanding
approximately $8,129,000 of government grants and research contracts under which
services were yet to be performed. These grants and contracts call for these
services to be performed over approximately the next 5 to 36 months. The
Company's government grants and contracts are typically funded annually and are
subject to appropriation by the United States Congress each year. Funding may be
discontinued or reduced at any time by the Congress. As of August 31, 1996, the
funded portion of these grants and contracts was $5,841,000. For fiscal 1994,
1995 and 1996, revenue recognized pursuant to United States government grants
and research accounted for approximately 92%, 63% and 32%, respectively, of the
Company's total revenues. The decrease in government research revenue, as a
percentage of total revenues, over the last two years reflects a substantial
increase in revenue derived from the Company's collaborative partnerships. The
Company plans to continue to seek government grants and contracts in the
genomics field and to enter into additional corporate partnering arrangements
with the goal of advancing the Company's genomic technologies and gene discovery
programs and of obtaining revenues sufficient to cover a portion of the
Company's cash requirements. There can be no assurance that the Company will be
able successfully to pursue this strategy.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $33,254,000 at August 31, 1996. The
Company's 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 government grants and contracts and collaborative
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agreements. The Company is subject to risks common to companies in its industry
including unproven technology and business strategy, availability of, and
competition for, family resources, reliance upon collaborative partners and
others, reliance on United States government funding, history of operating
losses, need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty of
pharmaceutical pricing, health care reform and related matters, product
liability exposure, and volatility of the Company's stock price.
RESULTS OF OPERATIONS
- ---------------------
REVENUE
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Total revenues increased 90% from $11,207,000 in fiscal 1995 to
$21,256,000 in fiscal 1996 and increased 69% from $6,619,000 in fiscal 1994 to
$11,207,000 in fiscal 1995. Collaborative research, license fees, product and
royalties increased 220% from $3,961,000 in fiscal 1995 to $12,676,000 in fiscal
1996 primarily due to milestone payments, license fee and sponsored research
revenue of $4,539,000 and $7,868,000 received under the Company's collaboration
agreements with Astra and Schering-Plough, respectively. Collaborative research,
license fees, product and royalties increased from $400,000 in fiscal 1994 to
$3,961,000 in fiscal 1995 primarily due to a $3,500,000 payment received from
Astra in August 1995.
Government research revenue decreased slightly by 3% from $7,014,000 in
fiscal 1995 to $6,795,000 in fiscal 1996 and increased 15% from $6,077,000 in
fiscal 1994 to $7,014,000 in fiscal 1995. The decrease in government research
revenue in fiscal 1996 was primarily attributable to a decrease in research
effort on existing government grants and contracts. The increase in government
research revenue in fiscal 1995 was primarily attributable to the commencement
of work performed under the Company's 3-year, $10 million Genome Sequencing
Center grant from the NIH and existing government grants and contracts. Revenue
derived from government research grants and contracts is generally based upon
direct cost such as labor, laboratory supplies as well as an allocation for
reimbursement of a portion of overhead.
The Company had royalty revenue of $148,000, $91,000 and $127,000 in
fiscal 1994, 1995 and 1996, respectively, from the Company's rennin patent. In
October 1996, the Company assigned its rights to the rennin patent to Pfizer,
Inc. for $671,000 and no further royalty payments will be received.
Interest income increased 669% from $232,000 in fiscal 1995 to $1,785,000
in fiscal 1996 and increased 63% from $142,000 in fiscal 1994 to $232,000 in
fiscal 1995 reflecting the increase in funds available for investment as a
result of proceeds received from the sale of Common Stock through a public
offering in February 1996, sale of Common Stock in a private placement in March
1995, as well as payments received under the Astra and Schering-Plough
collaborations.
COST AND EXPENSES
- -----------------
Total cost and expenses, excluding noncash charges for stock option
grants, increased 61% from $10,596,000 in fiscal 1995 to $17,015,000 in fiscal
1996 and increased 38% from $7,671,000 in fiscal 1994 to $10,596,000 in fiscal
1995. Research and development expense, which includes company-sponsored
research and development, research funded pursuant to arrangements with the
Company's corporate collaborators and cost of product revenue, increased 436%
from $1,478,000 in
24
25
fiscal 1995 to $7,924,000 in fiscal 1996 and increased 291% from $378,000 in
fiscal 1994 to $1,478,000 in fiscal 1995. The increase in research and
development expense in both fiscal 1995 and fiscal 1996 was primarily related to
the Company's expansion of its pathogen and gene discovery programs. The
increase consisted primarily of increases in payroll and related expenses,
laboratory supplies and overhead expenses. The Company expects to continue to
increase research and development expenditures, particularly with respect to its
human gene discovery programs.
The cost of government research decreased 4% from $6,414,000 in fiscal
1995 to $6,150,000 in fiscal 1996 and increased 25% from $5,144,000 in fiscal
1994 to $6,414,000 in fiscal 1995. The fluctuation in cost of government
research in both fiscal 1996 and fiscal 1995 was due primarily to the
fluctuation in government research revenue. Cost of government research, as a
percentage of government research revenue, was 91%, 91% and 85% in fiscal 1996,
1995 and 1994, respectively.
Selling, general and administrative expenses increased 9% from $2,704,000
in fiscal 1995 to $2,941,000 in fiscal 1996 and increased 26% from $2,150,000 in
fiscal 1994 to $2,704,000 in fiscal 1995. The increase in selling, general and
administrative expenses in fiscal 1996 was primarily due to increases in payroll
and related expenses, consulting and interest expense. The increase in selling,
general and administrative expenses in fiscal 1995 was primarily due to
approximately $495,000 of severance and relocation expenses as well as increases
in payroll and related expenses and facilities expenses.
In fiscal 1996, the Company's Board of Directors granted certain
employees, officers, and directors options to purchase an aggregate of 440,000
shares of Common Stock which were subject to shareholder approval. The options
were granted at exercise prices ranging from $7.25 to $9.56 per share, in each
case, the fair market value of the Common Stock on the date the Company's Board
of Directors granted the option. The Company recorded deferred compensation of
$2,565,000 which represents an amount equal to the difference between the fair
market value of the Common Stock on February 16, 1996, the date of shareholder
approval, and the per share exercise price of the options. The Company recorded
$2,320,000 of the $2,565,000, as compensation expense in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since September 1, 1992, the Company's primary sources of cash have been
revenue from government grants and contract, revenue from collaborative research
agreements, borrowing under capital leases and proceeds from sale of equity
securities. In fiscal 1994, the Company received net proceeds of approximately
$1,601,000 from the sale of Common Stock and the exercise of certain stock
options. In fiscal 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. In August 1995, the Company entered into a collaborative
agreement with Astra under which it received $3,500,000. In fiscal 1996, the
Company received $4,421,000 in collaborative payments from Astra consisting of
a $1,500,000 milestone payment and $2,921,000 in sponsored research. In December
1995, the Company entered into a collaborative agreement with Schering-Plough
under which it received a $3,000,000 up-front license fee, $2,750,000 in
milestone payments and $1,500,000 in sponsored research payments through
August 31, 1996.
In February 1996, the Company closed a public offering of 3,000,000 shares
of its Common Stock at $13.00 per share, resulting in proceeds of approximately
$36,007,000, net of issuance costs.
25
26
In March 1996, the Company sold an additional 450,000 shares of its Common Stock
in the underwriter's over-allotment, resulting in proceeds of $5,515,000, net of
issuance costs. Additionally, the Company received proceeds of $1,311,000 from
the issuance of 534,831 shares of Common Stock resulting from the exercise of
stock options and warrants during fiscal 1996.
As of August 31, 1996, the Company had cash, cash equivalents, restricted
cash and long and short-term marketable securities of approximately $53,769,000.
The Company has various arrangements under which it can finance up to $9,000,000
of certain office and laboratory equipment and leasehold improvements. Under
these arrangements, the Company is required to maintain certain financial
ratios, including minimum levels of tangible net worth, total indebtedness to
tangible net worth, maximum loss, and minimum restricted cash balances. At
August 31, 1996, the Company had approximately $2,267,000 available under these
arrangements and had an outstanding balance of approximately $5,335,000 which is
repayable over the three year period ending August 1999.
The Company's operating activities provided cash of approximately
$2,976,000 and $2,693,000 in fiscal 1996 and 1995, respectively, and used cash
of approximately $639,000 in fiscal 1994. Net cash provided in fiscal 1996 and
1995 was comprised primarily of deferred contract revenue, accounts payable,
accrued expenses and operating income. Cash was utilized in fiscal 1994
primarily to fund the Company's operating loss.
The Company's investing activities used cash of approximately $40,258,000
and $1,550,000 in fiscal 1996 and 1994, respectively. The Company's investing
activities provided cash of approximately $5,600 in fiscal 1995. The Company
used cash primarily for purchases of marketable securities and to a lesser
extent the purchase of equipment and leasehold improvements. In addition, the
Company acquired $1,340,000 and $4,724,000 of property and equipment in fiscal
1995 and 1996, respectively, under capital lease arrangements.
Financing activities provided cash of approximately $42,075,000,
$2,074,000 and $1,410,000 in fiscal 1996, 1995, and 1994, respectively,
primarily from the sale of equity securities and the exercise of stock options
and warrants, net of payments of capital lease obligations.
Capital expenditures totaled $4,888,000 during fiscal 1996. The Company
currently estimates that it will acquire $5,800,000 of capital equipment,
consisting primarily of computer systems, laboratory equipment and office
equipment in fiscal 1997. The Company plans to utilize capital lease
arrangements to finance the acquisition of this equipment.
At August 31, 1996, the Company had net operating loss and tax credit
carryforwards of approximately $33,968,000 and $1,128,000 respectfully. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period excess
of 50%. The Company does not believe it has experienced a cumulative ownership
change in excess of 50%. However, there can be no assurance that ownership
changes will not occur in future periods which will limit the Company's ability
to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's
26
27
plans or events affecting the Company's operations will not result in
accelerated or unexpected expenditures.
The Company may seek additional funding through public or private
financing and expects additional funding through 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.
Statements in this Form 10K that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment.
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. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
None.
PART III
--------
Pursuant to General Instruction G (3) to Form 10-K, the information
required for Part III (Items 10, 11, 12 and 13) is incorporated herein by
reference from the Company's proxy statement for the Special Meeting of
Shareholders in Lieu of an Annual Meeting to be held on February 7, 1997.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1)
AND (2) See "Index to Consolidated Financial Statements and
Financial Statement Schedules" appearing on page F-1.
27
28
GENOME THERAPEUTICS CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF AUGUST 31, 1995 AND 1996 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR
THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corp. and subsidiaries (a Massachusetts corporation) as of August
31, 1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1996. 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 Corp. and
subsidiaries as of August 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996, in conformity with generally accepted accounting principles.
Boston, Massachusetts
October 18, 1996
F-2
30
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
AUGUST 31,
1995 1996
CURRENT ASSETS:
Cash and cash equivalents $ 5,886,184 $ 10,679,287
Marketable securities 2,340,592 17,429,488
Accounts receivable 280,904 1,338,418
Interest receivable 79,889 1,296,657
Unbilled costs and fees 259,005 345,773
Prepaid expenses and other current assets 50,140 552,903
------------ ------------
Total current assets 8,896,714 31,642,526
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, AT COST:
Laboratory and scientific equipment 2,049,432 6,403,221
Equipment and furniture 319,501 581,533
Leasehold Improvements 1,597,069 1,939,545
Construction-in-progress 206,103 77,027
------------ ------------
4,172,105 9,001,326
Less--Accumulated depreciation 2,451,632 3,266,068
------------ ------------
1,720,473 5,735,258
RESTRICTED CASH 784,471 195,500
LONG-TERM MARKETABLE SECURITIES -- 25,464,287
OTHER ASSETS 127,016 241,446
------------ ------------
$ 11,528,674 $ 63,279,017
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 409,282 $ 864,279
Accrued expenses 1,736,569 1,731,220
Deferred contract revenue 774,048 1,035,504
Current maturities of capital lease obligations 478,033 2,106,882
------------ ------------
Total current liabilities 3,397,932 5,737,885
------------ ------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT MATURITIES 892,239 3,228,374
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value-
Authorized--34,375,000 shares
Issued and outstanding--13,476,135 and 17,460,966
shares at August 31, 1995 and 1996, respectively 1,347,613 1,746,097
Series B restricted stock, $.10 par value-
Authorized--625,000 shares
Issued and outstanding--none -- --
Additional paid-in capital 41,066,932 86,067,176
Accumulated deficit (35,174,225) (33,253,515)
Deferred compensation (1,817) (247,000)
------------ ------------
Total shareholders' equity 7,238,503 54,312,758
------------ ------------
$ 11,528,674 $ 63,279,017
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
31
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------- YEARS ENDED AUGUST 31,----------
1994 1995 1996
REVENUES:
Collaborative research, license fees,
product and royalties $ 399,987 $ 3,961,161 $12,675,836
Government research 6,077,346 7,014,280 6,795,393
Interest income 141,584 231,662 1,785,164
----------- ----------- -----------
Total revenues 6,618,917 11,207,103 21,256,393
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of government research 5,144,071 6,414,148 6,150,234
Research and development 377,654 1,478,247 7,924,113
Selling, general and administrative 2,149,566 2,703,546 2,941,119
Noncash charge for stock option grants 26,344 25,958 2,320,217
----------- ----------- -----------
Total costs and expenses 7,697,635 10,621,899 19,335,683
----------- ----------- -----------
Net income (loss) $(1,078,718) $ 585,204 $ 1,920,710
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Primary $ (0.10) $ 0.05 $ 0.11
=========== =========== ===========
Fully diluted $ -- $ 0.04 $ --
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 11,097,224 12,961,734 18,129,794
=========== =========== ===========
Fully diluted -- 13,036,741 --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
32
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
BALANCE, AUGUST 31, 1993 10,693,166 $1,069,316 $37,341,847 $(34,680,711) $ (54,119) $ 3,676,333
Exercise of stock options 84,276 8,428 138,779 -- -- 147,207
Amortization of
deferred compensation -- -- -- -- 26,344 26,344
Sale of common stock
and warrants 1,001,504 100,150 1,353,239 -- -- 1,453,389
Net loss -- -- -- (1,078,718) -- (1,078,718)
---------- ---------- ----------- ------------ ----------- -----------
BALANCE, AUGUST 31, 1994 11,778,946 1,177,894 38,833,865 (35,759,429) (27,775) 4,224,555
Exercise of stock options 244,166 24,417 394,982 -- -- 419,399
Amortization of
deferred compensation -- -- -- -- 25,958 25,958
Sale of common stock
and warrants 1,453,023 145,302 1,838,085 -- -- 1,983,387
Net income -- -- -- 585,204 -- 585,204
---------- ---------- ----------- ------------ ----------- -----------
BALANCE, AUGUST 31, 1995 13,476,135 1,347,613 41,066,932 (35,174,225) (1,817) 7,238,503
Exercise of stock options,
including tax effects 496,756 49,676 1,151,079 -- -- 1,200,755
Exercise of warrants 38,075 3,808 106,643 -- -- 110,451
Deferred compensation
from grant of stock options -- -- 2,565,400 -- (2,565,400) --
Amortization of
deferred compensation -- -- -- -- 2,320,217 2,320,217
Sale of common stock 3,450,000 345,000 41,177,122 -- -- 41,522,122
Net income -- -- -- 1,920,710 -- 1,920,710
---------- ---------- ----------- ------------ ----------- -----------
BALANCE, AUGUST 31, 1996 17,460,966 $1,746,097 $86,067,176 $(33,253,515) $ (247,000) $54,312,758
========== ========== =========== ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
33
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------ YEARS ENDED AUGUST 31, ------
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,078,718) $ 585,204 $ 1,920,710
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 205,889 350,230 887,907
Deferred compensation 26,344 25,958 2,320,217
Changes in assets and liabilities-
Accounts receivable 227,822 77,544 (1,057,514)
Interest receivable (4,589) (47,186) (1,216,768)
Unbilled costs and fees (86,281) (29,960) (86,768)
Prepaid expenses and other current assets 70,727 (27,754) (502,763)
Accounts payable 176,178 124,568 454,997
Accrued expenses (128,912) 897,974 (5,349)
Deferred contract revenue (47,289) 736,057 261,456
----------- ----------- ------------
Total adjustments 439,889 2,107,431 1,055,415
----------- ----------- ------------
Net cash provided by (used in)
operating activities (638,829) 2,692,635 2,976,125
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (4,985,970) (5,332,248) (49,553,183)
Proceeds from the sale of marketable securities 4,000,000 6,000,000 9,000,000
Purchases of equipment and leasehold improvements (191,907) (97,016) (164,211)
(Increase) decrease in restricted cash (94,674) (689,797) 588,971
(Increase) decrease in other assets (277,398) 124,687 (129,233)
----------- ----------- ------------
Net cash provided by (used in) investing activities (1,549,949) 5,626 (40,257,656)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options,
including tax benefits 147,207 419,399 1,200,755
Proceeds from the exercise of warrants -- -- 110,451
Proceeds from sale of common stock and warrants 1,453,389 1,983,387 41,522,122
Payments on capital lease obligations (190,588) (329,025) (758,694)
----------- ----------- ------------
Net cash provided by financing activities 1,410,008 2,073,761 42,074,634
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (778,770) 4,772,022 4,793,103
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,892,932 1,114,162 5,886,184
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,114,162 $ 5,886,184 $ 10,679,287
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 19,482 $ 85,759 $ 214,264
=========== =========== ============
Taxes paid during the year $ 13,049 $ 6,824 $ 43,240
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING
AND INVESTING ACTIVITIES:
Deferred compensation from grant of stock options $ -- $ -- $ 2,565,400
=========== =========== ============
Property and equipment acquired under capital leases $ 264,379 $ 1,340,611 $ 4,723,678
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
34
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. and subsidiaries (the Company) is engaged in the
field of genomics--the discovery and characterization of genes. The
Company's primary activity is genomic research and development.
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.
(a) Revenue Recognition
Research and contract revenues are derived from government grants and
contract arrangements as well as under collaborative agreements with
pharmaceutical companies. Research revenues are recognized as earned
under government grants, which consist of cost-plus-fixed-fee contracts
and fixed-price contracts. Revenues are recognized under collaborative
agreements as earned. Milestone payments from collaborative research
and development arrangements are recognized when they are achieved.
License fees are recognized as earned. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred contract
revenue represents amounts received prior to revenue recognition.
Royalty revenue is recorded as earned.
(b) 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.
The majority of the Company's equipment and leaseholds are financed
through capital leases.
(c) 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 period 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.
F-7
35
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure
of Information About Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no instruments with significant
off-balance-sheet risk or concentration of credit risk. The Company
maintains its cash and cash equivalents and marketable securities
balances with several institutions.
The Company had revenues from the following significant customers:
NUMBER OF
SIGNIFICANT PERCENTAGE OF
CUSTOMERS TOTAL REVENUES
A B C
Year Ended August 31,
1994 1 92% -% -%
1995 2 63 31 -
1996 3 32 21 37
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(f) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable
and long-term debt, approximates carrying value.
F-8
36
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) New Accounting Standard
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. The Company has
determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board (APB)
Opinion No. 25 and elect the disclosure-only alternative under SFAS No.
123. The Company will be required to disclose the pro forma net income
or loss and per share amounts in the notes to the financial statements
using the fair-value-based method beginning in the year ending August
31, 1997, with comparable disclosures for the year ended August 31,
1996. The Company has not determined the impact of these pro forma
adjustments.
(h) Reclassifications
The Company has reclassified certain prior year information to conform
with the current year's presentation.
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At August 31, 1996, the Company's cash
equivalents and marketable securities are classified as held-to-maturity,
as the Company has the positive intent and ability to hold these securities
to maturity. Cash equivalents are short-term, highly liquid investments
with original maturities of less than three months. Marketable securities
are investment securities with original maturities of greater than three
months. Cash equivalents are carried at cost, which approximates market
value, and consist of money market funds, repurchase agreements and debt
securities. Marketable securities are recorded at amortized cost, which
approximates market value, at August 31, 1995 and 1996. The Company has not
recorded any realized gains or losses on its marketable securities.
Marketable securities consist of commercial paper and U.S. Government
debt securities.
F-9
37
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES (Continued)
The aggregate fair value and costs of investments at August 31, 1995 and 1996 were as follows:
1995 1996
AMORTIZED MARKET AMORTIZED MARKET
MATURITY COST VALUE COST VALUE
Less than one year-
Corporate and other debt securities $ 2,340,592 $ 2,340,592 $17,429,488 $17,413,011
=========== --========= =========== ===========
Greater than one year-
U.S. Government and agency securities $ -- $ -- $ 2,998,931 $ 2,988,420
Corporate and other debt securities
(average maturity of 1.7 years) -- -- 22,465,356 22,296,279
----------- ----------- ----------- -----------
$ -- $ -- $25,464,287 $25,284,699
=========== =========== =========== ===========
The Company has $784,471 and $195,500 in restricted cash at August 31, 1995
and 1996, respectively, in connection with certain capital lease
obligations (see Note 6).
(3) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes, which
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 No. 109 requires deferred tax assets and
liabilities to be adjusted when the tax rates or other provisions of the
income tax laws change.
At August 31, 1996, the Company had net operating loss and tax credit
carryforwards of approximately $33,968,000 and $1,128,000, 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 years ended August 31, 1995 and 1996, respectively,
the Company utilized approximately $1,100,000 and $4,398,000 of net
operating loss carryforwards to offset taxable income.
F-10
38
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) INCOME TAXES (Continued)
The net operating loss carryforwards and tax credits expire approximately
as follows:
NET OPERATING RESEARCH INVESTMENT
LOSS TAX CREDIT TAX CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
1997 $ -- $ 80,000 $103,000
1998 5,069,000 208,000 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
2002-2011 15,219,000 8,000 37,000
----------- -------- --------
$33,968,000 $677,000 $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 1996
Net operating loss carryforwards $12,428,000 $11,997,000
Research and development credits 669,000 677,000
Investment tax credits 451,000 451,000
Other, net 1,143,000 1,173,000
----------- -----------
14,691,000 14,298,000
Valuation allowance (14,691,000) (14,298,000)
----------- -----------
$ -- $ --
=========== ===========
The valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax assets.
F-11
39
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
AUGUST 31,
1995 1996
Payroll and related expenses $ 630,290 $ 893,303
Severance 326,723 93,000
Employee relocation 230,468 137,622
License and other fees 283,971 335,434
All other 265,117 271,861
---------- ----------
$1,736,569 $1,731,220
========== ==========
(5) COMMITMENTS
(a) Lease Commitments
At August 31, 1996, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006.
Subsequent to year-end, the Company expanded its operating facilities.
Minimum lease payments and facilities charges under the leases,
including the expanded facilities at August 31, 1996, are as follows:
Year Ending August 31,
1997 $ 1,483,524
1998 1,705,731
1999 1,591,992
2000 1,591,992
2001 1,591,992
Thereafter 8,576,182
-----------
$16,541,413
===========
Rental expense was approximately $208,000, $411,000 and $472,000 in the
years ended August 31, 1994, 1995 and 1996, respectively. Rental
expense for the year ended August 31, 1994 was offset by approximately
$100,000 of sublease rental income.
(b) Employment Agreements
The Company has employment agreements with certain executive officers
which provide for bonuses, as defined, and severance benefits upon
termination of employment, as defined.
F-12
40
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) CAPITAL LEASE OBLIGATIONS
The Company has various capital lease line arrangements under which it can
finance up to $9,000,000 of certain office and laboratory equipment. These
leases are payable in 36 monthly installments. The interest rate ranges
from 7.97% 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 approximately $2,267,000 available under these various
capital lease agreements at August 31, 1996. Subsequent to August 31, 1996,
the Company entered into approximately $1,403,000 of additional capital
lease obligations under its capital lease line arrangements.
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 60 monthly
payments of $2,076.
Capital lease obligations at August 31, 1996 are as follows:
Year Ending August 31,
1997 $2,492,253
1998 2,112,900
1999 1,371,173
----------
Total minimum lease payments 5,976,326
Less--Amount representing interest 641,070
----------
Present value of total minimum lease payments 5,335,256
Less--Current portion 2,106,882
----------
$3,228,374
==========
F-13
41
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) SHAREHOLDERS' EQUITY
(a) Public Offering
In February 1996, the Company closed a public offering of 3,000,000
shares of its common stock at $13.00 per share, resulting in proceeds
of approximately $36,007,000, net of issuance costs. In March 1996, the
Company sold an additional 450,000 shares of its common stock in the
underwriter's overallotment, resulting in proceeds of approximately
$5,515,000, net of issuance costs.
(b) 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 an exercise price of $2.43 per share. These
warrants were exercised on July 18, 1995 through a cashless exercise
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.
(c) Stock Options
The Company has granted stock options to key employees and consultants
under its 1988, 1991, and 1993 Stock Option Plans. In February 1996,
the Company's stockholders approved the 1995 Stock Option Plan (the
1995 Plan) covering 750,000 options. The purchase price and vesting
schedule applicable to each option grant are determined by the stock
option and compensation committee of the Board of Directors. Under
separate agreements not covered by any plan, the Company has granted
certain key employees and certain directors of the Company, options to
purchase common stock.
On November 16, 1995, the Board of Directors of the Company granted,
and the shareholders approved on February 16, 1996, nonqualified stock
options outside the 1995 Plan for the purchase of an aggregate of
80,000 shares of common stock to four members of the Board of
Directors. The options were granted with an exercise price of $7.25
per share, the fair market value on the date of grant by the Board of
Directors, and vest at the end of five years or earlier as follows:
(i) 50% will become fully vested if the average closing price of the
stock for a period of 10 out of 20 consecutive trading days is
$9.425 or higher; and (ii) an additional 50% will become fully vested
if the average closing price for the stock for a period of 10 out of 20
consecutive trading days is $11.60 or higher.
F-14
42
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) SHAREHOLDERS' EQUITY (Continued)
(c) Stock Options (Continued)
On December 21, 1995, the Board of Directors of the Company granted,
and the shareholders approved on February 16, 1996, nonqualified stock
options outside the 1995 Plan for the purchase of 300,000 shares of
common stock to the Company's Chief Executive Officer. The options were
granted with an exercise price of $8.87 per share, the fair market
value on the date of grant by the Board of Directors, and vest at the
end of five years or earlier as follows: (i) 75,000 vest if the
average closing price of the common stock for a period of 10 out of
20 consecutive trading days is $10.25 or higher; (ii) 100,000 vest if
the average closing price of common stock for a period of 10 out of
20 consecutive trading days is $12.25 or higher; and (iii) 125,000
vest if the average closing price of the common stock for a period of
10 out of 20 consecutive trading days is $14.25 or higher.
On January 2, 1996, the Board of Directors of the Company granted, and
the shareholders approved on February 16, 1996, stock options for the
purchase of 60,000 shares of common stock to an employee. The options
were granted with an exercise price of $9.56 per share, the fair market
value on the date of grant, and vest over a four-year period.
On July 11, 1996, the Board of Directors of the Company granted
nonqualified stock options outside the 1995 Plan for the purchase of an
aggregate of 600,000 shares of common stock to the Company's Chief
Scientific Officer. The options were granted with an exercise price of
$7.44 per share, the fair market value on the date of grant, and vest
as follows: (a) an option covering 300,000 shares shall vest in four
equal annual installments with the first installment vesting on July
11, 1997; (b) an option covering 300,000 shares shall vest on July 11,
2001 or earlier as follows: (i) 33-1/3% will become fully vested if the
average closing price of the common stock for a period of 10 out of 20
consecutive trading days is $14.25 or higher; (ii) 33-1/3% will become
fully vested if the average closing price of the common stock for a
period of 10 out of 20 consecutive trading days is $18.25 or higher;
and (iii) 33-1/3% will become fully vested if the average closing price
of the common stock for a period of 10 out of 20 trading days is $20.25
or higher.
The Company records deferred compensation when stock options are
granted at an exercise price per share that is less than the fair
market value on the date of the grant. Deferred compensation is
recorded in an amount equal to the excess of the fair market value per
share over the exercise price multiplied by the number of options
granted. In 1996, the Company recorded $2,565,400 of deferred
compensation for certain options described above based upon a grant
date represented by shareholder approval. Deferred compensation will be
recognized as an expense over the estimated vesting period of the
underlying options. Compensation expense included in the statements of
operations was approximately $26,000, $26,000 and $2,320,000 for the
years ended August 31, 1994, 1995 and 1996, respectively.
F-15
43
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) SHAREHOLDERS' EQUITY (Continued)
(c) Stock Options (Continued)
There were 564,242 common shares available for future grants at August
31, 1996 under the 1995 Plan. The following is a summary of all stock
option activity:
-------YEARS ENDED AUGUST 31,-------
1994 1995 1996
Options shares-
Granted 970,100 355,275 1,361,775
Exercised (84,276) (244,166) (496,756)
Canceled (108,288) (70,624) (56,992)
---------- ---------- -----------
Outstanding 3,499,702 3,540,187 4,348,214
========== ========== ===========
Price range of outstanding
options, end of period $.20-$8.00 $.20-$8.00 $.20-$14.50
========== ========== ===========
Price range of exercised
options during the period $.88-$2.94 $.81-$4.00 $ .20-$8.00
========== ========== ===========
(d) Warrants
In connection with the sales of common stock in March and May, 1994,
the Company issued three-year warrants for the purchase of 30,075
shares of common stock at $3.09 per share and 8,000 shares of common
stock at $2.19 per share, respectively. These warrants were exercised
during the year ended August 31, 1996. In connection with the Company's
public offering described in Note 7(a), the Company issued two-year
warrants to its underwriters for the purchase of 224,250 shares of
common stock at $15.60 per share.
(8) 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. The
Company contributed $43,233, $43,533 and $58,354 to the Plan for the years
ended August 31, 1994, 1995 and 1996, respectively.
F-16
44
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) COLLABORATION AGREEMENTS
(a) 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. The Company granted Astra exclusive
access to the Company's H. pylori genomic sequence database and
exclusive worldwide rights to make, use and sell products based on the
Company's H. pylori technology. The agreement also provides for a
four-year research collaboration to further develop and annotate the
Company's H. pylori genomic sequence database, identify therapeutic and
vaccine targets and develop appropriate biological assays. This
research is being directed by a Joint Management Committee and a Joint
Research Committee, each consisting of representatives from both
parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain
product development milestones, up to approximately $22 million (and
possibly a greater amount if more than one product is developed under
the agreement) in license fees, expense allowances, research funding
and milestone payments. Of such fees, $500,000 is creditable against
any future royalties payable to the Company by Astra under the
agreement. Astra is obligated to provide funding for the research
program for a minimum of two and one-half years; Astra may terminate
the research collaboration at any time after the second year on six
months' notice.
The Company will also be entitled to receive royalties on Astra's sale
of 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
database licensed to Astra by the Company. The Company has the right,
under certain circumstances, to convert Astra's license to a
nonexclusive license in the event Astra is not actively pursuing
commercialization of the technology.
The Company has recognized $3,500,000 and $4,539,496 under the
agreement in the years ended August 31, 1995 and 1996, respectively.
The revenue in the year ended August 31, 1995 consisted of a
nonrefundable license fee and capital allowance. The revenue in the
year ended August 31, 1996 consisted of a $1.5 million milestone
payment and $3,039,496 of collaborative research revenues. The Company
recorded $768,750 and $650,504 of deferred collaborative research
revenues under this agreement at August 31, 1995 and 1996,
respectively.
F-17
45
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) COLLABORATION AGREEMENTS (Continued)
(b) Schering-Plough
In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd.
(collectively Schering-Plough) providing for the use by Schering-Plough
of the genomic sequence of a specified pathogen. The Company is
sequencing to identify new gene targets for development of antibiotics
effective against drug-resistant infectious organisms. As part of this
agreement, the Company granted Schering-Plough exclusive access to
certain of the Company's genomic sequence databases. The Company also
granted Schering-Plough a nonexclusive license to use the Company's
bioinformatics systems for Schering-Plough's internal use in connection
with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or
acquires. The Company also agreed to undertake certain research efforts
to identify bacteria-specific genes essential to microbial survival and
to develop biological assays to be used by Schering-Plough in screening
natural product and compound libraries to identify antibiotics with new
mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain
development milestones, Schering-Plough has agreed to pay the Company a
minimum of $10.3 million in additional research funding and milestone
payments. Subject to the achievement of additional product development
milestones and Schering-Plough's election to extend the research
collaboration, Schering-Plough has agreed to pay the Company up to an
additional $40.5 million (inclusive of the $10.3 million referred to
above) in research funding and milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to
make, use and sell pharmaceutical and vaccine products based on the
genomic sequence databases licensed to Schering-Plough by the Company
and on the technology developed in the course of the research program.
The Company has also granted Schering-Plough a right of first
negotiation if during the term of the research plan the Company desires
to enter into a collaboration with a third party with respect to the
development or sale of any compounds that are targeted against, as
their primary indication, the pathogen that is the principal subject of
the Company's agreement with Schering-Plough. The Company will be
entitled to receive royalties on Schering-Plough's sale of therapeutic
products and vaccines developed using the technology licensed from the
Company. Subject to certain limitations, the Company retained the
rights to make, use and sell diagnostic products developed based on the
Company's genomic database licensed to Schering-Plough or the
technology developed in the course of the research program.
F-18
46
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(9) COLLABORATION AGREEMENTS (Continued)
(b) Schering-Plough (Continued)
The Company has recognized $7,867,579 in revenue in the year ended
August 31, 1996 under this collaborative arrangement, which consisted
of a $3.0 million license fee, $1.1 million in collaborative research
revenues and a $3.75 million in milestone payments. The Company
recorded $382,421 as deferred collaborative research revenues at August
31, 1996.
(10) HARVARD LICENSE AGREEMENT
On November 12, 1993, the Company entered into an agreement with Harvard
College for an exclusive worldwide license for commercial applications of
their patented multiplex sequencing technology. Under this agreement, the
Company has 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. The
Company may terminate this agreement upon 90 days' notice. The Company
recorded a $10,000, $115,000 and $135,000 expense under this agreement in
the years ended August 31, 1994, 1995 and 1996, respectively, primarily
relating to the Astra and Schering-Plough collaborative agreements.
F-19
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Genome Therapeutics Corp. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on November 27,
1996.
GENOME THERAPEUTICS CORP.
/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 27, 1996.
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
/s/ Steven M. Rauscher Director
- -----------------------------
Steven M. Rauscher
/s/ Fenel M. Eloi Vice President, Treasurer
- ----------------------------- Chief Financial Officer
Fenel M. Eloi (Principal Financial and Accounting Officer)
48
EXHIBIT INDEX
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)
49
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. (17)*
10.29 Collaboration and License Agreement between the Company,
Schering Corporation and Schering-Plough Ltd., dated as of
December 6, 1995.(20)*
10.30 Form of director Stock Option Agreement and schedule of
director options granted (18)
10.31 United States government grant from the National Institutes
of Health, National Institute of Arthritis and
Musculoskeletal and Skin Diseases for Cloning the Gene
Responsible for FSH Muscular Dystrophy dated September 30,
1994, as amended. (17)
10.32 United States government grant from the National Center for
Human Genome Research for Genome Sequencing Center dated
August 16, 1994, as amended. (17)
10.33 United States government grant from the National Center for
Human Genome Research for High Resolution Physical Map of
Chromosome 10 dated April 13, 1995, as amended. (17)
10.34 United States government contract from the National
Institute of Neurological Disorders and Stroke, NIH for
Large Scale Automated DNA Sequencing of Human Genes
Involved in Neurological Disorders dated November 30,
1993, as amended. (17)
10.35 Cooperative agreement from the United States Department of
Energy for Microbial Genome Sequencing dated December 21,
1994, as amended. (17)
10.36 Credit Agreement between the Company and Silicon Valley Bank
dated June 1, 1995, as amended. (17)
10.37 Lease amendment dated November 15, 1996 to certain property in
Watham, MA (21)
11.1 Calculation of Shares Used in Determining Net Income (Loss)
Per Share (21)
23. Consent of Arthur Andersen LLP Independent Public Accounts (21)
* Confidential treatment requested with respect to a portion of this Exhibit.
28
50
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.