<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: AUGUST 31, 1995
OR
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from to .
---------- ----------------
Commission file number: 0-10824
GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297484
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
100 BEAVER STREET, WALTHAM, MASSACHUSETTS 02154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (617) 893-5007
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of
<PAGE> 2
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of November 27, 1995 was approximately $86,753,315.
The number of shares outstanding of the registrant's common stock as
of November 27, 1995 was 13,695,085.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for use at its Special
Meeting of Shareholders in lieu of an Annual Meeting to be held on February 16,
1996 (the "Proxy Statement") are incorporated by reference into Part III of
this Report.
Exhibit Index appears on Page 49.
<PAGE> 3
PART 1
Item 1. BUSINESS
OVERVIEW
Genome Therapeutics Corp. ("GTC" or the "Company") is a leader in the field
of genomics -- the identification and characterization of genes. The Company has
over ten years of experience in positional cloning, having served as one of the
primary researchers under genome programs sponsored by the United States
government, and has developed numerous techniques and tools that are widely used
in this field. GTC's commercial gene discovery strategy capitalizes on its
pioneering work in genomics by applying its proprietary high-throughput
multiplex DNA sequencing technology and positional cloning and bioinformatics
capabilities in two principal areas, the discovery and characterization (i.e.,
determination of functionality) of (i) genes of infectious organisms
("pathogens") that are responsible for many serious diseases and (ii) human
disease genes. The Company believes that its genomic discoveries may lead to the
development of novel therapeutics, vaccines and diagnostic products by it and
its strategic partners. In 1995, the Company entered into two corporate
collaborations in connection with its pathogen gene discovery programs, an
agreement with Astra Hassle AB ("Astra") and an agreement with Schering
Corpration and Schering-Plough Ltd. ("collectively, Schering-Plough").
SCIENTIFIC BACKGROUND
Human disease is caused by a variety of factors, including genetic defects,
pathogens and environmental factors, with many of the most common
life-threatening and chronic diseases believed to have a genetic basis. Genes,
which define the inherited characteristics of an organism, are found in all
living cells (e.g., human, animal and pathogen cells). Each gene codes for a
specific protein that performs a specific function in the body, such as the
production of insulin. In humans, a defect in a gene, or the absence of a
critical gene, may lead to overproduction, underproduction, improper function or
absence of a protein resulting in the onset of disease or an undesirable
physical condition. Genetic defects can be inherited or can accumulate during
the lifetime of an individual. Human diseases caused by pathogens also have a
genetic foundation in that specific genes in the pathogen are required for that
organism to survive and infect its human host.
The genetic content of an organism consists of DNA, a chemically complex
material comprised of four different nucleotides (adenine, guanine, cytosine,
and thymine) which are the building blocks of DNA. The sequence in which these
nucleotides are linked together in a molecule of DNA determines the
informational content of genes. The entire genetic content of an organism,
including humans, is referred to as its genome.
The human genome consists of 23 pairs of DNA sequences or chromosomes.
These chromosomes contain approximately 100,000 human genes distributed over
approximately three billion nucleotides. Human genes are found in the
chromosomes as coding regions of DNA ("exons") interrupted by non-coding regions
of DNA ("introns"). The number of exons found in human genes can be quite large
as can be the distance between exons. The function of the majority of human DNA
is unknown. The DNA sequence of a human gene is transcribed into a messenger RNA
molecule (mRNA) which is processed to contain only the exon sequences. The
information in the mRNA molecule is, in turn, translated into a protein product.
Genomes of pathogens are significantly less complex than the human genome
and generally consist of a single chromosome containing several thousand genes
distributed over millions of nucleotides. The majority of DNA in pathogens
typically is comprised of genes as uninterrupted DNA sequences.
Proteins expressed by genes are the targets of most current drugs. As a
result, the identification of human disease genes and the protein product of
these genes may lead to new therapeutics and diagnostic tests. In the case of
diseases caused by pathogens, the identification of the biologically important
genes of the pathogen may lead to the development of new drugs and vaccines to
combat the pathogen. Moreover, because of the simpler nature of the genomes of
pathogens relative to the human genome, efforts to identify and characterize
pathogen genes may lead to product development candidates more quickly than
human gene discovery efforts. The two principal technologies currently being
used to discover genes are sequencing and positional cloning.
2
<PAGE> 4
Sequencing
Sequencing is the process of identifying genes through the determination of
the order or sequence of nucleotides in DNA fragments. In recent years,
high-throughput procedures, such as those being employed by the Company, have
been developed which now enable sequencing to be performed on a larger scale and
with greater speed than was previously possible.
There are generally two ways of applying high-throughput sequencing to
discover genes: random discovery and targeted discovery. In random discovery,
high-throughput sequencing is used to identify the genes in a genome without
regard to the function of the genes. In targeted discovery, high-throughput
sequencing is used to identify the genes in a specific chromosomal region or
tissue after the region or the tissue has been implicated in or associated with
a specific disease.
High-throughput sequencing offers a practical way of randomly identifying
all of the genes in a pathogen because the genomes of pathogens consist of
relatively small numbers of uninterrupted gene sequences. In contrast, the human
genome is very large with only small portions of the DNA containing genes which
are present as interrupted DNA sequences. As a result, although high-throughput
sequencing of the DNA in a particular chromosomal region is used in human gene
discovery, sequencing of all of the DNA in the human genome is not a practical
means to identify large numbers of human genes. Instead, several groups are
randomly discovering large numbers of human genes by sequencing expressed copies
of genes, which contain only exons and are called cDNA, which they synthesize
from mRNA.
Although random discovery permits the rapid identification of pathogen and
human genes, it generally does not provide an understanding of the function of a
gene or of the gene's role in a particular disease. Any determination of
function, or "characterization," of randomly discovered genes is dependent on
the detection of structural similarities, or homology, existing between the
protein product of such sequenced genes and genes with a known function.
Targeted gene discovery by high-throughput sequencing of human DNA
typically is applied as part of positional cloning (described below) after a
specific chromosomal region has been identified which is believed to contain a
particular gene. In this targeted gene discovery procedure, the entire
chromosomal region is sequenced in an effort to identify, from all the genes
present in that region, the one gene located in that region which is responsible
for causing the specific disease.
Another type of targeted gene discovery involves the use of high-throughput
sequencing of cDNA to identify genes believed to cause or maintain a particular
disease. In this procedure, which is referred to as "comparative gene
expression," mRNA present in healthy and diseased tissues is converted into cDNA
and then sequenced to identify the genes whose protein product is present in
each. Candidate genes responsible for causing or maintaining the disease are
identified by comparing which genes are expressing or producing their protein
product and at what level this expression is occurring in both the healthy and
diseased tissue.
Positional Cloning
Positional cloning is the process of analyzing disease inheritance patterns
to identify the genes responsible for causing human disease. The first step in
positional cloning is the identification of individual families or genetically
homogeneous populations in which the occurrence of the disease in individuals
within such families or populations is substantially higher than in the general
population. Blood samples are collected from individuals within the family or
population to provide DNA to be used to identify the region on a particular
chromosome where the disease-causing gene is located. This process is referred
to as "genetic linkage mapping."
In genetic linkage mapping, DNA probes are used to detect genetic markers,
regions of DNA that vary in sequence content from person to person. The position
of these genetic markers on a chromosome, as detected by the DNA probes,
constitutes a genetic linkage map of the chromosome. The chromosomal regions
which are initially examined are those regions which have been identified as
containing genes that are likely candidates for causing or predisposing an
individual to the disease. Because very few human genes have been mapped to
date, most genetic mapping is done genome-wide with a set of DNA probes that
span the genome. By following the inheritance patterns of genetic markers and
looking for the coinheritance of the genetic markers and the disease, the gene
responsible for causing or predisposing an individual to that disease can be
3
<PAGE> 5
located within a specific chromosomal region. Using additional DNA probes, the
chromosomal region containing the targeted disease gene can be narrowed to a
region consisting of approximately 2,000,000 to 3,000,000 nucleotides in size
containing between approximately 60 and 100 genes.
Next, libraries comprised of large DNA fragments are examined to find those
fragments which contain pieces of DNA from the relevant chromosomal region. The
aligning of these DNA fragments so that their resulting order represents how
these DNA fragments are related to each other in the relevant chromosomal region
is called physical mapping. The physical map of the relevant chromosomal region
can then be used to identify the genes which are contained within the region.
These genes can be identified in two ways. First, "exon trapping" is used,
whereby individual exons within this chromosomal region can be isolated and then
used to obtain a complete copy of the gene from a cDNA library. Alternatively or
in combination with exon trapping, the DNA of the chromosomal region can be
sequenced using high-throughput procedures and, through the use of special
computer software, the exons which are contained within the chromosomal region
can be predicted. This sequencing information is then used to search cDNA
libraries for DNA fragments which contain these presumed exons.
Each gene identified through this process is a candidate for causing the
disease. By determining the sequence of these genes in individuals with the
disease and comparing it to the sequence of that gene from healthy individuals,
the gene involved in the disease can be identified. DNA sequence differences,
which are only found in individuals who have inherited the disease, identify the
gene which is believed to be responsible for causing the disease.
COMPANY TECHNOLOGY
The Company applies its proprietary technologies and know-how in
high-throughput multiplex sequencing and positional cloning in its gene
discovery programs. In its pathogen programs, the Company uses its
high-throughput sequencing capabilities to sequence the genomes of pathogens. In
its human gene discovery programs, the Company combines its proprietary
positional cloning capabilities, together with its high-throughput sequencing
capabilities, in its efforts to identify and characterize human genes associated
with disease. In support of these technologies, the Company has developed
sophisticated bioinformatics capabilities which utilize computer hardware and
proprietary software to track, process and analyze the data generated in the
gene discovery process.
Multiplex Sequencing
GTC uses its proprietary high-throughput DNA sequencing process, called
"multiplex sequencing," as its primary means to sequence DNA. The Company holds
exclusive world-wide commercial rights to this technology, which was originally
developed by Dr. George Church's laboratory at the Howard Hughes Medical
Institute, pursuant to a license from Harvard College. See "Patents and
Proprietary Technology." Dr. Church is a scientific advisor to the Company. In
multiplex sequencing, individual DNA samples are mixed together and then
processed simultaneously. At the end of the process, the nucleotide sequence of
the individual DNA samples in the mixtures is determined by using DNA probes.
The Company has routinely combined up to 20 different DNA samples and used up to
40 different DNA probes to detect the sequence generated from each end of each
DNA fragment in the mixtures. By combining 20 different DNA samples into a
single mixture, the Company only has to perform a single series of preparatory
procedures to produce 40 different DNA sequences. Commercially available
automated DNA sequencers require 20 individual samples to be processed through
the preparatory procedures to produce the same number of DNA sequences.
The Company has used its multiplex sequencing technology to sequence
virtually the entire genome of Helicobacter pylori ("H. pylori") and portions of
the genomes of three other pathogens (Staphylococcus auereus ("Staph."),
Microbacterium tuberculosis ("M. tuberculosis"), and Myclobacterium leprae ("M.
leprae")). The Company has also used multiplex sequencing to sequence a 60,000
nucleotide region of human chromosome 4 thought to contain the gene responsible
for fascioscapeulohumeral muscular dystrophy ("FSHD") and to sequence a 40,000
nucleotide region on human chromosome 10 which was subsequently determined by a
third party to contain the gene responsible for a type of thyroid cancer.
4
<PAGE> 6
The Company's multiplex sequencing technology currently is semi-automated.
The Company is developing a fully-automated version of the process. The Company
has built prototype equipment to automate the use of DNA probes in multiplex
sequencing and expects to introduce this equipment into full-scale use in the
second half of 1996. This equipment will also automate the use of DNA probes in
the Company's multiplex genotyping technology. See "Company
Technology--Positional Cloning." The Company also plans to acquire robotic
laboratory equipment to automate the sample preparatory procedures required in
the sequencing process. The Company believes that automation will increase the
speed and lower the cost of sequencing DNA samples. The Company supplements its
proprietary multiplex sequencing technology with automated, commercially
available, DNA sequencers.
Positional Cloning
The Company has over 10 years of experience in various aspects of
positional cloning. GTC was one of the pioneers in the use of genetic linkage
mapping and developed numerous techniques and tools that are widely used in the
positional cloning field. In its positional cloning efforts, the Company applies
its proprietary multiplex genotyping technology. Genotyping is the process of
using DNA probes to determine the genetic composition of specific regions on
each chromosome of each family member. Using multiplex genotyping, the Company
has simultaneously processed up to 50 genetic markers for each family member in
a single sample mixture. By combining 50 different genetic markers, the Company
reduces the number of laboratory steps required to obtain the data needed to
localize a disease gene to a specific chromosomal region.
The Company has considerable experience in identifying genetic markers for
specific chromosomal regions. This ability is needed when additional genetic
markers are required to narrow the size of the chromosomal region believed to
contain the disease gene. The Company also has several libraries of large DNA
fragments arranged in a format which facilitates the isolation of DNA fragments
from a specific chromosomal region. These libraries are used to develop physical
maps of chromosomal regions thought to contain disease genes. In addition, the
Company uses specialized tools to trap the exons present in large DNA fragments.
These tools are used to isolate exons from the genes present in chromosomal
regions believed to contain disease genes.
<TABLE>
Examples of key accomplishments by GTC in positional cloning include:
<CAPTION>
Year(s) Accomplishment
------- --------------
<S> <C>
1985 Completion of genetic linkage mapping of the gene
responsible for cystic fibrosis to chromosome 7
1987 Completion of the first genetic linkage map of the entire
human genome
1987 to 1994 Completion of detailed genetic linkage maps of human
chromosomes 5, 7, 10, 16, 17 and 20
1995 Completion of genetic and physical maps for chromosome 10
and detailed physical maps for regions of chromosome 10
thought to contain tumor suppressor genes
</TABLE>
Bioinformatics
The process of identifying and characterizing genes generates vast amounts
of data which must be organized and managed. Such data result from genetic
linkage and physical mapping, DNA sequencing and biological experiments
performed on identified genes. The use of computers, software and databases to
track, process, store, retrieve and analyze data generated by genomic research
is referred to as "bioinformatics," which is an emerging subspecialty of
genomics and a key capability of any participant in the field. Because of its
early work in large-scale genetic linkage analysis, GTC was one of the first
companies to develop significant bioinformatics capabilities. The Company
expanded these capabilities several years ago when it began to use and further
develop its proprietary multiplex sequencing technology. The Company uses its
current bioinformatics systems to manage the production and interpretation of
multiplex sequence data and compare and screen these data against public and
proprietary sequence databases.
5
<PAGE> 7
The Company continually refines its bioinformatics systems. The Company
currently is focusing these efforts in four areas: upgrading and standardizing
its bioinformatics hardware and software; developing enhanced data management
systems; expanding its software engineering capabilities; and expanding its
resources in computational molecular biology. These enhancements are expected to
result in more effective data management by allowing for higher-throughput
sequencing, providing for smooth integration of laboratory automation,
supporting more rapid analyses and comparison of genomic data and facilitating
the identification of gene targets for the development of therapeutic, vaccine
and diagnostic products. As part of its enhancement of its bioinformatics
capabilities, the Company is in the process of significantly increasing the
number of its bioinformatics personnel.
GTC STRATEGY
The Company's objective is to use its proprietary multiplex sequencing and
positional cloning technologies and bioinformatics capabilities to identify gene
targets for the development of novel therapeutic, vaccine and diagnostic
products in collaboration with pharmaceutical and biotechnology company
partners. The Company is using the following strategies to achieve this
objective:
Sequencing of Pathogens
Over the past four years, the Company has devoted a significant portion of
its resources to, and obtained considerable experience in, sequencing the
genomes of pathogens. The Company has sequenced virtually the entire genome of
H. pylori and portions of the genomes of three other disease-causing pathogens.
The Company plans to continue to identify and characterize genes of these and
other pathogens for which the Company believes new or improved therapeutic,
vaccine or diagnostic products represent a significant commercial opportunity.
In particular, the Company plans to focus its efforts on pathogens where the
incidence of antibiotic resistance or other factors limit the use or efficacy
of currently available therapies, creating a need for novel antibiotics and
vaccines. The Company believes its pathogen gene discovery programs may lead to
product development candidates more quickly than human gene discovery efforts.
Discovery of Human Disease Genes
In the human gene discovery area, the Company plans to build on its decade
of experience and knowledge in positional cloning and its proprietary multiplex
genotyping and multiplex sequencing technologies and bioinformatics capabilities
by obtaining exclusive rights to collections of DNA samples from relevant family
resources in order to map, identify and characterize genes responsible for
selected human diseases. The Company is seeking collaborations with clinicians
and academic researchers to obtain these rights. The Company believes that
access to these family and other resources will bolster its existing human gene
discovery programs and enable it to initiate additional programs directed at
human genes associated with significant diseases.
Strategic Collaborations
The Company plans to continue to seek strategic collaborations with
pharmaceutical and biotechnology companies for the development and
commercialization of products based on the Company's genomic discoveries. This
strategy is designed to provide the Company access to the scientific and product
development expertise of its partners and permit the Company to benefit from the
commercialization of products based on the Company's gene discoveries without
incurring the substantial costs required for pharmaceutical product development
and commercialization. The Company generally expects to exclusively license to
its partners all rights to therapeutic products and vaccines (and, depending
upon the gene, diagnostic products) developed based on the particular genetic
database licensed by the Company. In exchange, the Company generally expects to
receive a combination of up-front license fees, research funding, milestone
payments and royalty payments on product sales. To date, the Company has entered
into two collaborations relating to pathogens, one with Astra for the
development of therapeutic, diagnostic and vaccine products effective against
gastrointestinal infections and other diseases caused by H. pylori, and one with
Schering-Plough to use the genomic sequence of a specified pathogen to identify
new gene targets for the development of antibiotics and vaccines effective
against drug resistant infectious organisms.
6
<PAGE> 8
Government Grants and Contracts
The Company has served as one of the primary researchers under genomic
programs sponsored by the United States government and actively seeks to
continue its participation in government sponsored genomics research programs.
These programs add to the Company's genomics technology base and increase the
number and enhance the expertise of its scientific personnel. From January 1991
through August 1995, the United States government awarded the Company grants and
contracts providing for aggregate payments over their terms of approximately $37
million. Moreover, subject to certain rights of the government, under most of
these programs the Company becomes the owner of any resulting discoveries or
inventions.
GENE DISCOVERY PROGRAMS
The Company is currently conducting gene discovery programs directed at
both pathogen genes and human disease genes. The factors the Company considers
in determining whether to initiate these programs include the projected
commercial potential, the effectiveness of current therapies, the likelihood of
attracting a pharmaceutical or biotechnology company as a collaborator, the
status of competitive programs and anticipated development costs.
Pathogen Programs
Antibiotics are the standard therapy for bacterial and fungal infections.
During the twelve month period ended November 1995, approximately 287 million
prescriptions for antibiotics were written in the United States for such
infections and approximately $7 billion was expended in the United States for
oral and injectable antibiotics. The approximately 100 antibiotics in use in the
United States today are primarily variations of a small number of original
antibiotic compounds. In the past decade, a growing number of infections have
been caused by pathogens which are becoming resistant to an increasing number of
currently available antibiotics. This problem of growing resistance to
antibiotics is particularly problematic in the approximately 6,500 acute care
hospitals in the United States in which approximately 2.1 million patients each
year develop infections. Examples of pathogens that have exhibited resistance to
a number of current antibiotics include Staph., M. tuberculosis, Streptococcus
pneumonia, and Enterococcus. To date, the primary response of pharmaceutical
companies to the resistance problem has been to modify existing antibiotics.
However, in many cases, the pathogens that are the targets of these antibiotics
have further mutated, often quite rapidly, and thereby developed resistance to
the modified antibiotics. The Company believes that the development of novel
antibiotics and vaccines based on new pathogen targets identified using genomic
information may be less prone to the rapid development of resistance than
antibiotics that are only modified versions of existing drugs.
Helicobacter pylori. H. pylori is the pathogen believed responsible for
causing 90% of duodenal peptic ulcers, the most common type of ulcer, and 70% of
gastric peptic ulcers. Peptic ulcer disease is a chronic inflammatory condition
of the stomach and duodenum. Although frequently asymptomatic, all persons
infected by H. pylori have chronic gastric inflammation (gastritis). It is
estimated that approximately 4.5 million people suffer from active peptic ulcers
each year, and approximately 500,000 new cases are diagnosed annually in the
United States. Approximately 600,000 patients are hospitalized each year in the
United States for peptic ulcer disease. Serious complications occur in
approximately one-third of these cases, including intestinal obstruction, upper
gastrointestinal hemorrhage and perforation. Further, each year over 6,000
deaths in the United States are directly caused by ulcer disease, and peptic
ulcers are a contributing factor in an additional 11,000 deaths. Approximately
10% of the population in the United States will develop peptic ulcer disease
during their lifetimes. Studies have also linked H. pylori with the development
of certain stomach cancers and coronary heart disease.
The most common medication for treating peptic ulcers are anti-secretory
drugs, such as H2 antagonists (e.g., Tagamet and Zantac), and proton pump
inhibitors (e.g., Prilosec). Although anti-secretory drugs reduce ulcer symptoms
by inhibiting gastric acid secretion, they do not eradicate the H. pylori which
is the primary cause of the disease. In 1994, the market for such drugs for the
treatment of ulcers totaled approximately $7 billion worldwide. An approach
being developed to treat recurrent peptic ulcer disease recognizes the role of
H. pylori and involves the administration of antibiotics, often in combination
with bismuth or anti-secretory drugs. The most effective antibiotic treatments
may be complicated by the need to
7
<PAGE> 9
treat for prolonged periods with multiple drugs, by side effects and problems
with patient compliance, by relapses if treatment is interrupted, and by the
development of antibiotic-resistant strains of the bacteria.
Using its proprietary high-throughput multiplex sequencing technology, the
Company completed sequencing virtually the entire genome of H. pylori in
December, 1994. Under its agreement with Astra, the Company is identifying the
genes critical to the survival of H. pylori and proteins on the surface of the
bacterium that are believed to be likely targets for therapeutic products and
vaccines, respectively. See "Collaborative Agreements -- Pharmaceutical Company
Collaborations."
Staphylococcus aureus. Staph. is the most common cause of skin, wound and
blood infections. Staph. infections are typically treated with antibiotics. The
percentage of Staph. isolates resistant to penicillin and certain other
antibiotics increased from 2.4% in 1975 to 29% by 1991. Moreover, clinical
isolates of Staph. exist which are resistant to all known antibiotics other
than vancomycin. Vancomycin resistance has appeared in Enterococcus, a
pathogen related to Staph., which has raised the possibility that untreatable
strains of Staph. could appear. Using its high-throughput sequencing
capabilities, the Company has sequenced a substantial portion of the genome of
Staph.
Mycobacterium tuberculosis. M. tuberculosis is the pathogen responsible
for causing tuberculosis. The clinical manifestations of tuberculosis include:
pulmonary tuberculosis, the most highly infectious form; tuberculous meningitis,
the major form causing mortality in children; and disseminated tuberculosis of
bone or other internal organs, forms increasingly found in AIDS patients where
it causes chronic wasting and debilitation. Approximately one-third of the
world's population is infected with M. tuberculosis, but harbors the pathogen in
an inactive form. Such individuals have a 10% lifetime risk of developing the
disease. The fatality rate of untreated tuberculosis is between 40% and 60%.
Each year, there are an estimated 8 million new cases of tuberculosis worldwide
and 2.9 million deaths from the disease, making tuberculosis the leading cause
of death in the world from a single pathogen. While the disease is primarily
associated with the developing world, tuberculosis is not uncommon in
immuno-compromised patients, including cancer and AIDS patients. In the United
States, outbreaks of infection have occurred in health care workers and
residents of homeless shelters and prisons.
The primary treatment for tuberculosis is the use of antibiotics. A problem
of effectively treating tuberculosis with antibiotics is compliance with the
long drug treatment regimens, often as long as six months. In addition, strains
of M. tuberculosis have become resistant to isoniazid and rifampicin, two
principal antibiotics used to treat tuberculosis. M. bovis vaccine, the most
widely used vaccine in the world, protects against disseminated tuberculosis and
tuberculosis meningitis in children. However, in clinical trials this vaccine
has been shown to be only partially effective against pulmonary tuberculosis in
adults.
Using its high-throughput multiplex sequencing technology, the Company has
sequenced over 800,000 bases of the genome of M. tuberculosis, which the Company
estimates represents approximately 20% of the total genome of this pathogen. See
"Collaborative Agreements--Government Collaborations."
8
<PAGE> 10
Human Gene Discovery Programs
GTC has initiated a variety of programs to identify human genes that are
responsible for various diseases. In some of these programs the Company is using
positional cloning strategies, while in others it is employing a multifaceted
approach incorporating both positional cloning and comparative gene expression.
The Company's current primary human gene discovery programs are directed at
FSHD, prostate cancer, BPH, and manic depressive illness. Most of the Company's
current human gene discovery programs target common diseases that are most
likely due to defects in more than a single gene. The following table summarizes
the current status of the Company's human gene discovery programs. This table is
qualified in its entirety by the more detailed descriptions contained elsewhere
in this Prospectus.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
POSITIONAL CLONING ACTIVITIES
<CAPTION>
APPROPRIATE FAMILY IDENTIFICATION
RESOURCES GENETIC CHROMOSOMAL OF DISEASE
------------------------ LINKAGE REGION PHYSICAL MAP CANDIDATE GENE
DISEASE EVALUATION COLLECTION MAPPING IDENTIFICATION CONSTRUCTION GENES IDENTIFICATION
-------- ---------- ---------- ------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
FSHD
---------------------------------------------------------------------------
Prostate Cancer
Tumor/Blood Samples
----------------------------------------------------------------------
Family Studies
---------
Manic Depressive Illness
------------------------------------------
Schizophrenia
------------------
Osteoporosis
---------
Asthma
---------
</TABLE>
<TABLE>
SEQUENCING ACTIVITIES
<CAPTION>
CANDIDATE DISEASE
TISSUES cDNA LIBRARIES cDNA COMPARATIVE GENE GENE
COLLECTED PREPARED SEQUENCING ANALYSIS IDENTIFICATION IDENTIFICATION
----------- --------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Prostate Cancer
---------------------------------------
BPH
---------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FSHD. FSHD is a form of muscular dystrophy characterized by muscular
weakness and atrophy initially concentrated in the face and shoulder. FSHD is
believed to affect approximately one in 20,000 people worldwide. Steroids are
administered to patients with FSHD to decrease inflammation associated with
muscle wasting caused by the disease, but no therapies are available to reverse
or halt progression of the disease. Using detailed genetic linkage mapping,
physical mapping, and high-throughput multiplex sequencing, GTC has narrowed the
suspected location of the gene responsible for FSHD to an approximately 60,000
nucleotide region on the tip of the long arm of chromosome 4. The Company has
identified several candidate genes based on the sequence of this region and is
evaluating these candidates in affected individuals and normal controls. See
"Collaborative Agreements--Government Collaborations."
Prostate Cancer. In the United States, prostate cancer is the most
commonly diagnosed cancer in males and the second most common cause of death
from cancer in males. The American Cancer Society predicted that there would be
approximately 244,000 new cases of prostate cancer and approximately 40,000
deaths from prostate cancer in the United States in 1995. The treatment for
early stage prostate cancer is surgery to remove the prostate gland or
radiation. Removal of the prostate results in incontinence or impotence in a
substantial number of patients. Radiation is often not fully effective in
stopping the progression of the cancer. The treatment for later stage prostate
cancer is therapy to reduce testosterone levels. While testosterone reduction is
successful in slowing disease progression in 80% of patients, it is typically
effective for only 12 to 18 months.
9
<PAGE> 11
GTC is conducting a multifaceted program to identify the genes
responsible for prostate cancer. First, based on academic research that used
genetic data obtained by comparing DNA isolated from tumors and blood samples
to localize a candidate tumor suppressor gene to a region on the long arm of
chromosome 10, the Company continues to refine its detailed physical map of the
region and is sequencing a set of DNA fragments which cover a portion of the
region. The Company, working with the National Institutes of Health (the
"NIH"), also has identified several candidate genes in the region using exon
trapping techniques. In addition, the Company has initiated gene expression
profiles for prostate cancer by constructing cDNA libraries from normal
prostate and prostatic tumors and is sequencing the resulting cDNAs. GTC is
supplementing its gene expression studies with technologies which are used to
determine the differences in genes which are expressed in different samples.
To further this program, the Company is also seeking to identify appropriate
families exhibiting early onset (under 55 years of age) of prostate cancer for
genetic linkage mapping efforts.
GTC is collaborating with the NIH National Center for Human Genome
Research ("NCHGR") in this program to identify and begin to evaluate candidate
prostate cancer genes. Pursuant to the terms of the Company's Cooperative
Research and Development Agreement ("CRADA") with NCHGR, any inventions
or discoveries developed in the course of the research plan solely by the
Company remain the property of the Company. Any inventions or discoveries
developed by employees of NCHGR remain the property of the NIH and any
inventions or discoveries developed jointly will be jointly owned. Under
the terms of the CRADA, the Company has the right to negotiate with the
NIH to obtain an exclusive license to any inventions or discoveries not made
soley by the Company. The terms of any such license may include field of use
restrictions and a royalty obligation on the part of the Company. The NIH
retains a nonexclusive, nontransferable license to practice any such inventions
or discoveries by or on behalf of the United States government. The NIH is also
entitled to a license, including the right to grant sublicenses, to use for
research purposes any such inventions or discoveries developed solely by the
Company.
Benign Prostate Hypertrophy ("BPH"). BPH is a common disease in males that
results from enlargement of the prostate. Although BPH is non-life threatening,
it can have a significant effect on the quality of life. The peak age of onset
of symptoms of BPH is between 50 and 55. BPH affects approximately 40% of men in
the United States by the time they reach the age of 74. The current treatments
for BPH include transurethral resection of the prostate and drugs such as
Proscar. Resection of the prostate results in incontinence or impotence in a
substantial number of patients. Drugs such as Proscar are effective in treating
the early symptoms of BPH but are not effective as the prostate becomes
enlarged. GTC has initiated gene expression profiles for BPH by constructing
cDNA libraries from tissue exhibiting BPH, normal prostate tissue and prostate
tumors.
Manic Depressive Illness. Manic depressive illness is a serious
neuropsychiatric disorder characterized by alternating mood swings of mania and
depression. Manic depressive illness affects approximately one percent of the
United States population. The most common treatment for manic depressive illness
is lithium carbonate, which has both therapeutic and prophylactic effects but is
toxic at levels that are very close to therapeutic levels. Alternatives are
anticonvulsant agents such as carbamazepine, valproate, and clonazepam.
Treatments with either lithium carbonate or anticonvulsant agents result in
diminished intellectual and emotional capacity.
GTC has been collaborating with the National Institute of Mental Health
(the "NIMH") in a search for DNA markers associated with this disorder in
several Old Order Amish pedigrees. This population represents a relatively
genetically isolated community with a small number of founders in the 1800's.
Strict pressures against substance abuse also facilitate accurate disease
diagnoses. The Company has completed a genome wide scan and has identified three
candidate chromosomal regions.
Although NIMH funding for this program ends in March 1996, the Company
plans to continue this program with its own funds. Any gene discovered in the
course of research funded by the NIMH would be the property of the NIMH.
However, the NIMH has no rights to genes discovered by the Company after
expiration of the contract term. Based on the current status of the research in
this program, the Company believes that it is very unlikely that a gene will be
identified during the current term of the research contract.
Other Programs. The Company is also conducting preliminary research on
osteoporosis, asthma and schizophrenia. These diseases affect large numbers of
people in the United States and throughout the world and are believed to have a
genetic basis. The Company is currently evaluating various family resources for
research on these diseases and may expand its research on one or all of these
diseases.
COLLABORATIVE AGREEMENTS
An important part of the Company's strategy is to pursue strategic
collaborations with pharmaceutical and biotechnology companies, for the
development and commercialization of products based on the Company's genomic
discoveries. The Company also plans to continue to seek government grants and
research contracts related to the Company's technology and research programs.
10
<PAGE> 12
Pharmaceutical Company Collaborations
Astra. In August 1995, the Company entered into a collaboration agreement
with Astra to develop pharmaceutical, vaccine and diagnostic products effective
against gastrointestinal infections or any other disease caused by H. pylori.
The Company granted Astra exclusive access to the Company's H. pylori genomic
sequence database and exclusive worldwide rights to make, use and sell products
based on the Company's H. pylori technology. The agreement also provides for a
four-year research collaboration to further develop and annotate the Company's
H. pylori genomic sequence database, identify therapeutic and vaccine targets
and develop appropriate biological assays. This research is being directed by a
Joint Management Committee and a Joint Research Committee, each consisting of
representatives from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain product
development milestones, up to approximately $22 million (and possibly a greater
amount if more than one product is developed under the agreement) in license
fees, expense allowances, research funding and milestone payments. $500,000 of
such fees is creditable against any future royalties payable to GTC by Astra
under the agreement. The Company received approximately $5 million in license
fees, expense allowances and research funding under the Astra agreement through
December 1995. For the Company's fiscal year ended August 31, 1995, revenue
recognized the Company under its agreement with Astra accounted for
approximately 31% of the Company's total revenue. Astra is obligated to provide
funding for the research program for a minimum of two and one-half years; Astra
may terminate the research collaboration at any time after the second year on
six months' notice.
The Company will also be entitled to receive royalties on Astra's sale of
any products (i) protected by the claims of patents licensed exclusively to
Astra by the Company pursuant to the agreement, or (ii) the discovery of which
was enabled in a significant manner by the genomic database licensed to Astra by
the Company. GTC has the right under certain circumstances to convert Astra's
license to a nonexclusive license in the event Astra is not actively pursuing
commercialization of the licensed technology.
Schering-Plough. In December 1995, the Company entered into a
collaboration and license agreement with Schering-Plough providing for the use
by Schering-Plough of the genomic sequence of a specified pathogen the Company
is sequencing to identify new gene targets for development of antibiotics
effective against drug-resistant infectious organisms. As part of this
agreement, the Company granted Schering-Plough exclusive access to certain of
the Company's genomic sequence databases. The Company also granted
Schering-Plough a non-exclusive license to use the Company's bioinformatics
systems for Schering-Plough's internal use in connection with the genomic
databases licensed to Schering-Plough under the agreement and other genomic
databases Schering-Plough develops or acquires. The Company also agreed to
undertake certain research efforts to identify bacteria-specific genes essential
to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and milestone
payments. Subject to the achievement of additional product development
milestones and Schering-Plough's extension of the research collaboration,
Schering-Plough has agreed to pay the Company up to an additional approximately
$40.5 million (inclusive of the $10.3 million referred to in the previous
sentence) in expense allowances, research funding and milestone payments. The
Company expects that in fiscal 1996 it will complete the milestones that will
entitle it over the next several years to receive the minimum additional
payments of $10.3 million.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the Company's genomic
database of the specified pathogen and on the technology developed in the course
of the research program. GTC has also granted Schering-Plough a right of first
negotiation if during the term of the research plan GTC desires to enter into a
collaboration with a third party with respect to the development or sale of any
compounds which are targeted against, as their primary indication, the pathogen
that is the principal subject of the Company's agreement with Schering-Plough.
The Company will be entitled to receive royalties on Schering-Plough's sale of
therapeutic products and vaccines developed using the technology licensed from
the Company. Subject to certain limitations, GTC retained the rights to make,
use,
11
<PAGE> 13
and sell diagnostic products developed based on the Company's genomic database
licensed to Schering-Plough or the technology developed in the course of the
research program.
Government Collaborations
Since 1989, the Company has been awarded a number of grants and contracts
by various agencies of the United States government pursuant to the government's
genomics programs. The scope of the research covered by the grants and contracts
encompasses technology development, sequencing production, technology automation
projects and positional cloning projects. Among other things, these grants and
contracts have provided significant funds for the Company's M. tuberculosis,
FSHD and manic depressive illness gene discovery programs. These grants and
contracts represent an important aspect of the Company's strategy because they
add to the Company's genomics technology and enable the Company to increase the
number and enhance the expertise of its scientific personnel.
Under the government grants and a majority of the government research
contracts, the Company has exclusive rights to any commercial applications of
technology developed, including all gene discoveries, inventions and technology
improvements created or discovered. However, the government retains certain
rights to practice such technology. See "Patent and Proprietary Technology" and
"Human Gene Discovery Programs -- Manic Depressive Illness." In addition, the
Company is obligated under certain government grants and contracts to make data
and materials resulting from the research public within 180 days from the date
such data and materials are developed.
The Company's government grants and research contracts include both
cost-plus-fixed-fee arrangements and fixed price contracts. Under cost plus
fixed fee arrangements, the Company receives reimbursement of its direct costs
associated with the research, a portion of its indirect or overhead costs as
well as fees in excess of such costs. The amount of overhead reimbursement
varies with each contract. Under fixed price contracts, the Company agrees to
perform a particular research plan for an agreed upon payment.
From January 1991 through August 1995, the United States government awarded
the Company grants and contracts providing for aggregate payments over their
terms of approximately $37 million. Listed below are the major government grants
and contracts under which the Company is currently performing services:
<TABLE>
<CAPTION>
TOTAL AWARD
TERM OF OVER
PROJECT AWARD DATE PROJECT PROJECT TERM
------- ---------- ------- ------------
<S> <C> <C> <C>
Genome Sequencing Center........................ August 1994 3 yrs. $10.4 million
Microbial Genome Sequencing..................... December 1994 3 yrs. $ 3.0 million
Physical Map of Chromosome 10................... May 1994 3 yrs. $ 1.9 million
Gene Expression................................. December 1993 3 yrs. $ 1.5 million
FSHD............................................ September 1994 3 yrs. $ 1.0 million
</TABLE>
These grants and research contracts are typically funded annually and
subject to the appropriation by the United States Congress of funding in each
year. In addition, funding under these grants and contracts may be discontinued
or reduced at any time by the United States Congress.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will be dependent in part on its ability
to obtain patent protection on genes, or products based on genes, discovered by
it. The current criteria for obtaining patent protection for partially sequenced
genes and for genes whose biological functions have not been characterized are
unclear. The Company's current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous sequences. Where the biological function of a gene or gene fragment
has not been characterized at the time of filing a patent application, the
Company intends to supplement such patent filing as soon as additional
information with respect to the biological function of such gene or gene
fragment is available. However, there can be no assurance that the Company will
be able to obtain patent protection on such genes or gene fragments, and even if
such patents are issued, the scope of the coverage or protection
12
<PAGE> 14
provided by any such patents is uncertain. In addition, there can be no
assurance that any patents, if issued, will provide protection against any
competitors, will provide the Company with competitive advantages, will provide
protection for any therapeutic, vaccine or diagnostic products based on the
Company's gene discoveries or will not be successfully challenged by others.
Furthermore, others have filed and are likely to file in the future patent
applications which have not yet been published covering genes or protein
sequences similar or identical to the Company's. No assurance can be given that
any such patent application will not have priority over patent applications
filed by the Company or that any patent applications filed by the Company will
result in issued patents.
There have been, and continue to be, intensive discussions on the scope of
patent protection for both gene fragments and full-length genes. In November
1995, the United States Patent and Trademark Office (the "PTO") scheduled a
hearing and requested public comment on the patenting of a complete genome of an
organism as well as the patenting of human gene fragments. Although the PTO
canceled the hearings and request for comments, they may be rescheduled at a
future date. There can be no assurance that these or other proposals will not
result in changes in, or interpretations of, the patent laws which will
adversely affect the Company's patent position.
The PTO issued new Utility Guidelines in July 1995 that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics. While the guidelines do not require clinical efficacy data
for issuance of patents for human therapeutics, the guidelines have been issued
only recently and there can be no assurance that the PTO's interpretations of
such guidelines, and any changes to such interpretations will not delay or
adversely affect the Company's or its collaborators' ability to obtain patent
protection. The biotechnology patent situation outside the United States is even
more uncertain and is currently undergoing review and revision in many
countries.
The Company has filed patent applications with respect to a number of full
length genes and corresponding proteins and partial genes of H. pylori and of M.
leprae. The Company plans to file foreign counterparts of these U.S.
applications within the appropriate time frames. These applications seek to
protect these full length and partial gene sequences and corresponding proteins,
as well as equivalent sequences, such as substantially homologous sequences, and
products derived therefrom and uses therefor. These applications also identify
possible biological functions for the genes and gene fragments based in part on
a comparison to genes or gene fragments included in public databases but do not
contain any laboratory or clinical data with respect to such biological
functions. There are certain court decisions indicating that disclosure of a
partial sequence may not be sufficient to support the patentability of a
full-length sequence. The PTO initially rejected a patent application by the
National Institutes of Health (the "NIH") seeking protection for a substantial
number of genes based upon partial gene sequences, and the rejection was not
appealed by the NIH. In addition, the Company is aware of published patent
applications owned by third parties relating to nucleic acids encoding several
H. pylori proteins. Patents may issue thereon that have priority over the patent
applications filed by the Company, which may limit the scope of coverage or
protection afforded by any patent, if any, that may issue to the Company with
respect to the genes of H. pylori, or may preclude the issuance of any such
patents.
A number of groups are attempting to rapidly identify and patent gene
fragments and full length genes whose functions have not been characterized, as
well as fully characterized genes. To the extent any patents issue on such
partial or full length genes, the risk increases that the potential products of
the Company or its strategic partners may give rise to claims that such products
infringe the patents of others. Such groups could bring legal actions against
the Company or its collaborators claiming damages and seeking to enjoin drug
development efforts or the manufacturing or marketing of the affected products.
If any such actions are successful, in addition to any potential liability for
damages, the Company or its collaborators could be required to obtain a license
in order to continue to manufacture or market the affected products. There can
be
13
<PAGE> 15
no assurance that the Company or its collaborators would prevail in any
such action or that any license required under any such patent would be made
available upon commercially acceptable terms, if at all. The Company believes
that there may be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's management
and financial resources. In addition, publication of information concerning
genes or genetic sequences prior to the time the Company applies for patent
protection based on the full-length gene could adversely affect the Company's
ability to obtain patent protection with respect to genes identified by it.
Washington University is currently identifying genes through partial sequencing
pursuant to funding provided by Merck & Co., Inc. and depositing the partial
gene sequences identified in a public database. In addition, Human Genome
Sciences, Inc. recently provided non-commercial research organizations access to
human genetic sequence data relating to between 30,000 and 50,000 genes from The
Institute for Genomic Research's Human cDNA Database.
Under most of the Company's government grants and contracts, the government
has a statutory right to use for government purposes, and, under certain
circumstances (including inaction on the part of the Company or its licensees to
achieve practical application of the invention or a need to alleviate public
health or safety concerns not reasonably satisfied by the Company or its
licensees), to grant to other parties licenses under any inventions developed
based on research funded by the government. In addition, under certain of the
Company's government grants and research contracts, any genes discovered in the
course of sponsored research would be the property of the government. The
Company is also obligated under certain government grants and contracts to make
data and materials resulting from the research public within 180 days from the
date such data and materials are developed. If this requirement results in
premature publication of the Company's discoveries and inventions, the Company's
ability to obtain patent protection for such discoveries and inventions may be
adversely affected.
The multiplex sequencing technology used by the Company was developed
by researchers at Harvard College and the Howard Hughes Medical Institute
("HHMI"), including Dr. George Church, a scientific advisor to the Company. The
multiplex sequencing technology is the subject of two issued United States
patents and foreign counterparts to such patents are pending in certain, but
not all, foreign countries. The Company has obtained an exclusive worldwide
license from Harvard College to use the multiplex sequencing technology for
commercial applications. In situations where the Company is unable to provide a
third party with multiplex sequencing services, it is obligated under the
license to use reasonable efforts to sublicense the multiplex sequencing
technology to such third parties on commercially reasonable terms except where
doing so would place the Company at a materially competitive disadvantage. This
provision may require the Company to make the multiplex sequencing technology
licensed by it from Harvard College available to third parties. Harvard College
has retained the right to use and license others to use the technology for
research purposes. Under this license, the Company paid Harvard College
sublicensing fees and a nonrefundable license fee of $100,000 and must pay
Harvard College royalties on license fees, royalties and certain other income
received by the Company in respect of sublicenses granted by the Company,
products sold that include the multiplex sequencing technology and services
performed that utilize the multiplex sequencing technology. Under the licenses,
the Company must pay Harvard College minimum annual royalties ranging from
$15,000 in 1996 to $35,000 beginning in 1998. Under certain circumstances,
Harvard College has the right to convert the license to a nonexclusive license
if the Company has not put the technology into commercial use and is not
keeping the technology reasonably available to the public. In addition, the
HHMI, through Harvard College, has the right under certain circumstances, to
require the Company to license the technology to others if, in the judgment of
HHMI, the Company has not taken reasonable steps to achieve a practical
application of the technology or if required in response to public health or
safety needs. The Company continues to make improvements to the multiplex
sequencing technology, which improvements are owned by the Company. The
Company has granted Harvard a license to use the improvements the Company makes
to the software component of the technology for Harvard's internal academic
purposes and in the event Harvard desires to grant a sublicense to any such
improvements, the Company has agreed to negotiate with Harvard in good faith
concerning the terms of any such sublicense.
The Company also relies on trade secret protection for its confidential
and proprietary information. There can be no assurance that the Company can
maintain adequate protection for its trade secrets or other proprietary
information. In addition, while the Company has entered into proprietary
information agreements with its employees, consultants and advisors, there can
be no assurance that these agreements will provide meaningful protection for
the Company's proprietary information in the event of unauthorized use or
disclosure of such information. Moreover, there can no assurance that others
will not independently develop
14
<PAGE> 16
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its trade secrets.
COMPETITION
The Company faces intense competition both with respect to its human gene
and pathogen gene discovery programs. There is a finite number of genes in the
human genome and the Company believes virtually all of such genes will be
identified within two to three years albeit largely without known function. The
Company also believes that the primary genes that cause or predispose
individuals to most common diseases will be identified and characterized within
five to eight years. In addition, the Company believes that the genomes of many
commercially important pathogens will be sequenced within two to three years.
Competitors of the Company include pharmaceutical and biotechnology
companies both in the United States and abroad. In addition, significant
research to identify and sequence genes is being conducted by universities,
other non-profit research institutions and United States and foreign
government-sponsored entities. A number of commercial, scientific and
governmental entities are attempting to sequence human genes and the genomes of
other organisms. Other entities are utilizing positional cloning to identify and
characterize human disease genes. Certain of the Company's competitors' human
gene programs are more advanced than the Company's and any one of these
companies or other entities may discover and establish a competitive advantage
in one or more pathogen development programs which the Company has commenced.
The Company also faces competition in its human gene discovery programs in
gaining access to family DNA samples for use in positional cloning.
The Company believes that its ability to compete is dependent, in part,
upon its ability to create and maintain advanced technology, the speed with
which it can identify and characterize the genes involved in human diseases, the
Company's ability to rapidly sequence the genomes of selected pathogens, its
collaborators' ability to develop and commercialize therapeutic, vaccine and
diagnostic products based upon the Company's gene discoveries, as well as its
ability to attract and retain qualified personnel, obtain patent protection or
otherwise develop proprietary technology or processes and secure sufficient
capital resources for the expected substantial time period between technological
conception and commercial sales of products based upon the Company's gene
discoveries.
Many of the Company's competitors have substantially greater research and
product development capabilities and financial, scientific, marketing and human
resources than the Company. These competitors may succeed in identifying or
sequencing genes or developing products earlier than the Company or its
collaborators, obtaining authorization from the FDA for such products more
rapidly than the Company or its collaborators or developing products that are
more effective than those proposed to be developed by the Company or its
collaborators. Any potential products based on genes identified by the Company
will face competition both from companies developing gene-based products and
from companies developing other forms of diagnosis or treatment for the
particular diseases targeted by the Company. There can be no assurance that
products developed by others will not render the products which the Company or
its collaborators may seek to develop obsolete or uneconomical or result in
diagnoses, treatments or cures superior to any developed by the Company or its
collaborators, or that any product developed by the Company or its strategic
collaboration partners will be preferred to any existing or newly developed
technologies.
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the development, manufacturing and
marketing of any products which may be developed by the Company or its
collaborators. The nature and the extent to which such regulation may apply to
the Company or its collaborators will vary depending on the nature of any such
products. Virtually all of the Company's or its collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic and vaccine products are
subject to rigorous preclinical and clinical testing and other approval
procedures by the United States Food and Drug Administration (the "FDA") in
the United States and similar health authorities in foreign countries. Various
federal and, in some cases, state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The
15
<PAGE> 17
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Products based on the
Company's technologies could potentially fall into all three categories.
Generally, in order to gain FDA pre-market approval of a new drug or biological
product, a company first must conduct pre-clinical studies in the laboratory and
in animal model systems to gain preliminary information on an agent's efficacy
and to identify any safety problems. The results of these studies are submitted
as a part of an investigational new drug application ("IND"), which the FDA must
review before human clinical trials of a drug or biologic can commence. In order
to commercialize any products, the Company or its collaborators will be required
to sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and are likely to take a number of years to
complete. After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is classified as a new drug, the
Company or its collaborators will be required to file a New Drug Application
("NDA") and receive approval before commercial marketing of the drug. If the
product is classified as a biologic (e.g., a vaccine), the Company or its
collaborator will be required to file a product license application and an
establishment license application ("ELA") and receive approval of both before
commercial marketing of the product can take place. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approvals will be granted on a timely basis, if at all.
Even if FDA regulatory clearances are obtained, a marketed product is
subject to continual review, and later discovery of previously unknown problems
or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions. In addition, biologic
products may be subject to batch certification and lot release requirements. To
the extent that any of the Company's products involve recombinant DNA
technology, additional layers of government regulation and review are possible.
For marketing outside the United States, the Company will also be subject to FDA
export regulations and foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
The Company or its collaborators may also develop diagnostic products based
upon the human or pathogen genes that the Company identifies. The Company
believes that the diagnostic products to be developed by the Company or its
collaborators are likely to be regulated by the FDA as devices rather than drugs
or biologics. The nature of the FDA requirements applicable to such diagnostic
devices depends on their classification by the FDA. A diagnostic device
developed by the Company or a collaborator would most likely be classified as a
Class III device, requiring pre-market approval. Obtaining pre-market approval
involves the costly and time-consuming process, comparable to that for new drugs
or biologics, of conducting pre-clinical studies, obtaining an investigational
device exemption to conduct clinical tests, filing a pre-market approval
application, and obtaining FDA approval. Again, there can be no assurance that
any approval will be granted on a timely basis, if at all.
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state,
federal and local laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any liability could exceed the resources of the Company.
16
<PAGE> 18
MANUFACTURING AND MARKETING
The Company does not generally expect to directly manufacture or market
products in the near term. However, the Company may, in the future, consider
taking such actions if it believes they are appropriate under the circumstances.
The Company has no recent experience in developing pharmaceutical products or in
manufacturing or marketing products. The Company may not have the resources to
develop or to manufacture or market by itself any products based on genes
identified by it. In the event the Company decides to establish a manufacturing
facility, the Company will require substantial additional funds and will be
required to hire and train significant additional personnel and comply with the
extensive "good manufacturing practice" regulations applicable to such a
facility. In addition, if any products produced at the Company's facilities were
regulated as biologics, the Company would be required to file and obtain
approval of an ELA for its facilities.
HUMAN RESOURCES
As of December 31, 1995, the Company had 125 full-time employees, of whom
110 were engaged in research and development activities, and 15 in general and
administrative functions. Twenty of the Company's employees hold Ph.D. degrees
and 38 others hold other advanced degrees.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.
SCIENTIFIC ADVISORS AND CONSULTANTS
The Company's principal scientific advisors and consultants are individuals
with recognized expertise in fields related to the Company's technology and
development programs who advise the Company on an as-needed basis on scientific
matters that arise in the course of the Company's business. They are all
employed by academic institutions and may have commitments to, or consulting or
similar agreements with other entities, including in some cases competitors of
the Company, that may limit their availability to the Company. These individuals
include:
PHILIP J. LEDER, M.D., John Emory Andrus Professor of Genetics, Chairman of
the Department of Genetics, Harvard Medical School and Senior Investigator of
the Howard Hughes Medical Institute, Boston, MA. Dr. Leder, a director of the
Company and Chairman of GTC's Scientific Advisory Committee, was the recipient
in 1987 of the Albert Lasker Award for research on the genetics of the human
immune system, including fundamental discoveries of how human genes rearrange
themselves to produce antibodies against disease. He is a developer of a
transgenic mouse model for human cancer and received the National Medal of
Science in 1989.
MARTIN J. BLASER, M.D., The Addison B. Scoville Professor of Medicine,
Director, Division of Infectious Diseases, Professor of Microbiology and
Immunology, Vanderbilt University School of Medicine, Nashville, TN. Dr.
Blaser's research is focused on the epidemiology, pathogenesis, and molecular
biology of gastrointestinal and extraintestinal disease caused by exogenous
enteric pathogens, such as H. pylori.
MICHAEL BOEHNKE, PH.D., Professor, Department of Biostatistics, University
of Michigan, Ann Arbor, MI. Dr. Boehnke is a statistical geneticist whose
research is focused on appropriate study design for the mapping and cloning of
genes responsible for complex human diseases.
GEORGE M. CHURCH, PH.D., Associate Professor, Department of Genetics,
Harvard Medical School and Associate Investigator of the Howard Hughes Medical
Institute, Boston, MA. Dr. Church co-invented the multiplex sequencing
technology licensed to the Company, and software for automatically identifying
nucleotides in DNA sequencing.
17
<PAGE> 19
PHILIP P. GREEN, PH.D., Associate Professor, Department of Molecular
Biotechnology, University of Washington, Seattle, WA. Dr. Green developed novel
algorithms for rapid construction of genetic maps. He has more recently
developed new statistical methodologies for nucleotide identification in DNA
sequencing and for assembling individual DNA sequences into large contiguous
stretches of DNA sequences.
GREGORY A. PETSKO, D.PHIL., Lucille P. Markey Professor, Department of
Biochemistry and Department of Chemistry, and Director, Rosenstiel Basic Medical
Sciences Research Center, Brandeis University, Waltham, MA. Dr. Petsko, a member
of the National Academy of Sciences, focuses his research on protein structure
determination by X-ray crystallography. His research includes analyzing the
mechanisms of enzyme catalysis by structural methods.
DAVID M. SHLAES, M.D., PH.D., Professor of Medicine, Case Western Reserve
University School of Medicine, and Chief, Infectious Diseases Section, VA
Medical Center, Cleveland, OH. Dr. Shlaes' research centers on the molecular
mechanisms of bacterial resistance to antibiotics and the mode of transmission
of resistance between bacteria.
JEFFREY L. SKLAR, M.D., PH.D., Professor of Pathology, Harvard Medical
School, Director, Division of Diagnostic Molecular Biology and Director,
Division of Molecular Oncology, Department of Pathology, Brigham and Women's
Hospital, Boston, MA. Dr. Sklar's research is focused on understanding the
origins of cancer at the molecular level.
18
<PAGE> 20
Item 2. PROPERTIES
The Company's executive office and research and development laboratories
are located in two leased facilities in Waltham, Massachusetts. One lease covers
approximately 23,000 square feet of space and expires on July 31, 1999. The
other lease covers approximately 14,000 square feet of space and expires on
December 31, 1997, subject to the right of the Company to extend its lease for
an additional five-year period.
19
<PAGE> 21
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of August 31,
1994 and 1995 and for the three years in the period ended August 31, 1995 are
derived from the Company's consolidated financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, which are
included elsewhere in this 10-K. The selected consolidated financial data set
forth below as of August 31, 1991, 1992 and 1993 and for the years ended August
31, 1991 and 1992 are derived from the Company's consolidated financial
statements which have been audited by Arthur Andersen LLP, which are not
included herein. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes included
elsewhere in this 10-K.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Government research............. $ 1,988 $ 4,171 $ 5,022 $ 6,077 $ 7,014
Collaborative research, license
fees and royalties............ 228 160 361 314 3,924
Interest income................. 140 385 174 142 232
Product and service............. 6,764 792 893 86 37
------- ------- ------- ------- -------
Total revenues.................. 9,120 5,508 6,450 6,619 11,207
Costs and expenses:
Cost of government research..... 1,915 3,575 4,527 5,144 6,414
Research and development........ 2,480 387 423 365 1,475
Selling, general and
administrative................ 4,265 2,493 2,802 2,176 2,730
Cost of product and service..... 4,251 1,132 1,543 13 3
(Gain) loss on sale of
businesses.................... (2,104) -- 637 -- --
------- ------- ------- ------- -------
Total costs and expenses........ 10,807 7,587 9,932 7,698 10,622
------- ------- ------- ------- -------
Net income (loss)................... $(1,687) $(2,079) $(3,482) $(1,079) $ 585
======= ======= ======= ======= =======
Primary net income (loss) per common
and common equivalent share....... $ (0.16) $ (0.19) $ (0.33) $ (0.10) $ 0.05
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding..... 10,659 10,663 10,669 11,097 12,962
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities............. $ 9,041 $ 7,144 $ 3,915 $ 4,123 $ 8,227
Working capital..................... 8,780 5,768 3,264 3,244 5,499
Total assets........................ 10,790 9,355 5,289 5,911 11,529
Capital lease obligations, net of
current maturities................ -- 275 111 165 892
Shareholders' equity................ 9,109 7,081 3,676 4,225 7,239
</TABLE>
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues have been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra relating to H. pylori in August
1995 and with Schering-Plough in December 1995 providing for the use by
Schering-Plough of the genomic sequence of a specified pathogen that the Company
is sequencing to identify new gene targets for the development of novel
antibiotics.
The Company will not receive significant product revenues on a sustained
basis until such time, if any, at which products based on the Company's research
efforts are commercialized. The Company's product development strategy is to
enter into collaborations with pharmaceutical and biotechnology companies
whereby these corporate partners will provide most or all of the financial and
other resources required to complete the development and to commercialize
products based on the Company's genomics research in exchange for a variety of
license and milestone payments, research support and royalties. In order for a
product to be commercialized based on the Company's research, it will be
necessary for the collaborators to conduct preclinical tests and clinical
trials, obtain regulatory clearances and make manufacturing, distribution and
marketing arrangements. Accordingly, the Company does not expect to receive
royalties based on product revenues for many years.
For fiscal 1993, 1994, and 1995, the Company expended $4,950,000,
$5,509,000 and $7,889,000, respectively on research and development, of which
$4,527,000, $5,144,000 and $6,414,000, respectively, was sponsored by the
United States government. As of August 31, 1995, the Company had outstanding
approximately $13,446,000 of government grants and research contracts
under which services were yet to be performed. These grants and contracts call
for these services to be performed over approximately the next 18 to 24 months.
The Company's government grants and contracts are typically funded annually
and are subject to appropriation by the United States Congress each year.
Funding may be discontinued or reduced at any time by the Congress. As of
August 31, 1995, the funded portion of these grants and contracts was
$5,351,000. For fiscal 1993, 1994 and 1995 revenue pursuant to United
States government grants and research contracts accounted for approximately
78%, 92% and 63%, respectively of the Company's total revenues. The Company
plans to continue to seek government grants and contracts in the genomics
field and to enter into additional corporate partnering arrangements with the
goal of advancing the Company's genomic technologies and gene discovery
programs and of obtaining revenues sufficient to cover a portion of the
Company's cash requirements. There can be no assurance that the Company will
be able successfully to pursue this strategy.
The Company has incurred significant losses since inception, with an
accumulated deficit of approximately $35,174,000 at August 31, 1995. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new government grants and contracts and collaborative
agreements. The Company is subject to risks common to companies in its industry
including, unproven technology and business strategy, availability of, and
competition for, family resources, reliance upon collaborative partners,
reliance on United States government funding, history of operating losses,
need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty
of pharmaceutical pricing, health care reform and related matters, product
liability exposure and the volatility of the Company's stock price.
RESULTS OF OPERATION
21
<PAGE> 23
FISCAL YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
Revenue
Total revenues increased 69% from $6,619,000 in fiscal 1994 to $11,207,000
in fiscal 1995 and increased 3% from $6,450,000 in fiscal 1993 to $6,619,000 in
fiscal 1994. Government research revenues increased 15% from $6,077,000 in
fiscal 1994 to $7,014,000 in fiscal 1995 and increased 21% from $5,022,000 in
fiscal 1993 to $6,077,000 in fiscal 1994. These increases in government research
revenues were primarily attributable to the commencement of payments under the
Company's 3-year, $10 million Genome Sequencing Center grant from the NIH,
which was awarded in August 1994, as well as increased levels of funding under
existing government grants and contracts. Revenue derived from government
research grants and contracts is generally based upon direct costs such as
labor and laboratory supplies as well as an allocation for reimbursement of a
portion of overhead.
22
<PAGE> 24
Collaborative research, license fees and royalties increased from $314,000
in fiscal 1994 to $3,924,000 in fiscal 1995 primarily due to a $3,500,000
payment received from Astra in August 1995. Collaborative research, license fees
and royalties remained relatively unchanged in fiscal 1994 as compared to fiscal
1993. Product and service revenue significantly decreased after fiscal 1993 due
to the sale by the Company of its diagnostic testing business in June 1993.
Interest income increased 64% from $142,000 in fiscal 1994 to $232,000 in
fiscal 1995, and decreased 19% from $174,000 in fiscal 1993 to $142,000 in
fiscal 1994. The changes in interest income reflect fluctuations in interest
rates as well as the increase in funds available for investment in fiscal 1995
as a result of the Company's sale of Common Stock in a private placement in
March 1995.
Costs and Expenses
Total costs and expenses increased 38% from $7,698,000 in fiscal 1994 to
$10,622,000 in fiscal 1995 and decreased 22% from $9,932,000 in fiscal 1993 to
$7,698,000 in fiscal 1994. The cost of government research increased 25% from
$5,144,000 in fiscal 1994 to $6,414,000 in fiscal 1995 and increased 14% from
$4,528,000 in fiscal 1993 to $5,144,000 in fiscal 1994. The increase in cost of
government research in both fiscal 1995 and fiscal 1994 was due primarily to
increases in payroll and related costs associated with the increase in
government research revenue as well as an increase in overhead expenses
associated with the expansion of the Company's facilities. Cost of government
research, as a percentage of government research revenue, was 91% in fiscal
1995, 85% in fiscal 1994 and 90% in fiscal 1993.
Research and development expenses increased 304% from $365,000 in fiscal
1994 to $1,476,000 in fiscal 1995 and decreased 14% from $423,000 in fiscal 1993
to $365,000 in fiscal 1994. The increase in research and development expenses in
fiscal 1995 was primarily related to expenses incurred in connection with the
Company's H. pylori sequencing activities prior to entering into a collaborative
agreement with Astra in August 1995. The increase consisted primarily of
increases in payroll and related expenses, laboratory supplies and overhead
expenses. The decrease in research and development expenses in fiscal 1994 was
primarily related to the completion of certain research agreements and the
termination of research related to the Company's diagnostic testing business,
partially offset by increases in the Company's pathogen sequencing activities.
Selling, general and administrative expenses increased 25% from $2,176,000
in fiscal 1994 to $2,730,000 in fiscal 1995 and decreased 22% from $2,802,000 in
fiscal 1993 to $2,176,000 in fiscal 1994. The increase in selling, general and
administrative expenses in fiscal 1995 was primarily due to approximately
$495,000 of severance and relocation expenses as well as increases in payroll
and related expenses and facilities expenses. The decrease in selling, general
and administrative expenses in fiscal 1994 was due primarily to the sale of the
diagnostics business in fiscal 1993 and cost cutting actions taken by the
Company in fiscal 1994.
Cost of product and service significantly decreased after fiscal 1993 due
to the sale of the Company's diagnostic testing business in June 1993. The
Company sold substantially all of the assets used in this business in fiscal
1993 for $1,000,000, resulting in a loss of $637,000 in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been
revenue from government grants and contracts, revenue from collaborative
research agreements, borrowing under capital leases and proceeds from the sale
of equity securities. In fiscal 1995, the Company received net proceeds of
approximately $2,403,000 from the private sale of Common Stock and warrants and
the exercise of stock options. In fiscal 1994, the Company received net proceeds
of approximately $1,601,000 from the sale of Common Stock and the exercise of
certain stock options. In August and December 1995, the Company entered into
collaborative arrangements under which it received $3,500,000 from Astra and
$3,000,000 from Schering-Plough, respectively.
As of August 31, 1995, the Company had cash, cash equivalents and
marketable securities of approximately $9,011,000 (of which approximately
$784,000 is restricted in connection with certain capital lease obligations) and
working capital of approximately $5,499,000. The Company has various
arrangements under which it can finance up to $2,500,000 of certain office and
laboratory equipment and leasehold
23
<PAGE> 25
improvements. Under these arrangements, the Company is required to maintain
certain financial ratios, including minimum levels of tangible net worth, total
indebtedness to tangible net worth, maximum loss, and minimum restricted cash
balances. At August 31, 1995, the Company had approximately $494,000
available under these arrangements and had an outstanding balance of
approximately $1,370,000, which is repayable over the three year period ending
August 1998.
The Company's operating activities provided cash of approximately
$2,693,000 in fiscal 1995, including the utilization of approximately $1,100,000
of net operating loss carryforwards, and used cash of approximately $639,000 and
$3,252,000 in fiscal 1994 and 1993, respectively. Net cash provided in fiscal
1995 was composed primarily of deferred contract revenue, accrued expenses,
and operating income. Cash was utilized in fiscal 1994 and 1993 primarily to
fund the Company's operating loss.
The Company's investing activities provided cash of approximately $6,000 in
fiscal 1995. The Company's investing activities used cash of approximately
$1,550,000 and $1,548,000 in fiscal 1994 and 1993, respectively. The Company
used cash primarily for purchases of marketable securities and equipment and
leasehold improvements.
Financing activities provided cash of approximately $2,074,000 and
$1,410,000 in fiscal 1995 and 1994 respectively, primarily from the sale of
equity securities and warrants and the exercise of stock options, net of
payments of capital lease obligations. Financing activities used cash of
approximately $451,000 in fiscal 1993 primarily for the payment of capital lease
obligations.
Capital expenditures totaled $1,438,000 during fiscal 1995. The Company
currently estimates that it will acquire $1,500,000 of capital equipment during
fiscal 1996, consisting primarily of computer systems and laboratory and office
equipment. The Company plans to utilize its capital lease arrangements to
finance the acquisition of this equipment.
The Company believes that its existing capital resources are adequate to
meet its cash requirements for at least the next 24 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures.
The Company may seek additional funding through public or private financing
and expects to seek additional funding through collaborative or other
arrangements with corporate partners. There can be no assurance, however, that
additional financing will be available from any of these sources or will be
available on terms acceptable to the Company.
24
<PAGE> 26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by Item 8 are set
forth at the pages indicated in Item 14 (a) below.
25
<PAGE> 27
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS REPORTS ON FORM
8-K
(a) (1) (2) Financial Statements and Financial Statement Schedule
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" appearing on page F-1.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3 Restated Articles of Organization and By-laws (1)
3.1 Amendment dated January 5, 1982 to Restated Articles of
Organization (2)
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
3.2 Amendment dated January 24, 1983 to Restated Articles of
Organization (3)
3.3 Amendment dated January 17, 1984 to Restated Articles of
Organization (4)
3.4 Amendment dated October 20, 1987 to the By-laws (8)
3.5 Amendment dated December 9, 1987 to Restated Articles of
Organization (9)
3.6 Amendment dated October 16, 1989 to the By-laws (11)
3.7 Amendment dated January 24, 1994 to Restated Articles of
Organization (15)
3.8 Amendment dated August 31, 1994 to Restated Articles of
Organization (15)
4 Series B Restricted Stock Purchase Plan (3)
10.1 Research Agreement with The Dow Chemical Company dated May 21,
1980 (1)
10.2 Research Agreement with The Dow Chemical Company dated August
19, 1981 (1)
10.3 1981 Amended Stock Option Plan and Form of Stock Option
Certificate (1)
10.4 Incentive Stock Option Plan and Form of Stock Option
Certificate (1)
10.5 1984 Stock Option Plan and Form of Stock Option Certificate
(5)
10.6 Collaborative Research Incentive Savings Plan (6)
10.7 Amendment dated November 4, 1986 to the Collaborative Research
Incentive Savings Plan dated March 1, 1985 (7)
10.8 Stock Option Agreement with Mr. Lawrence Levy (8)
10.9 Form of Amendment to the 1981 Incentive Stock Option Plan (8)
10.10 Stock Option Agreement with Mr. Mark Friedman (10)
10.11 1988 Stock Option Plan and Form of Stock Option Certificate
(10)
10.12 Stock Option Agreement with Dr. Rothchild (11)
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
10.13 Agreement with Health Sciences Research Institute (Hoken
Kagaku Kenkyojyo) (12)
10.14 1991 Stock Option Plan and Form of Stock Option Certificate
(13)
10.15 Lease dated November 17, 1992 relating to certain property in
Waltham, Massachusetts (14)
10.16 Lease dated June 3, 1993 relating to certain property in
Waltham, Massachusetts (14)
10.17 License Agreement with President and Fellows of Harvard
College (14)
10.18 Agreement with Becton Dickinson and Company (14)
10.19 Employment Agreement with Robert J. Hennessey (14)
10.20 Agreement with Immuno-Cor Inc. dated September 13, 1993 (14)
10.21 Agreement with DIANON Systems, Inc. (14)
10.22 Lease Amendment dated August 1, 1994 relating to certain
property in Waltham, MA (15)
10.23 Consulting Agreement with Dr. Philip Leder (15)
10.24 1993 Stock Option Plan and Form of Stock Option Certificate
(15)
10.25 Stock and Warrant Purchase Agreement among the Company and
certain purchasers named therein dated March 20, 1995 (16)
10.26 Registration Rights Agreement among the Company and certain
purchasers named therein dated March 20, 1995 (16)
10.27 Form of Warrant Certificate issued pursuant to the Stock and
Warrant Purchase Agreement (16)
10.28 Agreement between the Company and Astra Hassle AB dated August
31, 1995 (16)
11.1 Calculation of Shares Used in Determining Net Income (Loss)
Per Share (17)
23. Consent of Arthur Andersen LLP Independent Public Accounts (17)
</TABLE>
28
<PAGE> 30
FOOTNOTES
(1) Filed as exhibits to the Company's Registration Statement on Form S-1
(No. 2-75230) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 27, 1982 and incorporated herein by reference.
(3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 26, 1983 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 25, 1984 and incorporated herein by reference.
(5) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1984 and incorporated herein by reference.
(6) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
(7) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1986 and incorporated herein by reference.
(8) Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1987 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 28, 1987 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1988 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1989 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1990 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1992 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1993 and incorporated herein by reference.
29
<PAGE> 31
(15) Filed as an Exhibit of the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1994 and incorporated herein by reference.
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1995 and incorporated by reference herein.
(17) Filed herewith.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Genome Therapeutics Corp. has duly caused this amended report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
January , 1996.
GENOME THERAPEUTICS CORP.
By /s/ FENEL M. ELOI
-----------------------
Fenel M. Eloi
Vice President and
Chief Financial Officer
31
<PAGE> 33
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................... F-2
Consolidated Balance Sheets as of August 31, 1994 and 1995......................... F-3
Consolidated Statements of Operations for the Year Ended August 31, 1993, 1994 and
1995............................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Year Ended August 31, 1993,
1994 and 1995.................................................................... F-5
Consolidated Statements of Cash Flows for the Year Ended August 31, 1993, 1994 and
1995............................................................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corp. and subsidiaries (a Massachusetts corporation) as of August
31, 1994 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Genome Therapeutics Corp.
and subsidiaries as of August 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 4, 1995
(except with respect to
the matter discussed in
Note 10(b) as to which the
date is December 6, 1995)
F-2
<PAGE> 35
<TABLE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
AUGUST 31,
----------------------------
1994 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 1,114,162 $ 5,886,184
Marketable securities......................... 3,008,344 2,340,592
Accounts receivable (less allowances for
doubtful accounts of $229,000 in 1994)...... 391,151 360,793
Unbilled costs and fees....................... 229,045 259,005
Prepaid expenses and other current assets..... 22,386 50,140
----------- -----------
Total current assets..................... 4,765,088 8,896,714
----------- -----------
Equipment and Leasehold Improvements, at Cost:
Laboratory and scientific equipment........... 752,482 1,464,987
Leasehold improvements........................ 1,446,236 1,597,069
Office equipment and furniture................ 532,656 903,946
Construction-in-progress...................... 173,186 206,103
----------- -----------
2,904,560 4,172,105
Less accumulated depreciation................. 2,120,146 2,451,632
----------- -----------
784,414 1,720,473
Restricted Cash.................................... 94,674 784,471
Other Assets....................................... 266,506 127,016
----------- -----------
$ 5,910,682 $11,528,674
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $ 450,854 $ 409,282
Accrued expenses.............................. 838,595 1,736,569
Deferred contract revenue..................... 37,991 774,048
Current maturities of capital lease
obligations................................. 193,388 478,033
----------- -----------
Total current liabilities................ 1,520,828 3,397,932
----------- -----------
Capital Lease Obligations, Net of Current
Maturities....................................... 165,299 892,239
----------- -----------
Commitments (Note 6)
Shareholders' Equity:
Common stock, $.10 par value--
Authorized--34,375,000 shares
Issued and outstanding--11,778,946 shares at
August 31, 1994, 13,476,135 shares at
August 31, 1995 and 13,703,085 shares at
November 25, 1995........................ 1,177,894 1,347,613
Series B restricted stock, $.10 par value--
Authorized--625,000 shares
Issued and outstanding--57,512 shares....... 5,751 5,751
Additional paid-in capital.................... 38,905,080 41,138,147
Accumulated deficit........................... (35,759,429) (35,174,225)
Deferred compensation......................... (27,775) (1,817)
Series B subscriptions receivable............. (76,966) (76,966)
----------- -----------
Total shareholders' equity............... 4,224,555 7,238,503
----------- -----------
$ 5,910,682 $11,528,674
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 36
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Government research.................. $ 5,021,975 $ 6,077,346 $ 7,014,280
Collaborative research, license fees
and royalties...................... 361,494 314,428 3,923,944
Interest income...................... 173,788 141,584 231,662
Product and service.................. 893,083 85,559 37,217
----------- ----------- -----------
Total revenues..................... 6,450,340 6,618,917 11,207,103
----------- ----------- -----------
Costs and Expenses:
Cost of government research.......... 4,527,595 5,144,071 6,414,148
Research and development............. 422,535 365,208 1,475,601
Selling, general and
administrative..................... 2,801,633 2,175,910 2,729,504
Cost of product and service.......... 1,543,407 12,446 2,646
Loss on sale of diagnostics
business........................... 637,027 -- --
----------- ----------- -----------
Total costs and expenses........... 9,932,197 7,697,635 10,621,899
----------- ----------- -----------
Net income (loss).................. $(3,481,857) $(1,078,718) $ 585,204
=========== =========== ===========
Net Income (Loss) Per Common Share:
Primary.............................. $(0.33) $(0.10) $0.05
Fully diluted........................ $ -- $ -- $0.04
====== ====== =====
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Primary.............................. 10,668,628 11,097,224 12,961,734
=========== =========== ===========
Fully diluted........................ -- -- 13,036,741
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 37
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
SERIES B
COMMON STOCK RESTRICTED STOCK ADDITIONAL
------------------------ ---------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
---------- ---------- ------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1992........... 10,664,166 $1,066,416 57,512 $5,751 $37,440,631 $(31,198,854) $ (155,667)
Exercise of stock options........ 29,000 2,900 -- -- 2,900 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 71,079
Cancellation of stock options.... -- -- -- -- (30,469) -- 30,469
Net loss......................... -- -- -- -- -- (3,481,857) --
---------- ---------- ------ ------ ----------- ------------ ------------
Balance, August 31, 1993........... 10,693,166 1,069,316 57,512 5,751 37,413,062 (34,680,711) (54,119)
Exercise of stock options........ 84,276 8,428 -- -- 138,779 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 26,344
Sale of common stock and
warrants....................... 1,001,504 100,150 -- -- 1,353,239 -- --
Net loss......................... -- -- -- -- -- (1,078,718) --
---------- ---------- ------ ------ ----------- ------------ ------------
Balance, August 31, 1994........... 11,778,946 1,177,894 57,512 5,751 38,905,080 (35,759,429) (27,775)
Exercise of stock options........ 244,166 24,417 -- -- 394,982 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 25,958
Sale of common stock and
warrants....................... 1,453,023 145,302 -- -- 1,838,085 -- --
Net loss......................... -- -- -- -- -- 585,204 --
---------- ---------- ------ ------ ----------- ------------ ------------
Balance, August 31, 1995........... 13,476,135 1,347,613 57,512 5,751 41,138,147 (35,174,225) (1,817)
<CAPTION>
SERIES B TOTAL
SUBSCRIPTIONS SHAREHOLDERS'
RECEIVABLE EQUITY
------------- -------------
<S> <C> <C>
Balance, August 31, 1992........... $ (76,966) $ 7,081,311
Exercise of stock options........ -- 5,800
Amortization of deferred
compensation................... -- 71,079
Cancellation of stock options.... -- --
Net loss......................... -- (3,481,857)
------------- -------------
Balance, August 31, 1993........... (76,966) 3,676,333
Exercise of stock options........ -- 147,207
Amortization of deferred
compensation................... -- 26,344
Sale of common stock and
warrants....................... -- 1,453,389
Net loss......................... -- (1,078,718)
------------- -------------
Balance, August 31, 1994........... (76,966) 4,224,555
Exercise of stock options........ -- 419,399
Amortization of deferred
compensation................... -- 25,958
Sale of common stock and
warrants....................... -- 1,983,387
Net loss......................... -- 585,204
------------- -------------
Balance, August 31, 1995........... (76,966) 7,238,503
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 38
<TABLE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................. $(3,481,857) $(1,078,718) $ 585,204
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Loss on sale of assets....................... 637,027 -- --
Depreciation and amortization................ 325,591 205,889 350,230
Deferred compensation........................ 49,306 26,344 25,958
Changes in assets and liabilities--
Accounts receivable........................ (141,691) 223,233 30,358
Unbilled costs and fees.................... 25,284 (86,281) (29,960)
Prepaid expenses and other current
assets................................... (32,862) 70,727 (27,754)
Accounts payable........................... (127,331) 176,178 124,568
Accrued expenses........................... (197,305) (128,912) 897,974
Deferred contract revenue.................. (308,537) (47,289) 736,057
----------- ----------- ----------
Total adjustments........................ 229,482 439,889 2,107,431
----------- ----------- ----------
Net cash provided by (used in) operating
activities............................... (3,252,375) (638,829) 2,692,635
----------- ----------- ----------
Cash Flows from Investing Activities:
Purchases of marketable securities............. (5,422,374) (4,985,970) (5,332,248)
Proceeds from the sale of marketable
securities................................... 3,400,000 4,000,000 6,000,000
(Increase) decrease in restricted cash......... -- (94,674) (689,797)
Purchases of equipment and leasehold
improvements................................. (158,657) (191,907) (97,016)
(Increase) decrease in other assets............ -- (277,398) 124,687
Payments for net assets acquired............... (268,500) -- --
Proceeds from sale of assets................... 901,297 -- --
----------- ----------- ----------
Net cash provided by (used in) investing
activities............................... (1,548,234) (1,549,949) 5,626
----------- ----------- ----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and
warrants..................................... -- 1,453,389 1,983,387
Proceeds from exercise of stock options........ 5,800 147,207 419,399
Payments on capital lease obligations.......... (456,399) (190,588) (329,025)
----------- ----------- ----------
Net cash provided by (used in) financing
activities............................... (450,599) 1,410,008 2,073,761
----------- ----------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (5,251,208) (778,770) 4,772,022
Cash and Cash Equivalents, Beginning of Period..... 7,144,140 1,892,932 1,114,162
----------- ----------- ----------
Cash and Cash Equivalents, End of Period........... $ 1,892,932 $ 1,114,162 $5,886,184
========== ========== =========
Supplemental Disclosure of Cash Flow Information:
Interest paid during period.................... $ 44,100 $ 19,482 $ 85,759
========== ========== =========
Supplemental Disclosure of Noncash Investing
Activities:
Property and equipment acquired under capital
leases....................................... $ 318,151 $ 264,379 $1,340,611
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 39
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. and Subsidiaries (the Company), is engaged in the
field of genomics -- the discovery and characterization of genes. The Company's
primary activity is genomic research and development.
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
(a) Revenue Recognition
Research and contract revenues are derived from government grants and
contract arrangements as well as under collaborative agreements with
pharmaceutical companies. Research revenues are recognized as earned under
government grants, which consist of cost-plus-fixed-fee and fixed-price
contracts. Revenues are recognized under collaborative agreements as earned.
Milestone payments from collaborative research and development arrangements are
recognized when they are achieved. Unbilled costs and fees represent revenue
recognized prior to billing. Deferred contract revenue represents amounts
received prior to revenue recognition. Royalty revenue is recorded as earned.
(b) Equipment and Leasehold Improvements
Equipment and leasehold improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful life for
leasehold improvements is the lesser of the term of the lease or the estimated
useful life of the assets. Equipment and all other depreciable assets useful
lives vary from three to ten years.
(c) Net Income (Loss) per Common and Common Equivalent Share
Net income per common and common equivalent share is computed by dividing
net income by the weighted average number of common and common equivalent shares
outstanding during the period using the treasury stock method. Net loss per
share is computed by dividing the net loss by the weighted average number of
common shares outstanding during the period.
(d) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentration of Credit Risk, requires disclosure of
any significant off-balance sheet and credit risk concentrations. The Company
has no significant off-balance sheet concentration of credit risk such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements.
F-7
<PAGE> 40
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The Company had revenues from the following significant customers:
<CAPTION>
NUMBER OF
SIGNIFICANT PERCENTAGE
CUSTOMERS OF TOTAL REVENUES
----------- ------------------
<S> <C> <C>
Year Ended August 31:
1993................................. 1 78%
1994................................. 1 92%
1995................................. 2 31% and 63%
</TABLE>
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Reclassifications
The Company has reclassified certain prior year information to conform with
the current year's presentation.
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company's cash equivalents and marketable
securities are classified as available-for-sale. Cash equivalents are
short-term, highly liquid investments with original maturities of less than
three months. Marketable securities are investment securities with original
maturities of greater than three months. Cash equivalents consist of money
market funds, repurchase agreements and debt securities. Marketable securities
are carried at fair market value which approximates amortized cost, accordingly
unrealized holding gains and losses were immaterial. The Company has not
recorded any realized gains or losses on its marketable securities. Marketable
securities consist of commercial paper with an average maturity of six months.
The Company has $94,674 and $784,471 in restricted cash at August 31, 1994 and
1995 in connection with certain capital lease obligations (see Note 7).
(3) INCOME TAXES
The Company applies SFAS No. 109, Accounting for Income Taxes which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statement or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse. SFAS No.
109 requires deferred tax assets and liabilities to be adjusted when the tax
rates or other provisions of the income tax laws change.
At August 31, 1995, the Company had net operating loss and tax credit
carryforwards of approximately $35,007,000 and $1,120,000, respectively,
available to reduce federal taxable income and federal income taxes,
respectively, if any. Net operating loss carryforwards and credits are subject
to review and possible adjustments by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in
F-8
<PAGE> 41
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the ownership interest of significant shareholders over a three-year period in
excess of 50%. In the year ended August 31, 1995, the Company utilized
approximately $1,100,000 of net operating loss carryforwards to offset taxable
income.
<TABLE>
The net operating loss carryforwards and tax credits expire approximately
as follows:
<CAPTION>
NET RESEARCH INVESTMENT
OPERATING TAX TAX
LOSS CREDIT CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
--------------- ------------- ------------- -------------
<S> <C> <C> <C>
1997............................. $ -- $ 80,000 $103,000
1998............................. 6,108,000 208,000 90,000
1999............................. 5,039,000 273,000 143,000
2000............................. 3,829,000 84,000 75,000
2001............................. 4,812,000 24,000 3,000
2002 - 2010...................... 15,219,000 -- 37,000
----------- -------- --------
$35,007,000 $669,000 $451,000
=========== ======== ========
</TABLE>
<TABLE>
The components of the deferred tax assets at the respective balance sheet
dates are as follows:
<CAPTION>
AUGUST 31,
-------------------------------
1994 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards.......... $ 12,878,000 $ 12,428,000
Research and development credits.......... 669,000 669,000
Investment tax credits.................... 414,000 451,000
Other, net................................ 998,000 1,167,000
------------ ------------
14,959,000 14,715,000
Valuation allowance....................... (14,959,000) (14,715,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The valuation allowance has been provided due to the uncertainty
surrounding the realization of the deferred tax assets.
(4) OTHER ASSETS
<TABLE>
Other assets consist of the following:
<CAPTION>
AUGUST 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Intangible assets, net of
accumulated amortization of
$10,892, $25,695 and $29,396,
respectively...................... $105,525 $ 48,110
Deposits............................ 60,981 78,906
Other............................... 100,000 --
-------- --------
$266,506 $127,016
======== ========
</TABLE>
Intangible assets consist of licenses and patents. Intangible assets are
recorded at cost and are amortized over their expected useful life of five years
using the straight-line method.
F-9
<PAGE> 42
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<CAPTION>
AUGUST 31,
---------------------
1994 1995
-------- ----------
<S> <C> <C>
Payroll and related expenses........... $330,654 $ 630,290
Severance.............................. -- 326,723
Employee relocation.................... -- 230,468
License and other fees................. 227,391 283,971
All other.............................. 280,550 265,117
-------- ----------
$838,595 $1,736,569
======== =========
</TABLE>
(6) COMMITMENTS
(a) Lease Commitments
At August 31, 1995, the Company has operating leases for office and
laboratory facilities which expire on July 31, 1999. Minimum lease payments
under the leases at August 31, 1995 are as follows:
<TABLE>
<S> <C>
Year Ending August 31,
1996.............................................. $ 613,094
1997.............................................. 619,405
1998.............................................. 567,499
1999.............................................. 534,895
----------
$2,334,893
=========
</TABLE>
Rental expense was approximately $296,000, $208,000, and $411,000, in the
year ended August 31, 1993, 1994 and 1995. Rental expense for the year ended
August 31, 1994 was offset by approximately $100,000 of sublease rental income.
(b) Employment Agreements
The Company has employment agreements with certain executive officers which
provide for bonuses and severance benefits upon termination of employment, as
defined.
(7) CAPITAL LEASE OBLIGATIONS
The Company has various capital lease line arrangements under which it can
finance up to $2,500,000 of certain office and laboratory equipment. These
leases are payable in 36 monthly installments. The interest rate ranges from
prime (8.75% at August 31, 1995) plus 1% to 11.42%. The Company is required to
maintain certain restricted cash balances, as defined (see Note 2). In addition,
the Company is required to maintain certain financial ratios pertaining to
minimum cash balances, tangible net worth, debt to tangible net worth and
maximum loss. The Company has approximately $493,711 available under these
various capital lease agreements at August 31, 1995.
Additionally, in connection with its facilities lease, the Company issued a
$100,000 note payable in September 1994 to its lessor to finance leasehold
improvements. The note bears interest at 9% and is payable in 60 monthly
payments of $2,076.
F-10
<PAGE> 43
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Capital lease obligations at August 31, 1995 are as follows:
<S> <C>
Year Ending August 31,
1996.................................................... $ 589,644
1997.................................................... 587,276
1998.................................................... 354,272
1999.................................................... 40,135
----------
Total minimum lease payments............................ 1,571,327
Less -- Amount representing interest.................... 201,055
----------
Present value of total minimum lease payments........... 1,370,272
Less -- Current portion................................. 478,033
----------
$ 892,239
=========
</TABLE>
(8) SHAREHOLDERS EQUITY
(a) Private Placement
On March 20, 1995, the Company completed a private placement of 850,000
shares of common stock at $2.43 per share resulting in proceeds of approximately
$2,000,000, net of issuance costs. In connection with the private placement, the
Company issued warrants to purchase 1,020,000 shares of common stock at an
exercise price of $2.43 per share. These warrants were exercised on July 18,
1995 through a cashless exercise and resulted in the net issuance of 603,023
shares of common stock. The net issuance represents the excess fair market value
of the shares purchasable pursuant to the warrants on the date of exercise over
the total exercise price of such warrants.
(b) Series B Restricted Stock
The Company has designated 625,000 shares of common stock as Series B
restricted stock (Series B Stock) and issued 57,512 shares of Series B Stock in
exchange for a subscription receivable. In the event of liquidation, holders of
common stock are entitled to receive, prior to and in preference to any
distribution of the Company's assets to the holders of Series B Stock, the
greater of (a) $5.00 per share or (b) an amount per share equal to 10 times the
amount which, after such distribution, would remain available for distribution
to holders of the Series B Stock. After such preferential distribution, the
remaining assets, if any, of the Company would be distributed ratably to the
holders of common stock and Series B Stock.
(c) Stock Options and Warrants
The Company has granted stock options to key employees and consultants
under its 1988, 1991, and 1993 Stock Option Plans. The purchase price and
vesting schedule applicable to each option grant are determined by the stock
option and compensation committee of the Board of Directors. Under separate
agreements not covered by any plan, the Company has granted a key employee, and
certain directors of the Company options to purchase common stock.
The Company records deferred compensation when stock options are granted at
an exercise price per share which is less than the fair market value on the date
of the grant. Deferred compensation is recorded in an amount equal to the excess
of the fair market value per share over the exercise price times the number of
options granted. Deferred compensation will be recognized as an expense over the
vesting period of the underlying options. Compensation expense included in the
statement of operations was approximately
F-11
<PAGE> 44
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$71,000, $26,000, and $26,000 for the year ended August 31, 1993, 1994 and
1995, respectively.
<TABLE>
There were 139,650 common shares available for future grants at August 31,
1995. The following is asummary of all stock option activity:
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------------
1993 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
Options shares--
Granted............................. 1,791,350 970,100 355,275
Exercised........................... (29,000) (84,276) (244,166)
Canceled............................ (157,798) (108,288) (70,624)
------------- ------------ ------------
Outstanding......................... 2,722,166 3,499,702 3,540,187
============ =========== ===========
Price range of outstanding options,
end of period....................... $.20 - $11.94 $.20 - $8.00 $.20 - $8.00
============ =========== ===========
Price range of exercised options
during the period................... $.20 $.88 - $2.94 $.81 - $4.00
============ =========== ===========
</TABLE>
In connection the sale of common stock in fiscal 1994, the Company issued
three year warrants for the purchase of 30,075 shares of common stock at $3.09
per share.
(9) INCENTIVE SAVINGS PLAN 401(K)
The Company maintains an incentive savings plan (the Plan) for the benefit
of all employees, as defined. Matching contributions are made to the Plan by the
Company at a rate of 50% for the first 2% of salary and 25% for the next 4% of
salary, limited to the first $50,000 of annual salary. The Company contributed
$36,315, $43,233, and $43,533 to the Plan for the years ended August 31, 1993,
1994 and 1995, respectively.
F-12
<PAGE> 45
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COLLABORATION AGREEMENTS
(a) Astra AB
In August 1995, the Company entered into a collaboration agreement with
Astra Hassle AB (Astra) to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infections or any other disease
caused by H. pylori. The Company granted Astra exclusive access to the Company's
H. pylori genomic sequence database and exclusive worldwide rights to make, use
and sell products based on the Company's H. pylori technology. The agreement
also provides for a four-year research collaboration to further develop and
annotate the Company's H. pylori genomic sequence database, identify therapeutic
and vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representatives from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of
approximately $11 million and, subject to the achievement of certain product
development milestones, up to approximately $22 million (and possibly a greater
amount if more than one product is developed under the agreement) in license
fees, expense allowances, research funding and milestone payments. $500,000 of
such fees is creditable against any future royalties payable to the Company by
Astra under the agreement. Astra is obligated to provide funding for the
research program for a minimum of two and one-half years; Astra may terminate
the research collaboration at any time after the second year on six-months
notice.
The Company will also be entitled to receive royalties on Astra's sale of
any products (i) protected by the claims of patents licensed exclusively to
Astra by the Company pursuant to the agreement, or (ii) the discovery of which
were enabled in a significant manner by the genomic database licensed to Astra
by the Company. The Company has the right, under certain circumstances, to
convert Astra's license to a nonexclusive license in the event Astra is not
actively pursuing commercialization of the license technology.
In August 1995, the Company received $4,269,000, of which $3,500,000 was
recorded as a nonrefundable license fee and capital allowance which is included
in collaborative research, license fees and royalties on the accompanying
consolidated statement of operations, and $769,000 was recorded as deferred
revenue on the accompanying consolidated balance sheet.
(b) Schering-Plough
In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd. (collectively
"Schering-Plough") providing for the use by Schering-Plough of the genomic
sequence of a specified pathogen the Company is sequencing to identify new gene
targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic sequence
databases. The Company also granted Schering-Plough a non-exclusive license to
use the Company's bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to microbial survival and to develop
biological assays to be used by Schering-Plough in screening natural product and
compound libraries to identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the
Company of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and milestone
payments. Subject to the achievement of additional product development
milestones and Schering-Plough's election to extend the research collaboration,
Schering-Plough has agreed to pay the Company up to an additional approximately
$40.5 million (inclusive of the $10.3 million referred to in the previous
sentence) in expense allowances, research funding and milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the Company's genomic
database of specified pathogen and on the technology developed in the course of
the research program. The Company has also granted Schering-Plough a right of
first negotiation if during the term of the research plan the Company desires to
enter into a collaboration with a third party with respect to the development or
sale of any compounds which are targeted against, as their primary indication,
the pathegon that is the principal subject of the Company's agreement with
Schering-Plough. The Company will be entitled to receive royalties on
Schering-Plough's sale of therapeutic products and vaccines developed using the
technology licensed from the Company. Subject to certain limitations, the
Company retained the rights to make, use, and sell diagnostic products developed
based on the Company's genomic database licensed to Schering-Plough or the
technology developed in the course of the research program.
F-13
<PAGE> 46
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(11) LOSS ON SALE OF DIAGNOSTIC TESTING BUSINESS
On June 27, 1993, the Company sold all of the assets of its diagnostic
testing business for $1,000,000. The transaction resulted in a nonrecurring loss
of approximately $637,000.
(12) HARVARD LICENSE AGREEMENT
On November 12, 1993, the Company entered into an agreement with Harvard
College for an exclusive worldwide license for commercial applications of their
patented multiplex sequencing technology. Under this agreement, the Company has
paid a nonrefundable license fee of $100,000, of which $50,000 can be credited
against future royalties. In addition, the Company must pay minimum royalties
ranging from $5,000 in 1995 to $35,000 in 1998. The Company may terminate this
agreement upon 90 day's notice.
F-14
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To Genome Therapeutics Corp.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statement of Genome Therapeutics Corp.
and subsidiaries as of August 31, 1994 and 1995 and for each of the three years
in the period ended August 31, 1995 included in this Registration Statement and
have issued our report thereon dated October 4, 1995 (except with respect to
the matter discussed in Note 10(b) as to which the date is December 6, 1995).
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states, in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 4, 1995
(except with respect to
the matter discussed in Note 10(b)
as to which the date is December 6, 1995)
S-1
<PAGE> 48
Schedule II
<TABLE>
Genome Therapeutics Corp. and Subsidiaries
Valuation and Qualifying Accounts
For the Year Ended August 31, 1995, 1994 and 1993
Reserves for Doubtful Accounts
<S> <C>
Balance, August 31, 1992 $ 74,390
Additions charged to expense 124,992
Write-off of uncollecticible accounts, net (20,800)
---------
Balance, August 31, 1993 $ 178,582
=========
Additions charged to expense 59,102
Write-off of uncollecticible accounts, net (8,418)
---------
Balance, August 31, 1994 $ 229,266
=========
Additions charged to expense 0
Write-off of uncollecticible accounts, net (229,266)
---------
Balance, August 31, 1995 $ 0
=========
</TABLE>
S-2
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
11.1 Calculation of Shares used in Determining Net
Income (Loss) Per Share
23 Consent of Arthur Anderson LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING
PRIMARY NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding during the
year .............................................. 10,668,628 11,097,224 12,287,918
Weighted average common stock equivalents outstanding
during the year ................................... -- -- 673,816
---------- ---------- ----------
10,668,628 11,097,224 12,961,734
========== ========== ==========
</TABLE>
CALCULATION OF SHARES USED IN DETERMINING
FULLY DILUTED NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding during the
year .............................................. 10,668,628 11,097,224 12,287,918
Weighted average common stock equivalents outstanding
during the year ................................... -- -- 748,823
---------- ---------- ----------
10,668,628 11,097,224 13,036,741
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports dated October 4, 1995 (except with respect to the
matter discussed in Note 10(b) as to which the date is December 6, 1995)
included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statements No. 2-77846, No. 2-81123, No. 2-95446, No. 33-12633,
No. 33-27885, No. 33-45432, No. 0-10824 and No. 03-361191.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARRY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GENOME THERAPEUTICS CORPORATION FOR THE YEAR ENDED
AUGUST 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<EXCHANGE-RATE> 1
<CASH> 5,886
<SECURITIES> 2,341
<RECEIVABLES> 620
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,897
<PP&E> 4,172
<DEPRECIATION> 2,452
<TOTAL-ASSETS> 11,529
<CURRENT-LIABILITIES> 3,398
<BONDS> 0
<COMMON> 1,348
0
0
<OTHER-SE> 5,891
<TOTAL-LIABILITY-AND-EQUITY> 7,239
<SALES> 7,385
<TOTAL-REVENUES> 11,207
<CGS> 6,414
<TOTAL-COSTS> 10,622
<OTHER-EXPENSES> 4,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 585
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
