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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: AUGUST 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-10824
GENOME THERAPEUTICS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 24, 1997 was approximately $123,461,072.
The number of shares outstanding of the registrant's common stock as of
November 24, 1997 was 18,211,543.
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 January 26, 1998 are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the field
of genomics-based drug discovery -- the identification and functional
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. The Company has entered into several corporate
collaborations in connection with its pathogen and human gene discovery
programs.
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.
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.
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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 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 or the analysis of the
signaling pathways both upstream and downstream from such sequenced genes.
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
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
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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 to 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.
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, positional cloning and functional genomics 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 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.
HIGH-THROUGHPUT SEQUENCING AND FINISHING
GTC has an automated process using DNA sequencers and computers to sequence
and analyze genes in its discovery research programs. Using its technology, the
Company has randomly sequenced the genomes of several pathogens and various
chromosomal regions of the human genome. GTC's sequencing production currently
generates approximately .5 billion nucleotides of raw sequence annually.
Finishing is the "end game" of high-throughput sequencing. It is the
process of producing a complete genome once the majority of the sequence has
been generated by the high-throughput shotgun process. Finishing is necessary
because shotgun sequencing is a random process; the individual clones that are
sequenced contain small randomly selected fragments of the complete genome.
These fragments are assembled using sophisticated computer software which
identifies overlapping regions of sequence and arranges the fragments into large
contiguous sequence regions called "contigs". As more sequence is generated, the
fragments assemble into larger contigs covering more of the genome. At an
appropriate point in a sequencing project, the process moves from a random to a
directed sequencing approach in order to specifically target and obtain sequence
for the missing regions and, thereby, "finish" the genome sequence.
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The Company has developed a proprietary quality control process to assure a
high-quality sequenced genome. Sequence quality is expressed in terms of the
probability of error at any given base location in the sequence. The integrated
computational and biochemical techniques used in the finishing process, when
coupled with the sequence quality measurements generated by the high-throughput
sequencing process, allow the Company to specify the required quality of the
end-product sequence and then direct the process to achieve the desired quality
level.
Finishing is also very important in the later stages of human gene
discovery where the identification of disease-associated mutations requires gene
sequences of much higher quality than in the early stages of gene
identification. The quality of the sequence must be such as to allow the
detection of two different nucleotides in a given position.
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.
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 from 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
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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, the gene must be 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 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 function, including interaction with other proteins and genes. Thus, in
order to bridge the gap between gene discovery and drug discovery target
identification, the Company mobilized a group which solely focuses on Functional
Genomics. This department is developing 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 functional genomics program.
The Company's integrated approach to gene function and signal pathway
analysis is supported by multiple technology platforms. These include:
a) Rapid analysis of differential gene expression profiles. Such
analysis can be applied to identify genes differentially expressed in
normal vs. disease states, or, using cellular model systems developed by
the Company, of genes differentially expressed in response to conditional
and controlled expression of specific disease genes.
b) Functional expression cloning of signaling molecules, associated
with and regulating specific disease pathways. This approach takes
advantage of recent advances in retroviral gene transfer technologies to
search for regulatory components of signaling pathways encoded by complex
cDNA libraries.
c) High-throughput protein-protein interaction screening, to identify
critical interactors and regulators of disease gene-encoded protein
products and their downstream signaling mediators. The Company employs
various in vitro and cell-based technologies to identify physiologically
relevant and novel protein-protein interactions. These include yeast and
mammalian cell-based screening assays. The Company's high-throughput DNA
sequencing, automation, and bioinformatics capabilities provide critical
support to
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the gene identification process, data analysis and management, and the
development of signal pathway databases.
The identification of novel disease pathway-associated signaling
molecules represents a critical step towards the selection of novel
candidate therapeutic targets. Candidate targets are validated by multiple
approaches, including antisense and gene "knock-out" technologies.
High-throughput drug discovery assay development skills, which are already
implemented in the Company's pathogen programs, will be applied to specific
validated targets towards the identification of novel therapeutic agents.
GTC STRATEGY
The Company's objective is to use its sequencing, positional cloning,
functional genomics and bioinformatics capabilities to identify and validate
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 several
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.
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. Through August 1997, the Company has entered into three
collaborations, two of which relates to pathogens and one which relates to
asthma genetics. The collaboration with Astra is for the development of
therapeutic, diagnostic and vaccine products effective against gastrointestinal
infections and other diseases caused by H. pylori, and the one with
Schering-Plough is providing for the use by Schering-Plough of the genomic
sequence of Staph. aureus to
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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 programs. These programs
strengthened the Company's genomics technology base and increased the number and
enhanced the expertise of its scientific personnel. From January 1991 through
August 1997, the United States government awarded the Company grants and
contracts providing for aggregate payments over their terms of approximately $37
million. However, as of the end of fiscal 1997, the Company has substantially
reduced its reliance on government grants and contracts as it implements its
commercial strategy.
NON-EXCLUSIVE DATABASE SUBSCRIPTIONS
In May 1997, the Company introduced to the market a database of genomic
information from over a dozen pathogens and fungi, PathoGenome(TM). This
database is available through non-exclusive subscriptions to pharmaceutical and
other drug discovery companies. Together with the sequence modules, GTC will
offer some functional genomics modules which would allow for exclusive
collaborations. As of August 31, 1997, the Company had subscribed one customer
to the PathoGenome(TM) database; however, subsequent to the fiscal year end, the
company added two additional subscribers to the PathoGenome(TM) database.
DRUG DEVELOPMENT PROGRAMS
In order to maximize the commercial utilization of novel drug discovery
targets derived from GTC's genomics approach, the Company's alliance strategy
with pharmaceutical companies will be complemented with internal drug discovery
programs. These internal drug discovery efforts were initially focused in the
Pathogen area, since GTC has extensive expertise in this field based on its
existing pharmaceutical alliances. The non-exclusive business strategy of the
PathoGenome(TM) database allows GTC to choose its own drug discovery targets.
The Company's internal programs include drug discovery target validation through
gene knock-outs, protein expression and purification, development of
high-throughput assays, and -- via external collaborations -- lead compounds
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 1997, 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
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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 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(TM) and Zantac(TM)), and proton
pump inhibitors (e.g., Prilosec(TM)). 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.
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
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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.
Atherosclerosis. The Company's atherosclerosis programs focuses on
identifying genes which regulate high density lipoproteins (HDL).
Epediomiological studies in man and animal experimentation have established that
HDL is a major risk factor for atherosclerosis. Although there is strong
evidence for genetic determinants, genes that regulate HDL levels have not yet
been identified. In addition, there currently are no effective drugs for raising
HDL levels. Given these opportunities, the company is using positional cloning
to identify genes regulating HDL levels for the purpose of defining new
atherosclerotic drug discovery targets.
Cancer Program. The Company's strategy is to identify novel signaling
molecules in cellular pathways that control tumor cell survival and are linked
to the most commonly mutated cancer genes known to date, such as the p53 tumor
suppressor gene. Multiple technology platforms are used to paint a comprehensive
picture of such cancer gene signaling pathways. These include tools for the
development of biological model systems, differential gene expression profiling,
functional expression cloning, and protein-protein interaction analysis.
The identification of cancer pathway signaling molecules is expected to
provide an important resource of new therapeutic targets whose inhibition
selectively sensitizes tumor cells to cell death, and, thus, the development of
novel anticancer agents that may be administered either alone or in combination
with currently known chemotherapeutic agents to inhibit tumor growth.
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
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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 $10.7 million in license
fees, expense allowances and research funding under the Astra agreement through
August 31, 1997. For the Company's fiscal years ended August 31, 1995, 1996 and
1997, revenue recognized by the Company under its agreement with Astra accounted
for approximately 31%, 21% and 15%, 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. On July 21, 1997, Astra elected to extend the
research program to at least September 1998.
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.
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 has agreed to pay the Company a
minimum of $13.3 million in an up-front license fee, 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
$30.2 million in research funding and milestone payments. The Company received
approximately $11.9 million in an up-front license fee, research funding and
milestone payments through August 31, 1997. For the Company's fiscal years ended
August 31, 1996 and 1997, revenue recognized by the Company under its agreement
with Schering-Plough accounted for approximately 37% and 17%, respectively, 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.
In December 1996, the Company entered into its second research
collaboration and license agreement with Schering-Plough. This agreement calls
for the use of genomics to discover new therapeutics for treating
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asthma. As part of the agreement, the Company will employ its high-throughput
positional cloning, bioinformatics, and genomics sequencing capabilities to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals. Under this agreement, the Company has granted
Schering-Plough exclusive access to (i) certain gene sequence databases made
available under this research program, (ii) information made available to the
Company under certain third party research agreements, (iii) an exclusive
worldwide right and license to make, use and sell pharmaceutical and vaccine
products based on the rights to develop and commercialize diagnostic products
that may result from this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments to the Company, as well as pay royalties to the
Company based upon sales of therapeutics products developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will approximate $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development objectives. The company received approximately $5.8 million in
up-front license fees, research funding and expense allowances through August
31, 1997. For the Company's fiscal year ended August 31, 1997, revenue
recognized under this agreement with Schering-Plough accounted for approximately
23% of the Company's total revenue.
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.
Under the 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 1997, 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, 1997,
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the Company recognized revenue under its government collaborations of $4.5
million which accounted for approximately 23% of the Company's total revenue.
DATABASE SUBSCRIPTIONS
Bayer AG. In May 1997, the Company entered into a license agreement with
Bayer AG, (Bayer) to provide Bayer with a non-exclusive access to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated information
relating to microbial organisms. The subscription agreement calls for the
Company to provide Bayer with periodic data updates, analysis tools and software
support. Under the agreement, Bayer has agreed to pay a license fee, annual
subscription fee and royalties on any molecules developed as a result of access
to the information provided by Pathogenome(TM). The Company retains all rights
associated with protein therapeutic, diagnostic and vaccine use of bacterial
genes or gene products. For the Company's fiscal year ended August 31, 1997,
revenue recognized under this agreement with Bayer accounted for approximately
3% 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
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
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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 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 albeit largely without known function. The Company also believes that
the primary genes that cause or predispose individuals to most common diseases
will eventually be identified and characterized. In addition, the Company
believes that the genomes of many commercially important pathogens will be
sequenced within the next 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
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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 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 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
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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 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, 1997, the Company had 211 full-time employees, of whom 187
were engaged in research and development activities, and 24 in general and
administrative functions. Thirty-nine of the Company's employees hold Ph.D.
degrees and 55 others hold other advanced degrees.
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's executive offices and laboratories are
located at 100 Beaver Street, Waltham Massachusetts, where the Company has
leased approximately 80,000 square feet of space expiring November 15, 2006 with
options to extend for two consecutive five-year periods. The Company has
additional labs at 1365 Main Street where the Company has leased approximately
14,000 square feet of space under a lease expiring December 31, 1997. The
Company plans to consolidate its operations at its Beaver Street facility during
fiscal 1998 at an estimated cost of $6,500,000 which consists of office and
laboratory renovations. As of August 31, 1997, the Company had
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incurred approximately $847,000 of capital improvements and plans to spend an
estimated $5,653,000 during fiscal 1998 on this renovation project.
During fiscal 1997, the Company incurred aggregate rental costs, excluding
maintenance, taxes and utilities, for all facilities of approximately $949,000.
The aggregate minimum rental cost to be paid in fiscal 1998 is expected to be
approximately $1,015,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market System
(ticker symbol "GENE"). The table below sets forth the range of high and low
quotations for each fiscal quarter of the Company during 1997 and 1996 as
furnished by the National Association of Securities Dealers Quotation System.
1997 1996
-------------- --------------
HIGH LOW HIGH LOW
------ ----- ------ -----
First Quarter................. 10 1/2 7 3/8 8 1/2 6 5/8
Second Quarter................ 12 1/2 8 5/8 15 7
Third Quarter................. 10 1/8 5 7/8 15 8 1/2
Fourth Quarter................ 8 7/8 6 1/2 12 1/8 6 1/8
As of November 24, 1997, there were approximately 1,305 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
FOR THE YEAR ENDED AUGUST 31, 1993 1994 1995 1996 1997
- ------------------------------- ----------- ----------- ----------- ----------- ------------
Revenues:
Collaborative research,
licenses, subscription
fees and service.......... $ 1,114,864 $ 251,529 $ 3,870,620 $12,548,724 $ 11,550,786
Government research.......... 5,021,975 6,077,346 7,014,280 6,795,393 4,454,828
Royalties.................... 139,713 148,458 90,541 127,112 647,150
Interest income.............. 173,788 141,584 231,662 1,785,164 2,965,866
Total........................ $ 6,450,340 $ 6,618,917 $11,207,103 $21,256,393 $ 19,618,630
Net income (loss).............. $(3,481,857) $(1,078,718) $ 585,204 $ 1,920,710 $(11,302,391)
Net income (loss) per common
share........................ $ (0.33) $ (0.10) $ 0.05 $ 0.11 $ (0.64)
Weighted average common and
common equivalent shares..... 10,668,628 11,097,224 12,961,734 18,129,794 17,617,614
Cash, cash equivalents,
restricted cash and long and
short-term marketable
securities................... $ 3,915,306 $ 4,311,854 $ 9,011,247 $53,768,562 $ 47,843,597
Working capital................ 3,264,454 3,244,260 5,498,782 25,904,641 35,868,618
Total assets................... 5,288,691 5,910,682 11,528,674 63,279,017 60,688,379
Shareholders' equity........... 3,676,333 4,224,555 7,238,503 54,312,758 43,946,197
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leader in the field of genomics-based drug discovery --
the identification and functional 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 the field. The Company'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 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. The Company
has entered into several corporate collaborations in connection with its
pathogen and human gene discovery programs.
The Company does not anticipate revenues from product sales on a sustained
basis until such time that products based on the Company's research efforts are
commercialized, if at all. The Company's product development strategy is to form
collaborations with pharmaceutical and biotechnology companies generating
revenues from licensing fees, sponsored research and milestone payments.
Additionally, the Company will sell non-exclusive access to its proprietary
genome sequence database, PathoGenome(TM). These collaborations are expected to
result in the discovery and commercialization of novel therapeutics, vaccines
and diagnostics, generating royalty payments to the Company from product sales
downstream. 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 upon product revenues for many years.
For the past several years, the Company's primary sources of revenue have
been government research grants and contracts and collaborative agreements with
pharmaceutical company partners. As of August 31, 1997, the Company had three
collaborative research agreements and one subscriber to its proprietary genome
sequence database, PathoGenome(TM). In September 1997, subsequent to fiscal year
end, the Company entered into its fourth collaborative research agreement and
added two additional subscribers to its PathoGenome(TM) database. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H.
18
19
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 Company's Staph. aureus genomic database to identify new
gene targets for the development of novel antibiotics. In December 1996, the
Company entered into its second research collaboration with Schering-Plough to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop new pharmaceuticals for treating asthma. In September 1997,
subsequent to the fiscal year end, the Company entered into its third research
collaboration with Schering-Plough to use genomics to discover and develop new
pharmaceutical products to treat fungal infections. In May 1997, the Company
sold its first subscription to its proprietary genome sequence database,
PathoGenome(TM) to Bayer AG ("Bayer"). Under the agreement, Bayer will receive
nonexclusive access to the Company's PathoGenome(TM) database and associated
information relating to microbial organisms. In September 1997, subsequent to
the fiscal year end, the Company sold two additional subscriptions to its
PathoGenome(TM) database to Bristol-Myers Squibb and Schering-Plough.
For fiscal 1995, 1996, and 1997, the Company expended $7,892,000,
$14,074,000 and $26,524,000, respectively, on research and development, of which
$6,414,000, $6,150,000 and $4,455,000, respectively, was sponsored by the United
States government. As of August 31, 1997, the Company had outstanding
approximately $2,968,000 of government research grants and contracts under which
services were yet to be performed. These grants and contracts call for services
to be performed over the next 30 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 Congress. As of August 31, 1997, the funded portion of these grants and
contracts was $2,416,000. For fiscal 1995, 1996 and 1997, revenue recognized
pursuant to United States government grants and research contracts accounted for
approximately 63%, 32% and 23%, respectively, of the Company's total revenues.
The Company expects government revenue, in absolute dollars and as a percentage
of total revenues, to decline in the future periods as the Company focuses its
resources towards company-sponsored research and development programs in order
to pursue its strategy of attaining additional corporate partnerships 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 to pursue
this strategy successfully.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $44,556,000 at August 31, 1997. 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 collaborative agreements and government research
grants and contracts. 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
Total revenues decreased 8% from $21,256,000 in fiscal 1996 to $19,619,000
in fiscal 1997 and increased 90% from $11,207,000 in fiscal 1995 to $21,256,000
in fiscal 1996. Collaborative research, licenses and subscription fees decreased
8% from $12,549,000 in fiscal 1996 to $11,551,000 in fiscal 1997 due to lower
license fees and milestone payments received in fiscal 1997 under the Company's
collaborative research agreements with Astra and Schering-Plough. Collaborative
research, licenses and subscription fees increased 224% from $3,871,000 in
fiscal 1995 to $12,549,000 in fiscal 1996 primarily due to revenue received in
fiscal 1996 under the Company's collaborative research agreements with Astra and
Schering-Plough of $4,539,000 and $7,868,000, respectively, consisting of
milestone payments, license fees and sponsored research.
Government research revenue decreased 34% from $6,795,000 in fiscal 1996 to
$4,455,000 in fiscal 1997 and decreased 3% from $7,014,000 in fiscal 1995 to
$6,795,000 in fiscal 1996. The decrease in government
19
20
research revenue in both fiscal 1996 and 1997 was primarily attributable to a
shift in personnel from government research programs to Company sponsored
research and development programs, in particular, the microbial genetic database
program, PathoGenome(TM). 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
expenses. The Company expects government research revenue to continue to
decrease, in absolute dollars and as a percentage of total revenues, in the
future periods as the Company continues to focus its resources in
company-sponsored research and development programs in order to obtain
additional corporate partnerships.
The Company had royalty revenue of $91,000, $127,000 and $647,000 in fiscal
1995, 1996 and 1997, 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 royalties will be received.
Interest income increased 66% from $1,785,000 in fiscal 1996 to $2,966,000
in fiscal 1997 and increased 671% from $232,000 in fiscal 1995 to $1,785,000 in
fiscal 1996 reflecting the increase in funds available for investment as a
result of (i) proceeds received from the sale of Common Stock through a public
offering in February 1996, (ii) the sale of Common Stock in a private placement
in March 1995 and (iii) payments received under the Company's collaborative
agreements.
COST AND EXPENSES
Total cost and expenses, excluding noncash charges for stock option grants,
increased 81% from $17,015,000 in fiscal 1996 to $30,842,000 in fiscal 1997 and
increased 61% from $10,596,000 in fiscal 1995 to $17,015,000 in fiscal 1996.
Research and development expense, which includes company-sponsored research and
development and research funded pursuant to arrangements with the Company's
corporate collaborators increased 179% from $7,924,000 in fiscal 1996 to
$22,069,000 in fiscal 1997 and increased 436% from $1,478,000 in fiscal 1995 to
$7,924,000 in fiscal 1996. The increase in research and development expenses in
both fiscal 1996 and fiscal 1997 was primarily attributable to increases in both
personnel and laboratory expenses associated with the Company's expansion of its
pathogen, microbial genetic database, human gene discovery and functional
genomics research 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 in
the future periods, particularly with respect to its fungal, osteoporosis,
atherosclerosis, oncology and functional genomics projects.
The cost of government research decreased 28% from $6,150,000 in fiscal
1996 to $4,455,000 in fiscal 1997 and decreased 4% from $6,414,000 in fiscal
1995 to $6,150,000 in fiscal 1996. The decrease in cost of government research
in both fiscal 1996 and fiscal 1997 was due primarily to a decrease in
government research revenue. Cost of government research, as a percentage of
government research revenue, was 100%, 91% and 91% in fiscal 1997, 1996 and
1995, respectively.
Selling, general and administrative expenses increased 35% from $2,727,000
in fiscal 1996 to $3,686,000 in fiscal 1997 and increased 4% from $2,618,000 in
fiscal 1995 to $2,727,000 in fiscal 1996. The increase in selling, general and
administrative expenses in fiscal 1997 was primarily due to increases in payroll
and related expenses and legal fees. The increase in legal fees in fiscal 1997
was directly attributable to the Company's new collaborative agreements with
Schering-Plough, Bayer and Bristol-Myers Squibb. The increase in selling,
general and administrative expenses in fiscal 1996 was primarily due to
increases in payroll and related expenses and consulting fees.
Interest expense increased 195% from $214,000 in fiscal 1996 to $631,000 in
fiscal 1997 and increased 150% from $86,000 in fiscal 1995 to $214,000 in fiscal
1996. The increase in interest expense for each period was attributable to
increases in the Company's outstanding balance under its capital lease
arrangements.
In November and December 1995, 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
20
21
shareholder approval, and the per share exercise price of the options.
Additionally, in March 1997, the Company granted options valued at approximately
$51,000 to certain consultants in lieu of cash for services. The Company
recorded $79,000, $2,320,000 and $26,000 as compensation expense in fiscal 1997,
1996 and 1995, respectively.
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 and subscription fees, borrowings under equipment lending facilities
and capital leases and proceeds from sale of equity securities.
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
research agreement with Astra under which it received $3,500,000.
In fiscal 1996, the Company received approximately $11,671,000 in
collaborative payments from its collaborative partners consisting of an up-front
license fee, milestone payments and sponsored research funding. In fiscal 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. The Company also 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 from the exercise of stock
options and warrants during fiscal 1996.
In fiscal 1997, the Company received payments of $13,496,000 from its
collaborative partners consisting of an up-front license fee, subscription fee,
expense allowance, milestone payments and sponsored research funding.
As of August 31, 1997, the Company had cash, cash equivalents, restricted
cash and long and short-term marketable securities of approximately $47,844,000.
The Company has various arrangements under which it can finance 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, debt service coverage and minimum restricted cash balances. At August 31,
1997, the Company had approximately $6,420,000 available under these
arrangements for future borrowings and had an outstanding balance of
approximately $10,744,000 which is repayable over the five year period ending
August 2002. Under one of these arrangements, the Company received a $2,500,000
advance in July 1997 to finance office and laboratory renovations at its Beaver
Street facility of which approximately $1,653,000 had not been expended at
August 31, 1997.
The Company's operating activities used cash of approximately $4,757,000 in
fiscal 1997 and provided cash of approximately $2,976,000 and $2,693,000 in
fiscal 1996 and 1995, respectively. The Company primarily used cash in fiscal
1997 to fund the Company's operating loss which was partially offset by
increases in deferred revenue, accounts payable and accrued liabilities. Net
cash provided in fiscal 1995 and 1996 was comprised primarily of deferred
revenue, accounts payable, accrued liabilities and operating income.
The Company's investing activities provided cash of approximately
$2,257,000 and $5,600 in fiscal 1997 and 1995, respectively, and used cash of
approximately $40,258,000 in fiscal 1996. 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 financed
$1,340,000, $4,724,000 and $5,843,000 of property and equipment in fiscal 1995,
1996 and 1997, respectively, under equipment financing arrangements.
Capital expenditures totaled $6,138,000 during fiscal 1997 consisting of
laboratory, computer and office equipment. The Company currently estimates that
it will acquire approximately $6,200,000 in capital equipment in fiscal 1998
consisting of primarily computer and laboratory equipment which it intends to
finance under existing and new financing arrangements. The Company also plans to
consolidate its operations at its Beaver Street facility during fiscal 1998 at
an estimated cost of $6,500,000 which consists of office and
21
22
laboratory renovations. As of August 31, 1997, the Company had incurred
approximately $847,000 of capital improvements and plans to spend an estimated
$5,653,000 during fiscal 1998 on this renovation project. The Company plans to
utilize existing and new capital lease and equipment financing arrangements to
finance substantially all of these capital improvements.
Financing activities provided cash of approximately $422,000, $42,075,000
and $2,074,000 in fiscal 1997, 1996 and 1995, respectively, primarily from the
sale of equity securities and the exercise of stock options and warrants, net of
payments of capital lease obligations.
At August 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 and $1,128,000, respectively. 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 in
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 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 January 26, 1998.
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.
22
23
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, 1996 and 1997.................................................. F-3
Consolidated Statements of Operations for the Years Ended August 31, 1995, 1996 and 1997................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended August 31, 1995, 1996 and 1997.......... F-5
Consolidated Statements of Cash Flows for the Years Ended August 31, 1995, 1996 and 1997.................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
F-1
24
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, 1996 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
October 10, 1997
F-2
25
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31,
---------------------------
1996 1997
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents................................................. $10,679,287 $ 8,602,698
Marketable securities..................................................... 17,429,488 34,814,601
Accounts receivable....................................................... 1,338,418 55,142
Interest receivable....................................................... 1,296,657 1,280,611
Unbilled costs and fees................................................... 345,773 140,320
Note receivable from officer.............................................. -- 160,000
Prepaid expenses and other current assets................................. 552,903 408,240
----------- -----------
Total current assets............................................... 31,642,526 45,461,612
----------- -----------
Equipment and Leasehold Improvements, at cost:
Laboratory and scientific equipment....................................... 6,403,221 11,855,630
Equipment and furniture................................................... 581,533 792,342
Leasehold improvements.................................................... 1,939,545 1,964,981
Construction-in-progress.................................................. 77,027 1,111,526
----------- -----------
9,001,326 15,724,479
Less -- Accumulated depreciation............................................ 3,266,068 5,352,999
----------- -----------
5,735,258 10,371,480
Restricted Cash............................................................. 195,500 301,500
Long-Term Marketable Securities............................................. 25,464,287 4,124,798
Other Assets................................................................ 241,446 428,989
----------- -----------
$63,279,017 $60,688,379
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................... $ 864,279 $ 1,288,391
Accrued expenses.......................................................... 1,731,220 2,373,788
Deferred revenue.......................................................... 1,035,504 2,335,695
Current maturities of long-term obligations............................... 2,106,882 3,595,120
----------- -----------
Total current liabilities.......................................... 5,737,885 9,592,994
----------- -----------
Long-Term Obligations, net of current maturities............................ 3,228,374 7,149,188
----------- -----------
Commitments and Contingencies (Note 4)
Shareholders' Equity:
Common stock, $.10 par value --
Authorized -- 34,375,000 shares
Issued and outstanding -- 17,460,966 and 17,782,929 shares at August 31,
1996 and 1997, respectively............................................ 1,746,097 1,778,293
Series B restricted stock, $.10 par value --
Authorized -- 625,000 shares
Issued and outstanding -- none.......................................... -- --
Additional paid-in capital................................................ 86,067,176 86,942,034
Accumulated deficit....................................................... (33,253,515) (44,555,906)
Deferred compensation..................................................... (247,000) (218,224)
----------- -----------
Total shareholders' equity......................................... 54,312,758 43,946,197
----------- -----------
$63,279,017 $60,688,379
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
26
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31,
--------------------------------------------
1995 1996 1997
----------- ----------- ------------
Revenues:
Collaborative research, licenses and subscription
fees.......................................... $ 3,870,620 $12,548,724 $ 11,550,786
Government research.............................. 7,014,280 6,795,393 4,454,828
Royalties........................................ 90,541 127,112 647,150
Interest income.................................. 231,662 1,785,164 2,965,866
----------- ----------- ------------
Total revenues........................... 11,207,103 21,256,393 19,618,630
----------- ----------- ------------
Costs and Expenses:
Research and development......................... 1,478,247 7,924,113 22,068,996
Cost of government research...................... 6,414,148 6,150,234 4,454,828
Selling, general and administrative.............. 2,617,787 2,726,855 3,686,385
Interest expense................................. 85,759 214,264 631,442
Noncash charge for stock option grants........... 25,958 2,320,217 79,370
----------- ----------- ------------
Total costs and expenses................. 10,621,899 19,335,683 30,921,021
----------- ----------- ------------
Net income (loss)........................ $ 585,204 $ 1,920,710 $(11,302,391)
=========== =========== ============
Net Income (Loss) per Common Share:
Primary.......................................... $ 0.05 $ 0.11 $ (.64)
=========== =========== ============
Fully diluted.................................... $ 0.04 $ -- $ --
=========== =========== ============
Weighted Average Number of Common and Common
Equivalent Shares Outstanding:
Primary.......................................... 12,961,734 18,129,794 17,617,614
=========== =========== ============
Fully diluted.................................... 13,036,741 -- --
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
27
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
---------- ---------- ----------- ------------ ------------ -------------
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
Exercise of stock
options........... 321,963 32,196 824,264 -- -- 856,460
Deferred compensation
from grant of
stock options..... -- -- 50,594 -- (50,594) --
Amortization of
deferred
compensation...... -- -- -- -- 79,370 79,370
Net loss............. -- -- -- (11,302,391) -- (11,302,391)
---------- ---------- ----------- ------------ ----------- ------------
BALANCE, AUGUST 31,
1997................. 17,782,929 $1,778,293 $86,942,034 $(44,555,906) $ (218,224) $ 43,946,197
========== ========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
28
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31,
----------------------------------------------
1995 1996 1997
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 585,204 $ 1,920,710 $(11,302,391)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization....................... 350,230 887,907 2,382,286
Loss on disposal of fixed assets.................... -- -- 227,864
Deferred compensation............................... 25,958 2,320,217 79,370
Changes in assets and liabilities--
Accounts receivable.............................. 77,544 (1,057,514) 1,283,276
Interest receivable.............................. (47,186) (1,216,768) 16,046
Unbilled costs and fees.......................... (29,960) (86,768) 205,453
Loan to officer.................................. -- -- (160,000)
Prepaid expenses and other current assets........ (27,754) (502,763) 144,663
Accounts payable................................. 124,568 454,997 424,112
Accrued expenses................................. 897,974 (5,349) 642,568
Deferred contract revenue........................ 736,057 261,456 1,300,191
----------- ------------ ------------
Total adjustments.............................. 2,107,431 1,055,415 6,545,829
----------- ------------ ------------
Net cash provided by (used in) operating
activities................................... 2,692,635 2,976,125 (4,756,562)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.................... (5,332,248) (49,553,183) (20,575,625)
Proceeds from the sale of marketable securities....... 6,000,000 9,000,000 24,530,000
Purchases of equipment and leasehold improvements..... (97,016) (164,211) (1,370,028)
(Increase) decrease in restricted cash................ (689,797) 588,971 (106,000)
(Increase) decrease in other assets................... 124,687 (129,233) (220,850)
----------- ------------ ------------
Net cash provided by (used in) investing
activities................................... 5,626 (40,257,656) 2,257,497
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, including tax
benefits............................................ 419,399 1,200,755 856,460
Proceeds from the exercise of warrants................ -- 110,451 --
Proceeds from sale of common stock and warrants....... 1,983,387 41,522,122 --
Proceeds from long-term obligations................... -- -- 2,500,000
Payments on long-term obligations..................... (329,025) (758,694) (2,933,984)
----------- ------------ ------------
Net cash provided by financing activities...... 2,073,761 42,074,634 422,476
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 4,772,022 4,793,103 (2,076,589)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 1,114,162 5,886,184 10,679,287
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 5,886,184 $ 10,679,287 8,602,698
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year......................... $ 85,759 $ 214,264 631,442
=========== ============ ============
Income taxes paid during the year..................... $ 6,824 $ 43,240 36,612
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital
leases.............................................. $ 1,340,611 $ 4,723,678 $ 5,843,037
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
29
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. (the Company) is a leader in the field of
genomics-based drug discovery -- the identification and functional
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 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 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 and royalties are recognized as earned.
Unbilled costs and fees represent revenue recognized prior to billing. Deferred
revenue represents amounts received prior to revenue recognition.
Subscription fee revenues from the PathoGenome(TM) database are recognized
ratably over the life of the subscription agreement.
(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 seven years. The majority of the Company's equipment
and leaseholds are financed through capital leases. Construction-in-progress
primarily consists of renovations and expansions of the Company's headquarters.
(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.
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
SFAS No. 128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or potential
common stock.
This statement is effective for fiscal years ending after December 15, 1997
and early adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt this
statement for its fiscal year ending August 31, 1998. For the years ended August
31,
F-7
30
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, 1996 and 1997, basic earnings per share would have been $.05, $.12 and
$(.64), respectively. Diluted earnings per share would have been $.04, $.11 and
$(.64), respectively, for the same periods.
(d) Concentration of Credit Risk
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 significant off-balance-sheet or
concentration of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company maintains its cash
and cash equivalents and marketable securities balances with several
nonaffiliated institutions.
The Company had revenues from the following significant customers:
PERCENTAGE OF
NUMBER OF TOTAL REVENUES
SIGNIFICANT -------------------
CUSTOMERS A B C
--------- --- --- ---
Year Ended August 31,
1995...................................... 2 31% 63% --%
1996...................................... 3 21 32 37
1997...................................... 3 15 23 41
The Company had the following significant accounts receivable balances from
the following customers:
PERCENTAGE
OF ACCOUNTS
NUMBER OF RECEIVABLE
SIGNIFICANT --------------
CUSTOMERS A B
--------- ----- -----
As of August 31,
1996........................................... 2 25% 75%
1997........................................... 1 100% --%
(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.
(g) Loan to Officer
On December 6, 1996, the Company loaned $160,000 to an officer of the
Company. The loan bears interest at prime plus 1% and is due August 31, 1998.
(h) Reclassifications
The Company has reclassified certain prior year information to conform with
the current year's presentation.
F-8
31
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At August 31, 1997, 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. 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.
The aggregate fair value and costs of the investments at August 31, 1996
and 1997 were as follows:
1996 1997
------------------------- -------------------------
AMORTIZED MARKET AMORTIZED MARKET
MATURITY COST VALUE COST VALUE
---------------------------------- ----------- ----------- ----------- -----------
Less than one year--
Corporate and other debt
securities................... $17,429,488 $17,413,011 $34,814,601 $34,806,434
Greater than one year--
U.S. Government and agency
securities................... $ 2,998,931 $ 2,988,420 $ 654,529 $ 657,406
Corporate and other debt
securities (average maturity
of 1.7 and 1.5 years in 1996
and 1997, respectively)...... 22,465,356 22,296,279 3,470,269 3,462,547
----------- ----------- ----------- -----------
$25,464,287 $25,284,699 $ 4,124,798 $ 4,119,953
=========== =========== =========== ===========
The Company has $195,500 and $301,500 in restricted cash at August 31, 1996
and 1997, respectively, in connection with certain long-term obligations (see
Note 5).
(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, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 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 adjustment 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, the Company utilized approximately $1,100,000
and $4,398,000, respectively, of net operating loss carryforwards to offset
taxable income. In the year ended August 31, 1997, the Company did not utilize
any loss carryforwards.
F-9
32
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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........................................ 6,886,000 208,000 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................................... 28,498,000 8,000 37,000
The components of the deferred tax assets recognized in the Company's
balance sheet at the respective dates are as follows:
AUGUST 31,
-----------------------------
1996 1997
------------ ------------
Net operating loss carryforwards........................ $ 11,997,000 $ 17,743,000
Research and development credits........................ 677,000 677,000
Investment tax credits.................................. 451,000 451,000
Other, net.............................................. 1,173,000 1,856,000
------------ ------------
14,298,000 20,727,000
Valuation allowance..................................... (14,298,000) (20,727,000)
------------ ------------
$ -- $ --
============ ============
The valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax assets.
(4) COMMITMENTS
(a) Lease Commitments
At August 31, 1997, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006. Minimum
lease payments and facilities charges under the leases at August 31, 1997 are as
follows:
Year Ending August 31,
1998.......................................... $ 1,285,061
1999.......................................... 1,171,325
2000.......................................... 1,171,325
2001.......................................... 1,171,325
2002.......................................... 1,219,780
Thereafter.................................... 5,174,025
-----------
$11,192,841
===========
Rental expense was approximately $411,000, $472,000 and $949,000 in the
years ended August 31, 1995, 1996 and 1997, respectively. Rental expense for
fiscal 1997 includes the expansion of laboratory and office space at its primary
facility.
F-10
33
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Research and Development Commitments
The Company has entered three research and development alliances with
companies and research institutions. These agreements provide for the funding of
research activities by the Company and the possibility of royalties and, in some
cases, license fees. At August 31, 1997, the Company's obligations under these
arrangements totaled $1,715,000, of which $1,161,000 and $554,000 was payable
for the fiscal years ending August 31, 1998 and 1999, respectively.
(c) 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.
(5) LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment line of credit
under which it can finance up to $6,000,000 of laboratory, computer and office
equipment. Borrowings are payable in 48 monthly installments at a variable
interest rate of prime (8.5% as of August 31, 1997) plus one-quarter of one
percent. At any time during the term of this agreement, the Company may elect to
convert to a fixed rate loan at the prevailing interest rate. 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 and debt service
coverage. The Company has approximately $2,920,000 available under this
equipment line of credit at August 31, 1997.
On July 31, 1997, the Company entered into a financing arrangement under
which it can finance up to $6,000,000 of laboratory and office renovations at
its Beaver Street facility. The principal amount of the loan will be repaid over
48 consecutive months commencing July 1, 1998 at the prevailing 12 month
Eurodollar rate (12-month Eurodollar rate was 6% as of August 31, 1997) plus
1 1/2%. The Company is required to maintain certain financial ratios pertaining
to minimum cash balances, debt to net worth and tangible net worth. At August
31, 1997, the Company borrowed $2,500,000 under this arrangement; of which
approximately $1,653,000 has not been utilized to finance the Company's
purchases, and is included in cash and cash equivalents. The Company has
approximately $3,500,000 available under this financing arrangement at August
31, 1997. The Company is required to maintain certain restricted cash balances,
upon the occurrence of certain events, as defined.
The Company has entered into capital lease arrangements under which it
financed approximately $9,214,000 of certain laboratory, computer and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 7.52% 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 debt service
coverage. The Company has no additional borrowing capacity under these capital
lease agreements at August 31, 1997.
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.
F-11
34
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term obligations at August 31, 1997 are as follows:
Year Ending August 31,
1998................................................... $ 4,388,053
1999................................................... 4,134,793
2000................................................... 1,857,887
2001................................................... 1,416,028
2002................................................... 616,420
-----------
Total minimum payments............................ 12,413,181
Less -- Amount representing interest................... 1,668,873
-----------
Present value of total minimum payments.............. 10,744,308
Less -- Current portion................................ 3,595,120
-----------
$ 7,149,188
===========
(6) 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. In addition, 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 and 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 an
aggregate of 380,000 shares of common stock to four members of the Board of
Directors and the Company's Chief Executive Officer. The options were granted
with an exercise price of $7.25 and $8.87 per share, respectively, the fair
market value on the date of grant, and vest at the end of five years or in
earlier installments based upon the average closing price of the Company's
common stock, as defined.
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
F-12
35
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and March 12, 1997, the Board of Directors of the Company
granted nonqualified stock options outside the 1995 Plan for the purchase of
600,000 and 150,000 shares of common stock, respectively, to two executives of
the Company. The options were granted with an exercise price of $7.44 and $9.06
per share, respectively, the fair market value on the date of grant and vest at
the end of seven years or in earlier installments based upon the average closing
price of the Company's common stock, as defined.
During fiscal 1997, the Board of Directors of the Company granted
nonqualified stock options outside of the 1995 Plan for the purchase of an
aggregate 65,000 shares of common stock to a director of the company and two
consultants. The options were granted with an exercise price equal to the fair
market price at the date of grant and vest over a four-year period. In
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company computed the fair value of the options granted to the consultants at
$50,594 using the Black-Scholes option pricing model. Of this amount, $5,270 was
charged to operations for the year ended August 31, 1997 and the remaining
amount will be amortized over the remaining vesting periods of the options.
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 for options granted to non-employees. Deferred compensation for
employees is recorded in an amount equal to the excess of the fair market value
per share over the exercise price times the number of options granted. In 1996
and 1997, the Company recorded $2,565,400 and $50,594, respectively, of deferred
compensation for certain options described above. Deferred compensation is being
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, $2,320,000 and $79,000 for the years ended August 31,
1995, 1996 and 1997, respectively.
There were 154,430 common shares available for future grant at August 31,
1997 under the 1995 Plan. The following is a summary of all stock option
activity:
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE RANGE AVERAGE
--------- -------------- --------
Outstanding, August 31, 1994................... 3,499,702 $ .20 - $ 8.00 $1.87
Granted...................................... 355,275 $2.03 - $ 5.34 3.12
Exercised.................................... (244,166) $ .81 - $ 4.00 1.72
Canceled..................................... (70,624) $ .81 - $ 5.25 1.60
--------- -------------- -----
Outstanding, August 31, 1995................... 3,540,187 $ .20 - $ 8.00 $2.01
Granted...................................... 1,361,775 $1.56 - $14.50 $7.96
Exercised.................................... (496,756) $ .20 - $ 8.00 2.16
Canceled..................................... (56,992) $1.56 - $ 7.25 2.25
--------- -------------- -----
Outstanding, August 31, 1996................... 4,348,214 $ .20 - $14.50 $3.85
Granted...................................... 797,950 $6.19 - $ 9.69 8.58
Exercised.................................... (321,963) $ .88 - $ 7.25 2.66
Canceled..................................... (178,513) $1.56 - $14.50 6.86
--------- -------------- -----
Outstanding, August 31, 1997................... 4,645,688 $ .20 - $14.50 $4.63
========= ============== =====
Exercisable.................................. 2,795,938 $ .20 - $14.50 $2.78
========= ============== =====
F-13
36
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Pro Forma Disclosure of Stock-Based Compensation
The Company applies SFAS No. 123, Accounting for Stock-Based Compensation,
which requires the measurement of the fair value of stock options or warrants
granted to employees to be included in the consolidated statement of operations
or, alternatively, disclosed in the notes to consolidated financial statements.
The Company has determined that it will continue to account for stock-based
compensation for employees and non-employee directors under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company records the fair market value of stock options and
warrants granted to nonemployees in the consolidated statement of operations.
The Company has computed the pro forma disclosures required under SFAS No. 123
for stock options granted in 1996 and 1997 using the Black-Scholes option
pricing model. The weighted average assumptions used for 1996 and 1997 are as
follows:
1996 1997
-------------- --------------
Risk-free interest rate..................... 6.13% - 6.52% 6.20% - 6.73%
Expected life............................... 7 years 7 years
Expected volatility......................... 65% 65%
The total value of the options granted to employees during fiscal 1996 and
fiscal 1997 was computed as $5,691,880 and $3,857,026, respectively. Of these
amounts, $811,018 and $2,951,660 would be charged to operations for the years
ended August 31, 1996 and 1997, respectively. The remaining amount,
approximately $3,067,000, would be amortized over the remaining vesting periods.
The pro forma effect of these option grants for the years ended August 31, 1996
and 1997 is as follows:
1996 1997
-------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ------------ ------------
Net income (loss)................ $ 1,920,710 $ 1,109,692 $(11,302,391) $(14,254,051)
========= ========= =========== ===========
Net income (loss) per share...... $ 0.11 $ 0.06 $ (0.64) $ (0.81)
========= ========= =========== ===========
The weighted average remaining contractual life of options outstanding at
August 31, 1997 was 7.12 years. The resulting pro forma compensation expense may
not be representative of the amount to be expected in future years, as the pro
forma expense may vary based on the number of options granted. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
(e) 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 6(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. These warrants are
outstanding and exercisable as of August 31, 1997.
F-14
37
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCENTIVE SAVINGS PLAN 401(k)
The Company maintains an incentive savings plan (the Plan) for the benefit
of all employees. On October 1, 1996, the Company changed its matching
contribution from 50% of the first 2% of salary and 25% of the next 4% of
salary, limited to the first $50,000 of annual salary to 100% of the first 2% of
salary and 50% of the next 2% of salary, limited to the first $100,000 of annual
salary. The Company contributed $43,533, $58,354 and $165,778 to the Plan for
the years ended August 31, 1995, 1996 and 1997, respectively.
(8) COLLABORATION AGREEMENTS
(a) Astra Hassle 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. plyori 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. On July 21, 1997,
Astra elected to extend the research program to at least September 1998.
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 was
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, $4,539,496 and $2,859,262 in revenue
under the agreement in the years ended August 31, 1995, 1996 and 1997,
respectively. The revenue in the year ended August 31, 1995 consisted of a
nonrefundable license fee and capital allowance. The revenue in the years ended
August 31, 1996 and 1997 consisted of milestone payments and collaborative
research revenues. The Company has recorded $650,504 and $502,996 of deferred
revenue under this agreement at August 31, 1996 and 1997, respectively.
(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
F-15
38
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 has agreed to pay the Company a
minimum of $13.3 million for an up-front license fee, 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 $30.2 million
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.
The Company has recognized $7,867,579 and $3,364,810 in revenue in the
years ended August 31, 1996 and 1997, respectively, under this collaborative
agreement. The revenue in the year ended August 31, 1996 consisted of a license
fee, collaborative research revenue and milestone payments. The revenue in the
year ended August 31, 1997 consisted of collaborative research revenue. The
Company recorded $382,421 and $17,610 as deferred revenue at August 31, 1996 and
1997, respectively.
In December 1996, the Company entered into its second research
collaboration and license agreement with Schering-Plough. This agreement calls
for the use of genomics to discover new therapeutics for treating asthma. As
part of the agreement, the Company will employ its high-throughput positional
cloning, bioinformatics, and genomics sequencing capabilities to identify genes
and associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third-party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments to the Company, as well as pay royalties to the
Company based on sales of therapeutics products developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will approximate $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development milestones.
The Company has recognized $4,603,805 in revenue in the year ended August
31, 1997 under this agreement, which consisted of a license fee, expense
allowance and collaborative research revenues. The Company recorded $1,399,803
as deferred revenue at August 31, 1997.
F-16
39
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) DATABASE SUBSCRIPTIONS
In May 1997, the Company entered into a license agreement with Bayer AG,
(Bayer) to provide Bayer with nonexclusive access to the Company's proprietary
genome sequence database, PathoGenome(TM) and associated information relating to
microbial organisms. The subscription agreement calls for the Company to provide
Bayer with periodic data updates, analysis tools and software support. Under the
agreement, Bayer has agreed to pay a license fee, an annual subscription fee and
royalties on any molecules developed as a result of access to the information
provided by the PathoGenome(TM) database.
The Company retains all rights associated with protein therapeutic,
diagnostic and vaccine use of bacterial genes or gene products.
The Company has recognized $666,667 in revenue under this agreement in the
year ended August 31, 1997 consisting of license and subscription fees. The
Company recorded $333,333 as deferred revenue at August 31, 1997 under this
agreement.
(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 and beyond. The Company may
terminate this agreement upon 90 days notice. The Company recorded a $115,000,
$135,000 and $20,000 expense under this agreement in the years ended August 31,
1995, 1996 and 1997, respectively, primarily relating to the collaborative
agreements with Astra and Schering-Plough, as well as the subscription agreement
with Bayer. In 1997, the Company discontinued use of its multiplex sequencing
technology; however, the Company will continue to incur royalty expense for
future sales, if any, on products developed using the multiplex sequencing
technology.
(11) ACCRUED EXPENSES
Accrued expenses consist of the following:
AUGUST 31,
-------------------------
1996 1997
---------- ----------
Payroll and related expenses................................ $ 893,303 $1,130,296
Professional fees........................................... 77,918 321,626
Facilities.................................................. 34,276 157,228
Employee relocation......................................... 137,622 106,764
License and other fees...................................... 335,434 355,434
All other................................................... 252,667 302,440
---------- ----------
$1,731,220 $2,373,788
========== ==========
(12) SUBSEQUENT EVENTS
(a) Bristol-Myers Squibb
On September 16, 1997, the Company entered into a license agreement with
Bristol-Myers Squibb to provide Bristol-Myers Squibb with nonexclusive access to
the Company's proprietary genome sequence database, PathoGenome(TM) and
associated information relating to microbial organisms. The subscription
agreement calls for the Company to provide Bristol-Myers Squibb with periodic
data updates, analysis tools and software support. Under the agreement,
Bristol-Myers Squibb has agreed to pay annual subscription fees,
F-17
40
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
milestones and royalties on any molecules developed as a result of access to the
information provided by PathoGenome(TM). The Company retains rights associated
with therapeutic, diagnostic and vaccine use of bacterial genes or gene
products.
(b) Schering-Plough
On September 24, 1997, the Company entered into a research collaboration
and license agreement with Schering Corporation and Schering-Plough Ltd.
(collectively Schering-Plough) to use genomics to discover and develop new
pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the collaboration related to two fungal pathogens, Candida albicans
and Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
right to make, use and sell products based on the technology developed in the
course of the research program. In return, Schering-Plough has agreed to fund a
research program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $30.7 million, excluding royalties. Of
the total potential payments, approximately $7.7 million represents license fees
and research payments and $23 million represents milestone payments based on
achievement of research and product development milestones.
In a separate agreement, the Company entered into a license agreement with
Schering-Plough to provide Schering-Plough with nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome(TM) and associated
information relating to microbial organisms. The subscription agreement calls
for the Company to provide Schering-Plough with periodic data updates, analysis
tools and software support. Under the agreement, Schering-Plough has agreed to
pay annual subscription fees and royalties on any molecules developed as a
result of access to the information provided by PathoGenome(TM) database. The
Company retains certain rights to use the bacterial genes or gene products as
therapeutics, diagnostics and vaccines.
F-18
41
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 26, 1997.
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/ 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 Sr. Vice President, Treasurer
- ------------------------------------------ Chief Financial Officer
Fenel M. Eloi (Principal Financial and Accounting Officer)
42
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)
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)*
43
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)
10.38 Collaboration and License Agreement between the Company, Schering Corporation and
Schering-Plough Ltd., dated as of December 20, 1996(22)*
10.39 Credit agreement between the Company and Fleet National Bank dated February 28,
1997(23)
10.40 Credit agreement between the Company and Sumitomo Bank, Limited dated July 31,
1997(24)
11.1 Calculation of Shares Used in Determining Net Income (Loss) Per Share(24)
23. Consent of Arthur Andersen LLP Independent Public Accounts(24)
27. Financial Data Schedule(24)
- ---------------
* Confidential treatment requested with respect to a portion of this Exhibit.
44
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.
(15) Filed as an Exhibit of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994 and incorporated herein by reference.
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 and incorporated herein by reference.
(17) Filed as an Exhibit to the Company's Annual Report on Form 10-K/A3 for the
year ended August 31, 1995 and incorporated herein by reference.
(18) Filed as an Exhibit to the Company Registration Statement on Forms S-8
(File No. 33-61191) and incorporated herein by reference.
(19) Filed as an Exhibit to the Company's amended Annual Report on Form 10-K/A
for the fiscal year ended August 31, 1995 and incorporated herein by
reference.
(20) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 25, 1995 and incorporated herein by reference.
(21) Filed as an Exhibit to the Company's 10-K for fiscal year ended
August 31, 1996.
(22) Filed as an Exhibit to the Company's 10-Q/A for the quarter ended
March 1, 1997.
(23) Filed as an Exhibit to the Company's 10-Q for the quarter ended
May 31, 1997.
(24) Filed herewith.