As filed with the Securities and Exchange Commission on June 30, 2000
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------------------------------------------------------------
FORM 20-F
-------------------------------------------------------------------------------
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|_| For the fiscal year ended: December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-29526
GENSET
(Exact name of Registrant as specified in its charter)
France
(Jurisdiction of incorporation or organization)
24, rue Royale
75008 Paris, France
+33 1 55 04 59 00
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each representing one-third of one Ordinary Share
(Title of Class)
Ordinary Shares, nominal value 3 euros per share*
(Title of Class)
* Approved for listing (not for trading), but only in connection
with the registration of American Depositary Shares, pursuant to
the requirements of the NASDAQ National Market.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding Ordinary Shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report:
Ordinary Shares, nominal value euro 3 per share: 7,479,606
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 which financial statement item the Registrant has
elected to follow:
Item 17 |_| Item 18 |x|
-------------------------------------------------------------------------------
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction........................................................... 3
Exchange Rate Information.............................................. 3
Forward-Looking Statements............................................. 4
PART I
ITEM 1: Description of Business............................... 4
ITEM 2: Description of Property............................... 26
ITEM 3: Legal Proceedings..................................... 27
ITEM 4: Control of Registrant................................. 27
ITEM 5: Nature of Trading Market.............................. 28
ITEM 6: Exchange Controls and Other Limitations Affecting
Security Holders...................................... 31
ITEM 7: Taxation.............................................. 33
ITEM 8: Selected Consolidated Financial Data.................. 40
ITEM 9: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 41
ITEM 9A: Market Risk........................................... 47
ITEM 10: Directors and Officers of the Registrant.............. 47
ITEM 11: Compensation of Directors and Officers................ 55
ITEM 12: Options to Purchase Securities from Registrant or
Subsidiaries.......................................... 55
ITEM 13: Interest of Management in Certain Transactions........ 57
PART II
ITEM 14: Description of Securities to be Registered............ 57
PART III
ITEM 15: Defaults upon Senior Securities....................... 58
ITEM 16: Changes in Securities and Changes in Security for
Registered Securities
and Use of Proceeds................................... 58
PART IV
ITEM 17: Financial Statements.................................. 59
ITEM 18: Financial Statements.................................. 59
ITEM 19: Index to Financial Statements and Exhibits and
Signature............................................. 60
</TABLE>
2
<PAGE>
Introduction
Genset's consolidated financial statements that form part of this Annual
Report on Form 20-F (the "Annual Report") are presented in euros and prepared
in accordance with generally accepted accounting principles in the United
States ("U.S. GAAP").
Solely for the convenience of the reader, this Annual Report contains
translations of certain euro amounts into U.S. dollars at specified rates.
These translations should not be construed as representations that euro amounts
represent such U.S. dollar amounts or could be converted into U.S. dollars at
the rates indicated or at any other rate. Unless otherwise stated, the
translations of euros into U.S. dollars have been made at the rate of 0.993
euros to $1.00, or $1.007 to 1.00 euro, the noon buying rate in New York City
for cable transfers in euros as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 1999.
On December 31, 1998, France and ten other countries of the fifteen
countries of the European Union established fixed conversion rates between
their existing sovereign currencies and the euro. Following introduction of the
euro on January 1, 1999, all capital markets of these eleven countries
converted to euros and the share prices of all companies listed on these
markets have been officially quoted in euros. Effective January 1, 1999, the
Company converted its accounts from French francs into euros using the official
exchange rate fixed on December 31, 1998 (1 euro = FF 6.55957 or FF 1 =
0.152449 euros).
-------------------------------------------------------------------------------
All references herein to "United States" are to the United States of
America, references to "U.S. dollars," "U.S. $," "$" or "cents" are to the
currency of the United States, references to "France" are to the Republic of
France, references to "French francs," "francs" or "FF" are to the currency of
France, and references to "euro" or "euros" are to the common currency of the
eleven countries of the European Union.
-------------------------------------------------------------------------------
Genset is a societe anonyme organized under the laws of France (the
"Company"). Its principal executive offices are located at 24, rue Royale,
75008 Paris, France and its telephone number is +33 1 55 04 59 00.
Exchange Rate Information
For a discussion of the impact of currency fluctuations on the Company's
financial condition and results of operations, see "Item 9: Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Results of Operations -- Impact of Currency Fluctuations."
The following table sets forth, for the periods indicated, certain
information concerning the exchange rate between French francs and U.S. dollars
based on the Noon Buying Rate (expressed as French francs per U.S. dollar).
Such rates are provided solely for the convenience of the reader and are not
necessarily the rates used by the Company in the preparation of its
consolidated financial statements included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Year Period-End Rate Average Rate(1) High Low
-------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
1995........................... 4.90 4.96 5.39 4.78
1996........................... 5.19 5.12 5.29 4.90
1997........................... 6.02 5.85 6.35 5.19
1998........................... 5.59 5.90 6.21 5.41
</TABLE>
(1) The average of the Noon Buying Rates on the last business day of each
month during the relevant period
3
<PAGE>
The following table sets forth, for the period indicated, certain
information concerning the exchange rate between euros and U.S. dollars based
on the Noon Buying Rate (expressed as euros per U.S. dollar). Such rates are
provided solely for the convenience of the reader and are not necessarily the
rates used by the Company in the preparation of its consolidated financial
statements included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Year Period-End Average
Rate Rate(1) High Low
-------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1999....................................................... 0.9930 0.9445 0.9984 0.8466
2000 (through May 31, 2000)................................ 1.0720 1.0545 0.9676 1.1210
</TABLE>
(1) The average of the Noon Buying Rates on the last business day of each
month during the relevant period
Forward-Looking Statements
This Annual Report on Form 20-F contains certain forward-looking
statements that involve risks and uncertainties relating to our future
financial and technological performance. Such statements are based on our
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in
the forward-looking statements. In evaluating such statements, readers should
specifically consider factors which could affect expected results, including,
but not limited to, those highlighted in the relevant sections hereof and
principally: (i) the uncertainties inherent in scientific research in a field
subject to intense competition and rapid technological change, and in
particular the risk that we will be unable to discover and patent genes
associated with common disease or drug response or other valuable genomic or
biological information before our competitors, (ii) the inability to maintain
or initiate third-party arrangements which generate revenues, in the form of
license fees, research and development support, royalties and other payments,
in return for rights to the results of our research; and (iii) delays or
difficulties in developing or acquiring genomics technologies and technical and
managerial personnel to conduct our research programs at reasonable costs.
Readers are cautioned not to place undue reliance on such statements, which
speak only as of the date hereof. We undertake no obligation to release
publicly any revisions to forward-looking statements to reflect any changes in
events, conditions or circumstances on which such statements are based.
PART I
ITEM 1: Description of Business
General
We are an integrated genomics company. Our mission is to discover and
license genomics information relevant for the discovery, development and
marketing of new therapeutics for common diseases. We have developed an
original approach to the discovery of important genes, based on association
studies in human populations. These studies are made possible by our technology
platform, which integrates key scientific tools that we have either invented or
applied in novel ways. Our strategy is to focus our research efforts in the
following fields:
* central nervous system diseases;
* metabolic disorders, and in particular obesity; and
* pharmacogenomics, which is the application of genomics
technologies to the identification and analysis of genes involved
in drug response.
In parallel with our primary focus on gene discovery and pharmacogenomics,
we have used our technology platform to pursue commercial opportunities in
related areas, notably in the fields of therapeutic
4
<PAGE>
protein libraries, plant genomics and vaccine and immunotherapy applications.
In addition, our synthetic DNA division, Genset Oligos, is one of the
world's largest manufacturers and suppliers of oligonucleotides, a key raw
material in genomics research, with production facilities in France, the United
States, Japan, Singapore and Australia. Genset Oligos also provides us with a
reliable and low cost supply of high quality oligonucleotides for our own
research.
Overview of Science and Technology
Genomics
DNA
DNA is a chemical compound composed of chromosomes. This molecule is
present in all the cells of living organisms. Each DNA molecule is made up of
two strands entwined in a double helix. Each strand consists of a succession of
four basic elements, known as bases or nucleotides (A for adenine, T for
thymine, G for guanine and C for cytosine). The two strands are complementary,
which is to say that A on one strand is always opposite T on the other strand,
and C is always opposite G. These four bases can be seen as the letters of an
alphabet which determine what is called the genetic code. The order of these
bases in DNA, known as their sequence, determines the program which governs the
structure and activity of proteins, which are the active elements that carry
out the biological mechanisms of all organisms. In humans, for example, each
cell contains in its chromosomes a total length of DNA of over a meter
corresponding to a succession of about three billion bases; this is the human
genome.
Genes
Within each cell, the human genome is divided among 46 chromosomes, or
more precisely two sets of 23 chromosomes, inherited from each parent. Only a
fraction of the genome consists of genes that code for proteins; these portions
of the genome are referred to as "coding".
The human genome is estimated to contain about 100,000 genes, each of
which is a specific and independent sequence which codes for a distinct
protein. Each of these 100,000 proteins has a particular function, and it is
the assembly and combination of all these functions that enable organisms to
develop and survive. Humans, like all other complex organisms, are made up of a
great number of different specialized organs and tissues. Although all the
cells of all the tissues contain the identical DNA, of the same length and
sequence, all tissues are different in that they use or express only a subset
of the genes in the genome; different genes are active in different tissues.
There are generally speaking two categories of genes. On the one hand, there
are general-function genes that are expressed in all tissues and code for
functions that are common to all cells, including notably house-keeping
functions and energy functions necessary for the metabolism. On the other hand,
there are specialized genes that correspond to specific functions and
structures that are different depending on the tissue. The regulation and
expression of genes, both quantitative (the level at which a gene is expressed)
and qualitative (the tissue in which a gene is expressed), is determined by
regions of DNA located before the beginning of genes known as regulatory
regions. The sequence of these regions contain a specific code that regulates
when, where and at what level a gene will be expressed.
Proteins and Function
The function of genes is to direct the production of proteins. The order
of the DNA bases that comprise genes determines the order of the building
blocks that make up proteins, which are known as amino acids. Hence, the
structure and function of proteins is determined directly by the sequence of
the corresponding genes. The link between genes and proteins is effected by an
intermediate molecule known as messenger RNA, which is similar to DNA but has
only one strand, and which consists of the exact transcription of the sequence
of a gene. Messenger RNA directs the assembly of amino acids in a sequence that
corresponds exactly to the order of its bases.
5
<PAGE>
When amino acids are linked together, a protein results and the gene is said to
be expressed. In other words, the expression of a gene is the production of the
specific protein that corresponds to the DNA code of that gene. As a result,
any variation in the sequence or spelling of a gene between individuals may
have an effect on the quantity or structure, and hence the function, of the
corresponding protein. These variations, known as polymorphisms, are the reason
that all individuals, other than identical twins, are different, and vary in
particular in their physiological mechanisms.
Function and Polymorphisms
All human beings have the same genome but are different. The differences
between humans result from the several million variations spread throughout the
three billion bases that comprise the human genome. For example, the sequence
of a gene in 30% of individuals may read ACCTCA, but in the other 70% of
individuals read ACCGCA. This simple variation of one base, known commonly as a
SNP or Single Nucleotide Polymorphism, may result in a variation in the
function of the corresponding protein. If such a case, the protein will
function in one way in 30% of the population and in another way in 70% of the
population. If, for example, the protein is involved in a detoxification
process, the capacity of 30% of the population to eliminate the toxin in
question will be different from that of the other 70%.
All polymorphisms do not translate into a difference in function, either
because they are not located in the coding regions of the genome or because the
variation in the sequence of a gene does not result in a significant variation
in the function of the corresponding protein.
The Genomics Industry
Genomics can be defined as the science of the analysis of genomes.
The genomics industry was born with the first human genome mapping studies
in the early 1990s. Genome maps, which consist of fragments of genome sequence
with a known order, greatly facilitated the study of the genome. Thereafter,
large scale DNA sequencing became possible due to the development of automatic
sequencers which read the order of bases in fragments of DNA. The combination
of mapping and sequencing technologies enabled the emergence and rapid
development of this new science, pursuant to which the entire human genome will
soon be sequenced.
For various technical reasons, the genomics industry first focused on the
analysis of cDNAs (complimentary DNAs), which are the partial copies of gene
sequences generated by cells in the form of messenger RNA. Approaches focusing
on cDNAs resulted in the generation of very large quantities of sequences,
which, although often incomplete, served as the foundation for the first
commercial genomic databases and for a first wave of patent applications. In
parallel with these early large scale cDNA sequencing approaches, more focused
studies evolved with a view to discovering genes coding for new therapeutic
targets or which could serve as prognostic markers.
The international efforts aiming to sequence the entire human genome
recently entered into their final phase, and a first draft of this complete
sequence may be available before the end of 2000. It appears, however, that the
real difficulty no longer lies in generating sequence data, but in analyzing
its significance.
Biology is an extremely complex science, but underlying this great
complexity is a finite entity, the genome, that can be studied and analyzed
directly. The genome contains in coded form all the information necessary to
understand the biological system which it codes for. Genomics, beginning with
sequencing, allows us to identify genes and to analyze their functions to
determine their role in the physiological and pathological processes inherent
in all human beings. In this way, the study of the human genome is a
technological shortcut.
Although the scientific importance of the human genome is now widely
recognized, the ability of genomics information to lead to the development of
new drugs and diagnostic products remains unproven. Few therapeutic or
diagnostic products based on genomic discoveries have been developed and
commercialized and to date no one has developed or commercialized any
therapeutic or diagnostic products based on our technologies. Ultimately, our
business will not succeed unless we or our strategic partners can develop and
commercialize products based on our genomic discoveries.
6
<PAGE>
Genomics and Disease
Common diseases result from the interaction between an organism and its
environment. For example, the onset of an allergic reaction results from the
combination of the presence of the allergen (environment) and of a hyper-
sensitive reaction to the allergen. The hyper-sensitive reaction is the result
of the expression of one or more proteins in too great a quantity, or of a
protein reacting in too effective a manner to the presence of the allergen. All
individuals will not have an allergic reaction, even when exposed to large
quantities of a given allergen. The reaction is individual, a result of the
genomic make-up of the individual. To take another example, certain persons
will develop excessive cholesterol levels as a result of a diet too rich in
fats, whereas others, even with the same diet, will maintain a low cholesterol
level. Once again, the individual reaction is different in response to the same
environmental factor.
In most cases, the onset of a disease will depend not on one but on
several environmental factors, as well as on several factors inherent to the
individual, which reflect in practice the individual's genomic make-up. This is
especially true for complex diseases such as for example central nervous system
disorders.
The sequences of genes control the sequences and thus the function of
proteins. Proteins are fundamental to all of an organism's biological
functions, and in particular how an organism reacts to environmental factors.
The differences in individuals' responses to various environmental factors
depend directly upon differences in their genomic make-up, which is to say
differences between the sequence or spelling of their genomes. These genomic
variations or polymorphisms thus explain variations among individuals in terms
of their susceptibility to developing common diseases.
Genset's Approach
We have focused all our efforts these past years on developing a general
approach capable of elucidating the function of genes, and in particular on
identifying the genes associated with common diseases.
This approach is based on a simple but profound observation: if one takes
the genomes of individuals living in the same environment and having the same
disease, and compares these genomes with those of other individuals living in
the same environment but who do not have the disease, one should be able to
find genomic differences which indicate which genes are involved in the
disease.
To carry out these genetic association studies, the DNA sequences of a
great number of individuals must be compared, and the sequence variations
analyzed. The discovery of the genes involved in common diseases depends on the
identification of the DNA sequence variations that are common to different
individuals that have developed the same disease. A variety of technologies,
assets and expertise is necessary to carry out such association studies.
First of all, it is necessary to have access to collections of DNA samples
from hundreds of individuals affected with the disease and from hundreds of
unaffected individuals who serve as controls. The clinical characteristics or
phenotypes of both the affected and unaffected individuals must be well defined
and reliable. We have access to such collections through collaborations with
clinical research teams around the world.
The next step in these association studies involves the identification of
genomic regions of interest, which requires genomic mapping capabilities. Once
regions are identified as being likely to contain genes relevant to the disease
being studied, the sequence of these regions must be analyzed to locate genes
and polymorphisms. The polymorphisms must then be analyzed or genotyped.
Genotyping means determining for any given polymorphism which version of the
polymorphism is present in a given sample. A statistical analysis of the
genotyping results reveals which polymorphisms are statistically more common in
the genomes of individuals sharing the same disease than in those of
individuals who do not have the disease.
Once one or more polymorphisms are found to be significantly more common
in the individuals affected with the disease than in the non-affected
individuals, we can deduce an association between this or these polymorphisms
and the disease being studied. If the polymorphism(s) are contained in the
coding region of a gene, we can deduce that the gene itself is associated with
the disease. Even if the associated polymorphism(s)
7
<PAGE>
are not themselves in a coding region, the genetic phenomenon known as linkage
disequilibrium allows us to deduce that an associated gene is in close genomic
proximity with the polymorphism(s).
In practice, this approach can be used for different clinical
characteristics, from the susceptibility to developing complex diseases to the
individual variations in drug response, notably side effects and efficacy. Our
research programs have already identified genes associated with numerous
clinical characteristics, including prostate cancer, central nervous system
disorders, obesity and variations in patient side effects of a drug.
Although we have already successfully identified some genes using our
approach, both we and the general scientific and medical communities have a
limited understanding of the role of genes in the complex diseases we are
studying. Our association studies approach and technology platform may not
enable us to successfully identify and characterize medically useful genes
better or more quickly than our competitors. In any case, transforming our
genomics research results into commercialized products requires many years of
further research and development, including extensive clinical studies.
Moreover, our competitors' approach or technologies may enable them to identify
genes associated with the diseases we are targeting before we do or to identify
genes that are better suited to quickly developing effective pharmaceutical
products.
In addition, the development and commercialization of pharmaceutical
products (drugs or diagnostic products) based on our genomics discoveries will
be subject to the risks inherent in any such products, including the
possibilities that:
* any drugs or diagnostic products will be found to be ineffective
or unsafe, or otherwise fail to receive necessary regulatory
clearances;
* the drugs or diagnostic products, if effective and safe, will be
difficult to manufacture on a large scale or uneconomical to
market;
* proprietary rights of third parties will preclude the marketing of
these products; or
* third parties will market similar or superior products.
Genset's Technologies
Our ability to conduct these association studies in a systematic manner
relies on our integrated technology platform, which contains numerous
proprietary, patented and exclusive technologies and know-how. These
technologies are organized by department, each of which contributes its
specialized expertise to the association studies:
* Our medical research department manages our DNA sample collections
and our clinical research collaborations around the world.
* Our mapping department is a pioneer in the field, with more than
10 years of experience in all techniques required to generate and
exploit genomic maps. Our expertise in this field enables us to
localize regions of interest likely to contain genes involved with
a given clinical trait (disease or drug response), to generate
high-resolution maps covering these regions and to characterize
genes identified as perhaps being associated with the clinical
trait, known as candidate genes.
* Using the most advanced capillary electrophoresis technologies,
our sequencing department can sequence up to 10 million bases per
day. This department is principally involved in identifying or
discovering polymorphisms and in sequencing the specific genomic
regions that we have identified as being important.
* Our genotyping department allows us to calculate and analyze the
frequency of any given polymorphism in a given population. The
department contains both a production unit capable of conducting
tens of thousands of genotypes per day, and a research and
development unit, which, in collaboration with the LETI or
Electronics, Technology and Instrumentation Laboratory of the
French Atomic Energy Commission, is developing a genotyping
microprocessor based on microfluidic and microthermic technologies
capable of genotyping on a very large scale, at low cost and
consuming minimal quantities of DNA and reagents.
8
<PAGE>
* Our informatics department has more than 60 specialists and
substantial computer resources to analyze, store, and process
genomic data. This department is in particular responsible for
compiling and analyzing in real time both public and internally
generated sequence, polymorphism and genotype data, as they become
available.
* Our genetic epidemiology and biostatistics department, a unique
structure in the world, is responsible for developing algorithms
and software capable of performing the combinatorial analysis of
genotyping and clinical data required for association studies.
* Our functional genomics department analyzes in detail the
biological function of the genes involved in the diseases we
study, using cellular, molecular and animal models. This
department in principally involved today in the discovery and
analysis of new biological mechanisms related to obesity and
diabetes.
Our genomics strategy based on association studies, which is made possible
by the combination of these various integrated technologies, is to
systematically generate functional information related to the genes we discover
or identify as being of particular interest. This functional information is
fundamental to the value of genomic information. Our strategy has resulted
notably in August 1999 in our being granted the first U.S. patent on a disease
gene discovered through polymorphism or SNP-based association studies, in that
case a gene associated with prostate cancer.
Pharmacogenomics Applications
As with all other physiological traits, the response of an organism to a
drug is different depending on the individual's genomic make-up. Our
association studies approach applies not only to the discovery of genes
involved in common diseases, but also to the discovery of genes involved in
drug response. This field of research, launched by Genset in 1997 together with
our partner Abbott Laboratories, is known as pharmacogenomics. It encompasses
the discipline of pharmacogenetics, which is the study of genes specifically
related to drug metabolism. Pharmacogenomics is thus a particular field of
genomics whose goal is to define the genetic markers that can be used to tailor
pharmaceutical treatments to each individual, to ensure a greater effectiveness
of drugs and/or to prevent side effects.
Our Gene Discovery Programs
We have been conducting association studies to discover genes associated
with common diseases since 1996. We signed our first disease gene research
collaboration agreement in May 1996 with the French pharmaceutical company
Synthelabo (now Sanofi-Synthelabo) for the discovery of genes associated with
prostate cancer. Based on the results of this program, we filed one patent
application related to chromosomal regions suspected to contain genes
associated with prostate cancer, and three patent applications related to genes
associated with prostate cancer. In August 1999, the U.S. Trademark and Patent
Office issued a patent relating to one of these three genes, covering broad
therapeutic and diagnostic applications. Under our agreement, Sanofi-Synthelabo
provided research funding for the program and agreed to pay us research and
clinical milestone payments. We granted Sanofi-Synthelabo an exclusive license
to develop and commercialize therapeutic products and vaccines in exchange of
royalties on future drug sales. Sanofi-Synthelabo is currently conducting high
throughput screening with one of the three genes resulting from the program. We
believe that about one-third of prostate cancer cases in Caucasians can be
attributed to these three genes.
9
<PAGE>
We decided in 1999 to focus our gene and related biological pathway
discovery efforts on two therapeutic areas: central nervous system diseases and
metabolic disorders. We believe that we can compete successfully over the next
few years in the discovery of genes and pathways for these diseases. The
decision to focus on these specific disease areas was driven by the following
scientific and economic considerations:
* Both areas involve complex diseases influenced by multiple genetic
features. We believe that genomics, and in particular association
studies conducted in unrelated individuals, is the best approach
to understand the genetic causes of these diseases and their
complications and to develop new treatments.
* These diseases affect large patient populations and existing
treatments either do not exist or are unsatisfactory. There are
therefore substantial unmet medical needs in these fields, and
effective treatments would have enormous market potential.
Central Nervous System Diseases
Our intention is to identify genes associated with central nervous system
diseases. We have ongoing gene discovery programs for three diseases in this
area: schizophrenia, bipolar disease (also known as manic-depression) and
Alzheimer's disease.
Schizophrenia
Schizophrenia is a severe, chronic mental disorder characterized by
disturbances of mind and personality, including delusions, hallucinations and
dramatically altered behavior. According to the U.S. National Institute of
Mental Health and the WHO, schizophrenia is estimated to affect approximately
1% of the world's population at some point in their lifetime. More than two
million patients in the United States suffer from the illness in a given year,
where the annual direct costs of treating the disease are estimated at $20
billion. A new class of anti-psychotic drugs that combine superior efficacy
with reduced side effects is gradually replacing neuroleptics, the class of
drugs that have been used conventionally to treat schizophrenia but which do
not help some patients or have intolerable side effects. All current
treatments, however, only offer symptomatic relief allowing the patient to
function more effectively and appropriately; there is no cure for this disease.
It is estimated that less than one in five individuals who have suffered from
this disease recovers completely. There is no known single cause of
schizophrenia. Studies of twins have shown a strong genetic basis for the
disorder, but no structural or biochemical abnormality of the brain has been
universally identified. Understanding the genetic basis for schizophrenia
offers the greatest potential for the development of more specific treatments,
which address the underlying cause of the disease.
In September 1996, we entered into a research agreement with Janssen
Pharmaceutica N.V., a subsidiary of the U.S. pharmaceutical company Johnson &
Johnson, to identify genes associated with schizophrenia. We consider that
Johnson & Johnson's experience in the development and marketing of new products
for central nervous system diseases makes it an ideal partner to develop
therapeutics based on genomic discoveries. Pursuant to the agreement, Janssen
is funding our research, and has agreed to pay certain clinical milestone
payments, as well as royalties on net sales of future products resulting form
the results of our collaboration. In return, we granted to Janssen licenses to
develop and commercialize pharmaceutical products based on the results of the
program. Janssen has the sole responsibility to develop and market these
products.
In October 1999, we announced the discovery and delivery to Janssen of a
novel candidate gene associated with schizophrenia. We also filed patent
applications covering this discovery. We have agreed with Janssen to extend the
term of the agreement through July 31, 2000 to conduct the functional
characterization of this gene.
The results of our collaborative program with Janssen were confirmed in
several different study populations, including a clinical collection from
schizophrenic cases and controls we obtained pursuant to an agreement with The
Johns Hopkins University School of Medicine.
10
<PAGE>
Bipolar Disease
Bipolar disease, also known as manic-depression, is characterized by
episodes of mood swings that alternate between periods of mania (exaggerated
euphoria) and depression. Symptoms and severity vary tremendously among
patients and for each patient over time. An estimated 15 to 20% of patients who
suffer from bipolar disorder and who do not receive medical attention commit
suicide. Estimates provide that between 1 and 1.5% of people develop bipolar
disease at some point during their lives. The preferred class of drugs used for
bipolar disorder are mood stabilizers such as lithium, but many other types of
drugs may be required in addition to manage specific conditions, including
depressive episodes and rapid cycling between manic and depressive episodes.
The cause of bipolar disease is unknown but thought to involve structural
abnormalities of the part of the brain known as the hippocampus as well as
brain chemical imbalances involving dopamine. Although not all cases occur
within pedigrees containing other affected individuals, genetic factors appear
to play a major role in bipolar disorder. Researchers believe that
understanding the underlying genetic basis for bipolar disease can lead to the
development of more effective treatments with reduced side effects beyond the
mainstay drug of lithium.
In February 2000, we entered into a collaborative research agreement with
Abbott Laboratories to discover genes associated with bipolar disorder. Our
collaboration will initially focus on selected candidate genomic regions
associated with the disease. As part of the agreement, we received an up-front
payment and will be paid research funding throughout the research term. The
agreement also includes research milestone payments for the discovery of genes
and their validation as drug targets, clinical milestone payments, and
royalties. Abbott will receive a license to develop and commercialize
therapeutic and diagnostic products based on the genes identified through our
collaboration.
To conduct our research in the field of bipolar disease, we are relying
principally on two DNA collections compiled with collaborators in Argentina and
France. Pursuant to a collaboration dating from 1997 with the Argentinean
company LABIMO and the Parmenio Pinero Hospital in Buenos Aires, we have access
to DNA samples from patients affected with central nervous disorders, notably
bipolar disease. We have also obtained access to samples from patients affected
with bipolar disease and unaffected controls pursuant to a clinical research
program conducted with the Versailles Hospital Center located outside Paris.
Alzheimer's Disease
Alzheimer's disease is a type of progressive dementia characterized by
changes in the brain leading to mental and cognitive deterioration as well as
personality changes. An estimated 3 to 4 million people in the United States
have Alzheimer's disease. Alzheimer's is the most common cause of senile
dementia with up to 5% of people over the age of 65 and 20% of those over the
age of 80 potentially afflicted. The total lifetime treatment costs in the
United States have been estimated to be approximately $50,000 per case. Despite
numerous therapeutic research efforts, mostly attempting to enhance cognitive
function through increasing the level of a chemical in the brain called
acetylcholine, there are no effective treatments for the disease. Most drugs
currently being used to treat Alzheimer's are only aimed at slowing
progression. They are only minimally efficacious, merely delaying the time to
institutionalization. However, reduction of lifetime institutional care
requirements by as little as 12 months in mild to moderately affected patients
has been predicted to reduce treatment costs in the United States by as much as
$3.6 billion annually. Late-onset Alzheimer's disease has been associated with
specific forms of apolipoprotein E (ApoE), a protein that plays a role in the
movement and distribution of cholesterol. Most people with Alzheimer's disease,
however, do not carry these forms of the ApoE4 gene. Increasingly, researchers
believe that many cases of late-onset Alzheimer's disease are a result of a
constellation of genetic factors that participate in the process of producing
or degrading beta amyloid. Understanding the underlying genetic basis for
Alzheimer's disease offers the greatest promise for the development of
dramatically more effective treatments.
In May 1999, we established a collaboration with the Canadian company
Algene Biotechnologies (now SignalGene) to conduct research to discover genes
associated with Alzheimer's disease. Pursuant to this collaboration, we
obtained access to several genomic regions identified by SignalGene as being
associated with Alzheimer's disease, as well as to an extensive collection of
clinical samples from Alzheimer's patients. The diagnosis for a large number of
these clinical samples was confirmed by post-mortem diagnosis. Under the terms
11
<PAGE>
of the collaboration, all intellectual rights to the results of our research
will belong to us. SignalGene will receive license fees and possibly milestone
payments based on the results of our continued research and future revenues
from commercialization of the program's discoveries.
Metabolic Disorders
Obesity
Obesity is defined as disproportionately excessive body fat. The negative
consequences of obesity correlate directly with the proportion of adipose
tissue in the body and not with absolute body weight. Obesity is a disorder of
epidemic proportions in cultures with Western dietary habits. In the United
States, obesity affects 25 to 33% of the total population, or an estimated 60
to 80 million people. Obesity is a contributing factor for an estimated 300,000
deaths annually in the United States. In addition, the World Health
Organization estimates that obesity is prevalent in 10 to 25% of people in
Western Europe and 40% in certain specific groups, including in women from
Eastern Europe and from certain Mediterranean countries and in African
Americans. The direct medical costs of obesity have been estimated to be
between five and seven percent of total National Health Care Expenditure in the
United States or $50 to $70 billion. The current goal of treatment for the
obese patient is to reduce weight through reduced food intake and exercise.
Weight reduction diets and exercise programs are extremely difficult to
maintain over the long term in the majority of obese patients. The few drugs
that are marketed for weight loss have very modest long-term efficacy and
significant safety issues. Although several rare inherited hormonal diseases
cause massive weight gain, the cause of obesity is unknown in 99% of patients.
Fat accumulation results from unknown hormones that trigger excessive food
intake, more efficient storage of calories and/or decreased caloric
expenditure. The relative roles of these hormones is unknown. Researchers
believe that understanding the underlying genetic basis for obesity offers the
best hope for the development of more effective and safer treatments.
In February 1997, we entered into a research collaboration agreement with
the Institut National de la Sante et de la Recherche Medicale, INSERM or French
National Institute of Health and Medical Research, pursuant to which we funded
research in molecular physiology and pathology conducted by INSERM's laboratory
of nutrition, lipoprotein, metabolism and atherosclerosis. Based on the results
of the research, we filed a joint patent application on a new gene coding for a
receptor related to obesity, LSR, or lipolysis stimulated receptor. We have
since entered into a license agreement with INSERM pursuant to which INSERM
granted us an exclusive license worldwide to all applications of this joint
patent application, in exchange for royalty payments on products which may
result form the use of the gene.
Since the beginning of 1999, our obesity program has been the primary
responsibility of our Functional Genomics department located at Genset
Corporation in La Jolla, California. The three principal objectives of this
internally funded program are:
* to discover new genes associated with the development of excess
weight and resulting metabolic complications. These complications
include notably type II diabetes and cardiovascular and arterial
hypertension diseases;
* to produce biological screens -- cellular and animal -- that can
be used by pharmaceutical companies to identify on a large scale
new molecules that can improve the functioning of these genes; and
* to identify and develop secreted proteins whose production is
insufficient in obese individuals and whose administration could
lead to a diminution of excess weight.
This program has to date led to the discovery of several new genes that
are expressed abnormally in obese subjects. For four of these genes, patent
applications have been filed that include, to the extent available, their
genomic structure, their polymorphism(s) and related frequency data, the
sequence of the various messenger RNAs they generate, the function of the
proteins coded by these messenger RNAs, and the genes' potential diagnostic and
therapeutic uses. Two of these genes, LSR and ACRP30, have been the object of
extensive studies to validate their involvement in obesity and their potential
as a therapeutic target (LSR) and therapeutic protein (ACRP30). The other genes
are also being evaluated. We have obtained an exclusive license from the
12
<PAGE>
Whitehead Institute for Biomedical Research covering the commercial
applications of their ACRP30 patent. In addition, we signed in January 2000 a
research collaboration agreement with the Whitehead Institute to discover and
characterize genes involved in obesity and diabetes. One of the objectives of
this collaboration is to further refine our understanding of the biological
function of ACRP30.
LSR is a novel receptor expressed primarily in the liver. Association
studies using our SNP technologies have demonstrated that a certain combination
of polymorphisms of the LSR gene is correlated with a significantly increased
risk of developing excess weight, and with a modification of the tolerance to
glucose of individuals with these polymorphisms, thereby potentially increasing
their risk of developing type II diabetes. One polymorphism of the LSR gene is
also correlated with the development of hypertriglyceridemia associated with
obesity. This abnormality in the blood lipids, observed in 30% of obese
subjects, is one of the causes of cardiovascular complications induced by
excess weight. We have produced and characterized various cellular models that
can be used to evaluate therapeutic molecules that modulate the different
functions of the normal and varied forms of LSR. These models have enabled us
to identify peptide compounds that activate or inhibit this receptor. The
regular administration of the LSR activating compounds reduces significantly
the weight gain of a certain strain of mice that has a genetic defect that
causes them to become obese.
ACRP30 is a protein produced by the adipose tissue, the production of
which is decreased in obese subjects. ACRP30 is a regulator of LSR. The
polymorphism analysis of ACRP30 reveals that a certain combination of
polymorphisms is associated with a significantly increased risk of developing
obesity. The regular administration of ACRP30 in its active form induces in
mice a significant decrease of free fatty acid and glucose levels in the blood.
In addition, we observed that the active form of ACRP30 induced a pronounced
and sustainable weight loss in mice fed a diet rich in sugars and fats, while
mice fed the same diet and administered a less active form of ACRP30 gained
weight. Preliminary toxicological studies in mice show that 8% body weight
reduction caused by active form ACRP30 treatment caused no change in food
intake and no detectable alterations of critical blood biochemical parameters.
Based on these observations, we have undertaken large-scale toxicological and
pharmacological studies in mice to further our analysis of the potential use of
ACRP30 as a therapeutic protein for the treatment of obesity.
Type II Diabetes
An elevated blood glucose level and resistance to the action of insulin, a
key regulator of the body's metabolism, characterize type II or non-insulin-
dependent diabetes mellitus (NIDDM). It differs from type I, or insulin-
dependent diabetes mellitus (IDDM) where levels of endogenous insulin secretion
are almost nonexistent and do not respond to an increase in glucose levels.
NIDDM cases are about ten times more prevalent than IDDM cases. Between 50 to
90% of NIDDM patients are overweight. NIDDM is a disorder of epidemic
proportions in cultures with Western dietary habits. Currently, an estimated
100 million people worldwide have diabetes and WHO experts predict that, due to
worldwide developments in lifestyle and diet, this number will double by 2010,
largely because of dietary and other lifestyle factors. About 16 million people
in the United States have type II diabetes and one third are unaware they have
it. The complications of diabetes account for 40% of all new cases of end-stage
renal failure and result in over 50,000 lower extremity amputations annually.
Diabetes is the leading cause of blindness with about 10,000 new cases of
diabetes-related blindness per year in the United States. Additionally,
diabetic patients account for 10% of all acute care hospital days in the United
States. According to recent World Health Organization estimates, the potential
worldwide economic impact of diabetes is 2-3% of total worldwide health care
costs, with approximately $45 billion expended in direct costs in the United
States. Current drug therapy for NIDDM is a calorie restricted diet, oral
hypoglycemic drugs and insulin injections, if necessary. The goal of therapy is
to strictly control blood glucose levels. For many patients, blood glucose
levels cannot be tightly controlled with current therapies and complications of
diabetes eventually manifest themselves in the eye, kidney, heart, feet and
nervous system. Genetic factors are clearly important in the development of
NIDDM; however, the multigenic nature of the disease complicates the task of
identifying individual genes involved in the disease. To date, among the many
candidate genes studied, none has been clearly demonstrated as being involved
in the development of the disease. The scientific community remains convinced
that an understanding of the genetic causes of type II diabetes is the key
without which it will not be possible to develop new therapies targeting the
cause of the disease and stopping its progression.
In our research collaboration with Professor Lodish of the Whitehead
Institute for Biomedical Research, we are studying the biochemical pathways
involved in the development of diabetes. The principal objective of
13
<PAGE>
this program financed by Genset is to discover the genes that control the use
of glucose in muscles and adipose tissue. The program relies notably on a
functional cloning method for genes that regulate the activity of GLUT4, one of
the principal transporters of glucose. Genes modulating GLUT4 activity have
been identified and are under consideration for SNP-based polymorphism
analysis. Under the terms of our collaboration, we retain an exclusive option
to obtain commercial exploitation rights to all the results of the program.
Pursuant to our February 2000 agreement with Abbott Laboratories, we will
also conduct research to discover genes associated with type II diabetes. The
collaboration will focus on selected candidate genomic regions associated with
type II diabetes. As part of the agreement, we received an up front payment and
will be paid research funding throughout the research term. The agreement also
includes research milestone payments for the discovery of genes and their
validation as drug targets, clinical milestone payments, and royalties. Abbott
will receive a license to develop and commercialize therapeutic and diagnostic
products based on the genes identified through our collaboration.
Cardiovascular Diseases
We have established a gene discovery program for cardiovascular disease
that is initially focused on hypertension and its cardiovascular complications.
In October 1997, we entered into a ten-year strategic research collaboration
with the Royal College of Surgeons in Ireland or RCSI, a medical school with
substantial clinical research activities, to create a DNA bank and perform
genomics research based on association studies using samples from unrelated
individuals. As part of the collaborative arrangement, we formed Surgen with
RCSI, a dedicated joint venture owned 50% by each party and located in Dublin.
RCSI supplies Surgen with biological samples and corresponding anonymous
clinical data obtained in the course of conducting specified clinical studies,
principally in the field of cardiovascular diseases. Surgen is responsible for
DNA extraction, cell immortalization, sample and data storage, and more
generally, all operations connected with the creation and maintenance of the
DNA bank. Under the terms of the agreement, we have exclusive access to this
DNA bank to conduct disease gene discovery and pharmacogenomics studies and to
commercialize any products, including therapeutic, diagnostic and database
products, developed using the DNA bank. Surgen has the right to use the DNA
bank for non-commercial research. We are responsible for funding the salaries
of Surgen's employees and the expenses of the DNA bank. We have also provided a
loan to Surgen to serve as initial working capital.
In addition, as part of our broader program on cardiovascular diseases, we
sequenced and filed patent applications on the genomes of both Chlamydia
pneumoniae and Chlamydia trachomatis L2 strain. The bacterium Chlamydia
pneumoniae has been identified as a potential causative agent in the formation
of atherosclerotic plaques. In August 1998, we entered into an exclusive
license agreement with Wyeth-Lederle Vaccines ("Wyeth-Lederle"), a business
unit of Wyeth-Ayerst Laboratories, a division of American Home Products.
Pursuant to this agreement, we licensed exclusively to Wyeth-Lederle the
genomic sequence data of Chlamydia pneumoniae and Chlamydia trachomatis L2
strain for applications in vaccine development. In return for the license,
Wyeth-Lederle provided us with up-front licensing fees, clinical milestone
payments and royalties on net sales of vaccine products developed from the
genomics data.
Our Pharmacogenomics Programs
Pharmacogenomics is the application of genomics technologies to the
identification and analysis of genes involved in drug response. The diseases
which represent the greatest opportunities for pharmacogenomics are those
characterized by a broad range of clinical subtypes, such as central nervous
system disorders, including schizophrenia and bipolar disease, and
cardiovascular diseases. This is because the more genetically complex a disease
is, the more difficult it is to locate the correct drug target and hence the
less likely it is that a drug will have its desired effect across the target
population. In addition, clinical trials are long and costly for these
diseases.
The appeal of pharmacogenomics is its potential to make better drugs, with
greater efficiency and less toxicity, thereby increasing both the value and
safety of drugs. A report in the Journal of the American Medical Association,
published April 15, 1998 argues that more than 100,000 Americans die in
hospitals each year from adverse drug reactions. These reactions would be the
fourth leading cause of death in the United States after heart disease, cancer
and stroke. The findings of this study underscore the potential importance of
14
<PAGE>
pharmacogenomics in identifying patients who are susceptible to adverse
reactions to prescription drugs. The overall objective of pharmacogenomics is
to improve the risk-benefit profile of drugs and increase their benefit-cost
ratio. A drug that is safer and more effective delivers greater value for the
patient and can be sold at a premium while reducing overall healthcare costs.
Also, once the drug is prescribed and used by a patient population, its use is
more likely to be maintained as the drug has been customized to this
population's genetic make-up. Pharmacogenomics offers the opportunity to build
market share based on the real value of the drug and to collaborate on disease
management strategies with patients, doctors and insurance providers.
Our approach to pharmacogenomics is to derive functional information on
drug response genes by comparing individuals with different responses to drug
treatment, using data coming directly from clinical trials. Using this
information, we can work with our pharmaceutical partners to design clinical
trials more efficiently and to achieve better rates of success by tailoring the
drug to the correct target population of patients. We currently have ongoing
three pharmacogenomics programs.
Alliance with Abbott Laboratories
In July 1997, we entered into a strategic alliance with Abbott
Laboratories in the field of pharmacogenomics, for the development of genetic
markers and diagnostic tests for the analysis of drug response. The alliance
consisted of three parts:
* a capital investment by Abbott in Genset;
* a research and license agreement to study patient response to
Zyflo[Registered] (zileuton), a drug developed by Abbott for the
treatment of asthma; and
* an exclusive collaboration for the marketing and development of
pharmacogenomics research programs and of diagnostics systems
based on the results of pharmacogenomics research.
The capital investment by Abbott consisted of two tranches, an initial
purchase by Abbott in September 1997 of 10 million dollars of Genset shares,
and a put option to require Abbott to purchase a further 10 million dollars of
Genset shares. We exercised the put option in March 2000, resulting in a
purchase by Abbott of approximately 10.3 million euros of Genset shares at a
price per share of 188.33 euros.
We completed the Zyflo[Registered] research collaboration in 1999. We filed
two patent applications based on the results of the collaboration, covering two
genes involved in the susceptibility to liver hepatotoxicity of patients
treated with Zyflo[Registered]. Under the terms of that collaboration, we
received research funding from Abbott during the term of the research, and will
receive clinical milestone payments and royalties in the event Abbott uses the
results of the program to develop and market diagnostic products in conjunction
with Zyflo[Registered].
The co-marketing and development alliance agreement with Abbott provides
that we will search for genes and markers associated with drug response and
that Abbott will develop, produce and market diagnostic tests using these genes
and markers to test patient response to specific drugs. The goal of our
agreement is to provide pharmaceutical partners with simple genetic tests
specific for their drugs. We have also agreed to share revenues resulting from
pharmacogenomics collaborations based on the relative contributions of our
respective technologies. We will receive commercial milestone payments and
royalties on the sales of any drugs and diagnostic tests developed pursuant to
our collaboration.
Pharmacia & Upjohn Research Collaboration
In October 1998, we entered into a research collaboration with Pharmacia &
Upjohn for the development of genetic markers and discovery of genes associated
with the efficacy of a Pharmacia & Upjohn compound. The research is also aimed
at discovering genes involved in the disease targeted by the compound, which
can be used to discover new therapeutic compounds. Under the terms of the
collaboration, Pharmacia & Upjohn has been funding Genset's research, and has
agreed to pay certain clinical development milestones, as well as royalties on
future sales of its compound that make use of the results of the research
program, and on the sales of new compounds discovered and developed based on
genes identified through the research collaboration.
15
<PAGE>
Sanofi-Synthelabo Research Collaboration
In April 2000, we entered into a pharmacogenomics collaboration with
Sanofi-Synthelabo aimed at lead selection and optimization for a central
nervous system disease. Our objective in this collaboration is to discover and
analyze the significant polymorphisms of a large number of biological targets
used by Sanofi-Synthelabo to discover lead compounds for the treatment of this
disease. Once we have discovered the most common variants of these targets, we
will generate the corresponding clones as requested by Sanofi-Synthelabo, who
will be able to use the polymorphism data and clones generated to perform
further tests on the various leads it has in development and to optimize its
lead selection process. Under the terms of the collaboration, Sanofi-Synthelabo
will provide research funding and milestone payments and will pay clinical
milestones and royalties on any drugs developed through an active use of the
data and clones we provide.
Other Commercial Initiatives
The genomics technology platform we have assembled in developing our
primary gene discovery and pharmacogenomics activities has numerous other
applications. We consider these applications to be valuable commercial
opportunities and have initiated several programs to take advantage of them, in
parallel with our principal activities.
Therapeutic Proteins
We have compiled a database of more than 90,000 5 prime sequences of full-
length human cDNA clones, called NetGeneTM. Our patented 5 prime technology
allows us to identify the 5 prime or beginning sequences of genes. We have also
compiled a more specific database containing thousands of full-length cDNAs
coding for secreted proteins, identified by scanning NetGeneTM using
bioinformatic tools. We believe that the database contains proteins that are of
commercial and therapeutic interest as they include growth factors, hormones,
and cytokines which play a key role in triggering physiological responses.
In September 1999, we entered into a new agreement in the field of gene
libraries with the Genetics Institute unit of Wyeth-Ayerst Laboratories, the
pharmaceutical division of American Home Products. Under this new agreement,
which replaced the previous agreement signed in July 1997, we will provide
Genetics Institute and Wyeth-Ayerst with a larger variety of potential products
and targets which they will have the right to use in their internal drug
discovery programs. Pursuant to the agreement, Genetics Institute will obtain a
licensing-in option on up to 1000 selected sequences and corresponding clones
from our gene library. In addition to initial revenues, we will receive product
development milestone fees and royalties on any drugs discovered using the
sequences and the clones supplied by Genset.
Under the earlier 1997 agreement with Genetics Institute, we provided to
Genetics Institute full-length genes encoding novel human secreted proteins for
inclusion in Genetics Institute's DiscoverEase[Registered] program. That
agreement provided that we would receive product development milestone fees and
royalties on any drugs discovered using the sequences and clones supplied by
Genset. Since September 1999, the Company no longer has any obligation to
deliver secreted proteins to the DiscoverEase[Registered] program, but the
secreted proteins already commercialized in the program remain covered by the
terms of the agreement.
Plant Genomics
In December 1997, we entered into a series of agreements with Ceres, Inc.
("Ceres"), a U.S. company specializing in the field of agricultural
biotechnology. The collaboration consists of three parts:
* our acquisition of an equity interest in Ceres, initially of 20%
but later diluted to under 10% due to further capital increases by
Ceres in which we did not participate;
* a services agreement to provide sequencing and bioinformatics
services to Ceres in exchange for research funding and milestone
payments in the form of cash and additional equity; and
16
<PAGE>
* an exclusive, royalty-free, bilateral license agreement providing
each company access for applications in its field to certain of
the other company's technologies.
The service and license agreements were amended on several occasions in
the course of 1998, 1999 and 2000 to expand and further define the program. In
March 2000, Ceres and Genset announced that they had completed a major full-
length cDNA clone production and sequencing program for Arabidopsis thaliana.
Vaccine and Immunotherapy Applications
Agreement with Wyeth-Ayerst Laboratories
We fully sequenced and filed patent applications on the genomes of both
Chlamydia pneumoniae and Chlamydia trachomatis L2 strain. In August 1998, we
entered into an exclusive license agreement with Wyeth-Lederle Vaccines
("Wyeth-Lederle"), a business unit of Wyeth-Ayerst Laboratories, a division of
American Home Products. Pursuant to this agreement, we licensed exclusively to
Wyeth-Lederle the genomic sequence data of Chlamydia pneumoniae and Chlamydia
trachomatis L2 strain for applications in vaccine development. In return for
the license, Wyeth-Lederle provided us with up-front licensing fees, clinical
milestone payments and royalties on net sales of vaccine products developed
from the genomics data.
Agreement with Corixa Corporation
In February 2000, we entered into an agreement with Corixa Corporation, a
U.S. biotechnology company, to sequence the genome of an undisclosed microbial
organism provided by Corixa in exchange for various payments. Corixa intends to
use this data to develop immunotherapeutic products, including vaccines and
antibody-based products, targeting this infectious organism.
Dependence on Strategic Partnerships
We conduct most of our research activities in the context of strategic
partnerships. The success of these programs is heavily dependent on the efforts
and activities of our strategic partners. Our agreements with our strategic
partners allow them significant discretion in determining the efforts and
resources they devote to the partnership. Our existing and any future
partnerships may not be scientifically or commercially successful.
The risks that we face in connection with these partnerships include:
* if any of our partners were to breach or terminate an agreement
with us for a particular program, reduce its funding or fail to
allocate sufficient resources to the research program, we could be
required to devote additional internal resources to continue the
program, scale back the program or terminate the program;
* even if our strategic partnership research programs are
successful, our strategic partners may for various reasons,
including competing internal priorities and other developments in
the industry outside their control, not devote sufficient
resources to discover, develop and commercialize products based on
the results of our research programs, thereby limiting the
potential revenue generated from the partnership agreements;
* all of our partnership agreements are subject to termination under
various circumstances, in many cases on short notice without
cause. Some of our partnership agreements provide that if we fail
to meet specified research goals, our strategic partner may
terminate the agreement while maintaining rights and licenses to
certain of our discoveries. If a strategic partner terminates its
agreement with us, it may adversely affect how the business and
financial communities perceive us; and
* in our partnership agreements, we generally undertake not to
conduct competitive research in the field that is the subject of
the program. These undertakings may have the effect of limiting
the areas of research we may pursue, either alone or in
collaboration with third parties.
17
<PAGE>
Competition in Genomics Research
A number of entities are attempting to rapidly identify and patent genes
responsible for causing diseases or an increased susceptibility to diseases.
Competition in this field is intense and we expect it to increase. We face
competition from biotechnology and pharmaceutical companies that have, like us,
undertaken large-scale gene identification programs. We also face competition
from universities and other not-for-profit research institutions that generate
genomic information, which they either disclose publicly or patent and license
to biotechnology or pharmaceutical companies.
The number of our direct competitors is relatively limited, with about 20
listed companies worldwide specializing in genomics. Worldwide, genomics
companies can generally be separated into two categories, companies that are
primarily involved in commercializing databases and companies that are
primarily involved in conducting targeted research programs. We are the only
publicly-traded European company in this second category. A fundamental point
that distinguishes us from our competitors in this second category is our
focused approach to discover disease-associated genes based on association
studies in human populations using SNPs. We believe this approach to be
particularly well suited to the fields of CNS diseases and metabolic disorders.
With respect to pharmacogenomics, we were the first genomics company to
undertake research in this field and believe that we are still the leading
company for this kind of program. Although several other genomics companies
have decided to engage in pharmacogenomic research, we remain the only company
to have signed three major research collaborations with large pharmaceutical
companies in this field.
We can not be certain, however, that other companies have not or will not
develop approaches to more rapidly identify disease-related and drug response
genes. In addition, our competitors may using current technology discover and
establish a competitive advantage in one or more of the diseases that we have
decided to focus on. We are aware of other programs to identify new targets or
therapeutic proteins in all our disease areas. Several of our competitors have
also focused on the identification and patenting of secreted proteins.
We believe that our ability to compete in the industry depends on a number
of factors, including notably:
* our ability to develop and maintain scientifically advanced
technology;
* our ability to attract and retain qualified personnel;
* our ability to obtain patent protection for our discoveries;
* our ability to find strategic partners to develop and
commercialize drugs and diagnostic products based on our
discoveries;
* our ability to secure sufficient capital resources to fund our
gene discovery and pharmacogenomics programs; and
* our ability to continue to obtain and maintain access to
appropriate collections of DNA samples and related clinical data.
Many of our competitors have substantially greater research and product
development capabilities and financial, scientific, marketing and human
resources than we do. These competitors may identify genes or develop drugs and
obtain regulatory approval for these products before we or our strategic
partners do. They may also develop products that are more effective, safer or
less expensive than those developed using our genomic discoveries. Any products
based on genes we identify may face competition both from companies developing
gene-based products and from companies pursuing other approaches to disease
diagnosis and treatment. Any therapy developed by us or our strategic partners
may not be preferred to any existing or newly developed technologies.
Moreover, genomic, biotechnology and pharmaceutical technologies have
undergone and are expected to continue to undergo rapid and significant change.
Our future success will depend in large part on our ability to respond quickly
and successfully to these changes. Rapid technological development may render
our technologies less competitive or obsolete and we may not be able to make
the necessary enhancements to our technology to
18
<PAGE>
compete successfully with newly emerging technologies. Technological
developments may also make our genomic discoveries less attractive or result in
alternative or superior products before we or our strategic partners are able
to commercialize products based on our discoveries and recover the expenses
incurred in connection with their development.
Genset Oligos
Small fragments of synthetic DNA, commonly known as oligonucleotides, are
a basic raw material for all research in molecular biology. They are necessary,
for example, to amplify, sequence, genotype and hybridize DNA.
We began producing synthetic DNA in 1989 for our internal research
programs. In 1997, we created a specialized division, Genset Oligos, to focus
our oligonucleotide production and marketing efforts. Our synthetic DNA
business currently accounts for approximately 30% of our revenues. Genset
Oligos today has over 150 employees spread out among five production and
marketing sites, in France (Paris), the United States (La Jolla, California),
Singapore, Japan (Kyoto) and Australia (Lismore). This last site was
established in early 2000 following the acquisition of a majority equity
interest in Pacific Oligos, one of the largest Australian producers of
oligonucleotides.
In addition to producing and distributing oligonucleotides to clients
around the world, Genset Oligos is responsible for supplying our internal
research requirements for synthetic DNA. With an annual production capacity of
approximately two million oligonucleotides, of which about 25% are for our
internal research, we are today one of the largest producers worldwide of
synthetic DNA.
Manufacturing
Our various production lines in Paris (operational since 1989), La Jolla
(since 1992), Singapore (since 1998), Kyoto (since 1999) and Lismore (since
2000) together synthesize, label, purify and quality control thousands of
oligonucleotides a day. We believe that we are a highly efficient producer due
to our proprietary Ultrafast Parallel Synthesizer, as well as highly automated
production processes that incorporate comprehensive bioinformatics from order
processing through product delivery. We have been granted two patents relating
to the design of our synthesizer and reactor, which are assembled in our Evry
research center. This unique proprietary instrument has significantly reduced
nucleotide coupling time, the key step in production, and consumption of
phosphoramidites, the primary raw material, compared to the most advanced
instruments currently available commercially, and has substantially reduced our
manufacturing costs.
All our oligonucleotides are produced to custom order in a delay of
several hours. A pioneer in electronic commerce, we began in 1991 processing
custom orders communicated via internet directly to our synthesizers. This has
enabled us to reduce the risk of error and accelerate turnaround time. We have
also introduced a sophisticated internet-based tracking system allowing our
customers to monitor the status of the processing of their orders.
Marketing
The global oligonucleotide market is expanding rapidly, due notably to the
ever increasing use of large-scale amplification and sequencing in the fields
of biology, health care and agriculture research, and to the development of DNA
chips and clinical analysis systems based on molecular biology.
From our five production and marketing centers, we are able to serve our
customers in all our principal markets throughout the world. Genset Oligos has
approximately 4,000 customers in more than 50 countries. In 1999, sales in
France accounted for 23% of total sales, while sales in the rest of Europe, the
United States, Japan and the Asia-Pacific region (other than Japan) accounted
for 23%, 26.5%, 16.5 and 11% of total sales, respectively. Many of the large
laboratories involved in the international effort to map and sequence the human
genome are our customers. In addition, many of our customers are private as
well as public biotechnology and pharmaceutical companies. This client base
constitutes moreover a valuable information and distribution network of
customers in the molecular biology research industry.
19
<PAGE>
Competition
We are one of the world's largest manufacturers and suppliers of
oligonucleotides. The industry is characterized by a small number of large
producers, and a great many small, local producers. We compete in this industry
on the basis of our technical capabilities, our customer service and the
geographic location of our production and distribution facilities. The relative
importance of various competitive factors depends on the market segment being
served.
Large-scale genomics research projects require large numbers of different
oligonucleotides. We believe that the highly automated organization of our
production facilities, proprietary Ultrafast Parallel Synthesizer and automated
patented nucleic acid synthesis processes enable us to produce greater numbers
of oligonucleotides more quickly, accurately and economically than most of our
competitors.
Other market segments, including academic research and some biology and
clinical chemistry laboratories, typically require smaller quantities and
numbers of oligonucleotides that can be provided by a much greater range of
producers. Most of these producers are considerably smaller, have lower fixed
costs and serve a local or regional market. We believe that our strategy of
establishing a local presence at strategic locations around the world enables
us to also address this market segment, by providing as flexible and rapid a
service as smaller, local producers, while at the same time maintaining the
economies of scale and technical expertise required for the few very large
clients in each region. In addition, we believe that our recognized research,
chemical and analytical chemical expertise provide us with a unique competitive
advantage with respect to customers requiring complex and specially processed
oligonucleotides as well as extremely high quality standards.
Patents and Proprietary Rights
We utilize both patents and trade secret methods to protect our genomic
inventions and proprietary technologies.
Patents
Our commercial success depends, in part, on our ability to obtain
effective patent protection in Europe, the United States and other commercially
important markets for the results of our genomic research programs, as well as
the technologies we develop to support our research. Our strategy to protect
the results of our principal research programs is to file comprehensive patent
applications covering these results. These comprehensive applications contain
gene and corresponding protein sequence data, as well as associated SNP data
and related functional and other medically relevant information. Our ability to
generate the data necessary for such applications relies on our association
studies approach and the technology platform underlying the various elements of
this approach, in particular the high-throughput isolation and characterization
of genes, genotyping and the biostatistical analysis of SNP data. We believe
that the breadth and quality of the data available from our technology platform
provides us with a competitive advantage in the strength of our patent
portfolio.
The patent positions of biotechnology companies are, however, generally
uncertain and involve complex legal, scientific and factual questions. As a
result, we may be unable to obtain effective patent protection to prevent
others from using our inventions or proprietary technologies. The risks and
uncertainties that we face with respect to our patents and other proprietary
rights include the following:
* the pending patent applications we have filed or to which we have
exclusive rights may not be granted or may take longer than we
expect to be granted
* the scope of patents granted to us may not be broad enough to
effectively prevent others from using our genomic inventions or
technologies
20
<PAGE>
* because patent applications in the United States may be maintained
in secrecy until patents are issued, others may have filed patent
applications covering technologies we use or genomic inventions
for which we have pending patent applications, without us being
aware of such applications, thus increasing the risks of future
litigation
* other companies may challenge, invalidate, circumvent or infringe
patents licensed or granted to us or our strategic partners
* we may not be able to obtain licenses on commercially reasonable
terms to use the inventions or technologies covered by patents
granted to third parties
* if patent laws or the interpretation of patent laws change, our patent
strategy may prove inadequate and our patent position relative to that of
our competitors may be weakened
The Legal Environment
* Patentability of Genomic Inventions
There are believed to be approximately 100,000 genes scattered throughout
the human genome and we believe that virtually all such genes will be
identified over the next several years. Numerous groups are attempting to
rapidly identify and patent gene fragments and full-length genes. Patent
applicants seeking protection for gene fragments or full-length genes must
provide sufficient information relating to the DNA sequence and the specific
uses of such sequences to meet the legal requirements to obtain patent
protection. It is generally accepted that a gene sequence together with
specific information about the biological function, or potential commercial or
medical use of the sequence, is patentable. The patent strategies of the groups
seeking protection on gene fragments or full-length genes vary widely as to the
extent of biological characterization and the nature of the specific uses they
provide in their patent applications. There remains substantial uncertainty
regarding the potential to obtain and enforce patents covering gene fragments
or full-length genes without known function, as well as the amount and type of
functional information necessary to obtain granted patents in this field.
* Duration of Patent Protection
The duration of patent protection is particularly important in the
biotechnology and pharmaceutical fields because it takes many years to develop
and obtain the regulatory authorizations necessary to market products in these
fields. Due to the large number of biotechnology patent applications being
filed and the complex and often novel scientific and legal issues involved, the
time from filing to issuance is particularly uncertain in the biotechnology
field. When patents are granted, they are typically valid for 20 years from the
earliest filed patent application the inventor(s) filed on a particular
invention. In late 1999 the Patent Term Guarantee Authority Act became law in
the United States. This law was designed to extend patent exclusivity past the
statutory 20 years from filing to compensate patentees for delays in patent
processing on the part of the U.S. Patent and Trademark Office. The bill was
designed to ensure patentees would receive at least 17 years of patent
protection, so long as they had been diligent in responding quickly to the
Patent Office during prosecution.
* Number of Gene Sequences per Patent Application
In most commercially important countries, patent offices have established
policies limiting the number of distinct protein or gene sequences they will
review and grant in a single patent. For example, typically the European Patent
Office will examine one sequence per application, while the U.S. Patent and
Trademark Office has in the past limited examination to 10 distinct sequences
per application. However, the U.S. policy is apparently under review and
examination may be limited to one sequence per application in the future. In
cases in which the initial applications include more sequences, the additional
sequences must be separated out and included in distinct applications.
Alternatively, in some patent offices, for example the European Patent Office,
substantial additional fees may be paid in order to have additional sequences
reviewed and granted in a single patent. These requirements significantly
increase the time required and the cost to obtain patent protection for large
numbers of sequences.
21
<PAGE>
* International Extension of Patent Applications
All patent applications must initially be filed in one jurisdiction.
Thereafter, within 12 months following the filing of the initial or "priority"
application, the application may be extended internationally, either through
the procedure prescribed by the Patent Cooperation Treaty or "PCT" or,
independently from the PCT procedure, to selected countries. In the case of a
PCT extension, the applicant has 18 months from the general PCT extension to
select those countries among the PCT signatories, which include notably the 19
member countries of the European Patent Office as well as the United States,
Canada, Australia, and Japan, in which it wishes to pursue its patent
application. Regardless of the procedure chosen to extend a particular patent
application, the priority date of an extension application will generally
correspond to the date of the initial filing so long as the invention covered
by the extension is the same as that covered by the initial filing.
Our Patent Portfolio and Strategy
As of May 31, 2000, we had filed almost 400 patent applications, of which
97 have to date been granted. We constantly review our patent portfolio to
determine which applications to maintain. The maintenance of patent
applications and patents requires the payment of periodic taxes. Of the 97
patents granted to Genset, we have maintained 76 in force. Our currently
pending patent applications and patents in force include 25 in France, 80 in
the United States, 23 in Canada, 23 in Japan, 18 in Australia, 22 before the
European Patent Office, and 28 PCT extensions.
To obtain patent protection for the results of our disease gene discovery
and pharmacogenomics research programs, our strategy is to file comprehensive
patent applications that combine full-length gene sequences with as much
genomic information of pharmaceutical relevance as is available at the time of
filing. This information includes the sequence of the corresponding proteins,
their functional characterization, related SNPs, together with disease or drug
response association data. Our first comprehensive patent application of this
kind, filed in 1997 on a gene discovered in our prostate cancer collaboration
program with Sanofi-Synthelabo, was granted in 1999. This was the first patent
application granted in the United States covering a gene discovered through SNP
association with a disease (U.S. Patent No. 5,945,522). For some of our
programs, we have filed patent applications claiming large numbers of SNPs
associated with a series of functionally related genes, as well as methods to
use these SNPs in combination to study the susceptibility to disease, drug
response, or other specific clinical traits. We do not know how regulatory
limitations on the number of genomic sequences that can be granted in any one
patent application will affect these applications, in which numerous SNP
sequences are involved in the same invention.
* Obesity and Metabolic Disorders
In the context of our obesity and metabolic disorder programs, we have
filed patent applications covering genes and corresponding SNPs, including the
gene sequences of the LSR receptor and ACRP30 (as well as their variants), SNPs
associated with phenotypic traits underlying obesity, type II diabetes, and
related syndromes, and treatment methods addressing these diseases. Some of the
earlier applications in this portion of our portfolio are co-owned by Genset
and INSERM. In addition, we have obtained an exclusive license for the
commercialization of the Whitehead Institute's granted U.S. patent entitled
"DNA Encoding a Novel Serum Protein Produced Exclusively in Adipocytes."
* Central Nervous System Disorders
In our CNS disorder programs, we have filed patent applications covering
genes and SNPs associated with schizophrenia, bipolar disorder, and depression.
These patents include, notably, the results of our schizophrenia collaboration
with Janssen.
* Other Genomic Inventions
We also seek patent protection for the partial and full-length gene
sequences identified through our 5 prime high-throughput gene identification
program, especially when we have identified specific functional information
indicating that sequences have particular potential value either as therapeutic
agents or as targets for drug screening. We have, for example, filed several
patent applications covering a large number of DNA sequences
22
<PAGE>
corresponding to secreted proteins. The genes resulting from our gene
identification programs are systematically evaluated as candidates in our
obesity and metabolic and CNS disorder disease gene discovery programs, and we
file further patent applications covering any additional functional or
medically relevant information that is discovered in relation to these genes.
We also have filed patent applications relating to the complete genome
sequences of two related infectious microorganisms, Chlamydia trachomatis and
pneumoniae, the latter of which has been identified as being potentially
associated with the occurrence of cardiovascular diseases, especially
atherosclerosis. The patent applications relating to both organisms claim
therapeutic, diagnostic and vaccine applications.
* Technology Platform
We also seek patent protection for the proprietary technologies that
support our genomics research programs in selected cases where trade secret
methods do not offer optimal protection. For example, our patent relating to
our 5 prime sequence identification technique was granted in the United States
and France and is pending in other jurisdictions including Europe and Japan. We
have a granted European patent relating to the solid phase amplification of
nucleic acids, a technique which is particularly useful for replicating small
regions of a DNA sample so that it can be accurately analyzed in a genotyping
or diagnostic assay. We also have a granted U.S. patent relating to vectors and
cloning strategies that enable the systematic and efficient sequencing of
extremely large regions of DNA, including entire genomes. We have filed several
additional patent applications covering our key genomics technologies,
including high-throughput cloning, sequencing, mapping, genotyping and gene
localization techniques, and computerized statistical methods to analyze
complex sets of genotyping data from multiple sets of single nucleotide
polymorphisms.
* Oligonucleotides Business
In the field of synthetic DNA production and the uses of oligonucleotides,
including circular oligonucleotides, ribozymes and antisense therapies, we have
filed patent applications covering, for example, our synthesizer and reactor
designs and related processes for the preparation of oligonucleotides, as well
as certain therapeutic uses of oligonucleotides. We have also developed and
continues to develop proprietary processing software, synthesizer designs and
improvements, and purification and quality control techniques, some of which we
have chosen to protect as trade secrets.
Intellectual Property Litigation
There has been substantial litigation regarding patent and trade secret
rights in the pharmaceutical and biotechnology industries. Situations in which
we may become involved in patent and trade secret litigation or other
proceedings to establish intellectual property rights include the following:
* we believe that some genes and technologies for which we have
filed patent applications are also claimed in patent applications
filed by others. We expect that we will have to participate in
negotiations or legal proceedings to determine the priority of
these inventions
* we may initiate litigation or other legal proceedings against
third parties to enforce our intellectual property rights or our
licensed intellectual property rights
* we may initiate litigation or other proceedings against third
parties to seek to invalidate the patents they hold or to obtain a
judgment that our genomic inventions or technologies do not
infringe their patents
* if third parties initiate litigation or other proceedings claiming
that our genomic inventions or technologies infringe their patents
or result from the unauthorized use of their trade secrets, we
will need to defend ourselves against such claims.
Patent litigation and other proceedings to establish intellectual property
rights will require significant management time, and their cost to us, even if
resolved in our favor, could be prohibitive. Some of our competitors may be in
a better position to sustain the cost of such litigation or proceedings because
of their
23
<PAGE>
substantially greater financial resources. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could
significantly harm our ability to commercialize our discoveries.
Proprietary Rights
We rely on trade secret protection methods, notably confidentiality
agreements and physical and computer security measures, to protect our
interests in proprietary know-how that is not patentable or for which patents
are difficult to enforce or too expensive. Any unauthorized or unintended
disclosure of confidential data into the public domain or to third parties
could negatively impact our competitive position and harm our business.
Several elements of our integrated technology platform involve proprietary
technologies or know-how that are not covered by a patent or patent
application, including our sequencing process control, sequence verification
software, certain statistical analysis methods, and other bioinformatic tools.
Our databases of genomic information are protected through both physical
and computer security measures In the case of strategic partnerships or other
collaborative arrangements which require the sharing of data, our policy is to
make available to our partner only such data as is relevant to the partnership
or arrangement, under controlled circumstances and subject to confidentiality
agreements. These measures, however, may not provide adequate protection for
our proprietary genomics information that we have not patented.
We also require all employees, academic collaborators and consultants to
enter into confidentiality or non-disclosure agreements. These agreements may
however be breached and we may not have adequate remedies for any breach. In
addition, our competitors may otherwise gain access to our trade secrets or
develop them independently.
Government Regulation
Regulation by governmental authorities in France, the European Union, the
United States and other countries has a major impact our business. Government
regulations are particularly relevant to the following aspect of our
activities:
* The collection and use of the DNA samples necessary for our
research;
* The development and commercialization by our strategic partners of
pharmaceutical products based on our research; and
* The safety and quality procedures governing our research and
manufacturing activities.
We do not currently conduct clinical research programs, but our research
requires DNA samples. We obtain the DNA samples we need from clinical research
programs conducted by research organizations and clinicians with whom we have a
collaboration agreement relating to a specific disease. Clinical research
programs are subject to the regulations of the country where they are
performed. These regulations generally require, among other things, that an
ethical and scientific committee approves the research protocol pursuant to
which the samples will be collected, that each donor consent to the use that is
to be made of the sample and that the samples and related clinical data be
communicated in an anonymous fashion to protect the identity of their donor.
Our ability to obtain DNA samples and related clinical data depends on the
ability of our collaborators and strategic partners to comply with these
regulations and obtain and maintain required authorizations.
In addition, we are directly subject to certain regulations, both as the
promoter or sponsor of several clinical research programs in France and in
respect of our genomics research programs themselves. For example, a 1996
French law governing genetic research requires us to declare any research we
perform using DNA samples and authorizes the administration to suspend any
research which does not respect criteria concerning the appropriate use and
safety of the samples and the confidentiality of resulting data. The government
has not yet promulgated a decree specifying the applicable criteria and the
declaration procedure. The increasing public scrutiny of genomics and other
biotechnology research is leading to additional regulation of both the
collection and the use of DNA samples. New regulation could harm our research
efforts by limiting
24
<PAGE>
either our ability or the ability of our collaborators or strategic partners to
obtain appropriate DNA samples and related clinical data or the use which we
can make of them.
The development and marketing of human drugs and diagnostic products by
our strategic partners is subject to strict regulatory controls on the clinical
testing, manufacture, labeling, supply and marketing of these products. Of
particular importance is the requirement in most countries to obtain and
maintain regulatory approval to market pharmaceutical products. The process of
obtaining required regulatory approvals is expensive and lengthy, typically
taking a number of years. The approval process for products developed from
genomics research may take even longer because they involve new technologies.
Our strategic partners may not obtain the required regulatory approvals in a
timely manner, or at all. Any delay in obtaining, or the failure to obtain,
such approvals would adversely affect our ability to generate royalty revenues.
Even if required regulatory approvals are obtained, the manufacturing and
marketing of drugs and diagnostic products are subject to continuing regulatory
review, and later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
Regulatory authorities rarely grant all applications submitted to them.
Furthermore, each regulatory authority may impose its own requirements and may
refuse to grant, or may require additional data before granting, an approval
even though another authority has approved the relevant product. Even after
approval has been granted, regulatory authorities monitor the marketing and
manufacturing of therapeutic, vaccine and diagnostic products, and later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market. Any delay in obtaining, or the
failure to obtain, regulatory approval would reduce our product royalty
revenues.
France and other European countries and the United States have very high
standards of technical appraisal and consequently, in most cases, a lengthy
approval process for pharmaceutical products. The trend in recent years has
been towards greater regulation and higher standards. The time taken to obtain
approval in particular countries varies, but generally takes from six months to
four years from the date of application, depending upon the nature of the
product, the degree of control the regulatory authority exercises, and the
efficiency of its review procedures.
Even if pharmaceutical products are approved for marketing, their
commercial success depends in large part on the degree to which they are
reimbursed by governments, private health care coverage insurers and other
organizations. Governments and other third-party payors continually attempt to
contain or reduce health care costs by limiting both coverage and the level of
reimbursement for new drugs. If adequate coverage and reimbursement levels are
not provided by government and third-party payors for products resulting from
our genomics discoveries, the market acceptance of these products would be
adversely affected, thereby limiting our ability to generate royalties from
these sales.
Genetic testing has raised issues regarding confidentiality and the
appropriate use of the resulting information. For example, concerns have been
expressed regarding the ability of insurers or employers to discriminate based
on the results of genetic tests. There is also significant public concern
relating to the types of genetic tests that should be allowed and the ethical
issues surrounding the use of the results of these tests. These concerns may
result in decreased public demand for genetic tests or in government regulation
limiting the use of genetic testing or prohibiting testing for genetic
predisposition to certain diseases, particularly those that have no known cure.
Any of these scenarios could reduce the potential markets for diagnostic
products based on our genomic discoveries.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. There is a
risk of accidental contamination or injury from these materials. If our
operations result in contamination of the environment or expose individuals to
hazardous substances, we could be liable for damages and government fines. In
addition, future changes to environmental, health and safety laws could cause
us to incur additional expense or restrict our operations.
25
<PAGE>
Suppliers
We currently rely on two suppliers to provide all of our DNA sequencing
machines. While other DNA sequencing machines are available, we do not believe
that these other machines are as efficient as those we currently use.
Nonetheless, more efficient new machines may become available in the coming
months, and we will consider such new machines for potential future capacity
extensions. We are also dependent on a limited number of suppliers for the
chemical raw materials or reagents required for all our research activities,
and notably DNA sequencing, as well as for the production of synthetic DNA. We
cannot be certain that these reagents will remain available in commercial
quantities at costs that are not economically prohibitive. Should we be unable
to purchase competitive sequencing machines or to obtain an adequate supply of
reagents at commercially reasonable rates, our ability to continue to conduct
our genomics research programs using our current technology platform, or to
produce oligonucleotides at a competitive cost, could be adversely affected.
Employees
As of May 31, 2000, we had 543 full-time employees, including 433 in
France (Paris and Evry), 74 in La Jolla, California, 8 in Singapore, 13 in
Kyoto and 15 in Australia. This total includes 333 dedicated research and
development personnel; 76 of our employees have Ph.D.s and 11 (including eight
of the employees with Ph.D.s) have M.D.s. 333 of these 543 employees were
employed in genomics research, 176 were dedicated to the Genset Oligos division
and 34 had general and administrative responsibilities covering both
activities.
We anticipate that our employee headcount will remain relatively stable
through at least June 30, 2001. While we have been successful in attracting and
retaining skilled and experienced scientific personnel, we may not be able to
continue to do so.
Employment contracts are in place for all personnel other than the three
directeurs generaux, who, under French law, may not have employment contracts.
The employment contracts with all of our French employees are subject to the
provisions of the collective agreement for the chemical industries. Some of our
French employees have been represented by the French union CGT since November
1998. We believe the establishment of union representation to be normal in the
ordinary course of business for a French company with over 400 employees. As
required by French law, our management holds periodic meetings with
representatives of employees. We consider relations with our employees to be
good.
Pursuant to a French law which took effect on February 1, 2000, all
employers of more than 20 employees in France are required to implement a 35-
hour work week, with retroactive effect to January 1, 2000. On March 23, 2000,
we signed an agreement with our employees' union representatives specifying the
measures to be implemented at Genset to comply with this new legislation and
have implemented these measures.
ITEM 2: Description of Property
Our corporate headquarters are in Paris at 24, rue Royale, 75008 Paris, a
central downtown location. At this location, we lease 1,247 square meters
(approximately 13,400 square feet) of office space used principally for
executive offices, and patent and bioinformatics activities. There are two
leases with terms of nine years; one began on February 3, 1997, and the second
began on October 15, 1998. In addition, we lease 1,839 square meters
(approximately 19,800 square feet) of laboratory, production and office space
in a complex located at 1, rue Robert & Sonia Delaunay, 75011 Paris. This
location is occupied principally by Genset Oligos and our accounting
department. The term of the lease for this location, which was initially for
nine years from January 31, 1991, has been renewed for a further nine years
through January 31, 2009.
Our Genomics Research Center is housed in a modern complex located in
Evry, outside of Paris. The Genomics Research Center contains our integrated
sequencing, mapping, gene libraries, genotyping, functional
26
<PAGE>
polymorphism scanning, clinical collections and bioinformatics activities, as
well as industrial office space and engineering support. It currently occupies
approximately 8,500 square meters (approximately 91,500 square feet), out of
the total surface area of approximately 12,000 square meters (129,000 square
feet) covered by the lease, which expires on March 31, 2005.
Our U.S. subsidiary leases two facilities in La Jolla, California. The
larger facility, consisting of 11,651 square feet, is occupied by our U.S.
synthetic DNA production facility and by our physiological genomics
laboratories. The lease for this facility expires on January 31, 2003.
Administrative offices occupy 8,496 square feet at a separate site, under a
lease that expires on August 31, 2003.
ITEM 3: Legal Proceedings
We are not involved in any legal proceedings which could materially harm
our business, financial condition or results of operations, either individually
or in the aggregate.
ITEM 4: Control of Registrant
PRINCIPAL SHAREHOLDERS
At December 31, 1999, there were 7,479,606 Ordinary Shares outstanding of
which 2,798,497 were represented by 8,395,491 ADSs. At May 31, 2000, there were
7,948,450 Ordinary Shares issued and outstanding of which 3,381,431 were
represented by 10,144,293 ADSs. The fully diluted number of Ordinary Shares at
such date, assuming the exercise of all authorized options and warrants
(whether or not allocated by the Board of Directors), was 9,254,100.
The following table sets forth certain information regarding all owners of
greater than 5% of the Company's Ordinary Shares as of May 31, 2000 (based on
the most recent information available to the Company):
<TABLE>
<CAPTION>
Number of
Ordinary
Shares Percent of
Shareholder Owned(1) Class(2)
-------------- --------------
<S> <C> <C>
OppenheimerFunds, Inc.(3)................... 1,165,067 14.7%
JP Morgan(4)................................ 505,186 6.4%
-------------- --------------
Total 1,670,253 21.1%
============== ==============
</TABLE>
(1) Including both Ordinary Shares and ADSs.
(2) Calculated based on the total number of Ordinary Shares outstanding at May
31, 2000.
(3) Held by registered investment companies advised or subadvised by
OppenheimerFunds, Inc.
(4) Held by investment management subsidiaries of JP Morgan Investment
Management and JP Morgan Securities.
As of May 31, 2000, the total number of Ordinary Shares owned by directors
of the Company as a group (eight persons) and by executive officers (excluding
directors) of the Company as a group (15 persons) was 668,502 and 93,481,
respectively, or approximately 8.4% and 1.2%, respectively, of Genset's
outstanding Ordinary Shares. If such directors and executive officers exercised
all their outstanding options and warrants to purchase Ordinary Shares
(including options that have not yet vested), they would own as a group 15.8%
of Genset's fully diluted share capital, of which 592,550 Ordinary Shares or
6.4% would be held by the three directors that are executive officers of the
Company, 357,052 Ordinary Shares or 3.9% of the share capital would be held by
the five other directors, and 510,531 Ordinary Shares or 5.5% of the share
capital would be held by executive officers (excluding directors) as a group
(15 persons).
27
<PAGE>
ITEM 5: Nature of Trading Market
MARKET INFORMATION
Prior to the June 1996 initial public offering, there was no public market
for the Ordinary Shares or the American Depositary Shares ("ADSs"). In the
United States, the Ordinary Shares trade in the form of ADSs, each ADS
representing one-third of one Share. The ADSs are listed on the NASDAQ National
Market (the "NASDAQ"), the principal trading market for the Ordinary Shares,
under the symbol "GENXY." American Depositary Receipts evidencing the ADSs are
issuable by The Bank of New York, as Depositary. The Ordinary Shares are also
listed on the Nouveau Marche of the Bourse de Paris (the "Nouveau Marche").
The Paris Bourse
Securities listed on the Bourse de Paris (the "Paris Bourse" or Paris
Stock Exchange) are traded in one of four regulated markets. The securities of
most large public companies are listed on the Premier Marche, with the Second
Marche available for small and medium-sized companies. Trading on the Nouveau
Marche was introduced in March 1996 to allow companies seeking development
capital to access the stock market. A new regulated market was created in May
1998, the Marche des EDR (European Depositary Receipts or EDR market) which has
been in operation with effect from the beginning of 1999, with the introduction
of the euro. Securities of certain other companies have also been traded on a
non-regulated over-the-counter market, the Marche Libre OTC.
The Nouveau Marche
The Nouveau Marche is a regulated market, managed and operated by the
ParisBourseSBF SA ("SBF") manages and operates the Paris Bourse. The Nouveau
Marche, however, is neither a new section of an existing market, nor a stepping
stone to the Paris Bourse's Second Marche.
The Nouveau Marche is an electronic market, which combines a central
orderbook with market making to ensure greater liquidity. Member firms of the
Nouveau Marche may act in one or more capacities: Listing Advisers/Market-
Makers (Introducteurs/Teneurs de Marche, or ITMs) or broker-dealers
(Negociateurs-Courtiers). ITMs operate in a dual capacity as listing advisors
and as market makers for the Ordinary Shares assigned to them.
Admission to the Noveau Marche is subject to certain capital adequacy and
liquidity requirements determined by the SBF. In addition, companies applying
for listing on the Noveau Marche are required to publish comprehensive
information regularly and to keep the public informed of all events likely to
affect the market price of their securities.
Since September 14, 1998, the SBF has introduced continuous trading for
the most actively shares on the Noveau Marche. Such trading takes place on each
business day from 9:00 a.m. to 5:30 p.m., with a pre-opening session from 7:30
a.m. to 9:00 a.m. and a pre-closing session from 5:30 p.m. to 5:35 p.m. during
which transactions are recorded but not executed, and a closing auction at 5:35
p.m.. For shares which are not traded continuously, retail orders on the Noveau
Marche are matched by the central system at two daily fixings, at 9:30 a.m. and
5:00 p.m. Between such fixings, ITMs display bid/ask spreads for a minimum
number of each of the securities for which they act as market-makers, and
trades with the ITM are executed from time to time throughout the day. The
shares of the Company are traded continuously. Trading in the securities listed
on the Noveau Marche may be suspended by the SBF if quoted prices exceed
certain price limits defined by the regulations of the SBF. In particular,
unless market conditions otherwise require, the SBF may suspend trading of a
security, for up to 30 minutes, if the SBF believes that the offers and demands
for such security would cause the next quoted price of a security to vary by
more than 10% from the quoted price resulting from the last fixing or the last
trading price for the shares which are traded on a continuous basis. In the
latter case, further suspensions for up to 30 minutes are
28
<PAGE>
also possible if the price varies again by more than 5%. The SBF may also
suspend trading of a listed security in certain other limited circumstances,
including, for example, the occurrence of unusual trading activity in such
security.
Prior to any transfer of securities held in registered form on the Noveau
Marche, such securities must be converted into bearer form and accordingly
inscribed in an account maintained by an accredited intermediary with the
Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres
("SICOVAM"), an organization that maintains securities accounts of French
listed companies and acts as a clearing house for trades in such securities.
Dealings in securities are initiated by the owner giving instructions (through
an agent, if appropriate) to the relevant accredited intermediary. Trades of
securities listed on the Noveau Marche are cleared and settled through SICOVAM,
using a continuous net settlement system. A fee or commission is payable to the
ITM or broker-dealer or other agent involved in the transaction.
Trading Activity
The table below sets forth, for the periods indicated, the reported high
and low sales prices in U.S. dollars for the ADSs on the NASDAQ and the
reported high and low sales prices in euro for the Ordinary Shares on the
Noveau Marche and the average daily volume of shares traded on each exchange.
On December 31, 1998, France and ten other countries of the fifteen
countries of the European Union established fixed conversion rates between
their existing sovereign currencies and the euro. Following the introduction of
the euro, on January 1, 1999, all capital markets of these eleven countries
converted to euros and all companies listed on these markets have been
officially quoted in euros since January 4, 1999. Solely for the convenience of
the reader, 1997 and 1998 prices on the Noveau Marche have been restated from
French francs into euros using the official exchange rate fixed on December 31,
1999 (euro 1 = FF 6.55957 or FF 1 = euro 0.152449).
29
<PAGE>
<TABLE>
<CAPTION>
NASDAQ Nouveau Marche
Price per ADS Price per Share
---------------------------- ----------------------------
Avg. Daily Avg. Daily
Calendar Period High ($) Low ($) Volume(1) High (euros) Low (euros) Volume(2)
<S> <C> <C> <C> <C> <C> <C>
1997
First quarter....................... $ 17.25 $ 13.25 17,331 44.82 35.06 6,001
Second quarter...................... $ 20.87 $ 15.87 16,038 54.73 38.87 6,027
Third quarter....................... $ 25.00 $ 18.00 43,448 71.96 49.55 9,254
Fourth quarter...................... $ 23.43 $ 17.75 36,210 63.11 46.19 5,233
1998
First quarter....................... $ 29.00 $ 19.62 29,998 81.71 55.34 8,718
Second quarter...................... $ 38.00 $ 28.25 34,771 103.67 80.04 10,785
Third quarter....................... $ 32.50 $ 17.63 28,886 86.96 50.61 8,149
Fourth quarter...................... $ 31.13 $ 22.63 23,970 83.08 55.64 9,615
1999
First quarter....................... $ 29.00 $ 14.25 53,024 74.45 36.90 11,576
Second quarter...................... $ 19.00 $ 14.18 22,351 55.95 42.00 11,048
Third quarter....................... $ 15.88 $ 10.00 22,538 47.00 27.55 13,917
Fourth quarter...................... $ 20.38 $ 7.88 47,783 55.90 22.00 32,703
2000
First quarter....................... $ 78.94 $ 18.81 269,069 249.90 54.30 49,759
Second quarter (through May 31)..... $ 34.50 $ 17.75 269,854 108.50 60.00 29,784
</TABLE>
(1) Average of the daily number of ADSs traded on the NASDAQ, each ADS
representing one-third of one Ordinary Share. The numbers obtained from
the NASDAQ have been adjusted so that the purchase and sale of the same
ADS is counted as one transaction.
(2) Average of the daily number of Ordinary Shares traded on the Nouveau
Marche.
At December 31, 1999, there were 7,479,606 Ordinary Shares outstanding of
which 2,798,497 were represented by 8,395,491 ADSs. At May 31, 2000, there were
7,948,450 Ordinary Shares issued and outstanding of which 3,381,431 were
represented by 10,144,293 ADSs.
The market price of our shares has been and is likely to continue to be
volatile due to the risks and uncertainties described in these risk factors, as
well as other factors, including:
* developments in, and public opinion regarding, the genomics
industry or life sciences industries generally;
* sales of substantial amounts of our shares by existing
shareholders;
* price and volume fluctuations in the stock market at large which
do not relate to our operating performance; and
* comments by securities analysts, or our failure to meet analysts'
expectations.
30
<PAGE>
Trading by the Company in its Securities
Under French law amended by a law dated July 2, 1998, a company may not
subscribe for newly-issued shares in its own capital, but it may, either
directly or through an intermediary acting on its behalf, acquire its own
shares (a) to reduce its share capital by canceling such acquired shares, with
approval of the shareholders at an extraordinary meeting, (b) to provide shares
for distribution to employees under a profit-sharing plan or stock option plan,
and (c) if the company shares are listed on a regulated market (i.e. on the
Premier Marche, the Second Marche or the Nouveau Marche), subject to the filing
of a note d'information that has received a visa of the COB and after obtaining
approval from the shareholders at an ordinary meeting, acquire up to 10 % of
its share capital. In the latter case, the Company may decide (i) to keep these
shares, (ii) to sell or transfer them (including to employees under a non-
profit or stock option plan) or (iii) with the approval of the shareholders at
an extraordinary shareholders' meeting, to cancel them up to a limit of 10% of
the outstanding capital over a 24 month-period. French law also requires the
Company to notify such purchases to the COB, prior to engaging in such
transactions as well as to report on any purchase and sale thereafter. In
addition, pursuant to Regulation no 90-04 (as modified) of the COB, all
purchases by the Company of its own shares are subject to certain limitations,
including as to timing, price and quantity, so as not to disrupt the normal
trading of the shares. Furthermore, the Company has to inform the Conseil des
Marches Financiers (the "CMF") the self-regulatory organization that has
general authority over French stock exchange, on a monthly basis of any
purchase, sale, transfer or cancellation of its own shares. The CMF will then
make this information public.
In addition, under French law an issuer may not directly or through a
person acting on its own behalf, own more than 10% of its outstanding share
capital except in certain limited circumstances. If a company acquires its own
shares, they must be held in registered form and fully paid up at the time of
their acquisition by the company. Such shares are deemed outstanding under
French law but, as long as held by the company, they are not entitled to
dividends, voting rights or preferential rights.
On June 16, 2000, we received shareholder approval to purchase up to a
maximum of 10% of the company's outstanding Ordinary Shares. This approval is
subject to the conditions that the share purchase price must not exceed 200
euros, that the share selling price must not be lower than 30 euros, and that
the total funds spent on purchasing our own shares must not exceed 10,000,000
euros. This authorization will expire on the date of the annual ordinary
meeting of shareholders that will approve the accounts for the year ended
December 31, 2000.
ITEM 6: Exchange Controls and Other Limitations Affecting Security Holders
LIMITATIONS AFFECTING SHAREHOLDERS OF A FRENCH COMPANY
Ownership of ADSs or Ordinary Shares by Non-French Residents
Under French law, there is no limitation on the right of non-French
residents or non-French security holders to own, or where applicable, to vote
securities of a French company. However, both E.U. and non-E.U. residents must
file a declaration administrative, or administrative notice, with French
authorities in connection with the acquisition of a controlling interest in any
French company. Under existing administrative rulings, ownership of 20 percent
or more of a listed company's share capital or voting rights is regarded as a
controlling interest, but a lower percentage may be held to be a controlling
interest in certain circumstances (depending upon such factors as the acquiring
party's intentions, its ability to elect directors or financial reliance by the
French company on the acquiring party).
Exchange Controls
Under current French exchange control regulations, there are no
limitations on the amount of payments that may be remitted by a French company
to non-French residents. Laws and regulations concerning foreign exchange
controls do require, however, that all payments on transfers of funds made by a
French resident to a non-French resident be handled by an accredited
intermediary. In France, all registered banks and substantially all credit
31
<PAGE>
establishments are accredited intermediaries.
Requirements for Holdings Exceeding Certain Percentages
French law provides that any individual or entity (including a holder of
ADSs), acting alone or in concert with others, that acquires, directly or
indirectly, more than 5%, 10%, 20%, 33 1/3%, 50% or 66 2/3% of the outstanding
voting shares or the rights thereof of a listed company, or that increases or
decreases its shareholding or voting rights thereof by any such percentage,
must notify such company within fifteen calendar days of the date such
threshold has been crossed, of the number of shares it holds and the voting
rights attached thereto. Such individual or entity must also notify the CMF,
within five trading days of the date such threshold has been crossed. In
addition, any shareholder who fails to comply with the above requirements may
have all or part of its voting rights suspended for up to five years by the
commercial court at the request of the company's chairman, any shareholder or
the COB.
In addition, the Company's statuts provide that every shareholder
(including a holder of ADSs) who, directly or indirectly, acting alone or in
concert with others, acquires ownership or control of Ordinary Shares
representing 2%, or any multiple of 2%, of the Company's share capital or
voting rights, or whose holdings fall below any such limit, shall be required
to notify the Company of such fact within 15 calendar days of such acquisition
or disposition. Failure to comply with such notification provisions will result
in the suspension of the voting rights attached to the Ordinary Shares
exceeding such 2% threshold held by such shareholder if requested by one or
more shareholders holding Ordinary Shares representing at least 2% of the
Company's share capital or voting rights.
In order to permit shareholders to give the notice required by French law,
the Company is obligated to publish information with respect to the total
number of votes available as of the date of the Company's annual general
meeting in the Bulletin des Annonces Legales Obligatoires ("BALO") not later
than 15 calendar days after such meeting. In addition, if the number of
available votes changes by at least 5% between two ordinary general meetings,
the Company is required to publish in the BALO, within 15 calendar days of such
change, the number of votes then available and provide the CMF with a written
notice. In order to facilitate compliance with the notification requirements
provided for in French law, a holder of ADSs may deliver any such notification
to the Depositary with respect to shares represented by ADSs and the Depositary
shall immediately forward such notification to the Company and the CMF.
Under COB regulations, any person or persons, acting alone or in concert
with others, who acquires more than 10% or 20% of the voting rights of a listed
company, must file with the CMF, the COB and such company a report disclosing
its future intentions with respect to the company. Such report must be filed
with the CMF and the COB within five trading days of the date such threshold
has been crossed and with such company within ten calendar days of the date
such threshold has been crossed. The CMF makes the notice public and the person
or persons who have acquired such voting rights are required to publish a press
release in a financial newspaper having national circulation in France, stating
whether or not such person or persons intend, within the 12-month period
following the acquisition, to increase its shareholdings and request a seat on
such company's Board of Directors and whether such person or persons are acting
in concert with others.
Form, Holding and Transfer of Ordinary Shares
Genset's statuts provide that Ordinary Shares may be held in registered or
bearer form.
In accordance with French law concerning "dematerialisation" of
securities, the ownership rights of holders of the Ordinary Shares are not
represented by share certificates but by book entries. Banque Nationale de
Paris, on behalf of the Company, and acting as its agent, maintains a share
account with SICOVAM in respect of all Ordinary Shares held in registered form
(the "Company Share Account"). Ordinary Shares are inscribed in the name of
each shareholder (either directly, or, at the shareholder's request, through
such shareholder's accredited intermediary) in separate accounts (the
"Shareholder Accounts") maintained by Banque Nationale de Paris. Each
Shareholder Account
32
<PAGE>
shows the name of the holder and such shareholder's shareholdings and, in the
case of Ordinary Shares inscribed through an accredited intermediary, shows
that they are so held. Genset, as a matter of course, issues confirmations as
to holdings of Ordinary Shares inscribed in the Shareholder Accounts to the
persons in whose names the shareholdings are inscribed, but these confirmations
do not constitute documents of title.
In the case of Ordinary Shares held in bearer form, the shares are held on
the shareholder's behalf by an accredited intermediary and are inscribed in an
account maintained by the accredited intermediary with SICOVAM separate from
the Company Share Account. Ordinary Shares held in this manner are referred to
as being in bearer form. Each accredited intermediary maintains a record of
Ordinary Shares held through it and will issue certificates of inscription in
respect thereof. Transfers of Ordinary Shares held in bearer form may only be
effected through accredited intermediaries and SICOVAM. The Company's statuts
permit it to request SICOVAM at any time to provide the Company with the
identity of the holders of bearer Ordinary Shares and with the number of
Ordinary Shares so held.
An owner of Ordinary Shares resident outside France may trade Ordinary
Shares on the Paris Bourse. Should such owner, or the broker or other agent
through whom a sale is effected, require assistance in this connection, an
accredited intermediary should be contacted. A fee or commission is payable to
the societe de bourse (the French broker, accredited intermediary or other
agent) involved in the transaction.
Shares Issued before the Dividend Payment Date
Under French law, whether or not dividends are eventually paid, shares of
a listed company issued in any year prior to the dividend payment date are
generally not fungible with the other outstanding shares of the company. Until
the annual ordinary meeting of shareholders has determined whether dividends
will be paid in respect of the preceding fiscal year and, if so, until such
dividends are paid, the shares issued since January 1 generally trade at a
discount to those issued previously since they do not have the potential right
to a dividend from the preceding year. If only a limited number of shares are
issued during this period such as, for example, pursuant to the exercise of
options or warrants, it is unlikely that a liquid market for these newly-issued
shares will develop and the owners thereof may therefore encounter difficulties
in trading the shares until the dividend payment date, at which time they
become fungible with all the other shares of the company.
ITEM 7: Taxation
FRENCH TAXATION
The following is a general summary of the material French tax consequences
of owning and disposing of Ordinary Shares for a holder who is not a French tax
resident and does not hold the Ordinary Shares in connection with a business
conducted in France. The statements relating to French tax laws set out below
are based on the laws in force as of the date hereof, and are subject to any
changes in applicable French tax laws or in any applicable double taxation
conventions or treaties with France occurring after such date.
This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or list of all potential tax effects of the
purchase or ownership of the Ordinary Shares.
Potential purchasers of Ordinary Shares are urged to consult their own tax
advisers concerning the consequences of ownership and disposal of Ordinary
Shares.
Taxation on Sale or Disposal of Ordinary Shares
Subject to the provisions of any relevant double tax treaty, persons who
are not French residents for the purpose of French taxation (as well as, under
certain conditions, foreign states, international organizations and certain
33
<PAGE>
foreign public bodies) and who have held not more than 25%, directly or
indirectly, alone or with relatives, of the dividend rights ("benefices
sociaux") of the Company at any time during the preceding five years, are not
generally subject to any French income tax or capital gains tax on any sale or
disposal of Ordinary Shares.
If a transfer of Ordinary Shares is evidenced by a written agreement, such
share transfer agreement is, in principle, subject to registration formalities
and therefore to a 1% registration duty assessed on the higher of the purchase
price and the market value of the Ordinary Shares (subject to a maximum
assessment of FF 20,000 per transfer), provided that, under certain
circumstances, no duty is due if such written share transfer agreement is
executed outside France.
Taxation of Dividends
In France, dividends are paid out of after-tax income. French residents
are entitled to a tax credit, known as the avoir fiscal. The rate of the avoir
fiscal is generally equal to 50% of the dividends paid for individuals and 40%
of the dividend paid for shareholders who are not individuals.
In addition, if the dividends are subject to the precompte, shareholders
entitled to the avoir fiscal at a rate of 40% are generally entitled to an
additional amount of avoir fiscal equal to 20% of any such precompte actually
paid in cash by the company (see paragraph below relating to the precompte)
Dividends paid to non-residents are normally subject to a 25% French
withholding tax and, under French domestic law, non-residents are not eligible
for the benefit of the avoir fiscal. Under most tax treaties entered into
between France and other countries, such withholding tax may, subject to
certain conditions, be reduced and give rise in such other country to a tax
credit of the amount of the tax withheld or, in the case of certain tax
treaties, be eliminated.
Furthermore, the following countries and Territoires d'Outre-Mer and other
territories have entered into treaties with France whereby tax residents of
such countries and territories may, under certain circumstances, obtain from
the French tax authorities a reduction (generally to a rate of 15%) of all or
part of such withholding tax and a refund of the avoir fiscal (net of
applicable withholding tax), or in the case of German tax residents, a tax
credit in an amount equal to the aggregate of the amount of the applicable
avoir fiscal and the amount of the applicable withholding tax.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Australia Canada Israel Malta Norway Switzerland
Austria Finland Italy Mauritius Pakistan Togo
Belgium Gabon Ivory Coast Mexico Senegal Turkey
Bolivia Germany Japan Namibia Singapore Ukraine
Brazil Ghana Luxembourg Netherlands South Korea United Kingdom
Burkina Faso Iceland Malaysia New-Zealand Spain United States of America
Cameroon India Mali Niger Sweden Venezuela
</TABLE>
Territoires d'Outre-Mer and Other Territories
Mayotte
New Caledonia
Saint-Pierre et Miquelon
Treaties with some of the countries and territories listed above contain
specific limitations applicable to corporate entities entitled to benefit from
the avoir fiscal, or limit the rights to the avoir fiscal strictly to
individual residents (as opposed to corporate entities).
Dividends paid to non-residents of France benefiting from the avoir fiscal
in accordance with a tax treaty (other than German residents) will be subject,
on the date of payment, to the withholding tax at the reduced rate provided for
by such treaty (subject to certain filing formalities) rather than to the
French withholding tax at the rate of
34
<PAGE>
25% to be later reduced to the treaty rate; provided, however, that they
establish their entitlement to such reduced rate before the date of payment.
Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have
been earned and taxed more than five years before the distribution are subject
to a tax known as the precompte. The precompte is paid by the distributing
company to the French tax authorities and is equal to one-half of the nominal
dividend distributed. When a tax treaty in force does not provide for a refund
of the avoir fiscal or when the non-resident investor is not entitled to such
refund but is otherwise entitled to the benefits of a tax treaty, such investor
may obtain from the French tax authorities a refund of such precompte (net of
applicable withholding tax) to the extent such precompte was actually paid in
cash by the Company.
Estate and Gift Tax
Generally, France imposes estate and gift tax on non-residents on certain
shares of a French company acquired by inheritance or gift from a non-resident
of France. France has entered into estate and gift tax treaties with a number
of countries pursuant to which, assuming certain conditions are met, residents
of the treaty countries may be exempted from such tax or obtain a tax credit.
Prospective investors in Ordinary Shares should consult their own advisors
concerning the applicability of French estate and gift tax to their
shareholding in the Company and the availability of, and the conditions for
claiming exemption under, such a treaty.
Wealth Tax
In the absence of a more favorable tax treaty, the French wealth tax
(impot de solidarite sur la fortune) does not generally apply to non-French
resident individual investors owning directly or indirectly less than 10% of
the Company's share capital.
TAXATION OF U.S. INVESTORS
The following is a general summary of the material United States federal
income tax and French tax consequences to owners of one or more ADSs or
Ordinary Shares (a) who own, directly, indirectly or through attribution, less
than 10% of the voting power or capital of the Company, (b) who are (i)
citizens or individuals resident of the United States for United States federal
income tax purposes, (ii) corporation or certain other entities, created or
organized in or under the laws of the United States or any state thereof
(including the district of Columbia), (iii) an estate the income of which is
subjhect to United States federal income taxation regardless of its source,
or(iv) a trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons have
the authority to control all of the substantial decisions of such trust, (c)
who are entitled to Treaty benefits under the "limitation on benefits"
provisions contained in the Treaty, as discussed below ("U.S. Holders"), (d)
who hold the ADSs or Ordinary Shares as capital assets and (e) whose functional
currency is the U.S. dollar. Certain holders (including, but not limited to,
United States expatriates, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax,
securities broker-dealers and persons holding the ADSs or Ordinary Shares as
part of a conversion transaction) may be subject to special rules not discussed
below. Because this is a general summary, prospective purchasers are advised to
consult their own tax advisor with respect to the purchase and ownership of
ADSs and Ordinary Shares.
The statements of United States and French tax laws set forth below assume
that each obligation in the Deposit Agreement and any related agreement will be
performed in accordance with its terms and are based on United States and
French laws and the double taxation conventions between the United States and
France in force, and on the practice of the French tax authorities, as of the
date hereof, and as a consequence are subject to any changes in such laws,
conventions or practice occurring after such date. In this regard, the
Convention between the United States of America and the French Republic for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income and Capital of August 31, 1994 (the "Treaty"), entered into
force on December 30, 1995 and the French tax authorities issued tax
regulations regarding the Treaty application (the "Regulations").
35
<PAGE>
For purposes of the Treaty and the United States Internal Revenue Code of
1986, as amended (the "Code"), U.S. Holders of ADRs will be treated as owners
of the ADSs evidenced thereby and the Ordinary Shares represented by such ADSs.
Taxation of Dividends
Avoir Fiscal
In France, dividends are paid out of after-tax income. French residents
are entitled to a tax credit, known as the avoir fiscal. T rate of the avoir
fiscal is generally equal to 50% of the dividends paid for individuals and 40%
of the dividend paid for shareholders who are not individuals. In addition, if
the dividends are subject to the precompte, shareholders entitled to the avoir
fiscal at a rate of 40% are generally entitled to an additional amount of avoir
fiscal equal to 20% of any such precompte actually paid in cash by the company
(see paragraph below relating to the precompte)
Dividends paid to non-residents are normally subject to a 25% French
withholding tax and, under French domestic law, are not eligible for the
benefit of the avoir fiscal.
Under the Treaty, the rate of French withholding tax on dividends paid to
a U.S. Holder whose ownership of the ADSs or Ordinary Shares is not effectively
connected with a permanent establishment or a fixed base in France is reduced
to 15%. Dividends paid to an Eligible U.S. Holder as defined below will be
immediately subject to the reduced rate of 15%, provided that such holder
establishes before the date of payment that such holder is a resident of the
United States under the Treaty in accordance with the procedures described
below. An Eligible U.S. Holder would also be entitled to a payment equal to the
avoir fiscal, (i.e. to 50% or 40% of the dividend paid; depending on whether
its user is an individual or not), less a 15% withholding tax. As noted below,
such payment will not be made to an Eligible U.S. Holder until after the close
of the calendar year in which the dividend was paid and only upon receipt by
the French tax authorities of a claim made by the Eligible U.S. Holder for such
payment in accordance with the procedures set forth below.
An Eligible U.S. Holder is a U.S. Holder whose ownership of ADSs or
Ordinary Shares is not effectively connected with a permanent establishment or
fixed base in France, and who is (i) an individual or other non-corporate
holder that is a resident of the United States as defined pursuant to the
provisions of the Treaty, (ii) a United States corporation, other than a
regulated investment company, (iii) a United States corporation which is a
regulated investment company only if less than 20% of its Ordinary Shares are
beneficially owned by persons who are neither citizens nor residents of the
United States or (iv) a partnership or trust that is treated as a resident of
the United States as defined pursuant to the provisions of the Treaty, but only
to the extent that its partners, beneficiaries or grantors would qualify under
clause (i) or (ii) above.
In general, under the Treaty, an Eligible U.S. Holder may receive a
payment of the avoir fiscal only if such holder (or its partners, beneficiaries
or grantors, if the holder is a partnership or trust) attests that it is
subject to United States federal income taxes on the payment of the avoir
fiscal and the related dividend. Certain entities are not entitled to the full
avoir fiscal. Tax-exempt "U.S. Pension Funds", as discussed below, and certain
other tax-exempt entities (including certain State-owned institutions, not-for-
profit organizations and individuals with respect to dividends beneficially
owned by such individuals and derived from an investment in a tax-favored
retirement account) ("Other Tax-Exempt Entities") that own, directly and
indirectly, less than 10% of the capital of the Company, and that satisfy
certain filing formalities specified in the Regulations (i) are entitled to a
payment, subject to French withholding tax, equal to 30/85 of the gross avoir
fiscal (the "partial avoir fiscal") and (ii) are eligible for the reduced
withholding tax rate of 15% on dividends. A "U.S. Pension Fund" includes the
exempt pension funds established and managed in order to pay retirement
benefits subject to the provisions of Section 401(a) (qualified retirement
plans), Section 403(b) (tax deferred annuity contract) or Section 457 (deferred
compensation plans) of the Code.
Dividends paid to an Eligible U.S. Holder will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if (i) such holder
duly completes and provides the French tax authorities with Treasury Form RF 1
A EU-NO. 5052 (the "Form") before the date of payment of the relevant dividend
together with, if such
36
<PAGE>
Eligible U.S. Holder is not an individual, an affidavit attesting that it is
the beneficial owner of all the rights attached to the full ownership of the
ADSs or Ordinary Shares, including, but not limited to dividend rights, or (ii)
if completion of the Form is not possible prior to the payment of dividends,
such holder duly completes and provides the French tax authorities with a
simplified certificate (the "Certificate") stating that (a) such holder is a
U.S. resident as defined pursuant to the provisions of the Treaty, (b) such
holder's ownership of the ADSs or Ordinary Shares is not effectively connected
with a permanent establishment or fixed base in France, (c) such holder owns
all the rights attached to the full ownership of the ADSs or Ordinary Shares,
including but not limited to dividend rights, (d) such holder meets all the
requirements of the Treaty for obtaining the benefit of the reduced rate of
withholding tax and the right to payment of the French avoir fiscal, and (e)
such holder claims the reduced rate of withholding tax and payment of the
French avoir fiscal. Dividends paid to a U.S. Holder that is not entitled to
the avoir fiscal (i.e., not an Eligible U.S. Holder) or to an Eligible U.S.
Holder that has not filed a completed Form or Certificate before the dividend
payment date will be subject to French withholding tax at the rate of 25%. Such
holder may claim a refund of the excess withholding tax and an Eligible U.S.
Holder may claim the avoir fiscal by completing and providing the French tax
authorities with the Form before December 31st of the year following the end of
the calendar year during which the dividend is paid. U.S. Pension Funds and
Other Tax-Exempt Entities are subject to the same general filing requirements
as Eligible U.S. Holders except that they may have to supply additional
documentation evidencing their entitlement to these benefits.
Eligible U.S. Holders, U.S. Pension Funds and Other Tax-Exempt Entities
must file the Form and, when applicable, the affidavit in order to receive
payment of the avoir fiscal or partial avoir fiscal (whichever is applicable).
The avoir fiscal or partial avoir fiscal is generally expected to be paid to
Eligible U.S. Holders, U.S. Pension Funds and Other Tax-Exempt Entities within
12 months of filing the Form, but not before January 15th following the end of
the calendar year in which the related dividend is paid. Similarly, any French
withholding tax refund is generally expected to be paid to U.S. Holders within
12 months of filing the Form, but not before January 15th following the end of
the calendar year in which the related dividend is paid.
The Form or the Certificate, together with their respective instructions,
will be provided by the Depositary to all U.S. Holders of ADRs registered with
the Depositary and are also available from the United States Internal Revenue
Service. The Depositary will arrange for the filing with the French tax
authorities of all Forms or Certificates completed by U.S. Holders of ADRs that
are returned to the Depositary within the time period specified by the
Depositary in its distribution to registered U.S. Holders of ADRs.
For United States federal income tax purposes, the gross amount of a
dividend and the amount of the avoir fiscal paid to a U.S. Holder, including
any French withholding tax thereon, will be included in gross income as
ordinary dividend income in the year each such payment is received (which, in
the case of a U.S. Holder of ADRs, will be the date of receipt by the
Depositary) to the extent paid or deemed paid out of the Company's current or
accumulated earnings and profits as calculated for United States federal income
tax purposes. No dividends received deduction will be allowed with respect to
dividends paid by the Company. Such dividends will generally constitute foreign
source "passive" or (in the case of certain holders) "financial services"
income for foreign tax credit purposes. The amount of any dividend paid in
francs or euros, including the amount of any French taxes withheld therefrom,
will be equal to the dollar value of the francs or euros on the date such
dividend is included in income (which, for a U.S. Holder of ADRs, will be the
date of receipt by the Depositary), regardless of whether the payment is in
fact converted into dollars. A U.S. Holder will generally be required to
recognize a United States source ordinary income or loss upon the sale or
disposition of francs or euros, unless such U.S. Holder converts the foreign
currency on the date of receipt. Moreover, a U.S. Holder may be required to
recognize foreign currency gain or loss, upon the receipt of a refund of
amounts, if any, withheld from a dividend in excess of the Treaty rate of 15%.
Such foreign currency gain or loss generally will be United States source
ordinary income or loss.
French withholding tax imposed at the Treaty rate of 15% on dividends paid
by the Company and on any related payment of the avoir fiscal is treated as
payment of a foreign income tax and, subject to certain conditions and
limitations, may be taken as a credit against such U.S. Holder's United States
federal income tax liability.
37
<PAGE>
Precompte
Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have
been earned and taxed more than five years before the distribution and which
give rise to the avoir fiscal are subject to a "precompte" or prepayment by
such companies. The precompte is paid by the distributing company to the French
tax authorities and is generally equal to one-half of the nominal dividend
distributed. However, the precompte may be reduced to 45% in respect of
dividends paid to holders that are entitled to use the avoir fiscal at the rate
of 45% rather than the rate of 50%, provided that the Company certifies to have
distributed such dividends to such beneficiaries.
A U.S. Holder not entitled to the full avoir fiscal may generally obtain a
refund from the French tax authorities of any precompte paid by the Company
with respect to the dividends distributed. Pursuant to the Treaty, the amount
of the precompte refunded to United States residents is reduced by the 15%
withholding tax applicable to dividends and by the partial avoir fiscal paid to
U.S. Pension Funds and other Tax-Exempt Entities. A holder is only entitled to
a refund of precompte actually paid in cash by the Company (net of applicable
withholding tax) and is not entitled to a refund of the precompte paid by the
Company by off-setting French and/or foreign tax credits.
A U.S. Holder entitled to the refund of the precompte must apply for such
refund by filing a French Treasury form RF 1 B EU-NO. 5053 before the end of
the year following the year in which the dividend was paid. The form and its
instructions are available from the United States Internal Revenue Service or
at the Centre des Impots des Non Residents (9 rue d'Uzes, 75094 Paris Cedex 2).
For United States federal income tax purposes, the amount of the precompte
paid to a U.S. Holder will generally be included in gross income as ordinary
dividend income in the year such payment is received. Such amounts will
generally constitute foreign source "passive" or (in the case of certain
holders) "financial services" income for foreign tax credit purposes. The
amount of any precompte paid in francs, including the amount of any French
taxes withheld therefrom, will be equal to the dollar value of the francs or
euros on the date such precompte is included in income (which, for a U.S.
Holder of ADRs, will be the date of receipt by the Depositary), regardless of
whether the payment is in fact converted into dollars. A U.S. Holder will
generally be required to recognize a United States source ordinary income or
loss upon the sale or disposition of francs or euros.
Taxation of Capital Gains
A U.S. Holder who is a resident of the United States as defined pursuant
to the provisions of the Treaty will not be subject to French tax on any
capital gain from the sale or exchange of ADSs or Ordinary Shares unless these
ADSs or Ordinary Shares form part of the business property of a permanent
establishment or fixed base that the U.S. Holder has in France. Special rules
apply to individuals who are residents of more than one country. The deposit or
withdrawal of Ordinary Shares by U.S. Holders under the Deposit Agreement will
not be subject to United States federal income tax. In general, for United
States federal income tax purposes, a U.S. Holder will recognize a capital gain
or loss on the sale or exchange of ADRs or Ordinary Shares in the same manner
as on the sale or exchange of any other Ordinary Shares held as capital assets.
Such gain or loss, if any, will generally be United States source gain or loss.
In the case of a U.S. Holder who is an individual, any capital gain generally
will be subject to U.S. federal income tax at preferential rates if specified
minimum holding periods are met.
French Estate and Gift Taxes
Pursuant to "The Convention Between the United States of America and the
French Republic for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Estates, Inheritance and Gifts of
November 24, 1978," a transfer of Ordinary Shares or ADSs by gift or by reason
of the death of a U.S. Holder that would otherwise be subject to French gift or
inheritance tax, respectively, will not be subject to
38
<PAGE>
French tax unless (i) the donor or the transferor is domiciled in France at the
time of making the gift, or at the time of his or her death, or (ii) the
Ordinary Shares or ADSs were used in, or held for use in, the conduct of a
business through a permanent establishment or fixed base in France.
French Wealth Tax
The French wealth tax does not generally apply to a U.S. Holder who is a
resident of the United States as defined pursuant to the provisions of the
Treaty.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends
paid in respect of ADSs or Ordinary Shares the proceeds received in the sale,
exchange or redemption of the ADSs or Ordinary Shares by a non-corporate U.S.
Holder, and a 31% backup withholding tax may apply to such amounts if the U.S.
Holder fails to provide an accurate tax identification number or to report
interest and dividends required to be shown on its federal income tax returns.
Finalized Treasury regulations have generally expanded the circumstances under
which information reporting and backup withholding may apply for payments made
after December 31, 2000. Holders of ADSs or Ordinary Shares should consult
their tax advisors regarding the application of the information reporting and
backup withholding rules.
39
<PAGE>
ITEM 8: Selected Consolidated Financial Data
The selected consolidated financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere herein and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data for the five years ended December 31, 1995, 1996,
1997, 1998 and 1999 have been extracted or derived from the Consolidated
Financial Statements of the Company, which have been prepared in accordance with
U.S. GAAP and audited by Ernst & Young Audit, France, independent auditors.
<TABLE>
<CAPTION>
Year Ended and at December 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
euros euros euros euros euros U.S. $(1)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Research and development revenues......... 72 2,460 9,792 21,297 19,406 19,542
Net sales................................. 4,160 4,943 5,253 5,614 8,290 8,348
Total Revenues.......................... 4,232 7,403 15,045 26,911 27,696 27,890
Research and development expenses......... (4,951) (13,416) (23,225) (33,732) (42,423) (42,720)
Cost of goods sold........................ (2,808) (3,262) (3,165) (2,667) (3,457) (3,481)
Selling and marketing expenses............ (535) (727) (1,112) (1,229) (1,462) (1,472)
General and administrative expenses....... (2,616) (4,705) (7,003) (8,689) (10,513) (10,587)
----------- ----------- ----------- ----------- ----------- -----------
Total Expenses.......................... (10,910) (22,110) (34,505) (46,317) (57,855) (58,260)
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.................... (6,678) (14,707) (19,460) (19,406) (30,159) (30,370)
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net............ 266 1,406 1,914 1,709 818 823
Foreign Exchange gain (loss).............. (136) 45 296 (889) 2,984 3,005
Other income (expense) net................ 2 9 23 1,182 (698) (703)
Loss before income tax benefit.......... (6,547) (13,248) (17,227) (17,404) (27,055) (27,245)
----------- ----------- ----------- ----------- ----------- -----------
Income tax benefit(3)..................... 1,211 3,326 2,919 2,687 4,945 4,980
Net loss................................ (5,336) (9,922) (14,308) (14,717) (22,110) (22,265)
----------- ----------- ----------- ----------- ----------- -----------
Loss per ordinary share(2)(4)............. (1,21) (1,78) (2,06) (2,02) (2,97) (2,99)
Weighted average of Ordinary Shares
outstanding(2)(4) ....................... 4,396 5,581 6,932 7,293 7,452 7,452
----------- ----------- ----------- ----------- ----------- -----------
Loss per ADS (American Depositary
Share)(2)(4) ............................ (0,40) (0,59) (0,69) (0,67) (0,99) (1,00)
Weighted average of ADSs outstanding(2)(4) 13,188 16,743 20,796 21,879 22,356 22,356
----------- ----------- ----------- ----------- ----------- -----------
Consolidated Balance Sheet Data:
Cash and cash equivalents................ 6,414 79,086 70,346 50,204 21,148 21,296
Total assets............................. 17,381 101,018 102,890 101,594 80,946 81,512
Long-term liabilities (excluding current
portion) ................................ 5,467 6,425 6,253 8,019 5,387 5,424
Accumulated Deficit...................... (12,982) (22,904) (37,212) (30,659) (52,769) (53,138)
Shareholders' equity..................... 8,780 85,439 84,234 75,243 54,628 55,012
</TABLE>
(1) The financial information expressed in US$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying
rate in New York on December 31, 1999 which was US$ 1.007 for each euro.
(2) See "Item 19: Financial Statements -- Note 1 of the Notes to consolidated
Financial Statements."
(3) See "Item 19: Financial Statements -- Note 8 of the Notes to consolidated
Financial Statements."
(4) Figures for 1995 have been adjusted to reflect the 100-for-1 share split
approved by the shareholders on April 29, 1996.
40
<PAGE>
Dividend Policy
The Company currently intends to retain all earnings for use in the
operation and expansion of its business and correspondingly does not anticipate
paying any cash or share dividends on its Ordinary Shares in the foreseeable
future. To date, the Company has never declared or paid cash or share dividends
on its Ordinary Shares. Dividends if and when declared by the Company will be
declared in francs but paid to holders of ADSs in dollars.
Dividends paid to ADR holders will be net of fees and charges of the
Depository, net of French withholding tax and may be affected by exchange rate
fluctuations. See " -- Exchange Rate Information" and "Taxation."
ITEM 9: Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Annual Report contains certain forward-looking statements that
involve risks and uncertainties relating to our future financial and
technological performance. Such statements are based on our current
expectations and are subject to a number of factors and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements. In evaluating such statements, readers should
specifically consider factors which could affect expected results, including,
but not limited to, those highlighted in the relevant sections hereof and
principally: (i) the uncertainties inherent in scientific research in a field
subject to intense competition and rapid technological change, and in
particular the risk that we will be unable to discover and patent genes
associated with common diseases or drug response or other valuable genomic or
biological information before our competitors; (ii) the inability to maintain
or initiate third-party arrangements which generate revenues, in the form of
license fees, research and development support, royalties and other payments,
in return for rights to the results of our research; and (iii) delays or
difficulties in developing or acquiring the genomics technologies and technical
and managerial personnel required to conduct our research programs at
reasonable costs. Readers are cautioned not to place undue reliance on such
statements, which speak only as of the date hereof. We undertake no obligation
to release publicly any revisions to forward-looking statements to reflect any
changes in events, conditions or circumstances on which such statements are
based.
Overview
We are an integrated genomics company. Our mission is to discover and
license genomics information relevant for the discovery, development and
marketing of new therapeutics for common diseases. We have developed an
original approach to the discovery of important genes, based on association
studies in human populations. These studies are made possible by our technology
platform, which integrates key scientific tools that we have either invented or
applied in novel ways. Our strategy is to focus our research efforts in the
following fields:
* central nervous system diseases;
* metabolic disorders, and in particular obesity; and
* pharmacogenomics, which is the application of genomics
technologies to the identification and analysis of genes involved
in drug response.
In parallel with our primary focus on gene discovery and pharmacogenomics,
we have used our technology platform to pursue commercial opportunities in
related areas, notably in the fields of therapeutic protein libraries,
plant genomics and vaccine and immunotherapy applications.
41
<PAGE>
In addition, our synthetic DNA division, Genset Oligos, is one of the
world's largest manufacturers and suppliers of oligonucleotides, a key raw
material in genomics research, with production facilities in France, the United
States, Japan, Singapore and Australia. Genset Oligos also provides us with a
reliable and low cost supply of high quality oligonucleotides for our own
research.
Our principal source of revenue is our research and collaboration
agreements with strategic partners, which are pharmaceutical or biotechnology
companies. Under these agreements, we receive a combination of the following
forms of payments:
* research payments: regular fixed research funding payments and
milestone payments based on the completion of defined research
objectives;
* clinical milestone payments paid when and if our partner achieves
defined clinical development objectives; and
* royalties on sales of drugs that are developed or modified based
on our research results.
To date, we have generated the majority of our revenues from a limited
number of strategic partnership agreements and we expect we will continue to
rely on few partners for the foreseeable future. In 1999, we received revenues
under six research and collaboration agreements, including two in the area of
gene discovery, two in the area of pharmacogenomics, and two in the areas of
plant genomics and therapeutic protein libraries. Our current partnership
agreements typically provide for periods of guaranteed research funding of
about two years. We cannot be certain that the research periods under our
existing partnership agreements will not be terminated early, that any of them
will be renewed or that we will enter into new strategic partnerships to
replace existing ones whose research terms come to an end and are not renewed.
Our main costs and expenses relate to our research activities. The growth
of our research costs is driven by the initiation or expansion of research
activities or programs, which result in the need to invest in new personnel or
the expansion of our equipment and facilities. We also fund various scientific
collaborations, including notably collaborations with universities, hospitals
and medical centers, to ensure our continued access to collections of clinical
samples and data suitable for our association studies programs. Over the last
years, we have invested significantly in the expansion of our personnel and
facilities and the further development of our integrated technology. We believe
that our existing technology platform and infrastructure is sufficient to allow
us to conduct our current research activities.
Our results of operations for any period may not be comparable to the
results of operations for any other period. In addition, our historical results
should not viewed as being indicative of future operating results.
We have incurred losses since our inception in 1989 and we anticipate that
we will incur losses for the next years. To date, the majority of our revenues
have resulted from research funding and milestone payments from our strategic
alliance partners. We have not received any royalties from the sale of
products. Our losses may increase as we expand our investments in new
technology and research and development programs. As a result, we will need to
generate significant revenues to achieve profitability. We cannot be certain
whether or when this will occur because of the significant uncertainties that
affect our business.
Recent Developments
Since the beginning of 2000, we have entered into three new revenue-
generating research and collaboration agreements:
* in February 2000, we signed an agreement with Corixa Corporation,
a U.S. biotechnology company, to sequence the genome of an
undisclosed microbial organism provided by Corixa;
* also in February 2000, we signed an agreement with Abbott
Laboratories to discover genes associated with bipolar disorder
and Type II diabetes; and
* in April 2000, we signed an agreement with Sanofi-Synthelabo to
conduct a pharmacogenomics research program aimed at lead
selection and optimization for an undisclosed CNS disease.
42
<PAGE>
In March 2000, we exercised our put option to issue $10 million of Genset
equity to Abbott Laboratories.
In June of 2000, we issued convertible bonds exchangeable into new or
existing Genset ordinary shares, raising aggregate net proceeds of
approximately 53 million euros. The bonds were issued at par, with a principal
value of 94 euros per bond. The bond issuance was structured as a zero-coupon
convertible bond, with no interest payments payable during the 3.5 year term of
the bond. The bond accrues interest at a rate of 4.5% annually; assuming no
early conversion or redemption, the bonds will be redeemed at their maturity
date, January 1, 2004, at a price per bond of 109.72 euros or 116.72% of their
principal value.
The bondholders can convert their bonds into Genset common shares at any
time at a conversion rate of one share per bond. Alternatively, we can force
early redemption or conversion of the bonds into ordinary shares at this same
conversion rate if, prior to June 27, 2002, our ordinary shares trade at in
excess of 250% of the principal value per bond plus accrued interest during a
consecutive 20 day period within a 40 day period chosen by us. Between June 27,
2002 and December 31, 2003, we can force early redemption or conversion of the
bonds into ordinary shares if our ordinary shares trade at in excess of 120% of
the principal value per bond plus accrued interest. If the bondholders decide
to convert or exchange their bonds, we have the option either to issue them new
shares or to exchange existing Genset shares we had previously bought. The
issue consisted of a total of 591,366 bonds; consequently, at the conversion
rate of 1 share per bond, if all the bonds were converted into newly issued
ordinary shares, the bondholders would hold 591,366 shares, or approximately
6.9% of the share capital after conversion, based on the number of shares
outstanding at May 31, 2000.
Results of Operations
Years ended December 31, 1999 and 1998
We reported total revenues of 27.7 million euros for 1999, an increase of
3% compared to total revenues of 26.9 million euros for 1998. Research and
development revenues comprised 19.4 million euros, or 70% of total revenues,
while oligonucleotide sales accounted for 8.3 million euros. The slight
increase in revenues was due to a 48% increase in DNA sales which compensated
for a decrease in research and development revenues.
Our total operating expenses increased 25% to 57.9 million euros for 1999,
from -46.3 million euros for 1998. This increase was due to the increase in
research and development expenses resulting from the continued expansion of our
technology platform. Specifically, research and development expenses for the
year were 42.4 million euros, an increase of 26% as compared to 33.7 million
euros in 1998. This increase was due to the addition of new personnel and the
establishment of physiological genomics and epidemiology and biostatistics
departments in La Jolla. We expect research and development expenses to remain
stable in 2000.
Costs of goods sold amounted to 3.5 million euros for 1999, compared to
2.7 million euros for 1998. Selling and marketing expenses for 1999 amounted to
1.5 million euros, compared to 1.2 million euros for 1998. Both items relate
exclusively to sales of oligonucleotides and the increase in 1999 reflects the
increase in sales.
General and administrative expenses increased 21% to 10.6 million euros in
1999 from 8.7 million euros in 1998 as a result of an increase in patent and
licensing activities and bringing operations on line in new geographic areas.
We expect general and administrative expenses to continue to increase during
2000 due to continued expansion of patent, licensing and business development
activities.
The amortization of total deferred compensation over the next four years
with respect to stock options outstanding as of December 31, 1999 will amount
to approximately 2.2 million euros.
In the area of non-operating results, we reported a net foreign exchange
gain of 3.0 million euros in 1999, as a result of the strengthening of the U.S.
dollar relative to the euro during the year.
43
<PAGE>
Effective in the third quarter 1999, we changed our accounting treatment
of Ceres from the equity method to the cost method in recognition of our
decreasing influence in Ceres. We recorded equity in loss of affiliated
companies reflecting our portion of losses generated by the development of
Ceres' research activities for only the first two quarters of 1999. As a
result, equity in loss of affiliated companies decreased from 1998 to 1999.
We recorded an income tax benefit (research tax credit) of 4.9 million
euros for 1999 compared to 2.7 million euros for 1998. This increase was due to
an increase in research and development expenses in 1999. As of December 31,
1999, we had a research-related income tax credit receivable of 13.9 million
euros, of which 3.3 million euros is recoverable in 2000, 2.9 million euros is
recoverable in 2001, 2.7 million euros is recoverable in 2002, and 5.0 million
euros is recoverable in 2003.
At December 31, 1999, our accumulated deficit was 52.8 million euros
compared to 30.7 million euros at December 31, 1998.
Net sales and operating income by principal business activity
Research and Development
We reported total revenues of 19.4 million euros for 1999, a decrease of
8.9 % compared to revenues of 21.3 million euros for 1998. The slight decline
in research and development revenues reflects (1) the payment in 1998 of a one-
time up-front license fee under our agreement with Wyeth-Ayerst Laboratories,
and (2) a decrease in research fee payments under our existing collaboration
agreements during the second half of 1999, as we had fewer agreements under
which we were receiving research funding payments during this period. Direct
costs increased 31% to 41.8 million euros for 1999, from 31.9 million euros for
1998. This increase was due to the addition of new personnel and the
establishment of physiological genomics and epidemiology and biostatistics
departments in La Jolla. We reported a net loss for 1999 of 22.3 million euros,
compared to a net loss of 10.6 million euros for 1998.
Oligonucleotide Sales
We reported total revenues of 11.6 million euros for 1999, an increase of
38% compared to revenues of 8.5 million euros for 1998. The 48% increase in DNA
sales to third parties was primarily due to increased sales in Asia,
particularly in Singapore and Japan, following the establishment of our new
subsidiaries in these markets. The 27% increase in direct costs, from 7.8
million euros for 1999 to 9.9 million euros for 1998, was due to a 28% increase
in personnel headcount, and to the progression of the quantities produced. As a
result, our oligonucleotide sales activity reported operating income for 1999
of 1.8 million euros, compared to 0.7 million euros for 1998, an increase of
156%.
Years ended December 31, 1998 and 1997
Genset reported total revenues of 27.0 million euros for the year ended
December 31, 1998, an increase of 79% compared to total revenues of 15.1
million euros for the year ended December 31, 1997. Research and development
revenues comprised 21.3 million euros, or 79% of total revenues, while
oligonucleotide sales accounted for 5.6 million euros. The growth of revenues
was primarily due to the 117% increase in revenues from our research and
development activity.
Total operating expenses increased 34% to 46.3 million euros for 1998,
from 34.5 million euros for 1997. This increase was due primarily to the
increase in research and development expenses.
General and administrative expenses increased 24% to 8.7 million euros in
1998 from 7.0 million euros in 1997 as a result of an increase in patent and
licensing activities and bringing operations on line in new geographic areas.
We also recognized a deferred compensation expense of 0.5 million euros in 1998
related to stock options
44
<PAGE>
granted to general and administrative personnel.
The amortization of total deferred compensation over the next four years
with respect to stock options outstanding as of December 31, 1998 will amount
to approximately 3.4 million euros.
Net interest income declined approximately 11% to 1.7 million euros in
1998 from 1.9 million euros in 1997, reflecting declining cash and cash
equivalent balances. We reported a net foreign exchange loss of 0.9 million
euros in 1998 in contrast to the foreign exchange gain reported in 1997. This
is a result of the decline of the yen and the U.S. dollar relative to the euro
during the year and accounting in euros for assets denominated in yen and U.S.
dollars.
We recorded other income of 2.5 million euros, principally as a result of
a gain recorded on our equity interest in Ceres, which was accounted for using
the equity method. We also recorded a loss of 1.3 million euros from equity in
loss of affiliated companies reflecting, predominantly, the continued
development of Ceres' research activities.
We recorded a decrease in income tax benefit to 2.7 million euros for 1998
compared to 2.9 million euros for 1997. This benefit is principally due to a
research tax credit that is calculated based on the increase of qualifying
research expenditures in France and was lower due to a marginally lower
increase in 1998. As of December 31, 1998, the Company had a research-related
income tax credit receivable of 10.2 million euros, of which 1.2 million euros
is recoverable in 1999, 3.3 million euros is recoverable in 2000, 2.9 million
euros is recoverable in 2001, and 2.7 million euros is recoverable in 2002.
We reported a net loss for the year ended December 31, 1998 of 14.7
million euros as compared to a net loss of 14.3 million euros for the year
ended December 31, 1997. At December 31, 1998, our accumulated deficit was 30.7
million euros compared to 37.2 million euros at December 31, 1997. In
accordance with French law, we set off 21.3 million euros of accumulated
deficit against surplus paid-in capital during 1998.
Net sales and operating income by principal business activity
Research and Development
We reported total revenues of 21.4 million euros for 1998, an increase of
119% compared to revenues of 9.7 million euros for 1997, due to (1) additional
payments of research fees under two new research and collaboration agreements
in 1998, (2) the payment of a one-time up-front license fee under our agreement
with Wyeth-Ayerst Laboratories, and (3) milestone payments received under our
research contracts. Direct costs increased 58% to 31.9 million euros for 1998,
from 20.5 million euros for 1997. This increase was due primarily to the
recruitment of new personnel, the addition of new sequencing equipment, the
expansion of our research laboratories in Evry and La Jolla, California, and
the initiation of new genomics research programs. We reported a stable net loss
of 10.6 million euros for 1998, compared to a net loss of 10.7 million euros
for 1997.
Oligonucleotide Sales
We reported total revenues of 8.5 million euros for 1998, an increase of
31% compared to revenues of 6.5 million euros for 1997. The growth of sales in
all markets and the opening of our new subsidiary in Singapore contributed to
this increase. The 22% increase in direct costs, from 6.4 million euros for
1997 to 7.8 million euros for 1998, was due to an increase of personnel
headcount by 22% and to the progression of the quantities produced. As a
result, operating income increased six fold from 0.1 million euros for 1997 to
0.7 million euros for 1998.
45
<PAGE>
Liquidity and Capital Resources
We have financed our operations through the private placement of equity
securities, bank loans, conditional interest-free loans received from ANVAR, a
French government agency, French government grants and the proceeds of our June
1996 initial public offering. At December 31, 1999, our long term debt
(including current portion) amounted to 7.2 million euros compared with 10.4
million euros at December 31, 1998 and 8.9 million euros at December 31, 1997.
At December 31, 1999, cash and cash equivalents and short-term investments
(less than three months) totaled 21.1 million euros.
For the year ended December 31, 1999, our principal uses of cash were
funding of research and development expenses, purchases of additional equipment
for sequencing, genotyping, and bioinformatics, and expansion of Genset's
Genomics Research Center in Evry and La Jolla, California.
We have made significant capital investments to date to establish the
substantial scientific infrastructure necessary to conduct our genomics
programs. We expect to continue to do so over the next several years to
continue to develop and acquire new technologies and qualified personnel. More
specifically, our future capital requirements, the timing and amount of
expenditures and the adequacy of available funds will depend upon many factors,
including:
* the magnitude and progress of our research and development
programs,
* our ability to maintain and enter into new strategic partnerships
and collaborative agreements,
* the progress of the development and commercialization of potential
drugs resulting from our programs,
* competing technological and market developments, and
* the process of preparing, filing, maintaining and enforcing patent
claims and other intellectual property rights and related costs.
Based on our current plans, and after taking account of the capital raised
during the first two quarters of 2000, including notably the $10 million of
shares issued to Abbott Laboratories in March 2000 and the approximately 53
million euros of net proceeds from the June issuance of convertible bonds, we
believe our existing resources and loans, together with the net proceeds of
this offering, will be sufficient to fund our capital requirements for the next
three years. However, the actual amounts of funds we will need during or after
that period will depend on the factors listed above, some of which are beyond
our control, and we may need funds sooner than we currently anticipate. In
addition, if the holders of the bonds issued in June 2000 do not convert their
bonds into shares, and if the market price of Genset shares does not prior to
such date reach the level required for us to force conversion of the bonds, we
will have an obligation at their maturity date of January 1, 2004 to redeem the
bonds for an aggregate redemption price of 64.9 million euros. We may seek
funding through additional public or private equity offerings or debt
financings. This additional financing may not be available when needed, or, if
available, may not be available on favorable terms.
The Euro
We completed the conversion of our accounts and accounting systems into
euros in January 1999. We published our 1998 accounts in both French francs and
euros, and have, beginning with the first quarter of 1999, been maintaining and
publishing our accounts in euros only.
Year 2000
The risks related to the arrival of the Year 2000 did not cause any
significant disruptions in our business or research operations and did not
result in our having to invest heavily in software or computer modifications or
replacements.
46
<PAGE>
ITEM 9A: Market Risk
Currency Exchange Rate Sensitivity
We publish our consolidated financial statements in euros and the majority
of our expenses are and will for the foreseeable future continue to be
denominated in euros or euro-based currencies. The majority of our revenues,
however, are denominated in U.S. dollars. A strengthening or weakening of the
euro against the U.S. dollar could therefore significantly affect our results
of operations. We have significant U.S. dollar denominated expenses that
partially limit our exposure to fluctuations between the euro and the U.S.
dollar. These include the expenses of our U.S. subsidiary Genset Corporation,
as well as U.S. dollar denominated payment obligations of Genset S.A. pursuant
to numerous contracts entered into with non-French entities. In addition,
beginning in 1999, we have entered into hedging transactions on a non-
speculative basis to limit the potential impact of exchange rate fluctuations.
These transactions have to date been limited to purchasing, when deemed
necessary, forward contracts to cover firm U.S. dollar commitments so as to fix
the value in euros of these future revenues.
In addition to the euro and the U.S. dollar, the other primary functional
currencies for our operations are the Singapore dollar and the yen. The total
amount of our expenses and revenues denominated in these currencies remain
relatively small; we therefore do not expect that a strengthening or weakening
of the euro against these other currencies would have a material impact on our
financial results.
Our balance sheet may also be affected by exchange rate fluctuations as a
result of variations in the euro value of assets denominated in other
currencies. As at December 31, 1999, approximately 19.5% of our consolidated
total assets were denominated in currencies other than euros, principally U.S.
dollars.
Interest Rate Sensitivity
We have had net positive interest income since 1995, resulting from cash
and cash equivalent balances that are significantly greater than our debt.
Consequently, the principal risk currently associated with interest rate
fluctuations is that interest income could decrease as a result of a continued
decrease in interest rates. As our net cash and cash equivalent balance
decreases, the net effect of such a decrease in interest rates also diminishes.
Our long-term debt bears interest at fixed rates between 4.25% and 8.25%.
ITEM 10: Directors and Officers of the Registrant
MANAGEMENT
In accordance with French law governing a societe anonyme, the Company's
affairs are managed by its Board of Directors and by its Chairman of the Board
and Chief Executive Officer, who has full authority to manage the affairs of
the Company, subject to the prior authorization of the Board of Directors for
certain decisions.
Board of Directors
Under French law, the Board of Directors is responsible, among other
things, for presenting accounts to the shareholders and convening shareholders'
meetings. In addition, the Board of Directors reviews and monitors the
Company's economic, financial and technological strategies. The Company's Board
of Directors consists of between three and 24 members elected by the Company's
shareholders at their general meetings. Each director must own at least one
share of Genset. Under French law a director may be an individual or a
corporation.
Directors are required to comply with applicable law and Genset's statuts
(or charter and by-laws). Under
47
<PAGE>
French law, the Chairman of the Board and Chief Executive Officer may be
responsible individually for actions taken by such person that are contrary to
the Company's interests, and the directors may be responsible for such actions
both individually and jointly.
The Company has a compensation committee, which is responsible for
proposing the salaries and incentives of the Company's executive officers and
senior management to the Board. The Company also has an audit committee.
The following table sets forth the names of the directors of the Company,
their current positions with the Company, the dates of their initial
appointment as directors and the expiration dates of their current term.
Genset's statuts provide that each director is elected for a maximum six-year
period. Directors need not be French nationals and there is no limitation on
the number of terms that directors may serve.
<TABLE>
<CAPTION>
Name Age Current Positions Initially Appointed(1) Term Expires
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pascal Brandys Chairman of the Board
41 of Directors and Chief 1989 2004
Executive Officer
(President Directeur
General)
Marc Vasseur 50 Director, Chief Biology 1992 2004
Officer and Directeur
General
Daniel Cohen 49 Director, Chief 1996 2002
Genomics Officer and
Directeur General
Laurent Degos 54 Director and President 1989 2004
of the Scientific
Advisory Board
GIMD (represented by
Benoit Habert(2)) 34 Director 1994 2006
Martyn Greenacre(3) 58 Director and President 1993 2005
of the Compensation
Committee
Edmund Olivier de
Vezin(3) 62 Director 1994 2002
Andre Pernet (2) 55 Director 2000 2006
</TABLE>
(1) Dates specified for directors representing corporations relate to the
entity represented.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Pascal Brandys has been Chairman of the Board of Directors and Chief
Executive Officer (President Directeur General) of the Company since he co-
founded the Company in 1989 and President and Chief Executive Officer of Genset
Corporation since its founding in 1992. Mr. Brandys is also President of France
Biotech, the professional association of French biotechnology companies and is
a Director of Ceres Inc., a private plant genomics company and Ilog S.A., a
public optimization software company. Prior to founding the Company, from 1988
to 1989, Mr. Brandys was a Partner at Eurocontinental Ventures in London. At
Eurocontinental Ventures Mr. Brandys managed technology and biotechnology
investments in Europe. In 1986 he founded and became Chief Executive Officer of
Unihon, a venture capital fund acquired in 1989 by Credit Agricole. Mr. Brandys
is a graduate of the Ecole Polytechnique, has an M.S. in Civil Engineering from
the Ecole Nationale des Ponts et Chaussees and an M.S. in Economic Systems from
Stanford University.
Marc Vasseur, Ph.D., co-founded the Company in 1989 and has been Chief
Biology Officer and Directeur General of the Company since 1992. He is on leave
of absence from the University of Paris where he is a Professor
48
<PAGE>
of Virology and Head of the Molecular Virology Laboratory. Professor Vasseur is
a molecular biologist specializing in the regulation of gene expression and
transcriptional regulation of cellular and viral genes. From 1980 to 1987,
Professor Vasseur was a scientist in the Cell Genetics Laboratory at the
Pasteur Institute (Paris). From 1975 to 1980, he was a scientist at the
Institute of Cancer Research (Villejuif, France). He started his research
career at the Institute of Physico-Chemical Biology, where he worked from 1971
to 1975. Professor Vasseur has served on a number of boards and committees at
the University of Paris and at CNRS; he was a member of CNRS' National Board
for five years. Professor Vasseur received his Ph.D. from the University of
Paris. He is the author of more than 50 scientific publications and the book,
Oncogenic Viruses.
Daniel Cohen, M.D., Ph.D., joined the Company in 1996 as Chief Genomics
Officer and Directeur General. Professor Cohen is a Professor of Medical
Genetics at the University of Paris VII. Before joining the Company, Professor
Cohen was a co-founder and Scientific Director of CEPH. Professor Cohen was
also a co-founder and Scientific Director of Genethon and has served as a
scientific advisor for another genomics company. He is Doctor Honoris Causa of
Shanghai, Xi'an and Ben Gourion University, and has received UNESCO's Prize of
New Human Rights, the Daniel Bauperthuy Prize from the French Academy of
Sciences for epidemiology, and the Grand Prize for Medical Literature for the
book, The Genes of Hope, which has been translated into seven languages.
Professor Cohen received the Legion of Honor in 1998 and the American Academy
of Achievement's Golden Plate Award in 1999. He has authored more than 100
scientific publications. Professor Cohen has an M.D. and a Ph.D. in Immunology
and Immunogenetics from the University of Paris VII.
Laurent Degos, M.D., Ph.D., co-founder of the Company and the President of
its Scientific Advisory Board, is a Professor of Hematology at the University
of Paris VII-Denis Diderot. He is also Director of the University's Institute
of Hematology and Head of the Hematology Department (adult leukemia) at Hpital
Saint-Louis in Paris. Former Director of INSERM 93 Unit (immunogenetics of
transplantation), and past president of the National Council of French
Universities Committee of Hematology, Professor Degos is president of the
Scientific Council of the Institute of Health Policy and the Paris Hospitals
Scientific Board. Corresponding member of French Academy of Sciences, Laurent
Degos is chief editor of The Hematology Journal and the author of over 200
publications, including numerous books. The recipient of a number of
international honors and awards (including from the General Motors Cancer
Foundation in 1994), Laurent Degos has a Ph.D. in Human Biology from the
University of Paris.
Benoit Habert is President of Dassault Development, the venture capital
company of Groupe Insdustriel Marcel Dassault ("GIMD"). Mr. Habert is also a
member of the Board of Directors of GIMD. Prior to joining Dassault
Development, he was a member of the New Issue Department at Banque Indosuez,
which he joined in 1991. Mr. Habert has two masters degrees in business and tax
law from the University of Paris and holds an M.B.A. from INSEAD.
Martyn Greenacre joined Delsys Pharmaceutical Corp. as President and Chief
Executive Officer in 1997. Previously he was at Zynaxis Inc. as President and
Chief Executive Officer from 1992 to 1997 and at SmithKline Beecham plc since
1973, where from 1989 he was responsible for the strategic direction and
operational management of pharmaceutical subsidiaries in Europe and for
planning and executing European aspects of the merger between SmithKline
Beckman and Beecham Pharmaceutical. He is also a director of Cephalon Inc.,
Creative BioMolecules and Curis, Inc. Mr. Greenacre received his M.B.A. and
A.B. degrees from Harvard University.
Edmund Olivier de Vezin has been a partner at Oxford Bioscience Partners
L.P. ("Oxford Bioscience Partners") since 1992. Prior to entering the venture
capital field in 1984, he managed domestic and international operations for
Diamond Shamrock, Corning Glass Works and Conoco Chemicals. He is a Life Fellow
and Member of the National Council of the Salk Institute and a former Chairman
of Biotechnology Venture Investors Group. Mr. Olivier de Vezin has an M.B.A.
from Harvard University and a B.S. in Chemical Engineering from Rice
49
<PAGE>
University.
Andre G. Pernet, Ph.D., spent his entire pharmaceutical career from 1973
through 1999 at Abbott Laboratories. Dr. Pernet served in several research
management positions after joining Abbott's pharmaceutical products division in
Chicago in 1980. Dr. Pernet was elected corporate officer and vice president,
pharmaceutical products research and development in 1994 heading an
organization of 2700 scientists with an annual budget responsibility of $600
million. Among his accomplishments is the worldwide development of the
antibiotic Biaxin (clarithromycin) the sales of which peaked at $1.2 billion.
He also spearheaded the AIDS research at Abbott and developed Norvir, one of
the three breakthrough protease inhibitors which together reduced mortality in
AIDS patients by 74%. In February 1999, Pernet's team was awarded the Prix
Galien International, which is considered the highest distinction for medical
and scientific contribution. Dr. Pernet has degrees in management, chemical
engineering and a doctorate in chemistry.
Executive Officers
Under French law, the Chairman of the Board and Chief Executive Officer
has full executive authority to manage the affairs of the Company. The Board of
Directors has the power to appoint and remove, at any time, the Chairman of the
Board and Chief Executive Officer. Pursuant to Genset's statuts, the Chairman
of the Board and Chief Executive Officer has broad powers to act on behalf of
the Company and to represent the Company in dealings with third parties,
subject only to those powers expressly reserved to the Board of Directors or
the shareholders. The Chairman of the Board and Chief Executive Officer
determines and is responsible for matters such as the implementation of the
goals, strategies and budget for the Company's different business activities.
Pursuant to French law and Genset's statuts, the Board of Directors can
appoint up to five Directeurs Generaux proposed by the Chairman and Chief
Executive Officer, whose powers and responsibilities are determined by the
Board, together with the Chief Executive Officer. Each such Directeur General
generally has broad powers to represent and bind the Company in dealing with
third parties.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons' expertise would be
difficult to replace and could seriously disrupt our operations. Furthermore,
our future success will also depend on our ability to recruit and retain
qualified scientific personnel. We may not be able to do so given the intense
competition among biotechnology, pharmaceutical and health care companies,
universities and non-profit research institutions for experienced scientists
and managers.
While most of our personnel have signed employment contracts, which
contain non-compete and confidentiality clauses, we cannot be certain that
these provisions will provide meaningful protection for the Company's know-how
or technology or adequate remedies in case of breach. In addition, our three
Directeurs Generaux have not signed employment contracts or non-compete or
confidentiality agreements and none of our employees in the United States have
signed non-compete agreements. We do not have key-man life insurance coverage
during 2000 for our three Directeurs Generaux.
The following table sets forth the names of the executive officers and
senior management of the Company, their current positions with the Company and
the first dates as of which they served as executive officers or senior
management of the Company.
50
<PAGE>
Executive Officers
<TABLE>
<CAPTION>
Name Age Current Position(s) Since
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Pascal Brandys 41 Chairman of the Board of Directors and 1989
Chief Executive Officer
(President Directeur General)
Marc Vasseur 50 Director, Chief Biology Officer and
Directeur General 1992
Daniel Cohen 49 Director, Chief Genomics Officer and
Directeur General 1996
Bernard E. Bihain 42 Vice President, Functional Genomics 1998
Marta Blumenfeld 44 Vice President, Genomics Analysis 1990
David Bradfute 35 Vice President, Intellectual Property 1998
Jonathan Burnham 33 General Counsel 1998
Jerome Chailloux 50 Chief Information Officer 1995
Ilya Chumakov 50 Vice President, Mapping 1996
Audrey D. Keane 40 Vice President, Licensing 1999
James S. Kuo 36 Vice President, Business Development 1999
Agnes Le Saux-Narjoz 34 Vice President, Marketing 1989
Bruno Poddevin 35 Vice President,
Oligonucleotides Division 1992
Philippe J. Rousseau 29 Vice President, Finance 1998
Nicholas J. Schork 38 Vice President, Biostatistics and
Genetic Epidemiology 1999
Cecile Tharaud 34 Vice President of Operations 1996
Francois Thomas 42 Vice President, Pharmacogenomics and
Medical Affairs 1999
John Varian 41 Chief Financial Officer 2000
</TABLE>
Pascal Brandys. See " -- Board of Directors."
Marc Vasseur, Ph.D. See " -- Board of Directors."
Daniel Cohen, M.D., Ph.D. See " -- Board of Directors."
Bernard E. Bihain, M.D., Vice President, Physiological Genomics, joined
the Company in 1998. Dr. Bihain earned an M.D. from the Free University of
Brussels, Belgium and completed his postdoctoral research fellowship at
Columbia University, New York. Subsequently, he was Assistant Professor of
Physiology at the Louisiana State University Medical School in New Orleans.
From 1994 to 1998, he was Director of Research at INSERM Unit 391 and Chairman
of the Department of Biochemistry at the University of Rennes. Dr. Bihain is
the author of more than 20 scientific publications. His field of expertise
focuses on the pathogenesis of metabolic diseases such as obesity and diabetes
and their vascular complications.
Marta Blumenfeld, Ph.D., Vice President, Genomics Analysis, joined the
Company in 1990. From 1986 to 1990, she was a postdoctoral scientist studying
oncogenic viruses at the Pasteur Institute (Paris). Dr. Blumenfeld has a Ph.D.
in Biochemistry from the University of Buenos Aires and is the author of more
than 30 scientific publications.
51
<PAGE>
David Bradfute, Ph. D., joined the company in 1998 as Associate Director
of Intellectual Property U.S. and was named Vice President, Intellectual
Property in 2000. From 1993 to 1998, he worked as a Patent Agent and Technical
Advisor on biotechnology patent prosecution and intellectual property
litigation matters with the law firm of Morrison & Foerster LLP. At Stanford
University, Dr. Bradfute earned both his Ph.D. in Biological Sciences for work
on the regulation of cholesterol biosynthesis in 1993, and his J.D. in 1998. He
is a member of the California State and Washington D.C. Bars, and is registered
to practice before the U.S. and Canadian Patent Offices.
Jonathan Burnham joined the Company in 1998 as Director of Legal Affairs
and was named General Counsel in 2000. From 1994 to 1997, he was an associate
with the law firm of Shearman & Sterling in their New York, London and Paris
offices, practicing in the fields of corporate finance and mergers and
acquisitions. From 1993 to 1994, he was a trainee at the Legal Service of the
European Commission. A member of the New York State Bar, Mr. Burnham received a
B.A. from Dartmouth University, LL.B. (common law) and B.C.L. (civil law)
degrees from McGill University and a Masters in International Law from the
University of Aix-Marseille.
Jerome Chailloux, Ph.D., Chief Information Officer, joined the Company in
1995. From 1987 to 1995, Dr. Chailloux was co-founder, Chief Scientific Officer
and member of the board of Ilog, a subsidiary of INRIA, the French National
Institute of Computer Science. Ilog is a world leader in C++ development tools
and is listed on NASDAQ. Prior to founding Ilog, Dr. Chailloux was directing
research at INRIA in the fields of artificial intelligence, Lisp and functional
programming. Dr. Chailloux is a developer of the Lisp language and author of 30
publications. He received his Ph.D. in Computer Science from the University of
Paris VI in 1980.
Ilya Chumakov, Ph.D., Vice President, Mapping, joined the Company in 1996.
Prior to joining the Company, Dr. Chumakov was employed as a research scientist
at CEPH (1990-1996), most recently as its Scientific Director, where, together
with Professor Cohen, he lead the effort to produce the first physical map of
the human genome. Before joining CEPH, Dr. Chumakov was the leading staff
scientist at the Institute of Molecular Biology in Moscow, where he worked from
1977 to 1990. He received a Ph.D. from Moscow State University in 1971 and a
D.Sc. in Molecular Biology from the Institute of Molecular Biology of the
Russian Academy of Sciences in Moscow in 1990. He has authored more than 70
scientific publications.
Audrey D. Keane, Vice President, Licensing, joined the Company in 1996.
Previously, she was Vice President of Business Development at Sequana
Therapeutics where she was responsible for structuring and negotiating
strategic alliances with major pharmaceutical and biotechnology companies for
the commercial development of therapeutics and diagnostic products. Ms. Keane
received her M.B.A. from Harvard Graduate School of Business Administration and
a B.S. in Chemical Engineering from Case Western Reserve University.
James S. Kuo, Vice President, Business Development, joined the Company in
1999. Prior to joining the Company, Dr. Kuo was Vice President of Business
Development and a member of the senior management team at Myriad Genetics, Inc.
Prior to Myriad, Dr. Kuo was an Associate Director of Corporate Licensing and
Development at Pfizer, Inc. Prior to Pfizer, Dr. Kuo was Managing Director of
Venture Analysis at HealthCareVentures, LLC., a $378 million venture capital
fund. Dr. Kuo received his M.D. from the University of Pennsylvania School of
Medicine and his M.B.A. from The Wharton School of Business where he
concentrated in health care management and finance.
Agnes Le Saux-Narjoz joined the Company in 1989 as the Market Development
Manager and became Vice President, Marketing in 1993. In this role, she is
responsible for strategic marketing for the Company and developing and managing
advertising, pricing, and sales policies worldwide. Ms. Le Saux-Narjoz has held
a variety of market and strategic assessment positions within the biotechnology
sector prior to joining the Company, most recently at Bioinvest and Transgene.
She received her M.S. in Pharmaceutical Sciences from the University of Paris,
with concentrations in pharmaceutical marketing and health economics.
52
<PAGE>
Bruno Poddevin, Ph.D., joined the Company in 1992 and became Director of
Production in 1994 and Vice President, Oligonucleotides Division in 1997. Prior
to joining the Company, he was a post-doctoral fellow at the National Cancer
Institute (Bethesda, MD). Dr. Poddevin has a Ph.D. in Molecular Biology from
the University of Paris-Orsay and an M.S. in Engineering from the Ecole
Centrale de Paris. He has authored more than 15 publications.
Philippe J. Rousseau joined the Company in 1998 as Financial Analyst and
was named Vice President, Finance in 2000. From 1996 to 1998, he was a
consultant with the strategic consulting firm Mars & Co. in Paris. From 1994 to
1996, he was a member of the corporate finance department of Banque Paribas in
both the Dallas, Texas and Paris offices. Mr. Rousseau is a graduate of the
Ecole des Hautes Etudes Commerciales (H.E.C.) where he majored in finance.
Nicholas J. Schork, M.A., Ph.D., Vice President of Biostatistics and
Genetic Epidemiology, joined the Company in 1999. For the past five years, Dr.
Schork has been an Associate Professor in the Department of Epidemiology &
Biostatistics at Case Western Reserve University in Cleveland, Ohio, as well as
an adjunct Associate Professor in the Department of Biostatistics at Harvard
University and an adjunct Associate Staff Scientist at the Jackson Laboratory
in Bar Harbor, Maine. Dr. Schork has specific expertise in statistical issues
of relevance to high-resolution mapping efforts and population-based genetic
studies. Dr. Schork holds an M.A. in Philosophy, an M.A. in Statistics, and a
Ph.D. in Epidemiology from the University of Michigan in Ann Arbor. He has
authored over 100 publications, on all aspects of statistical and theoretical
genetics and epidemiology.
Cecile Tharaud, Ph.D., Vice President of Operations, joined the Company in
1996. Prior to joining the Company, she was Director of Business Development at
SmithKline Beecham, France from 1995 to 1996, and was Director of New Products
for Glaxo Laboratories, France from 1993 to 1995. Dr. Tharaud received an
M.B.A. from INSEAD and her Ph.D. in Molecular Genetics and Applied Immunology
from the Institut National Agronomique Paris-Grignon. Dr. Tharaud is also a
graduate of the Ecole Polytechnique.
Francois Thomas, M.D., Vice President, Pharmacogenomics and Medical
Affairs, joined the Company in 1999. From 1995 to 1998, he was President of
Bioserve Ltd, a consulting firm to the pharmaceutical industry specializing in
biotechnology and oncology. From 1991 to 1994, Dr. Thomas was Medical and
Scientific Director of Ipsen Biotech and from 1989 to 1991 Director of Research
and Development Planning at Pharmaceutical Group Ipsen Beaujour. Dr. Thomas
received his M.D. from the Paris School of Medicine in 1984 and his M.S. from
the M.I.T. Sloan School of Management in 1995. He is board certified in medical
oncology and has authored more than 70 scientific publications.
John Varian, Chief Financial Officer, joined the Company in May 2000.
Prior to joining the Company, he was Senior Vice President of Finance and
Administration at Elan Pharmaceuticals, Inc. He moved into that position in
August 1998 after Elan Corporation's acquisition of Neurex Corporation, where
he was Vice President and Chief Financial Officer since May 1997. Prior to
joining Neurex and since August 1991, Mr. Varian was Vice President and Chief
Financial Officer of Anergen Inc. Mr. Varian was a Senior Manager in the Audit
Department of Ernst & Young. He is a Certified Public Accountant and graduated
from Western Michigan University in 1980, with a Bachelors of Business
Administration.
53
<PAGE>
Scientific Advisory Board
The Company has organized a Scientific Advisory Board ("SAB") composed of
seven individuals with expertise in the fields of molecular biology, genetics,
obesity and diabetes, transcription regulation, DNA chemistry and hematology.
The SAB is international in scope and its members are affiliated with
institutions in France, Germany, Japan and the United States. The Company
consults with individual members of the SAB periodically when advice is
required in their particular area of expertise. The members of the SAB receive
a fee for each meeting with the Company and are reimbursed for expenses
incidental to their attendance of these meetings. In addition, certain members
of the SAB have been granted warrants. The members of the SAB are:
Jean-Francois Bach, M.D., Professor of Immunology at Necker Hospital in
Paris. He is also Director of an INSERM Unit devoted to the genetics and
treatment of autoimmune diseases. More recently he has developed major interest
in the genetic diseases of the adult, notably polygenic diseases. Professor
Bach is member of the French Academy of Sciences and of the French Academy of
Medicine. He has received several major national and international scientific
prizes.
Stephen K. Burley, M.D., Ph.D., F.R.S.C., Dr. Burley is the Richard M. and
Isabel P. Furlaud Professor at the Rockefeller University and an Investigator
in the Howard Hughes Medical Institute. He received a B.Sc. degree in physics
from the University of Western Ontario. As a Rhodes Scholar, he received his
Ph.D. degree in molecular biophysics from Oxford University. Subsequently, he
earned an M.D. degree from Harvard Medical School in the Harvard University-
Massachusetts Institute of Technology Joint Program in Health Sciences and
Technology. His clinical training combined a residency in Internal Medicine at
the Brigham and Women's Hospital with postdoctoral work in protein
crystallography under the direction of William N. Lipscomb at Havard
University. Research in Dr. Burley's laboratory is focused on the
macromolecular machines responsible for messenger RNA transcription, splicing
and translation in eukaryotes. He is a Fellow of the Royal Society of Canada
and of the New York Academy of Sciences. At Rockefeller University, he serves
as Deputy for Academic Affairs and Director of the Pels Family Center for
BioChemistry and Structural Biology.
Laurent Degos, M.D., Ph.D., President of the Scientific Advisory Board.
See " -- Board of Directors."
Harvey Lodish, Ph.D., Member, Whitehead Institute for Biomedical Research,
and Professor of Biology and Bioengineering, Massachusetts Institute of
Technology, Cambridge, MA. Dr. Lodish is a Member of the National Academy of
Sciences and a Fellow of the American Academy of Arts and Sciences. Author of
over 430 publications, he received a MERIT award from the National Institute of
Diabetes and Digestive and Kidney Diseases, the Stadie Award from the American
Diabetes Association, a Guggenheim Fellowship, and an honorary D.Sc. from
Kenyon College. Dr. Lodish is co-author of the textbook Molecular Cell Biology
and is on the editorial board of Proceedings of the National Academy of
Sciences.
Yoshiyuki Sakaki, Ph.D., Professor at the Human Genome Center at the
University of Tokyo. Dr. Sakaki is also Vice President of HUGO, the Human
Genome Organization. He has authored more than 200 scientific publications.
Gunther Schutz, Ph.D., Professor of Physiological Chemistry and Director
of the Department of Molecular Biology of the Cell at the Institute of Cell and
Tumor Biology, German Cancer Research Center in Heidelberg. Prior to 1980, Dr.
Schutz led an independent research group at the Max-Planck Institute for
Molecular Genetics at the Freie University in Berlin. He has authored more than
200 publications and received the Gottfried-Wilhem-Leibnitz Prize of the
Deutsche Forschungsgemeinschaft in 1987. In 1997, he was given the European
Medal of the Society of Endocrinology and in 1998 he received the Max-Plank-
Research Prize for International Cooperation.
54
<PAGE>
Moshe Yaniv, Ph.D., Professor at the Department of Biotechnology at the
Pasteur Institute in Paris, where he heads the Unit on oncogenic viruses, Dr.
Yaniv is a member of the French Academy of Sciences. He was the Vice Chairman
(1992-1995) and Chairman (1996) of the Council of EMBO (European Molecular
Biology Organization). His research is focused on growth control, development
and transcription regulation and he has authored more than 200 publications. He
received the Charles-Leopold Mayer prize of the French Academy of Science in
1995.
ITEM 11: Compensation of Directors and Officers
The aggregate amount of compensation paid by the Company to all of its
directors as a group (seven persons in 1999, including four independent
directors who receive limited compensation for services as directors, and
reimbursement of expenses incidental to their attendance at Board of Directors
meetings) for services in all capacities for 1999 was approximately 1.2 million
euros. The aggregate amount of compensation paid by the Company to all of its
executive officers (excluding directors) as a group (14 persons) for their
services in 1999 was approximately 1.5 million euros.
The Company does not contribute to any pension, retirement or other plans
for its executive officers or senior management.
ITEM 12: Options to Purchase Securities from Registrant or Subsidiaries
Stock Option Plans
Pursuant to resolutions adopted by the shareholders on October 25, 1994,
March 19, 1996, April 15, 1996, May 22, 1997, and May 19, 1999, the Board of
Directors has granted options to purchase Ordinary Shares to certain officers
and employees of the Company. The following table sets out certain information
relating to the various option plans in effect, as of May 31, 2000:
55
<PAGE>
<TABLE>
<CAPTION>
Option Options Options Options Ordinary Option Exercise Expiration
Plan Issuable Still Issuable Outstanding Shares Issuable Price per Share Date(1)(2)
(euros)
------------ -------------- ------------ --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
October 25, 1994 1,000 0 125 125,000(4) 6.10 April 30, 2004
March 19, 1996 7,000 60(3) 2,710 277,000(4) 24.93(5) March 31, 2008
April 15, 1996 2,000 502(3) 812 131,400(4) 30.76(6) January 31, 2008
May 22, 1997 400,000 130,456(3) 217,694 348,150 54.93(7) March 31, 2008
May 19, 1999 500,000 150 489,650 489,800 77.61(8) April 30, 2009
</TABLE>
(1) The options under each plan have various expiration dates. In each case,
the latest expiration date of options already issued under the plan is
indicated.
(2) All plans contain restrictions limiting the exercise of options after the
employee is no longer an employee of the Company.
(3) Pursuant to the June 16, 2000 extraordinary shareholders' meeting, the
authorization to issue these remaining options was canceled and replaced
by a new authorization; as a consequence, these options are no longer
issuable.
(4) Adjusted to reflect the 100-for-1 share split approved by the shareholders
on April 29, 1996.
(5) The exercise price of the options depends on the date at which they were
issued. The price indicated is the weighted average exercise price of the
options outstanding under the plan. The exercise prices of the outstanding
options range from 24.39 to 62.71 euros.
(6) The exercise price of the options depends on the date at which they were
issued. The price indicated is the weighted average exercise price of the
options outstanding under the plan. The exercise prices of the outstanding
options range from 26.23 to 62.71 euros.
(7) The exercise price of the options depends on the date at which they were
issued. The price indicated is the weighted average exercise price of the
options outstanding under the plan. The exercise prices of the outstanding
options range from 38.72 to 79.43 euros.
(8) The exercise price of the options depends on the date at which they were
issued. The price indicated is the weighted average exercise price of the
options outstanding under the plan. The exercise prices of the outstanding
options range from 34.70 to 125.48 euros.
In addition, at their June 16, 2000 extraordinary general meeting, the
shareholders adopted a new stock option plan, under which the Board of
Directors may grant stock options to the officers and employees of the company
enabling their beneficiaries to subscribe for up to 336,356 new shares.
As of May 31, 1999, an aggregate of 261,000 Ordinary Shares could be
purchased pursuant to outstanding options held by the President Directeur
General and the two Directeurs Generaux of the Company as a group (three
persons) and an aggregate of 417,050 Ordinary Shares could be purchased
pursuant to outstanding options held by the other executive officers of the
Company as a group (15 persons).
In June 1999, the Company's Board of Directors decided to modify all
outstanding stock options to provide that they would vest and become
immediately exercisable in the event of a change of control of Genset. This
acceleration would come into effect at the moment of the completion of any
transaction which results in a change of control of the Company. However, the
Board has reserved the right, which it may exercise at any moment prior to the
definitive completion of any such transaction, to cancel the acceleration of
the right to exercise stock options, and also to decide upon any other
treatment of the stock options which would be consistent with law and with the
terms and conditions of the stock options approved by the shareholders.
56
<PAGE>
Warrant Plans
Pursuant to resolutions adopted on July 27, 1992, October 25, 1994, March
28, 1995, March 19, 1996, May 22, 1997, May 19, 1998, August 19, 1998 and May
19, 1999, the shareholders have authorized the issuance of warrants to purchase
Ordinary Shares to certain directors and consultants of the Company and certain
other non-employees. The following table sets out certain information relating
to the various warrant plans in effect, as of May 31, 2000:
<TABLE>
<CAPTION>
Warrant Warrants Warrants Warrants Ordinary Warrant Exercise Expiration
Plan Authorized Subscribed Out-Standing Shares Issuable Price per Share Date(1)
(euros)
------------ ------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
July 27, 1992. 784 784 20 2,000(2) 4.39 October 5, 2000
March 19, 1996 2,000 308 219 21,900(2) 24.39 March 18, 2001
May 22, 1997.. 4,000 4,000 900 900 38.11 May 21, 2002
May 19, 1998.. 32,000 30,000 16,000 16,000 87.51 May 18, 2003
August 19, 1998 2,000 2,000 2,000 2,000 83.31 August 18, 2003
May 19, 1999.. 4,000 4,000 4,000 4,000 32.85 May 18, 2004
</TABLE>
(1) The warrants under each plan may have various expiration dates. In each
case, the latest expiration date of warrants issued under the plan is
indicated.
(2) Adjusted to reflect the 100-for-1 share split approved by the shareholders
on April 29, 1996.
In addition, at their June 16, 2000 extraordinary general meeting, the
shareholders granted new warrants to Genset's independent directors enabling
them to subscribe for up to an aggregate of 15,000 new shares at a price of
80.49 euros per share. Following this meeting, and assuming all 15,000 warrants
will be purchased by the independent directors, an aggregate of 35,100 Ordinary
Shares could be purchased pursuant to outstanding warrants held by directors
(other than executive officers) of the Company as a group (five persons), and
no outstanding warrants were held by executive officers of the Company.
ITEM 13: Interest of Management in Certain Transactions
Not applicable.
PART II
ITEM 14: Description of Securities to be Registered
Not applicable.
57
<PAGE>
PART III
ITEM 15: Defaults upon Senior Securities
None.
ITEM 16: Changes in Securities and Changes in Security for Registered
Securities and Use of Proceeds
Modification of Depositary Arrangements
Effective as of April 10, 1998, the Company and The Bank of New York, as
Depositary, amended the Deposit Agreement governing the ADSs of the Company.
This amendment was intended to simplify the procedures enabling ADS holders to
effectively vote the Ordinary Shares underlying their ADSs. Pursuant to these
amended procedures, all beneficial owners of ADSs as of the record date fixed
for a given shareholders' meeting shall receive, among other materials, a
summary in English or an English version of the notice of such meeting and a
copy of the materials provided by the Company to enable the beneficial owners
to give voting instructions regarding the resolutions being considered by the
meeting.
In order to instruct the Depositary to vote the Ordinary Shares underlying
their respective ADSs, beneficial owners must complete, sign and return the
voting instruction card or form provided to the person indicated thereon. In
signing and returning the card or form, the beneficial owner (a) certifies that
it was the beneficial owner on the record date of the ADSs being voted and is
entitled to exercise the right to vote with respect thereto, (b) undertakes to
be the beneficial owner of such ADSs during the five calendar days immediately
prior to and on the meeting date, and (c) certifies or undertakes such other
matters as may from time to time be necessary to permit the exercise of voting
rights by beneficial owners of ADSs in accordance with French law or the
statuts of Genset. The beneficial owners may, by completing, signing and
returning voting instruction cards or forms without providing specific voting
instructions on the resolutions, instruct the Depositary to vote the
corresponding Ordinary Shares in favor of all the resolutions proposed by the
Board of Directors of Genset.
Use of Proceeds
We conducted a registered initial public offering of its Ordinary Shares
in June 1996, pursuant to a registration statement with file number 33-34758,
which was declared effective on June 4, 1996.
The net proceeds from the offering after underwriting discounts and
commissions and other expenses were 76,829,139 euros ($77,4 million). In the
period from the effectiveness of the registration statement to December 31,
1999, we have expended (U.S. dollar amounts converted from euros at the
December 31, 1999 exchange rate of 0.993 euros to $1.00):
* 15.5 million euros ($15.6 million) on the construction of plant,
building and facilities;
* 22.1 million euros ($22.3 million) on the purchase and
installation of machinery and equipment;
* 8.8 million euros ($8.9 million) on the repayment of indebtedness;
and
* 41.8 million euros ($42.1 million) as working capital (including
research and development and general and administrative
expenditures).
58
<PAGE>
We had therefore, as of December 31, 1999, expended 88.2 million euros
since the date of the initial public offering, and have consequently expended
all the proceeds of that offering.
As the period for which the above amounts are presented do not correspond
precisely to accounting periods of the Company and as the categories do not in
all cases correspond to those used by the Company in its accounting procedures,
these amounts represent reasonable estimates made by the Company for each
category of expenditures.
As of December 31, 1999, the Company had 20.2 million euros ($20.3
million) invested in money market funds and short-term certificates of deposit.
Other than the compensation paid to directors and officers in connection
with their respective duties, all of such payments were made to persons other
than directors, officers or affiliates of the Company.
The expenditures set forth above are consistent with the use of proceeds
described in the prospectus.
PART IV
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
See Item 19 for a list of financial statements filed under Item 18.
59
<PAGE>
ITEM 19: Index to Financial Statements and Exhibits and Signature
INDEX TO FINANCIAL STATEMENTS
The following financial statements of Genset S.A. and its Subsidiaries are
filed as part of this Annual Report, together with the report of the
independent accountants. Financial statement schedules are omitted as the
information is not required, is not applicable, or the information is presented
in the financial statements or notes thereto.
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Independent Auditor's Report................ F-1
Consolidated Balance Sheets as of December
31, 1998 and 1999 ......................... F-2
Consolidated Statements of Operations for
the years ended December 31, 1997,
1998 and 1999.............................. F-4
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1997, 1998 and 1999........................ F-5
Consolidated Statements of Cash Flows for
the years ended December 31, 1997,
1998 and 1999.............................. F-6
Notes to the Consolidated Financial
Statements ................................ F-7
</TABLE>
60
<PAGE>
INDEX TO EXHIBITS
1.1 P Statuts of Genset S.A. amended through March 24, 2000
1.2[t] P Letter Agreement effective as of March 31, 1999 amending the
Amended and Restated Services Agreement dated as of June 30, 1998,
as amended, the Technology License Agreement dated as of December
28, 1997, as amended, the Series A Preferred Stock Issuance
Agreement dated as of December 28, 1997, as amended, and the
Amended and Restated Investors Rights Agreement dated as of
December 31, 1998, between Genset S.A. and Ceres, Inc.
1.3[t] P Letter Agreement dated June 30, 1999 amending the Amended and
Restated Services Agreement dated as of June 30, 1998, as amended,
the Technology License Agreement dated as of December 28, 1997, as
amended, the Series A Preferred Stock Issuance Agreement dated as
of December 28, 1997, as amended, and the Amended and Restated
Investors Rights Agreement dated as of December 31, 1998, as
amended, between Genset S.A. and Ceres, Inc.
1.4[t] P Letter Agreement dated September 24, 1999 amending the Amended and
Restated Services Agreement dated as of June 30, 1998, as amended,
between Genset S.A. and Ceres, Inc.
1.5[t] P Letter Agreement dated January 21, 2000 amending the Amended and
Restated Services Agreement dated as of June 30, 1998, as amended,
the Technology License Agreement dated as of December 28, 1997, as
amended, the Series A Preferred Stock Issuance Agreement dated as
of December 28, 1997, as amended, and the Amended and Restated
Investors Rights Agreement dated as of December 31, 1998, as
amended, between Genset S.A. and Ceres, Inc.
1.6[t] P Letter Agreement dated September 30, 1999 Amending and Terminating
the License Agreement dated as of July 25, 1997, between Genset
S.A. and Genetics Institute, Inc.
1.7[t] P Amendment dated December 21, 1999 to the Subscription Agreement
dated as of July 15, 1997, as amended, between the Company and
Abbott Laboratories
1.8[t] P Letter Agreement dated December 21, 1999 amending the Alliance
Agreement dated as of July 15, 1997, as amended, between the
Company and Abbott Laboratories
1.9[t] P First Supplement effective as of May 31, 2000 to the Research and
License Agreement dated as of October 2, 1998 between Genset S.A.
and Pharmacia and Upjohn Company
2.1[t] P Genomics License Agreement dated September 30, 1999 between Genset
S.A. and Genetics Institute, Inc.
2.2[t] P Research and License Agreement dated February 15, 2000 between
Genset S.A. and Abbott Laboratories
2.3[t] P Research Collaboration Agreement effective as of April 3, 2000
between Genset S.A. and Sanofi-Synthelabo S.A.
2.4 P Definitive Transaction Notice dated June 7, 2000 Made Available
to the French Public upon the Issue and Listing on the Nouveau
Marche of a Loan of 49,103,062 Euros, which may be Increased to
55,588,404 Euros, Represented by Bonds Convertible into and/or
Exchangeable for New or Existing Shares with a Principal Value per
Bond of 94 Euros
[t] Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
P Filed concurrently with the Securities and Exchange Commission in
paper format under cover of Form SE.
61
<PAGE>
Report of Independent Auditors
To the directors and shareholders of Genset, S.A.:
We have audited the accompanying consolidated balance sheets of Genset,
S.A. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, comprehensive income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
and its subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States.
/S/ JEAN-YVES JEGOUREL
Jean-Yves Jegourel
Ernst & Young Audit
Paris, France
February 23, 2000
F-1
<PAGE>
Genset
Consolidated Balance Sheets
(Amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1999 1998
-------------- -------------- --------------
US$ Euro Euro
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................................... 21,296 21,148 50,204
Accounts receivable (less allowance for doubtful accounts of euros 80 in
1999 and euros 64 in 1998) ................................................. 8,531 8,472 5,509
Receivable from affiliates.................................................. 599 595 1,946
Receivable from State....................................................... 7,574 7,521 3,302
Inventory................................................................... 1,276 1,267 1,037
Prepaid expenses and other current assets................................... 1,790 1,778 1,637
-------------- -------------- --------------
Total current assets....................................................... 41,066 40,781 63,635
-------------- -------------- --------------
Property and equipment, net.................................................. 25,079 24,904 25,839
-------------- -------------- --------------
Other assets:
Research and development tax credit receivable, less current portion........ 10,717 10,643 8,950
Patent development costs (less accumulated amortization of euros 1,066 in
1999 and euros 686 in 1998) ................................................ 1,160 1,152 668
Investments in affiliates................................................... 2,855 2,835 1,945
Other long term assets...................................................... 635 631 557
-------------- -------------- --------------
Total assets............................................................... 81,512 80,946 101,594
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
The financial information expressed in U.S.$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying rate
in New York on December 31, 1999 which was U.S.$ 1.007 for each euro.
F-2
<PAGE>
Genset
Consolidated Balance Sheets
(Continued)
(Amounts in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1999 1998
-------------- -------------- --------------
US$ Euro Euro
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt........................................... 2,871 2,851 3,260
Current portion of capital lease obligation................................. 301 299 311
Accounts payable............................................................ 13,656 13,562 11,318
Accrued expenses............................................................ 2,236 2,221 1,694
Deferred revenues........................................................... 2,012 1,998 1,749
-------------- -------------- --------------
Total current liabilities.................................................. 21,076 20,931 18,332
-------------- -------------- --------------
Long-term debt, less current portion......................................... 4,345 4,315 7,166
Capital lease obligation, less current portion............................... 616 612 509
Minority interest............................................................ 463 460 344
-------------- -------------- --------------
Total long-term liabilities................................................ 5,424 5,387 8,019
-------------- -------------- --------------
Shareholders' equity:
Common stock, euro 3 nominal value; 7,479,606 and 7,419,706 shares issued
and outstanding -December 31, 1999 and December 31, 1998, respectively....... 22,596 22,439 19,229
Additional paid-in capital.................................................. 88,573 87,957 90,067
Accumulated deficit......................................................... (53,138) (52,769) (30,659)
Less advances by the Company to fund employees' exercise of options......... (323) (321) (35)
Deferred compensation....................................................... (2,217) (2,202) (3,413)
Cumulative translation adjustment........................................... (479) (476) 54
-------------- -------------- --------------
Total shareholders' equity................................................. 55,012 54,628 75,243
-------------- -------------- --------------
Total liabilities and shareholders' equity ................................ 81,512 80,946 101,594
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
The financial information expressed in U.S.$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying rate
in New York on December 31, 1999 which was U.S.$ 1.007 for each euro.
F-3
<PAGE>
Genset
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1999 1999 1998 1997
------------ ------------ ------------ ------------
US$ Euro Euro Euro
<S> <C> <C> <C> <C>
Research and development revenues................................... 19,542 19,406 21,297 9,792
Oligonucleotide sales............................................... 8,348 8,290 5,614 5,253
------------ ------------ ------------ ------------
Total revenues...................................................... 27,890 27,696 26,911 15,045
------------ ------------ ------------ ------------
Research and development expenses .................................. (42,720) (42,423) (33,732) (23,225)
Cost of goods sold.................................................. (3,481) (3,457) (2,667) (3,165)
Selling and marketing expenses...................................... (1,472) (1,462) (1,229) (1,112)
General and administrative expenses................................. (10,587) (10,513) (8,689) (7,003)
------------ ------------ ------------ ------------
Total operating expenses............................................ (58,260) (57,855) (46,317) (34,506)
------------ ------------ ------------ ------------
Loss from operations................................................ (30,370) (30,159) (19,406) (19,460)
------------ ------------ ------------ ------------
Interest income..................................................... 1,356 1,347 2,268 2,442
Interest expense.................................................... (533) (529) (559) (528)
Foreign exchange gain (loss)........................................ 3,005 2,984 (889) 296
Minority interest................................................... (96) (95) 2 ---
Other income........................................................ 154 153 2,478 23
Equity in loss of affiliated companies.............................. (761) (756) (1,298) ---
------------ ------------ ------------ ------------
Loss before income tax.............................................. (27,245) (27,055) (17,404) (17,227)
------------ ------------ ------------ ------------
Income tax benefit.................................................. 4,980 4,945 2,687 2,919
------------ ------------ ------------ ------------
Net loss............................................................ (22,265) (22,110) (14,717) (14,308)
============ ============ ============ ============
Loss per ordinary share............................................. (2.99) (2.97) (2.02) (2.06)
Weighted average number of ordinary shares outstanding.............. 7,452 7,452 7,293 6,932
Loss per ADS (American Depositary Share)............................ (1.00) (0.99) (0.67) (0.69)
Weighted average number of equivalent ADSs outstanding.............. 22,356 22,356 21,879 20,796
</TABLE>
Consolidated Statements of Comprehensive Operations
<TABLE>
<CAPTION>
Period ended December 31,
-----------------------------------------------------------
1999 1999 1998 1997
------------ ------------ ------------ ------------
US$ Euro Euro Euro
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss............................................................ (22,265) (22,110) (14,717) (14,308)
Change in cumulative translation adjustment......................... (534) (530) 42 (60)
------------ ------------ ------------ ------------
Comprehensive Net loss.............................................. (22,799) (22,640) (14,675) (14,368)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
The financial information expressed in U.S.$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying rate
in New York on December 31, 1999 which was U.S.$ 1.007 for each euro.
F-4
<PAGE>
Genset
Consolidated Statements of Shareholders' Equity
(Amounts in thousands of euros, except share data)
<TABLE>
<CAPTION>
Ordinary Shares Additional Deferred Cumulative Share-
--------------------- Paid-in Accumulated Advances to Compen- Translation Holders'
Shares Amount Capital Deficit Shareholders sation Adjustment Equity
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1997.................. 6,769,985 17,545 92,412 (22,904) (250) (1,436) 72 85,439
Exercise of stock options from euros
4.39 to euros 31.63 per share...... 36,600 95 388 --- --- --- --- 483
Exercise of warrants from euros 4.39
to euros 38.11per share............ 205,000 531 2,350 --- --- --- --- 2,881
Exercise of options and warrants
funded by advances to shareholders. --- --- --- --- 159 --- --- 159
Issuance of ordinary shares at euros
51.28 per share.................... 177,502 460 8,643 --- --- --- --- 9,103
Deferred compensation arising from
stock option grants................ --- --- 857 --- --- (857) --- ---
Subscription of warrants............ --- --- 2 --- --- --- --- 2
Amortization of deferred
compensation....................... --- --- --- --- --- 534 --- 534
Translation adjustment.............. --- --- --- --- --- --- (60) (60)
Net loss............................ --- --- --- (14,308) --- --- --- (14,308)
--------- --------- --------- --------- --------- --------- --------- ---------
At December 31, 1997................ 7,189,087 18,631 104,652 (37,212) (91) (1,759) 12 84,233
========= ========= ========= ========= ========= ========= ========= =========
Exercise of stock options from euros
4.39 to euros 59.46 per share...... 130,719 339 2,824 --- --- --- --- 3,163
Exercise of warrants from euros 4.39
to euros 38.11 per share........... 99,900 259 1,064 --- --- --- --- 1,323
Exercise of options and warrants
funded by advances to shareholders. --- --- --- --- 56 --- --- 56
Accumulated deficit moved to APIC... --- --- (21,269) 21,269 --- --- --- ---
Deferred compensation arising from
stock option grants................ --- --- 2,776 --- --- (2,776) --- ---
Subscription of warrants............ --- --- 20 --- --- --- --- 20
Amortization of deferred
compensation....................... --- --- --- --- --- 1,122 --- 1,122
Translation adjustment.............. --- --- --- --- --- --- 42 42
Net loss............................ --- --- --- (14,716) --- --- --- (14,716)
--------- --------- --------- --------- --------- --------- --------- ---------
At December 31, 1998................ 7,419,706 19,229 90,067 (30,659) (35) (3,413) 54 75,243
========= ========= ========= ========= ========= ========= ========= =========
Exercise of stock options from euros
6.10 to euros 34.30 per share...... 59,900 175 828 --- --- --- --- 1,003
Exercise of options and warrants
funded by advances to shareholders. --- --- --- --- (286) --- --- (286)
Deferred compensation arising from
stock option grants................ --- --- 93 --- --- (93) --- ---
Subscription of warrants............ --- --- 4 --- --- --- --- 4
Conversion of nominal value from
FF 17 to euros 3................... 3,035 (3,035) --- --- --- --- ---
Amortization of deferred
compensation....................... --- --- --- --- --- 1,304 --- 1,304
Translation adjustment.............. --- --- --- --- --- --- (530) (530)
Net loss............................ --- --- --- (22,110) --- --- --- (22,110)
--------- --------- --------- --------- --------- --------- --------- ---------
At December 31, 1999................ 7,479,606 22,439 87,957 (52,769) (321) (2,202) (476) 54,628
========= ========= ========= ========= ========= ========= ========= =========
At December 31, 1999 (in thousands
of $).............................. --- 22,596 88,573 (53,138) (323) (2,217) (479) 55,012
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
The financial information expressed in U.S.$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying rate
in New York on December 31, 1999 which was U.S.$ 1.007 for each euro.
F-5
<PAGE>
Genset
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1999 1999 1998 1997
--------- --------- --------- ---------
US$ Euro Euro Euro
<S> <C> <C> <C> <C>
Cash flows from operating
activities :
Net loss........................ (22,265) (22,110) (14,717) (14,308)
Adjustments to reconcile net
loss to net cash used in
operating activities :
Depreciation and amortization
of property and equipment and
intangibles ................... 6,265 6,222 3,890 3,847
Stock compensation expense..... 1,311 1,302 1,122 534
Non cash R&D revenue........... (721) (716) (1,564) ---
Equity in loss of affiliated
companies ..................... --- --- 1,298 ---
Gain on sale of stocks by
equity investee ............... --- --- (2,312) ---
Goodwill amortization.......... --- --- 646 ---
Provisions..................... 26 26 --- ---
Variation of minority interests 117 116 344 ---
Increase (decrease) in cash
from :
Accounts receivable -- trades. (2,803) (2,784) (3,356) 68
Accounts receivable --
affiliates .................. 1,339 1,330 (1,947) ---
State receivable.............. (5,950) (5,909) (2,080) (3,784)
Inventory..................... (198) (197) (443) (162)
Prepaid expenses and other
current assets............... (126) (125) (61) 594
Accounts payable.............. 3,262 3,239 4,826 2,399
Accrued expenses.............. 466 463 411 207
Deferred revenue.............. 251 249 133 1,440
Other......................... (45) (45) (172) (82)
--------- --------- --------- ---------
Net cash used in operating
activities .................... (19,071) (18,939) (13,982) (9,246)
========= ========= ========= =========
Cash flows from investing
activities:
Proceeds from sales of short
term investments .............. --- --- 43 ---
Purchase of investments........ --- --- --- 77
Purchases of property and
equipment ..................... (5,415) (5,377) (11,651) (12,619)
Payment of patent development
costs and acquisition of other
intangibles ................... --- --- (520) (373)
Others......................... (886) (880) (13)
--------- --------- --------- ---------
Net cash used in investing
activities .................... (6,301) (6,257) (12,141) (12,915)
========= ========= ========= =========
Cash flows from financing
activities :
Proceeds from loans............ --- --- 4,573 4,658
Repayment of loans............. (3,282) (3,260) (3,010) (3,467)
Principal payments on capital
lease obligations ............. (232) (230) (222) (266)
Cash proceeds from sale of
common stock .................. 726 721 4,528 12,628
--------- --------- --------- ---------
Net cash provided by financing
activities .................... (2,788) (2,769) 5,869 13,553
========= ========= ========= =========
Effect of exchange rate changes
on cash and cash equivalents .. (1,099) (1,091) 110 (133)
Net decrease in cash and cash
equivalents ................... (29,259) (29,056) (20,142) (8,741)
Cash and cash equivalents,
beginning of period ........... 50,555 50,204 70,346 79,086
--------- --------- --------- ---------
Cash and cash equivalents, end
of period ..................... 21,296 21,148 50,204 70,346
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
The financial information expressed in U.S.$ is presented solely for the
convenience of the reader and is translated from euros at the noon buying rate
in New York on December 31, 1999 which was U.S.$ 1.007 for each euro.
F-6
<PAGE>
Genset SA
Notes to Consolidated Financial Statements
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Genset, S.A. (the "Company") is incorporated as a societe anonyme or
limited liability corporation under the laws of the Republic of France. The
Company was organized in 1989 to discover, develop and market products derived
from DNA and genetics research.
Principles of consolidation
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying footnotes. Actual results could differ from those estimates.
The consolidated financial statements include the financial statement of
Genset and all significant subsidiaries which are effectively controlled,
either directly or indirectly, by Genset together, the "Group".
Companies over which Genset exercises significant influence are accounted
for under equity method.
<TABLE>
<CAPTION>
Name of Investee Headquarters Percentage of Ownership Consolidation Method
------------------------------- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Subsidiaries
Genset Corp 875 Prospect Street, 100% consolidation
Suite 206
La Jolla, CA 92037, USA
Genset KK SCB #3 -- 100% consolidation
Kyoto Research Park
1 Awata-cho Chudoji
Shimogyo-Ku, Kyoto 600-8815,
Japan
Genset Singapore The Alpha bldg #04-28 52.60% consolidation
Biotechnology Singapore Science Park II
Pte Ltd 10 Science Park Road,
Singapore 117684
Affiliates
Surgen Ltd c/o Royal College 50.00% equity method
of Surgeons in Ireland
123 St Stephen's Green
Dublin 2, Ireland
</TABLE>
All intercompany accounts and transactions of consolidated companies have
been eliminated. The fiscal year-end is December 31, 1999 for all subsidiaries
and affiliates.
F-7
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
With effect July 1, 1999, Genset decided to change the consolidation
method of Ceres from equity accounting to cost, considering that it has no
longer a significant influence on Ceres. The Company's percentage equity
interest in Ceres is 10.40% as of December 31, 1999.
The financial information expressed in U.S. dollars is presented solely
for the convenience of the reader and is translated from euros at the noon
buying rate in New York on December 31, 1999 which was US$ 1.007 for each euro.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Translation of financial statements of foreign subsidiaries
Each foreign entity's results are measured in the currency in which that
entity primarily conducts its business (the functional currency). The local
currency is the functional currency for the Group's foreign subsidiaries. The
reporting currency of the Company is the euro. For consolidation purposes, the
financial statements of entities whose functional currency is other than the
euro are translated into euro equivalents at exchange rates as follows: (1)
balance sheet accounts at year-end rates; and (2) income statement accounts at
weighted average exchange rates for the year. Translation gains or losses are
recorded in shareholders' equity and transaction gains and losses are reflected
in net income.
Revenue recognition
Revenues from sales of synthetic DNA and related products are recognized
upon shipment. Revenues from research collaborations with strategic alliance
partners are recognized on a basis consistent with the performance requirements
of the contract. Certain fees payable to the Company under these contracts are
milestone-related and are due in accordance with the terms of each contract
when the milestone is achieved. The Company recognizes this milestone-related
revenue only when each milestone has been fully performed. Costs incurred under
these contracts are considered costs in the period incurred, regardless of when
the related revenue is recognized. Payments received in advance of performance
are recorded as deferred revenue.
The Company recognizes revenue from unconditional, non-refundable grants
received from governmental agencies in the period granted. Revenue from
conditional grants received is recognized when all conditions stated in the
grant have been met. Revenue from grants funding long-term research programs is
recognized on the percentage-of-completion method when there are no set
milestones or other technical requirements. Once stated conditions, milestones
or other requirements have been met, such grants are non-refundable.
Research and development expenses and related tax credit
Research and development costs are expensed as incurred. Such expenses
form the basis for a tax credit in France, which is recorded as a current tax
benefit in the period in which the qualifying expenses are incurred and the
credit claimed. The credit is recoverable in cash, if not used to offset taxes
payable, in the fourth year following its generation.
Concentration of credit risk and significant customers
The Company's customers consist principally of pharmaceutical companies,
research centers, hospitals and other state- and privately-owned entities
throughout Europe, the United States and Asia. The Company performs ongoing
credit evaluations of its customers' financial condition, and generally no
collateral is required. The Company maintains provisions for potential credit
losses, and such losses have been within management's
F-8
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
expectations. The activity in the allowance for doubtful accounts may be
summarized as follows, in thousands of euros:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Allowance balance as of January 1 64 63 44
Amounts charged to expense 16 2 26
Amounts written off -- (2) (7)
-------------- -------------- --------------
Allowance balance as of December 31 80 64 63
============== ============== ==============
</TABLE>
In 1999, seven strategic alliance partners accounted for 18.1 million
euros or 65%, of consolidated revenues. Amounts receivable from these seven
partners as of December 31, 1999, totaled 5.8 million euros.
In 1998, seven strategic alliance partners accounted for 21.3 million
euros or 79%, of consolidated revenues. Amounts receivable from these seven
partners as of December 31, 1998, totaled 5.1 million euros.
In 1997, three strategic alliance partners accounted for 8.4 million
euros, or 56%, of consolidated revenues. Amounts receivable from these three
partners as of December 31, 1997, totaled 0.9 million euros.
Deferred compensation
During the years ended December 31, 1999, 1998 and 1997, the Company
recorded compensation expense related to options of 1.3 million euros, 1.1
million euros and 0.5 million euros respectively. The Company will record an
aggregate compensation expense of approximately 2.2 million euros over the
related vesting period of the options in future years.
Net loss per share
The Company conforms to Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("SFAS 128"). As net losses have been reported in all
periods presented, the dilutive effects of warrants and stock options were
excluded from the calculation of net loss per share as including them would
have the effect of improving the loss per share.
Cash and cash equivalents
The Company considers all highly liquid investments with insignificant
interest rate risk and purchased with an original maturity of three months or
less to be cash equivalents. Such cash equivalents totaled 20.2 million euros
and 48.9 million euros as of December 31, 1999 and 1998, respectively.
Cash equivalents include marketable securities which are principally money
market funds and short-term certificates of deposit. The cost associated with
such securities approximates fair value.
In 1999, the Company booked a net exchange gain of 1.2 million euros and
in 1998, a net exchange loss of 0.5 million euros on operations realized on
foreign currency investments. Gross realized and unrealized gains and losses
during 1997 were immaterial.
F-9
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
Inventories
Inventories are stated at the lower of average cost (weighted average
cost) or market and consist primarily of materials and supplies. Provision is
made for obsolete and slow-moving inventories.
Property and equipment
Property and equipment is stated at cost. Depreciation and amortization
are charged to expense over the expected useful lives of the assets as follows:
<TABLE>
<CAPTION>
Method Period
------------- -------------
<S> <C> <C>
Leasehold improvements straight-line 5 to 10 years
Laboratory equipment accelerated 3 to 5 years
Office and computer equipment straight-line 5 years
Office furniture straight-line 5 to 7 years
</TABLE>
Assets under capital leases are amortized over the asset life, when there
is a bargain purchase option, or over the remaining lease term. Amortization of
capital leases is included in depreciation expense.
Long-lived assets are written-down in the year-end accounts when as a
result of events and changes in circumstances during the year, their
recoverable value based on undiscounted future cash flow appear to be
permanently less than their carrying value.
In March 1998, the American Institute of Certified Public Accountant
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company adopted the SOP on January 1, 1999. The
SOP requires the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
Intangible assets
Intangible assets include principally patent development costs. Such
costs, principally legal fees, related to the obtaining of patents, are
capitalized and amortized on a straight-line basis over five years.
The Company's policy is to evaluate, at each balance sheet date, the
appropriateness of the carrying values of the unamortized balances of
intangible assets on the basis of estimated undiscounted future cash flows and
other factors. If such evaluations were to indicate a material impairment of
these intangible assets, such impairment would be recognized by a write-down of
the applicable asset.
Investments in affiliates
Investments in affiliates are stated at cost. The investments are written
down when the recoverable value is permanently impaired. As of December 31,
1999, the investment in Ceres is recorded at an amount of 2.8 million euros
corresponding to its carrying value as of June 30, 1999.
F-10
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
Income taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recorded if it is
more likely than not that some portion or all of the deferred tax asset will
not be realized.
Employee stock option plans
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." As permitted by SFAS 123, the Company has elected to continue to
account for its employee stock option plans in accordance with the provisions
of the Accounting Principles Board opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees," which requires that compensation expense be
recorded when the option exercise price is less than the market value of the
underlying share on the grant date.
Foreign Currency
Forward foreign exchange contracts are utilized to manage the risk
associated with currency fluctuations on certain firm sales denominated in
foreign currencies. The Company does not engage in currency speculation. The
Company's forward foreign exchange contracts are primarily denominated in US $
and are for periods consistent with the terms of the underlying transactions,
generally one to three months. The forward foreign exchange contracts relate to
firm, foreign currency sales and are designated and effective as hedges of
firm, identifiable foreign currency commitments; accordingly, the gains and
losses resulting from the impact of currency exchange rate movements on these
contracts are not recognized in operations until the underlying hedged
transactions are recognized. Upon recognition, such gains and losses are
recorded in operations as an adjustment to the carrying amount of the
underlying transactions in the period in which these transactions are recorded.
The aggregate amount of all forward foreign exchange contracts outstanding
as of December 31, 1999 was 2.4 million euros. There were no contracts
outstanding as of December 31, 1998. If the counterparties to the exchange
contracts do not fulfill their obligations to deliver the contracted
currencies, the Company could be at risk for any currency related fluctuations
during the term of the contracts.
Segment information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. With the continued development of its Oligonucleotides Division, the
Company considers since 1999 that its activities comprise two segments:
genomics research and oligonucleotide production and sale.
F-11
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
Recent pronouncements
In June 1998, the Financial Accounting Standard Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. This statement is effective for fiscal years beginning
after June 15, 2000, and will be adopted by the Company for the year ending
December 31, 2001. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or on the financial position of the Company.
In March 1999, the FASB issued a proposed interpretation, Accounting for
Certain Transactions Involving Stock Compensation-An Interpretation of APB
Opinion No. 25. The proposed interpretation would clarify the application of
APB 25 in certain situations. The proposed interpretation would be effective
upon issuance (expected to be in early 2000) but would cover certain events
that occur after December 15, 1998, but before issuance of the final
interpretation. The effects of applying this proposed interpretation would be
recognized on a prospective basis from the effective date. Accordingly, upon
initial application of the final interpretation, (a) no adjustments would be
made to financial statements for periods before the effective date and (b) no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before the effective date. The Company expects that
the adoption of the Interpretation would affect the accounting for stock
options repriced during the fiscal year 1999 (see Note 7).
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Among other things, SAB 101 discusses the SEC staff's view on
accounting for non-refundable up-front fees received in connection with
collaboration agreements. The Company is currently evaluating the impact of SAB
101 on the accounting for up-front fees received prior to December 31, 1999.
Should the Company determine that a change in its accounting policy is
necessary, such a change will be made effective April 1, 2000 and would result
in a charge to net result for the cumulative effect of the change. This amount,
if recognized, would be recorded as deferred revenue and recognized as deferred
revenue and recognized as revenue in future periods. Prior financial statements
would not be restated.
2. Research and Collaboration Agreements
1999: In September 1999, the Company signed a new agreement in the field of
gene libraries with the Genetics Institute unit of Wyeth-Ayerst Laboratories,
the pharmaceutical division of American Home Products. Under this new
agreement, which replaced the previous agreement signed in July 1997, Genset
will provide Genetics Institute and Wyeth-Ayerst with a larger variety of
potential products and targets which they will have the right to use in their
internal drug discovery programs. Pursuant to the agreement, Genetics Institute
will obtain a licensing-in option on up to 1000 selected sequences and
corresponding clones from Genset's gene library. In addition to initial
revenues, Genset will receive product development milestone fees and royalties
on any drugs discovered using the sequences and the clones supplied by Genset.
Under the earlier 1997 agreement with Genetics Institute, the Company
provided to Genetics Institute full-length genes encoding novel human secreted
proteins for inclusion in Genetics Institute's DiscoverEase[Registered] program.
That agreement provided that Genset would receive product development milestone
fees and royalties on any drugs discovered using the sequences and clones
supplied by Genset. Since September 1999, the Company no longer has any
obligation to deliver secreted proteins to the DiscoverEase[Registered] program,
but the secreted proteins already commercialized in the program remain covered
by the terms of the agreement.
1998: In October 1998, the Company entered into a two-year pharmacogenomics
collaboration with Pharmacia & Upjohn. Under the terms of the agreement, Genset
is using its pharmacogenomics technologies to discover markers and genes
involved in response to a Pharmacia & Upjohn compound, and is receiving research
fees,
F-12
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
research milestone and clinical milestone payments, as well as royalty payments
on future sales of any Pharmacia & Upjohn compound that makes use of the
results of the pharmacogenomics program. The collaboration is also intended to
identify potential targets for the development of new compounds. Royalties
would be awarded on the sale of new compounds discovered, developed and
commercialized by Phamacia & Upjohn based on genes identified through the
research collaboration.
In August 1998, the Company entered into an exclusive license agreement
with Wyeth-Lederle Vaccines, a business unit of Wyeth-Ayerst Laboratories, a
division of American Home Products Corporation. Under the terms of the license
agreement, Genset granted Wyeth-Lederle Vaccines an exclusive worldwide
royalty-bearing licence under its know-how and patent applications covering the
entire Chlamydia pneumoniae and Chlamydia trachomatis L2 genomic sequences for
the development and commercialization of vaccines. In consideration of the
rights granted to Wyeth-Lederle Vaccines, the Company received an initial
license fee and will receive payments upon the achievement of certain clinical
development milestones. In addition, the Company will receive royalty payments
on all future sales of vaccines that are discovered and developed using the
licensed technologies.
1997: In December 1997, the Company entered into a series of agreements
with Ceres, Inc. ("Ceres"), a company specializing in the field of agricultural
biotechnology. The collaboration consists of three parts: (i) the acquisition of
an approximately 20% equity interest in Ceres by the Company; (ii) an agreement
for sequencing and bioinformatics services to be provided by the Company for
which Ceres will make quarterly payments and issue additional equity to the
Company; and (iii) an exclusive license agreement providing Ceres access, on a
royalty-free basis, to certain of the Company's technologies for applications in
agricultural genetics. The service and license agreements were amended on
several occasions in the course of 1998 and 1999 to expand and further define
the program. Ceres completed further rounds of financing in 1998. The Company
did not participate in these financings and its percentage equity interest in
Ceres was diluted to 8.41% as of December 31, 1998. During 1999, the Company
received certain payments under the research services agreement in the form of
equity, bringing its percentage equity interest to 10.40% as of December 31,
1999. This equity interest may increase slightly as a result of the issuance of
further shares linked to the achievement of research milestones, as well as the
exercise by the Company of warrants it holds to purchase Ceres shares.
In July 1997, the Company entered into a strategic alliance with Abbott
Laboratories in the field of pharmacogenomics for the development of genetic
markers and diagnostic tests for the analysis of drug response. The strategic
alliance is comprised of three parts: (i) a subscription agreement; (ii) an
exclusive 18 month research and license agreement for the development of genetic
markers and discovery of genes associated with drug response to and side effects
of an Abbott drug for the treatment of asthma, Zyflo[TM] (zileuton); and (iii)
an exclusive collaboration for the marketing and development of pharmacogenomics
research programs and of diagnostic systems based on the results of
pharmacogenomics research. The Company received research funding under the
research and license agreement, and may receive clinical milestone payments and
royalties if Abbott uses the results of the pharmacogenomics research to develop
and market diagnostic products in conjunction with Zyflo[TM]. Pursuant to the
subscription agreement and subsequent amendments thereto, Abbott made an equity
investment in the Company in September 1997 of 9.1 million euros and the Company
has a two-year put option exercisable until September 7, 2000, subject to
certain conditions, to sell an additional 10 million dollars of the Company's
equity to Abbott at the then current market price.
1996: In September 1996, the Company entered into a strategic alliance with
Janssen Pharmaceutica N.V, an affiliate of Johnson & Johnson, for the discovery
of genes associated with schizophrenia. The term of the agreement is for a
period of two years, commencing on September 26, 1996. The parties have agreed
to continue research under the agreement through July 31, 2000. Pursuant to the
agreement, the Company receives research funding and will receive clinical
milestone and royalty payments on the development and sale of pharmaceutical
products developed using the results of the research. In anticipation of the
agreement, on May 10, 1996, Johnson & Johnson Development Corporation purchased
119,900 ordinary shares of the Company for 3.1 million euros.
F-13
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
In May 1996, the Company entered into a research and development
collaboration agreement with the French pharmaceutical company Synthelabo to
discover and sequence genes involved in or associated with prostate cancer.
Pursuant to the agreement, Synthelabo made an equity investment of
approximately 7.6 million euros and agreed to provide research and development
funding and milestone payments of up to an aggregate of 54.1 million euros as
and when certain research objectives are met. In addition, the Company will
receive royalty payments on any future drug sales which may result from the use
of the Company's research results. The agreement is comprised of two parts: (i)
a collaborative research program and (ii) a license granted to Synthelabo for
therapeutic products that treat prostate cancer and potentially other prostate
diseases and that are derived from genes discovered pursuant to the
collaboration. The term of the initial research program was two years.
Subsequently, the Company and Synthelabo extended the research program for a
third year ending in May 1999. The Company has reached the research milestones
defined in the contract and has delivered a third gene associated to prostate
cancer, in April 1999.
Aggregate revenues of 18.1 million euros, 21.3 million euros and 8.4
million euros were recorded from these research, license and collaboration
agreements during 1999, 1998 and 1997, respectively.
3. Agreements with clinical and research institutions
1999: In October 1999, the Company entered into a collaboration agreement with
the Commissariat a l'Energie Atomique ("CEA" or French Atomic Energy Commission)
for the development of a large capacity genotyping microprocessor. The initial
objective of this collaboration is to develop in two years an integrated
microprocessor capable of genotyping on a very large scale, at low cost and
consuming minimal quantities of DNA and reagents. Given its highly innovative
character and important potential for the French biotechnology industry, the
project is partly supported by a grant from the French Ministry of Economics,
Finance and Industry.
1997: In October 1997, the Company formed a strategic research collaboration
with the Royal College of Surgeons in Ireland (RCSI) to perform large scale
cardiovascular genomic research programs based on association studies. As part
of the collaborative arrangement, the Company and RCSI formed Surgen, a 50:50
owned dedicated joint venture located in Dublin, Ireland. Surgen conducts sample
collection and storage, DNA extraction, cell immortalization, and, more
generally, all operations connected with the DNA banking part of this project.
1996: In April 1996, the Company entered into an agreement with the Centre
d'Etude du Polymorphisme Humain ("CEPH") setting out the terms of the transfer
to the Company of CEPH's mapping team and of certain proprietary materials and
data and the terms of collaboration between the Company and CEPH relating to
research on aging. The Company granted warrants to CEPH for the purchase of
209,800 ordinary shares of the Company at an exercise price of euros 15.24 (FF
100) per share. These warrants were valued at a total of 2.8 million euros and
have been recorded as a prepaid research and development expense, which was
amortized over the period that services were to be provided to the Company under
the agreement. Amortization expense of 0.1 million euros and 1.6 million euros
was recorded in the years ended December 31, 1998 and 1997, respectively. The
expense was completely amortized at the end of 1998.
Effective as of July 1994, the Company entered into an agreement with the
Association Francaise contre les Myopathies (the "AFM"), a private non-profit
association founded to combat neuromuscular diseases, and Genethon, a private
non-profit association. Pursuant to this agreement, the AFM made an equity
investment of approximately 1.7 million euros in the Company and agreed to loan
the Company 2.4 million euros over a two-year period commencing on January 1,
1995. The loan is repayable with interest calculated at the French daily money
market rates, which was 3.0635% at December 31, 1999, in four annual
installments due December 31, 1997 through 2000.
F-14
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
4. Inventories
The Company's inventories as of December 31 comprised raw materials and
supplies for 1.3 million euros and 1.0 million euros in 1999 and 1998
respectively.
No provisions were recorded in 1999 or 1998.
5. Fixed Assets
The Company's fixed assets as of December 31 are broken down as follows:
<TABLE>
<CAPTION>
In thousands of euros, 1999 1998
----------------------------- -----------------------------
<S> <C> <C>
Leasehold improvements........................................ 16,387 12,840
Laboratory equipment.......................................... 18,017 16,284
Furnishings -- office and computers equipment................. 8,152 6,414
Fixed assets under construction............................... 1,833 3,765
----------------------------- -----------------------------
Total cost.................................................... 44,389 39,303
Less: accumulated depreciation................................ (19,485) (13,464)
----------------------------- -----------------------------
Net fixed assets.............................................. 24,904 25,839
============================= =============================
</TABLE>
The increase in fixed assets in 1999 resulted primarily from: (i) the
expansion of the Genomics Research Center at Evry; and (ii) the renewal of
certain laboratory equipment for this Center.
6. Long-term debt
The Company's long-term debt as of December 31 comprised, in thousands of
euros:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
<S> <C> <C>
Bank loans bearing interest at rates of 4.25% to 8.25%........ 6,556 9,206
Amounts due to the AFM........................................ 610 1,220
Total......................................................... 7,166 10,426
============================= =============================
Less current portion (including 0.6 million euros due to the
AFM)......................................................... (2,851) (3,260)
----------------------------- -----------------------------
Total long-term debt less current portion..................... 4,315 7,166
============================= =============================
</TABLE>
The loans are to be repaid in monthly or quarterly installments through
the year 2003. The average interest rate on these loans was 6.53% in both 1999
and 1998.
As of December 31, 1999, bank debt with a balance due of 0.2 million euros
is secured by equipment totally amortized at the end of 1999.
Scheduled repayments of long-term debt are as follows, in thousands of
euros:
<TABLE>
<CAPTION>
<S> <C>
2000.................................. 2,851
2001.................................. 2,113
2002.................................. 1,449
2003.................................. 753
----------------------------------------
Total................................. 7,166
========================================
</TABLE>
F-15
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
Interest paid in the years ended December 31, 1999, 1998 and 1997 was
approximately 0.5 million euros, 0.5 million euros and 0.4 million euros,
respectively.
7. Shareholders' equity
General
As of December 31,1999, the issued and outstanding share capital of the
Company consists of 7,479,606 ordinary shares, nominal value 3 euros per share.
In January 1999, the nominal value per share was converted from FF 17 to 3
euros. The rounding up of the nominal value per share was affected through a
capital increase, whose aggregate amount was set off against the available
capital reserves of the Company.
In August 1998, the shareholders approved a reduction of the accumulated
deficit, which was effected by a set off against additional paid in capital.
In September 1997, the Company issued 177,502 ordinary shares to Abbott
Laboratories (corresponding to a capital increase of 9.1 million euros).
Preemptive subscription rights
Existing shareholders have preemptive rights to subscribe for cash on a
pro rata basis for any new shares issued by the Company. Shareholders, subject
to certain conditions, may waive such preemptive subscription rights at an
extraordinary general meeting of shareholders. Preemptive subscription rights,
if not previously waived, are transferable during the subscription period
relating to a particular issuance of shares.
Warrants
Under the authorized plans approved by shareholders in 1999, 1998, 1997,
1996, 1995, 1994, 1992 and 1990, the Company issued a certain number of
warrants to purchase ordinary shares (including the warrants issued to CEPH).
<TABLE>
<CAPTION>
Shares underlying the
warrants
-----------------------------
<S> <C>
Balance as of December 31, 1996............. 333,800
-----------------------------
Subscriptions............................... 4,000
Exercised................................... (205,000)
Expired or Canceled......................... (8,000)
-----------------------------
Balance as of December 31, 1997............. 124,800
-----------------------------
Subscriptions............................... 32,000
Exercised................................... (99,900)
Expired or Canceled ---
-----------------------------
Balance as of December 31, 1998 56,900
-----------------------------
Subscriptions............................... 4,000
Exercised................................... ---
Expired or Canceled......................... ---
-----------------------------
Balance as of December 31, 1999............. 60,900
=============================
</TABLE>
F-16
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
Issued warrants outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Shares Exercise price in euros Expiration date
------------ ----------------------- ----------------
<S> <C> <C>
2,000 4.39 October 5, 2000
21,900 24.39 March 18, 2001
1,000 38.11 May 21, 2002
28,000 87.51 May 18, 2003
2,000 87.51 May 18, 2003
2,000 83.31 August 18, 2003
4,000 32.85 May 18, 2004
</TABLE>
Stock Options
Under the authorized plans approved by shareholders in 1999, 1997, 1996,
1994, 1992 and 1990, the Company has issued stock options entitling the holder
the right to subscribe for one ordinary share per option under the 1999 and
1997 plans and 100 ordinary shares per option under all other plans. Options
generally vest ratably over a four-year period from the date of grant and
expire five years from date of vesting.
A summary of activity under the plans is as follows:
<TABLE>
<CAPTION>
Options outstanding
--------------------------------------------------------------------------
Weighted average
----------------------------- ------------------------
Shares Price per share
<S> <C> <C>
Balance as of December 31, 1996 964,900 25.29
-----------------------------
Granted 77,668 39.27
Exercised (36,600) 13.20
Canceled or expired (19,800) 22.63
-----------------------------
Balance as of December 31, 1997 986,168 25.31
-----------------------------
Granted 275,900 59.96
Exercised (130,719) 24.20
Canceled or expired (30,481) 48.33
-----------------------------
Balance as of December 31, 1998 1,100,868 33.49
-----------------------------
Granted 377,600 49.10
Exercised (59,900) 16.74
Canceled or expired (176,801) 55.96
-----------------------------
Balance as of December 31, 1999 1,241,767 35.85
=============================
</TABLE>
Of the total options granted in November 1996, 334 gave the holder the
right to purchase 33,400 ordinary shares subject to the achievement of certain
milestones. As of December 31,1999, 146 of these options were granted.
As of December 31, 1999 and 1998, options to purchase 610,225, and 485,167
shares, respectively, were exercisable at weighted-average exercise prices of
27.08 euros and 24.46 euros, respectively.
As of December 31, 1999, 1,594,481 shares were reserved for issuance to
option holders (1,241,767 under outstanding options at an exercise price
ranging from 4.39 euros to 68.45 euros plus 352,714 under options authorized
but not yet granted).
In June 1999, the Company's Board of Directors authorized the repricing of
options to purchase 64,500 shares of common stock at 79.43 euros (FF 521) per
share. As discussed in Note 1, these options will be subject
F-17
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
to variable plan accounting, as defined in the Proposed Interpretation, if the
Interpretation is adopted in its current form.
The weighted average remaining contractual life of all options outstanding
is 4.58 years as of December 31, 1999.
The exercise of options by certain employees in 1996 was financed by a
loan from the Company. The outstanding balance of this loan as of December 31,
1999 and 1998 has been shown as a reduction of shareholders' equity.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following average assumptions for 1999, 1998 and
1997, respectively: risk-free interest rate of 5.75% in 1999 and 3.65% in 1998
and 1997; dividend yields of 0% in all three years; volatility factors of the
expected market price of the Company's ordinary shares of 0.6% in 1999 and 0.5%
both in 1998 and in 1997, respectively; and a weighted-average expected life of
the option of five to eight years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for loss per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss (28,072) (18,044) (16,361)
Pro forma loss per share (3.77) (2.47) (2.35)
</TABLE>
These initial pro forma disclosures are not likely to be representative of
the effects of applying SFAS 123 in future years as the 1999, 1998, 1997
amounts reflect expense for only three, two and one year's vesting,
respectively.
The weighted-average fair values of options granted during 1999, 1998, and
1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Options whose price was greater than market price of the underlying shares on
the grant date 33.39 NA NA
Options whose price was less than the market price of the underlying shares
on the grant date 26.95 44.29 32.47
</TABLE>
8. Income Taxes
For financial reporting purposes, loss before income tax benefit includes
the following components, in thousands of euros, as of December 31 :
F-18
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
France (27,987) (15,030) (16,589)
United States 636 (1,971) (420)
Asia 296 (402) (218)
-------------- -------------- --------------
Total (27,055) (17,403) (17,227)
============== ============== ==============
</TABLE>
The income tax benefit in 1999, 1998, and 1997 is due to research and
development tax credits earned by the Company and recorded as current tax
benefit. There was no current tax expense or benefit in the Company's
subsidiaries, nor any deferred tax in any country, due to the accumulated
losses of all companies in the consolidated group.
A reconciliation of income taxes computed at the French statutory rate
(40% in 1999, 41.66% in 1998 and 1997) to the income tax benefit is as follows,
in thousands of euros, as of December 31 :
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Income tax benefit computed at the French statutory rate 10,822 7,250 7,177
Operating losses not utilized (10,822) (7,250) (7,177)
Research and development tax credit 5,004 2,698 2,923
Other (59) (11) (4)
-------------- -------------- --------------
Total 4,945 2,687 2,919
============== ============== ==============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
consist of the following, in thousands of euros, as of December 31 :
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Intangibles expensed upon acquisition for
tax purposes (270) (307)
-------------- --------------
Deferred tax assets:
Net operating loss carry forwards 25,368 19,108
Research and development costs capitalized
and amortized for tax purposes 8,290 7,594
Other 59 59
-------------- --------------
Total deferred tax assets 33,717 26,761
Valuation allowance (33,447) (26,454)
-------------- --------------
Net deferred tax --- ---
============== ==============
</TABLE>
As of December 31, 1999, the Company had French net operating loss carry
forwards of approximately 65.0 million euros, of which 63.2 million euros has
no expiration date. The remaining 1.8 million euros net operating loss carry-
forwards will expire in the years 2000 through 2001, if not utilized, as
follows :
<TABLE>
<CAPTION>
In thousands of euros, as of December 31
----------------------------------------
<S> <C>
2000 26
2001 1,808
--------------
Total 1,834
==============
</TABLE>
F-19
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
The Company also has research income tax credits receivable of 14.0
million euros which are recoverable if not used to offset taxes payable in the
fourth year following their generation. Of the total amount receivable, 3.3
million euros is recoverable in 2000.
The Company has U.S. net operating loss carry forwards of approximately
2.4 million euros which expire in the years 2008 through 2013 for federal tax
purposes, and 0.7 million euros which expire in the years 2001 through 2003 for
State of California tax purposes. The Company has net operating loss carry
forwards from its other subsidiaries of approximately 1.3 million euros which
expire in 2000 through 2003. The utilization of these net operating loss carry
forwards is limited to the future operations of the Company in the tax
jurisdictions in which such carry forwards arose.
9. Information on personnel and directors
As of December 31, the company had the following number of employees :
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- ---------------
<S> <C> <C> <C>
R&D 344 333 236
Total 512 479 355
</TABLE>
Salary expenses in the years 1999, 1998 and 1997 were 23.0 million euros,
17.0 million euros and 11.8 million euros, respectively.
The aggregate amount of compensation paid by the Company to all of its
directors as a group (seven persons in 1999, including four independent
directors who receive limited compensation for services as directors, and
reimbursement of expenses incidental to their attendance at Board of Directors
meetings) for services in all capacities for 1999 was approximately 1.2 million
euros. The aggregate amount of compensation paid by the Company to all of its
executive officers (excluding directors) and senior management as a group (14
persons) for their services in 1999 was approximately 1.5 million euros.
The Company contributes to pensions for personnel in France in accordance
with French law, by contributions based on salaries to the relevant state-
sponsored organizations. The Company has no further liability in connection
with these plans.
French law also requires payment of a lump sum retirement indemnity to
employees based upon years of service and compensation at retirement. Benefits
do not vest prior to retirement. The Company's obligations in this matter as of
December 31, 1999 and 1998 were immaterial.
The U.S. subsidiary has in place since 1997 a 401(K) retirement plan for
its employees; there is no obligation to make employer contributions. As of
December 31, 1999, other subsidiaries had no pension plans.
10. Fair value of financial instruments
As of December 31, 1999 and 1998, the carrying values of financial
instruments such as cash and cash equivalents, trade receivables and payables,
other receivables and accrued liabilities, and the current portions of long-
term debt and capital lease obligations approximated their market values, based
on the short-term maturities
F-20
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
of these instruments. As of December 31, 1999 and 1998, the fair value of long-
term debt was 4.2 million euros and 6.6 million euros, respectively. Fair value
is determined based on expected future cash flows, discounted at market
interest rates, and other appropriate valuation methodologies.
As of December 31, 1999, the fair value of foreign currency contract
obligations was 2.4 million euros. There was no contract as of December 31,
1998. Fair value of foreign currency contract obligations are estimated by
obtaining quotes from brokers.
11. Lease commitments
The Company leases certain of its equipment under capital leases.
Capitalized costs of approximately 2.8 million euros and 2.3 million euros are
included in property and equipment as of December 31, 1999 and 1998,
respectively. Accumulated amortization of these leased assets was approximately
1.8 million euros and 1.4 million euros as of December 31, 1999 and 1998,
respectively.
Future minimum lease payments under capital lease obligations due for the
fiscal years ending December 31 are as follows, in thousands of euros :
<TABLE>
<CAPTION>
<S> <C>
2000 320
2001 293
2002 293
2003 44
--------------
Total minimum lease payments 950
Less amount representing interest (39)
--------------
Present value of net minimum lease payments 911
Less current portion (299)
--------------
Long-term portion of minimum lease payments 612
==============
</TABLE>
The Company leases certain office, laboratory and research facilities
under operating leases, which expire through 2009. The majority of these leases
have nine-year terms, but are cancelable at the Company's option at each three-
year anniversary. Future minimum lease payments under operating leases due for
the fiscal years ending December 31 are as follows, in thousands of euros :
<TABLE>
<CAPTION>
<S> <C>
2000 2,361
2001 2,435
2002 2,519
</TABLE>
Rental expense for the years ended December 31, 1999, 1998, and 1997 was
approximately 3.9 million euros, 1.9 million euros, and 1.5 million euros,
respectively.
F-21
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
12. Segment and geographic information
Segment information
The Company has two reportable segments which are organized along its
divisional lines : the Oligos Division and Research and Development Division.
The Oligos Division produces and sells various products based on pieces of
synthetic DNA, or oligonucleotides, which are a principal raw material for
genomics research. The Research and Development Division conducts genomics
research.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on revenues and operating income.
Selected segment information
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Oligonucleotide division
Total revenues 11,630 8,455 6,463
============== ============== ==============
Direct costs (9,863) (7,757) (6,400)
Operating income (loss) 1,767 698 63
Capital expenditures 417 1,175 968
Headcount 130 109 89
R&D
Total revenues 19,392 21,278 9,763
============== ============== ==============
Direct costs (41,766) (31,918) (20,501)
Operating income (loss) (22,374) (10,640) (10,738)
Capital expenditures 4,119 12,259 9,359
Headcount 344 333 236
Reconciliation
Intersegment revenues (3,326) (2,822) (1,181)
Corporate general and administrative expenses not allocated to segment (9,552) (9,464) (8,785)
Total Genset
Revenues 27,696 26,911 15,045
============== ============== ==============
Operating income (loss) (30,159) (19,406) (19,460)
</TABLE>
Geographic information
Information about the Company's operations by geographic area is as follows:
F-22
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
In thousands of euros, as of December 31
France United States Asia Elimination Consolidated
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1999
----
Sales to third parties 23,247 2,193 2,262 (6) 27,696
Intercompany sales 947 104 2 (1,053) --
================ ================ ================ ================ ================
Total revenues 24,194 2,297 2,264 (1,059) 27,696
Operating loss (31,193) (5,858) 260 6,632 (30,159)
Identifiable assets 78,585 2,493 2,740 (2,872) 80,946
1998
----
Sales to third parties 24,383 1,797 731 - 26,911
Intercompany sales 593 -- -- (593) --
---------------- ---------------- ---------------- ---------------- ----------------
Total revenues: 24,976 1,797 731 (593) 26,911
================ ================ ================ ================ ================
Operating loss (16,296) (2,692) (419) -- (19,406)
Identifiable assets 101,899 2,394 1,438 (4,137) 101,594
1997
----
Sales to third parties 12,916 1,760 369 -- 15,045
Intercompany sales 377 28 -- (405) --
---------------- ---------------- ---------------- ---------------- ----------------
Total revenues: 13,293 1,788 369 (405) 15,045
================ ================ ================ ================ ================
Operating loss (18,795) (418) (230) (17) (19,460)
Identifiable assets 104,356 957 263 (2,686) 102,890
</TABLE>
Intercompany sales between geographic regions are accounted for at cost plus a
gross margin.
The Company's export sales from France were divided as follows in thousands of
euros, as of December 31 :
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States 12,910 15,444 2,690
United Kingdom 737 529 531
Italy 251 209 230
Other European countries 3,604 3,002 2,893
Asia and Middle East 605 183 325
Others 45 35 193
---------------- ---------------- ----------------
Total 18,152 19,402 6,862
================ ================ ================
</TABLE>
13. Subsequent events
* Corixa agreement. In February 2000, the Company entered into an
agreement with Corixa Corporation, a U.S. biotechnology company, pursuant to
which the Company will sequence the genome of an undisclosed microbial organism
provided by Corixa.
F-23
<PAGE>
Genset SA -- Notes to Consolidated Financial Statements (continued)
* Abbott agreement. Also in February 2000, the Company entered into a
collaborative research agreement with Abott Laboratories to discover genes
associated with bipolar disorder and Type II diabetes. Under the agreement,
Genset received an up-front payment, and will receive research funding and
success-based milestone payments, as well as clinical milestone payments and
royalties based on the development and sale of products developed using the
results of the research program. In addition, Abbott and Genset agreed that
Genset could exercise its put option to require Abbott to purchase U.S. $ 10
million of Genset stock.
* Convertible Bonds (unaudited). In June of 2000, we issued convertible
bonds exchangeable into new or existing Genset ordinary shares, raising
aggregate net proceeds of approximately 53 million euros. The bonds were issued
at par, with a principal value of 94 euros per bond. The bond issuance was
structured as a zero-coupon convertible bond, with no interest payments payable
during the 3.5 year term of the bond. The bond accrues interest at a rate of
4.5% annually; assuming no early conversion or redemption, the bonds will be
redeemed at their maturity date, January 1, 2004, at a price per bond of 109.72
euros or 116.72% of their principal value.
The bondholders can convert their bonds into Genset common shares at any
time at a conversion rate of one share per bond. Alternatively, we can force
early redemption or conversion of the bonds into ordinary shares at this same
conversion rate if, prior to June 27, 2002, our ordinary shares trade at in
excess of 250% of the principal value per bond plus accrued interest during a
consecutive 20 day period within a 40 day period chosen by us. Between June 27,
2002 and December 31, 2003, we can force early redemption or conversion of the
bonds into ordinary shares if our ordinary shares trade at in excess of 120% of
the principal value per bond plus accrued interest. If the bondholders decide
to convert or exchange their bonds, we have the option either to issue them new
shares or to exchange existing Genset shares we had previously bought. The
issue consisted of a total of 591,366 bonds; consequently, at the conversion
rate of 1 share per bond, if all the bonds were converted into newly issued
ordinary shares, the bondholders would hold 591,366 shares, or approximately
6.9% of the share capital after conversion, based on the number of shares
outstanding at May 31, 2000.
F-24
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENSET S.A.
Dated: June 28, 2000 By: /S/ PASCAL
BRANDYS
Name: Pascal Brandys
Title: Chairman of the Board and
Chief Executive Officer
