<PAGE> 1
FILED PURSUANT TO RULE 424(b)(4)
FILE NO. 333-00127
3,000,000 SHARES
[GENOME THERAPEUTICS CORPORATION LOGO]
COMMON STOCK
------------------------
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Genome Therapeutics Corp. (the "Company" or "GTC"). The Company's Common
Stock is traded over-the-counter on the Nasdaq National Market under the symbol
"GENE." On February 15, 1996 the last reported sale price of the Common Stock
was $13.81 per share.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share......................... $13.00 $0.75 $12.25
Total(3).......................... $39,000,000 $2,250,000 $36,750,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter under the Securities Act of 1933, as amended (the "Securities
Act"), and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(3) The Company has granted the Underwriter options, exercisable within 30 days
of the date hereof, to purchase up to 450,000 additional shares of Common
Stock for the purpose of covering over-allotments, if any. If the
Underwriter exercises such options in full, the total Price to Public,
Underwriting Discount, and Proceeds to Company will be $44,850,000,
$2,587,500 and $42,262,500, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriter when, as and if
delivered to and accepted by it, subject to its right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of the certificates representing the shares will be made
against payment on or about February 22, 1996 at the office of Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.
------------------------
OPPENHEIMER & CO., INC.
The date of this Prospectus is February 15, 1996
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits and schedules thereto) on Form S-3 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission , and to which reference is
hereby made. Statements made in this Prospectus as to the contents of any
document referred to are not necessarily complete. With respect to each such
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission referred to in "Available Information."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended August
31, 1995, the Company's amended Annual Report on Form 10-K/A-3 for the fiscal
year ended August 31, 1995, the Company's Quarterly Report on Form 10-Q for the
quarter ended November 25, 1995, and the description of the Company's Common
Stock contained in its Form 10/A, File No. 0-10824, are incorporated by
reference and made a part of this Prospectus as of the date hereof. All reports
and other documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this offering
shall be incorporated by reference into this Prospectus and shall be deemed to
be part of this Prospectus from the date of filing of such reports and
documents. Any statement contained herein or in a document incorporated by
reference shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained in this Prospectus or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide, upon request, without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, a copy of any or all of the documents which have been or may be
incorporated in this Prospectus by reference, other than certain exhibits to
such documents. Requests for such copies should be directed to: Genome
Therapeutics Corp., 100 Beaver Street, Waltham, Massachusetts 02154 (telephone:
(617) 893-5007).
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements (including the
Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise noted,
all information in this Prospectus assumes no exercise of the Underwriter's
overallotment option. Prospective investors should carefully consider the
information set forth under the caption "Risk Factors".
THE COMPANY
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
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
Corporation and Schering-Plough Ltd. (collectively, "Schering-Plough").
GTC's most advanced programs are in the area of pathogen gene sequencing.
By using genomic information from pathogens, the Company and its collaborators
are attempting to develop new antibiotics which may prove to be less prone to
the rapid development of resistance by pathogens or which may treat diseases for
which existing therapies are deficient. 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. To date, the Company has
sequenced virtually the entire genome of Helicobacter pylori ("H. pylori"),
which is believed responsible for ulcers, and portions of the genomes of three
other pathogens: Staphylococcus aureus ("Staph."), which is responsible for
skin, wound and blood infections, Mycobacterium tuberculosis ("M.
tuberculosis"), which is responsible for tuberculosis, and Mycobacterium leprae
("M. leprae"), which is responsible for leprosy. The Company believes its
pathogen gene discovery programs may lead to product development candidates more
quickly than human gene discovery efforts.
The Company's gene discovery strategy also involves the identification and
characterization of human genes that are responsible for many serious diseases.
The Company believes that the identification of specific human genes may provide
important insights into the cause of certain diseases and facilitate the
development of highly specific therapeutic and diagnostic products. To date, the
Company has initiated human gene discovery programs to identify and characterize
disease genes associated with fascioscapulohumeral muscular dystrophy ("FSHD"),
prostate cancer, benign prostatic hypertrophy ("BPH") and manic depressive
illness. GTC also is engaged in preliminary research activities relating to
osteoporosis, schizophrenia and asthma.
The Company's integrated technology platform includes high-throughput
sequencing, positional cloning and bioinformatics capabilities. In
high-throughput sequencing, the Company uses its proprietary multiplex
sequencing technology which allows the Company to process multiple DNA samples
simultaneously in a single mixture. In positional cloning, the Company uses its
proprietary multiplex genotyping technology to determine the chromosomal
location of genes believed to be responsible for causing specific diseases. The
Company applies its bioinformatics capabilities, including the use of computers
and proprietary software, to process, store and analyze the sequencing and
positional cloning data generated by its gene discovery programs. These
capabilities permit the Company to integrate and analyze genetic information
from GTC's proprietary databases as well as public genomic databases.
3
<PAGE> 4
The Company's product development strategy involves entering into strategic
collaborations with pharmaceutical and biotechnology companies to commercialize
products based on the Company's genomic discoveries. The Company believes that
these collaborations will 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 without incurring the substantial costs
required for pharmaceutical product development.
In August 1995, the Company entered into an agreement with Astra to develop
pharmaceutical, vaccine and diagnostic products effective against diseases
caused by H. pylori. Under this agreement, Astra agreed to pay the Company a
minimum of approximately $11 million, of which approximately $5 million has been
received to date, and, subject to the achievement of certain product development
milestones, up to approximately $22 million in license fees, expense allowances,
research funding and milestone payments. The Company also will be entitled to
receive royalties on the sale of products developed using the Company's genomic
database licensed to Astra. 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. Under this 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 and, subject
to the achievement of additional product development milestones and
Schering-Plough's election to extend the collaboration, up to an additional
approximately $40.5 million (inclusive of the $10.3 million referred to above)
in 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 Company
also will be entitled to receive royalties on the sale by Schering-Plough of
therapeutic products and vaccines developed using the technology licensed to it
by the Company.
In addition to its strategic collaborations with pharmaceutical companies,
GTC actively seeks to participate in government sponsored genomics research
programs. These programs add to the Company's genomics technology base and
enable the Company to 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 $36 million.
The Company's principal executive offices are located at 100 Beaver Street,
Waltham, Massachusetts 02154, and its telephone number is (617) 893-5007.
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 3,000,000 shares
Common Stock to be outstanding after the
offering......................................... 16,797,807 shares (1)
Use of proceeds.................................... To fund research and development
activities, particularly to accelerate
the Company's human gene discovery
programs, to fund a portion of the
Company's capital expenditures and for
working capital and other general
corporate purposes. See "Use of
Proceeds."
NASDAQ National Market symbol...................... GENE
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
--------------------------------------------------- ------------------------------
1991 1992 1993 1994 1995 NOV. 26, 1994 NOV. 25, 1995
------- ------- ------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Government research.............. $ 1,988 $ 4,171 $ 5,022 $ 6,077 $ 7,014 $ 1,526 $ 1,366
Collaborative research, license
fees and royalties............. 228 160 361 314 3,924 36 716
Interest income.................. 140 385 174 142 232 41 118
Product and service.............. 6,764 792 893 86 37 12 13
------- ------- ------- ------- ------- ------- -------
Total revenues................... 9,120 5,508 6,450 6,619 11,207 1,615 2,213
Costs and expenses:
Cost of government research...... 1,915 3,575 4,527 5,144 6,414 1,326 1,282
Research and development......... 2,480 387 423 365 1,475 256 1,079
Selling, general and
administrative................. 4,265 2,493 2,802 2,176 2,730 482 513
Cost of product and service...... 4,251 1,132 1,543 13 3 1 1
(Gain) loss on sale of
business....................... (2,104) -- 637 -- -- -- --
------- ------- ------- ------- ------- -------- -------
Total costs and expenses......... 10,807 7,587 9,932 7,698 10,622 2,065 2,875
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $(1,687) $(2,079) $(3,482) $(1,079) $ 585 $ (450) $ (662)
======= ======= ======= ======= ======= ======= =======
Primary net income (loss) per common
and common equivalent share........ $ (0.16) $ (0.19) $ (0.33) $ (0.10) $ 0.05 $ (0.04) $ (0.05)
======= ======= ======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding...... 10,659 10,663 10,669 11,097 12,962 11,779 13,540
</TABLE>
<TABLE>
<CAPTION>
AT NOVEMBER 25, 1995
------------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities....................................... $ 7,990 $ 44,240
Working capital........................................................................ 5,138 41,388
Total assets........................................................................... 11,744 47,994
Capital lease obligations, net of current maturities................................... 1,170 1,170
Shareholders' equity................................................................... 7,072 43,322
</TABLE>
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(1) Includes 94,722 shares issued since November 25, 1995 pursuant to the
exercise of stock options and warrants. Excludes, as of February 8, 1996,
3,391,615 shares of Common Stock issuable upon the exercise of outstanding
stock options at a weighted average exercise price of $2.22, 440,000 shares
of Common Stock issuable upon the exercise of recently granted stock options
that are subject to shareholder approval and shares of Common Stock reserved
for issuance upon the exercise of the Underwriter Warrants. See
"Underwriting" and Note 8 of Notes to Consolidated Financial Statements.
(2) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the
Company and the application of the net proceeds therefrom at a public
offering price of $13.00 per share (after deducting the underwriting
discount and estimated offering expenses payable by the Company).
5
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained elsewhere in this Prospectus, should be carefully considered in
evaluating the Company and its business before purchasing shares of Common Stock
offered hereby.
Unproven Technology and Business Strategy. The Company's strategy of
sequencing the genomes of select pathogens and identifying and characterizing
genes responsible for human diseases in order to develop therapeutic, diagnostic
and vaccine products is unproven. To date, only a few products based on genomic
information have been successfully developed. Although technologies similar to
those utilized by the Company have been utilized by others to identify and
characterize genes associated with certain human diseases, the Company has not
yet identified and characterized any such genes under its research programs.
There can be no assurance that the Company's approach to human gene discovery
will enable it to successfully identify and characterize the specific genes that
cause or predispose individuals to the diseases that are the targets of its gene
discovery programs.
Even if the Company is successful in identifying specific human disease
genes or sequencing the genomes of pathogens, there can be no assurance that its
gene discoveries will lead to the development of commercial products. Once the
Company identifies specific genes, it plans to license its discoveries to others
to complete product development and to commercialize products based upon such
discoveries. The Company's success will depend, in part, upon its ability to
focus its research efforts on diseases and pathogens that are suitable
candidates for gene-based therapeutic, diagnostic and vaccine products. The
human diseases targeted by the Company generally are believed to be caused by a
number of genetic as well as environmental factors, and there can be no
assurance that such diseases can be successfully addressed through gene-based
therapeutic, diagnostic or vaccine products.
In addition, the development of products based on the Company's gene
discoveries will be subject to the risks of failure inherent in the development
of products based on new technologies. These risks include the possibilities
that: these technologies or any or all of the products based on these
technologies will be found to be ineffective or toxic, or otherwise fail to
receive necessary regulatory approvals; the products, if safe and effective,
will be difficult to manufacture on a large scale or uneconomical to market;
proprietary rights of third parties will preclude the Company or its
collaborators from marketing products, or third parties will market superior or
equivalent products. As a result, there can be no assurance that the Company's
research and development activities will result in any commercially viable
products.
Availability of, and Competition for, Family Resources. The Company's
human gene discovery programs are based upon statistical analyses of disease
inheritance patterns and require the collection of large numbers of DNA samples
from affected individuals, their families and other suitable populations. The
Company is dependent upon others for the identification of donor populations and
the collection and supply of the DNA samples used in its human disease gene
research programs. The availability of DNA samples from large, family based or
other suitable populations is therefore critical to the Company's ability to
discover the genes responsible for human diseases. The Company currently has
rights to few such samples and does not have exclusive rights to any such
samples. The competition for these resources is intense and certain of the
Company's competitors have obtained rights to significantly more family
resources than the Company. There can be no assurance that the Company will be
able to obtain access to DNA samples necessary to support its human gene
discovery programs and any material lack of availability of such DNA samples
would have an adverse effect on the Company's business.
Reliance Upon Collaborative Partners. The Company's strategy for
development and commercialization of therapeutic, vaccine and diagnostic
products based upon both its human and pathogen gene discovery programs depends
on the formation of various strategic collaborations and licensing arrangements
with pharmaceutical and biotechnology development partners. To date, the Company
has entered into only two such arrangements with respect to the Company's
genetic databases for two pathogens. One such arrangement can be terminated by
the Company's collaborator as early as February 1998. Commencement of the
research collaboration under the other arrangement is contingent upon the
achievement by the Company of certain
6
<PAGE> 7
development milestones, and even if those milestones are met, the arrangement
can be terminated by the Company's collaborator as early as two and one-half
years after the start of the research collaboration. There can be no assurance
that the Company will be able to establish additional strategic collaborations
or licensing arrangements that the Company deems necessary to develop and
commercialize products based upon its gene discovery programs, that any such
arrangements or licenses will be on terms favorable to the Company, or that the
current or future strategic collaborations or licensing arrangements will
ultimately be successful. In addition, the Company's strategy involves pursuing
multiple, concurrent gene discovery programs in different disease areas. There
can be no assurance that the Company will be able to manage simultaneous
programs successfully.
With respect to current and potential future strategic collaborations and
licensing arrangements, the Company will be dependent upon the expertise and
dedication of sufficient resources by these outside parties to develop and
commercialize products based on the Company's gene discoveries. Under the
Company's current strategy, the Company does not expect to develop, manufacture
or market products in the near term. Should a collaborator fail to develop or
commercialize a product to which the Company has rights, the Company's business
may be adversely affected. There can be no assurance that current or future
collaborators will not pursue alternative technologies, or develop alternative
products either on their own or in collaboration with others, including the
Company's competitors, as a means for developing therapeutic, diagnostic or
vaccine products for the diseases targeted by the Company. If the Company
chooses in the future to directly engage in the development, manufacturing and
marketing of certain products, it will require substantial additional funds,
personnel and production facilities. See "Business--GTC Strategy--Strategic
Collaborations" and "--Collaborative Agreements--Pharmaceutical Company
Collaborations."
Reliance on United States Government Funding. Since 1992, the Company's
primary source of revenues has been payments under United States government
grants and research contracts. See "Business--Collaborative
Agreements--Government Collaborations." For fiscal 1993, 1994, 1995 and for the
13 week period ended November 25, 1995, revenue recognized pursuant to United
States government grants and research contracts accounted for approximately 78%,
92%, 63% and 62%, respectively, of the Company's total revenues. The
government's obligation to make payments under these grants and contracts is
subject to the appropriation by the United States Congress of funding in each
year. Moreover, it is possible that Congress or the government agencies that
administer the federal government's genomics programs will determine to scale
back these programs or terminate them or that the government will award future
grants and contracts to competitors of the Company instead of the Company. The
failure of the Congress to fund the Company's grants and federal government
contracts or any of the other events described in this paragraph could adversely
affect the Company's business and results of operations, possibly materially.
History of Operating Losses; Anticipation of Future Losses. All of the
Company's research and development programs involve complex research and are at
an early stage of development. It will be a number of years, if ever, before the
Company generates significant revenues or profits from product sales or
royalties. In recent years, substantially all of the Company's revenues have
resulted from payments received under United States government grants and
research contracts, and, to a lesser extent, agreements with collaborators. The
Company expects that substantially all of its revenues for the foreseeable
future will result from payments under government grants and contracts and
existing strategic collaborations, license fees, proceeds from the sale of
rights, payments from future strategic collaborations and licensing
arrangements, if any, and interest income. Certain payments under the Company's
agreements with its collaborators are and will be contingent upon the Company
meeting certain milestones, and funding under the Company's government grants
and research contracts is subject to appropriation each year by the United
States Congress. There can be no assurance that the Company will receive
additional revenues under existing strategic collaborations or government grants
and contracts or that the Company will be successful in entering into other
strategic collaborations or receive additional grants or contracts. Although the
Company had net income of approximately $585,000 for the fiscal year ended
August 31, 1995, the Company had a net loss of approximately $662,000 for the
thirteen week period ended November 25, 1995, and, as of November 25, 1995, the
Company had an accumulated deficit of approximately $36 million. The Company
anticipates incurring additional losses or generating only modest net income
over at least the next several years. Any such losses may increase as the
7
<PAGE> 8
Company expands its research and development activities. To achieve sustained
profitability, the Company, alone or with others, must successfully sequence the
genomes of pathogens and identify biologically relevant pathogen genes and
successfully discover and characterize human genes associated with particular
diseases and thereafter utilize such discoveries, either alone or with others,
to develop products, conduct clinical trials, obtain required regulatory
approvals and successfully manufacture, introduce and market such products. The
time required to reach profitability is highly uncertain and there can be no
assurance that the Company will be able to achieve profitability on a sustained
basis, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Need for Future Capital; Uncertainty of Additional Funding. Depending upon
the Company's success in entering into additional strategic collaborations and
the progress of the Company's and its collaborators' development programs, the
Company may require substantial additional funds before the Company achieves
profitability on a sustained basis, if at all. The Company expects capital and
operating expenditures to increase over the next several years as it increases
its research and development activities.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including the Company's ability to obtain
additional government grant and research contracts, the progress of its research
programs, the number and breadth of these programs, achievement of milestones
under the Company's strategic collaboration agreements, the ability of the
Company to establish and maintain additional strategic alliance and licensing
agreements, the progress of the development and commercialization efforts of the
Company's collaborators, competing technological and market developments, the
costs associated with collection of patient information and DNA samples, the
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights, the regulatory process and
other factors. The Company may seek such additional funds through public or
private equity or debt offerings or additional strategic collaborations and
licensing arrangements. No assurance can be given that additional funds will be
available when needed, or that, if available, such funds will be obtained on
terms favorable to the Company or its shareholders. To the extent the Company
raises additional capital by issuing equity securities, ownership dilution to
shareholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its research and
development programs or obtain funds through arrangements with collaborators or
others that may require the Company to relinquish rights to technologies,
product candidates, or products that the Company would not otherwise relinquish.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition. The Company faces intense competition with respect to its
human gene discovery and pathogen gene discovery programs. Competitors of the
Company include pharmaceutical and biotechnology companies both in the United
States and abroad. In addition, significant research to identify and
characterize 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 government 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 discovery 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 gene
discovery programs which the Company has commenced.
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 the
Company's 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 discovery programs.
8
<PAGE> 9
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
characterizing genes or developing products earlier than the Company or its
collaborators, obtaining authorization from the United States Food and Drug
Administration (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 diagnostics or therapeutics 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 other developed by the Company or its collaborators, or that any product
developed by the Company or its collaborators will be preferred to any existing
or newly developed technologies. See "Business--Competition."
Uncertainty With Respect to Patents and Proprietary Rights; Risk of Third
Party Claims of Infringement. The Company's commercial success will be
dependent in part on its ability to obtain patent protection on genes, or
products based on genes, discovered by it. The current criteria for obtaining
patent protection for partially sequenced genes and for genes whose biological
functions have not been characterized are unclear. The Company's current
strategy is to apply for patent protection upon the identification of a novel
gene or novel gene fragment and pursue claims to these gene sequences as well as
equivalent sequences, such as substantially homologous sequences. Where the
biological function of a gene or gene fragment has not been characterized at the
time of filing a patent application, the Company intends to supplement such
patent filing as soon as additional information with respect to the biological
function of such gene or gene fragment is available. However, there can be no
assurance that the Company will be able to obtain patent protection on such
genes or gene fragments, and even if such patents are issued, the scope of the
coverage or protection provided by any such patents is uncertain. In addition,
there can be no assurance that any patents, if issued, will provide protection
against any competitors, will provide the Company with competitive advantages,
will provide protection for any therapeutic, vaccine or diagnostic product 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. There can be no
assurance that these discussions will not result in changes in, or
interpretations of, the patent laws which will adversely affect the Company's
patent position. In addition, the United States Patent and Trademark Office (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 United States
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. In addition, the Company is aware of published patent
applications owned by third parties relating to nucleic
9
<PAGE> 10
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 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-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 the Company's government grants and contracts, the government has a
statutory right to practice or have practiced, and, under certain circumstances
(including inaction on the part of the Company or its licensees to achieve
practical application of the invention or a need to alleviate public health or
safety concerns not reasonably satisfied by the Company or its licensees), to
grant to other parties licenses under, any inventions first reduced to practice
under the government grants and contracts. In addition, under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
technology developed solely by the Company under the contracts. The Company is
also strongly encouraged under certain government grants to make data and
materials resulting from the research public within 180 days from the date such
data and materials are developed. If this requirement results in premature
publication of the Company's discoveries and inventions, the Company's ability
to obtain patent protection for such discoveries and inventions may be adversely
affected. The Company is also a party to a Collaborative Research and
Development Agreement ("CRADA") with the National Institutes of Health (the
"NIH") in connection with the Company's prostate cancer gene discovery program.
Pursuant to this CRADA, any inventions or discoveries developed in whole or in
part by NIH researchers are the property, either solely or jointly with the
Company, of the NIH, and the Company has the right to negotiate with the NIH to
obtain an exclusive license to such inventions and discoveries. 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 inventions or discoveries
developed solely by the Company in the course of the research plan under the
CRADA.
Amendments to Title 35 of the U.S. Code pursuant to the General Agreement
on Tariffs and Trade, implementing the Uruguay Round Agreement Act of 1994 have
affected the period of enforceability of United States patents. United States
patents that issue from applications filed before June 8, 1995 will be
enforceable for the longer of 17 years from the date of issue or 20 years from
the earliest claimed priority date. United States patents that issue from
applications filed on or after June 8, 1995 will be enforceable for 20 years
from
10
<PAGE> 11
the earliest filing date or the earliest claimed priority date. While the
Company cannot predict the effect that such laws will have on its business, the
adoption of such laws could effectively reduce the term during which a marketed
product is protected by patents.
In addition, the Company is party to various license agreements which give
it rights to use certain technology in its research and development programs
including a license from Harvard College to use the multiplex sequencing
technology. The technology licensed to the Company by Harvard College is covered
by two issued United States patents and foreign counterpart patent applications
in certain countries, but this technology is not covered by patents or patent
applications in all countries of the world. Under its license to the multiplex
sequencing technology, the Company is obligated to use reasonable efforts to
sublicense the technology to third parties if the Company is unable to provide
multiplex sequencing services to such third parties and if sublicensing such
technology would not 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. The
Company continues to make improvements to the multiplex sequencing technology
with its own funds and funding provided under the Company's $10.4 million Genome
Sequencing Center grant from the NIH. Subject to the rights of the government
described above in inventions developed by the Company under government grants
and the rights of Harvard College described below, the Company owns any such
improvements. The Company has granted Harvard College a license to use the
improvements the Company makes to the software component of the multiplex
sequencing technology for Harvard College's internal academic purposes. In the
event Harvard College desires to grant a sublicense to any such improvements,
the Company has agreed to negotiate with Harvard College concerning the terms of
any such sublicense. There can be no assurance that the Company will be able to
continue to license technology from third parties on commercially reasonable
terms, if at all. Failure by the Company to maintain rights to such technology
could have a material adverse effect on the Company.
The Company relies on trade secrets and proprietary know-how which it seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. See "Business--Patents and Proprietary
Technology."
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its senior management and key scientific and technical
personnel, none of whom is bound by a long term employment agreement or the
subject of key man life insurance. The Company's success is also dependent upon
its ability to attract and retain additional qualified scientific, technical and
managerial personnel. Significant competition exists among pharmaceutical and
biotechnology companies for such personnel, and there can be no assurance that
the Company will retain its key scientific, technical and managerial employees
or that it will be able to attract, assimilate and retain such other highly
qualified scientific, technical and managerial personnel as may be required in
the future. The Company's anticipated expansion of its gene discovery programs
will require the Company to hire and train a substantial number of additional
personnel with expertise in the Company's areas of research. The inability of
the Company to successfully hire, train and retain such personnel could have an
adverse effect on the Company. See "Management."
Uncertainty of Regulatory Approval. The FDA and comparable agencies in
foreign countries impose substantial requirements upon the manufacturing and
marketing of human therapeutic, diagnostic and vaccine products such as those
proposed to be developed by the Company or its collaborators. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
The time required for FDA and other approvals is uncertain and typically takes a
number of years, depending on the type, complexity and novelty of the product.
The Company or its collaborators may encounter significant delays or excessive
costs in their efforts to secure necessary approvals or licenses. Because
certain of the products likely to result from the Company's research and
development programs involve the application of new technologies and may be
based on a new therapeutic approach, such products may be subject to substantial
additional review by various governmental regulatory authorities and, as a
result, regulatory approvals may be obtained more slowly than for products using
more conventional technologies. There can be no assurance that FDA or other
approvals will be obtained in a timely manner, if at all. Any delay in
obtaining, or the failure to obtain, such approvals
11
<PAGE> 12
could materially adversely affect the Company's ability to generate product or
royalty revenues. Even if FDA or other approvals are obtained, the marketing and
manufacturing of diagnostic and therapeutic products are subject to continuing
FDA and other regulatory review, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
the product or manufacturer, including withdrawal of the product from the
market. Additional governmental regulations may be promulgated which could delay
regulatory approval of the Company's or a collaborator's potential products. The
Company cannot predict the impact of adverse governmental regulations which
might arise from future legislative or administrative action. See
"Business--Government Regulation" and "--Gene Discovery Programs."
Uncertainty of Pharmaceutical Pricing; Health Care Reform and Related
Matters. The levels of revenues and profitability of pharmaceutical and
biotechnology companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. In addition, in both the United States and elsewhere, sales
of prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third party payors, such as government and
private insurance plans. Third party payors are increasingly challenging the
prices charged for medical products and services. If the Company or one of its
collaborators succeed in bringing one or more products based upon the Company's
technology to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company or its collaborators to
sell such products on a profitable basis. Any inability of the Company or its
collaborators to sell products developed using the Company's technology on a
profitable basis would have a material adverse effect on the Company's business.
Uncertainty of Health Care Reform Measures. Federal, state and local
officials and legislators (and certain foreign governmental officials and
legislators) have proposed or are reportedly considering proposing a variety of
reforms to the health care systems in the United States and abroad. The Company
cannot predict what health care reform legislation, if any, will be enacted in
the United States or elsewhere. Significant changes in the health care system in
the United States or elsewhere are likely to have a substantial impact over time
on the manner in which the Company conducts its business. Such changes could
have a material adverse effect on the Company. The existence of pending health
care reform proposals could have a material adverse effect on the Company's
ability to raise capital. Furthermore, the Company's ability to commercialize
its potential products may be adversely affected to the extent that such
proposals have a material adverse effect on the business, financial condition
and profitability of other companies that are prospective corporate partners
with respect to the Company's proposed products.
Lack of Manufacturing, Marketing and Sales Capabilities. The Company plans
to rely significantly on collaborators for the manufacturing, marketing and
distribution of products based on the Company's gene discoveries. As a result,
the Company has made no investment in, and has no, manufacturing, marketing or
product sales capabilities or resources. To the extent the Company enters into
manufacturing, marketing or distribution arrangements with collaborative
partners, any revenues the Company receives will depend upon the efforts of
third parties. There can be no assurance that any third party will market
products based on the Company's gene discoveries successfully or that any
third-party collaboration will be on terms favorable to the Company. If a
collaborator does not manufacture or market a product successfully, the
Company's business would be materially adversely affected. In order for the
Company to manufacture, market and sell its own products, the Company would be
required to recruit and train qualified personnel, build or lease appropriate
facilities and obtain the necessary regulatory approvals for such facilities,
all of which would entail significant additional costs. There can be no
assurance that the Company would be able to successfully develop its own
manufacturing capability or attract and build a sufficient marketing and sales
force, or that the Company could do so in a manner and at a cost that would
enable the Company to compete successfully against other companies.
Product Liability Exposure. Clinical trials, manufacturing, marketing and
sale of any of the Company's or its collaborators' potential products may expose
the Company to liability claims from the use of such
12
<PAGE> 13
products. The Company currently does not carry product liability insurance for
any products which may be developed under the Company's gene discovery programs.
There can be no assurance that the Company or its collaborators will be able to
obtain such insurance or, if obtained, that sufficient coverage can be acquired
at a reasonable cost. An inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of pharmaceutical products
developed by the Company or its collaborators. A product liability claim or
recall would have a material adverse effect on the business or financial
condition of the Company.
Volatility of Stock Price. The market prices for securities of
biotechnology companies have historically been highly volatile, including the
market price of shares of the Company's Common Stock. Future announcements by
the Company or its competitors, including announcements concerning gene
discoveries, strategic collaborations, results of clinical testing,
technological innovations or new commercial products, changes in government
regulations, regulatory actions, health care reform, proprietary rights,
litigation and public concerns as to safety of the Company's or its
collaborators' products, as well as period-to-period variances in financial
results could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market price for many
biotechnology companies that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Common Stock.
Concentration of Ownership by Directors and Executive Officers. Upon
completion of the offering, the Company's directors and executive officers and
their affiliates will beneficially own approximately 26% of the Company's
outstanding Common Stock (including 2,182,700 shares issuable upon the exercise
of outstanding options held by the Company's directors and executive officers
and their affiliates which are exercisable within the 60-day period following
January 4, 1996). As a result, these shareholders, if acting together, will have
the ability to influence significantly the outcome of corporate actions
requiring stockholder approval. This concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Management."
Impact of Shares Eligible for Future Sale and Registration Rights; Future
Dilution. Upon completion of this offering, the Company will have approximately
16,797,807 shares of Common Stock outstanding, assuming no exercise of
outstanding warrants or options to purchase Common Stock. The Company's
officers, directors and certain shareholders that in the aggregate beneficially
own 6,131,329 shares of Common Stock (including 2,182,700 shares issuable upon
the exercise of outstanding options held by the Company's directors and
executive officers and their affiliates which are exercisable within the 60-day
period following January 4, 1996) have agreed, with respect to 5,666,329 shares
of Common Stock, not to sell or otherwise transfer such shares for a period of
120 days after the date of this Prospectus (the "Lock-Up Period"). An aggregate
of 400,000 shares held by certain shareholders may be sold during the Lock-Up
Period, and a total of 65,000 shares held by Dr. Friedman, a director of the
Company, may be transferred to irrevocable charitable trusts (which will have
the right to sell such shares if desired) during the Lock-Up Period.
Following expiration of the Lock-Up Period, all but approximately 4,400,000
shares of the Company's Common Stock (including 1,908,825 shares issuable upon
the exercise of outstanding options held by certain of the Company's directors
and executive officers which are exercisable within the 60-day period following
January 4, 1996) will be eligible for immediate resale as a result of having
been registered for resale under the Securities Act, pursuant to the provisions
of Rule 144 or otherwise. The shares not eligible for immediate resale will
remain eligible for sale pursuant to Rule 144, subject only to the volume
limitation and manner of sale restrictions of Rule 144. In addition, the shares
of Common Stock issuable upon the exercise of outstanding options have been
registered under the Securities Act and, upon exercise, will be eligible for
immediate resale.
The sale of shares of the Company's Common Stock could adversely affect the
prevailing market price of the Company's Common Stock.
To the extent the Company issues additional equity securities in order to
raise capital or pursuant to stock options, the Company's shareholders will
experience dilution of their ownership percentage and voting power.
13
<PAGE> 14
Pursuant to an agreement among the Company and six shareholders (the
"Rightsholders") that currently hold an aggregate of 1,453,023 shares of Common
Stock, the Company is obligated, upon the request of holders of 30% of the
shares of Common Stock held by the Rightsholders and subject to certain
limitations, to use its best efforts to register for public sale all shares of
Common Stock owned by the Rightsholders which the Rightsholders request to be
registered. The Company is obligated to honor such a request on two occasions.
In addition, under the terms of the Underwriter Warrants (as defined below) the
Company has granted the Underwriter the right to require the Company, on one
occasion and subject to certain limitations, to use its best efforts to register
for public sale the shares of Common Stock issuable upon the exercise of the
Underwriter Warrants. See "Underwriting." In the event the Company elects to
register any of its equity securities under the Securities Act for its own
account or otherwise, subject to certain exceptions and limitations, the
Rightsholders, the Underwriter and three other holders of an aggregate of 30,075
shares of Common Stock, are entitled to include certain shares in such
registration. The Company is required to bear all registration expenses incurred
in connection with the registration of shares of Common Stock held by the
Rightsholders, the Underwriter and such other holders. All selling expenses are
to be borne by the holders of shares being registered. Subject to certain
limitations, the registration rights described above are transferable.
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,000,000 shares of Common Stock offered by the Company hereby (at a public
offering price of $13.00 per share and after deducting the underwriting discount
and estimated offering expenses payable by the Company) are estimated to be
approximately $36,250,000 ($41,762,500 if the Underwriter's overallotment option
is exercised in full). The Company intends to use the net proceeds of this
offering to fund research and development activities, particularly to accelerate
the Company's human gene discovery programs, to fund a portion of the Company's
capital expenditures and for working capital and other general corporate
purposes.
The amount and timing of expenditures may vary significantly depending upon
numerous factors, including, but not limited to, the Company's success in
securing additional government grants and research contracts, the progress of
the Company's gene discovery programs, the Company's success in entering into
new collaborative agreements with strategic partners, changes in the Company's
relationship with its current strategic partners, payments received under the
Company's current collaborative agreements and competing technological and
market developments. See "Risk Factors -- Need for Future Capital; Uncertainty
of Additional Funding."
Pending application of the proceeds of the offering, the Company intends to
invest the net proceeds of the offering in short-term, investment-grade,
interest-bearing instruments.
<TABLE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "GENE." The following table presents quarterly information on the
price range of the Common Stock. This information indicates the high and low
sale prices reported by the Nasdaq National Market.
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1994
First Quarter...................................... $ 2.43 $1.25
Second Quarter..................................... 5.13 2.00
Third Quarter...................................... 3.13 1.75
Fourth Quarter..................................... 3.00 1.75
FISCAL 1995
First Quarter...................................... $ 2.69 $1.81
Second Quarter..................................... 2.88 1.50
Third Quarter...................................... 6.25 2.50
Fourth Quarter..................................... 8.63 5.13
FISCAL 1996
First Quarter...................................... $ 8.50 $6.62
Second Quarter (through February 8, 1996).......... 13.88 7.00
</TABLE>
As of November 27, 1995, there were approximately 1,489 shareholders of
record of the Company's Common Stock.
15
<PAGE> 16
DIVIDEND POLICY
The Company has not paid any dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on its Common Stock will be declared in
the foreseeable future. In addition, certain of the the Company's equipment
lease facilities restrict the Company from paying any cash dividends while there
are amounts outstanding under such facilities. Any future dividends will be
subject to the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, the operating and financial condition
of the Company, its capital requirements and general business conditions.
CAPITALIZATION
<TABLE>
The following table sets forth the capitalization of the Company as of
November 25, 1995 and such capitalization as adjusted to give effect to the sale
of the 3,000,000 shares of Common Stock offered by the Company at a public
offering price of $13.00 per share and after deducting the underwriting discount
and estimated offering expenses payable by the Company. This table should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<CAPTION>
NOVEMBER 25, 1995
----------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
DATA)
(UNAUDITED)
Capital lease obligations, net of current maturities............ $ 1,170 $ 1,170
Shareholders' equity:
Common stock, $.10 par value, 34,375,000 shares authorized,
13,703,085 shares issued and outstanding at November 25,
1995, 16,703,085 shares issued and outstanding, as
adjusted(1).............................................. 1,370 1,670
Series B restricted stock, $.10 par value, 625,000 shares
authorized, 57,512 shares issued and outstanding at
November 25, 1995 and as adjusted........................ 6 6
Additional paid-in capital................................. 41,609 77,559
Accumulated deficit........................................ (35,836) (35,836)
Series B subscriptions receivable.......................... (77) (77)
-------- -------
Total shareholders' equity............................ 7,072 43,322
-------- -------
Total capitalization.................................. $ 8,242 $44,492
======== =======
- ---------------
<FN>
(1) Excludes, 94,722 shares issued since November 25, 1995 pursuant to the
exercise of stock options and warrants. Also excludes as of February 8,
1996, 3,391,615 shares of Common Stock issuable upon the exercise of
outstanding stock options and warrants at a weighted average exercise price
of $2.22, 440,000 shares of Common Stock issuable upon the exercise of
recently granted stock options that are subject to shareholder approval and
shares of Common Stock reserved for issuance upon the exercise of the
Underwriter Warrants. See "Underwriting", and Note 8 of Notes to
Consolidated Financial Statements.
</TABLE>
16
<PAGE> 17
<TABLE>
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 Prospectus. 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 balance sheet data at November 25, 1995 and the statement of
operations data for the 13 week period ended November 26, 1994 and November 25,
1995 are derived from the Company's unaudited consolidated financial statements.
In the opinion of management of the Company, the unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations for these periods.
Operating results for the 13 week period ended November 25, 1995 are not
necessarily indicative of the results that may be expected for the entire year
ending August 31, 1996. 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 Prospectus.
<CAPTION>
THIRTEEN WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
--------------------------------------------------- ------------------------------
1991 1992 1993 1994 1995 NOV. 26, 1994 NOV. 25, 1995
------- ------- ------- ------- ------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Government research............. $ 1,988 $ 4,171 $ 5,022 $ 6,077 $ 7,014 $ 1,526 $ 1,366
Collaborative research, license
fees and royalties............ 228 160 361 314 3,924 36 716
Interest income................. 140 385 174 142 232 41 118
Product and service............. 6,764 792 893 86 37 12 13
------- ------- ------- ------- ------- ------- -------
Total revenues.................. 9,120 5,508 6,450 6,619 11,207 1,615 2,213
Costs and expenses:
Cost of government research..... 1,915 3,575 4,527 5,144 6,414 1,326 1,282
Research and development........ 2,480 387 423 365 1,475 256 1,079
Selling, general and
administrative................ 4,265 2,493 2,802 2,176 2,730 482 513
Cost of product and service..... 4,251 1,132 1,543 13 3 1 1
(Gain) loss on sale of
businesses.................... (2,104) -- 637 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total costs and expenses........ 10,807 7,587 9,932 7,698 10,622 2,065 2,875
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $(1,687) $(2,079) $(3,482) $(1,079) $ 585 $ (450) $ (662)
======= ======= ======= ======= ======= ======= =======
Primary net income (loss) per common
and common equivalent share....... $ (0.16) $ (0.19) $ (0.33) $ (0.10) $ 0.05 $ (0.04) $ (0.05)
======= ======= ======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding..... 10,659 10,663 10,669 11,097 12,962 11,779 13,540
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------------------
1991 1992 1993 1994 1995 NOV. 25, 1995
------- ------- ------- ------- ------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities............. $ 9,041 $ 7,144 $ 3,915 $ 4,123 $ 8,227 $ 7,990
Working capital..................... 8,780 5,768 3,264 3,244 5,499 5,138
Total assets........................ 10,790 9,355 5,289 5,911 11,529 11,744
Capital lease obligations, net of
current maturities................ -- 275 111 165 892 1,170
Shareholders' equity................ 9,109 7,081 3,676 4,225 7,239 7, 072
</TABLE>
17
<PAGE> 18
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, 1995, and for the 13 week period ended November 25,
1995, the Company expended $4,950,000, $5,509,000, $7,889,000 and $2,361,000,
respectively, on research and development, of which $4,527,000, $5,144,000,
$6,414,000 and 1,282,000, respectively, was sponsored by the United States
government. As of November 25, 1995, the Company had outstanding approximately
$12,034,000 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 November 25, 1995,
the funded portion of these grants and contracts was $4,201,000. For fiscal
1993, 1994, 1995 and for the 13 week period ended November 25, 1995, revenue
recognized pursuant to United States government grants and research contracts
accounted for approximately 78%, 92%, 63% and 62%, 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 $35,836,000 at November 25, 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 and
others, reliance on United States government funding, history of operating
losses, need for future capital, competition, patent and proprietary rights,
dependence on key personnel, uncertainty of regulatory approval, uncertainty of
pharmaceutical pricing, health care reform and related matters, product
liability exposure and the volatility of the Company's stock price. See "Risk
Factors."
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RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
Revenue
Total revenues increased 37% from $1,615,000 for the 13 week period ended
November 26, 1994 to $2,213,000 for the 13 week period ended November 25, 1995.
Government research revenue decreased approximately 10% from $1,526,000 for the
13 week period ended November 26, 1994 to $1,366,000 for the 13 week period
ended November 25, 1995. The decrease in government research revenue for the 13
week period ended November 25, 1995 was primarily attributable to a change in
the mix of government grants and contracts under which services were performed
to grants and contracts which contain provisions for lower overhead
reimbursement rates. 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.
Collaborative research, license fees and royalties increased from $36,000
for the 13 week period ended November 26, 1994 to $716,000 for the 13 week
period ended November 25, 1995, primarily due to revenues received under the
Company's collaboration with Astra which began in August 1995.
Interest income increased 188% from $41,000 for the 13 week period ended
November 26, 1994 to $118,000 for the 13 week period ended November 25, 1995
reflecting the increase in funds available for investment as a result of the
Company's sale of Common Stock in a private placement in March 1995 and payments
received under the Astra collaboration in August 1995.
Costs and Expenses
Total costs and expenses increased 39% from $2,065,000 for the 13 week
period ended November 26, 1994 to $2,875,000 for the 13 week period ended
November 25, 1995. Cost of government and collaborative research consists of
payroll and related costs, laboratory supplies and overhead expenses (including
facilities and equipment expenses). The cost of government research decreased 3%
from $1,326,000 for the 13 week period ended November 26, 1994 to $1,282,000 for
the 13 week period ended November 25, 1995. Cost of government research, as a
percentage of government research revenue, was 94% for the 13 week period ended
November 25, 1995 and 87% for the 13 week period ended November 26, 1994. This
increase was primarily due to a change in the mix of government grants and
contracts under which services were performed during the 13 week period ended
November 25, 1995 to grants and contracts which contain provisions for lower
overhead reimbursement rates. Cost of government research, as a percentage of
government research revenue, fluctuates based upon the nature of the government
contracts and grants, the overhead reimbursement rates under such contracts and
grants, as well as changes in the Company's overhead structure.
Research and development expense, which includes both company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators, increased 321% from $256,000 for the 13 week
period ended November 26, 1994 to $1,079,000 for the 13 week period ended
November 25, 1995. This increase was primarily related to increased expenses
related to the Company's H. pylori and Staph. pathogen gene discovery programs
and prostate cancer and BPH human gene discovery programs. The H. pylori program
is funded under the Company's collaborative agreement with Astra. The increase
consisted primarily of increases in payroll and related expenses, laboratory
supplies and overhead expenses. The Company expects to continue to increase
research and development expenditures in fiscal 1996, particularly with respect
to its human gene discovery programs.
Selling, general and administrative expenses increased 7% from $482,000 for
the 13 week period ended November 26, 1994 to $513,000 for the 13 week period
ended November 25, 1995. The increase in selling, general and administrative
expenses for the 13 week period ended November 25, 1995 was primarily due to an
increase in payroll and related expenses, interest expense and other corporate
expenses.
The Company has granted certain employees, officers and directors options
to purchase an aggregate of 440,000 shares of Common Stock, subject to
shareholder approval. The options were granted with exercise prices ranging from
$7.25 to $9.56 per share, in each case, the fair market value of the Common
Stock on the date the option was granted. Provided the shareholders approve the
options at the Annual Meeting of
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<PAGE> 20
Stockholders scheduled for February 16, 1996, the Company will be required to
record as a compensation expense for each option an amount equal to the
difference between the fair market value of the Common Stock on the date of
shareholder approval of the options and the per share exercise price of the
option. Based upon the market price of the Common Stock on February 8, 1996 of
$13.00 per share, the Company would be required to record a non-recurring
noncash charge of approximately $1,900,000, of which approximately $1,200,000 to
$1,700,000 would be recorded during the remainder of fiscal 1996.
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.
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.
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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 November 25, 1995, the Company had cash, cash equivalents and
marketable securities of approximately $8,766,000 (of which approximately
$776,000 is restricted in connection with certain capital lease obligations) and
working capital of approximately $5,138,000. The Company has various
arrangements under which it can finance up to $4,000,000 of certain office and
laboratory equipment and leasehold improvements. Under these arrangements, the
Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, and minimum restricted cash balances. At November 25, 1995, the Company
had approximately $1,400,000 available under these arrangements and had an
outstanding balance of approximately $1,851,000, which is repayable over the
three year period ending December 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,
$3,252,000 and $536,000 in fiscal 1994 and 1993 and the 13 week period ended
November 25, 1995, 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 and the 13 week period ended November
25, 1995 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, $1,548,000 and $3,380,000 in fiscal 1994 and 1993 and the 13 week
period ended November 25, 1995, 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, $1,410,000
and $307,000 in fiscal 1995 and 1994 and the 13 week period ended November 25,
1995, 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, laboratory equipment and
office equipment. The Company plans to utilize its capital lease arrangements to
finance the acquisition of this equipment.
At August 31, 1995, the Company had net operating loss and tax credit
carryforwards of approximately $35,007,000 and $1,120,000, respectively. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period in
excess of 50%. The Company does not believe that it has experienced cumulative
ownership changes in excess of 50% or that the consummation of this offering
will result in a cumulative ownership change in excess of 50%.
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However, there can be no assurance that ownership changes will not occur in
future periods which will limit the Company's ability to utilize the losses and
tax credits.
The Company believes that its existing capital resources, without regard to
the Company's receipt of the net proceeds of this offering, 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.
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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 of (i)
genes of pathogens that are responsible for many serious diseases and (ii) human
disease genes. The Company believes that its genomic discoveries may lead to the
development of novel therapeutics, vaccines and diagnostic products by it and
its strategic partners. In 1995, the Company entered into two corporate
collaborations in connection with its pathogen gene discovery programs, an
agreement with Astra and an agreement with Schering-Plough.
SCIENTIFIC BACKGROUND
Human disease is caused by a variety of factors, including genetic defects,
pathogens and environmental factors, with many of the most common
life-threatening and chronic diseases believed to have a genetic basis. Genes,
which define the inherited characteristics of an organism, are found in all
living cells (e.g., human, animal and pathogen cells). Each gene codes for a
specific protein that performs a specific function in the body, such as the
production of insulin. In humans, a defect in a gene, or the absence of a
critical gene, may lead to overproduction, underproduction, improper function or
absence of a protein resulting in the onset of disease or an undesirable
physical condition. Genetic defects can be inherited or can accumulate during
the lifetime of an individual. Human diseases caused by pathogens also have a
genetic foundation in that specific genes in the pathogen are required for that
organism to survive and infect its human host.
The genetic content of an organism consists of DNA, a chemically complex
material comprised of four different nucleotides (adenine, guanine, cytosine,
and thymine) which are the building blocks of DNA. The sequence in which these
nucleotides are linked together in a molecule of DNA determines the
informational content of genes. The entire genetic content of an organism,
including humans, is referred to as its genome.
The human genome consists of 23 pairs of 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.
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
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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
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.
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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 worldwide commercial rights to this technology, which was originally
developed by Dr. George Church's laboratory at the Howard Hughes Medical
Institute ("HHMI"), pursuant to a license from Harvard College. See "Risk
Factors--Uncertainty With Respect to Patents and Proprietary Rights; Risk of
Third Party Claims of Infringement" and "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 H. pylori and portions of the genomes of three
other pathogens (Staph., M. tuberculosis, and 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 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.
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
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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.
Examples of key accomplishments by GTC in positional cloning include:
<TABLE>
<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.
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
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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 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 antibiotics and vaccines effective against drug
resistant infectious organisms.
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<PAGE> 28
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 $36
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
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<PAGE> 29
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."
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<PAGE> 30
<TABLE>
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.
- -------------------------------------------------------------------------------------------------------------------------------
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.
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<PAGE> 31
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 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's National Center for Human Genome
Research ("NCHGR") in this program to identify and begin to evaluate candidate
prostate cancer genes on the long arm of chromosome 10. Pursuant to the terms of
the Company's 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 NCHGR researchers 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 solely 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 invention or discovery 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 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
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<PAGE> 32
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.
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 by 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 that 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 research funding and milestone payments. Subject to
the achievement of additional product development milestones and
Schering-Plough's election to extend the research collaboration, Schering-Plough
has agreed to pay the Company up to an additional approximately $40.5 million
(inclusive of the $10.3 million referred to in the previous sentence) in
research funding and
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<PAGE> 33
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 genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. GTC has also granted Schering-
Plough a right of first negotiation if during the term of the research plan GTC
desires to enter into a collaboration with a third party with respect to the
development or sale of any compounds which are targeted against, as their
primary indication, the pathogen that is the principal subject of the Company's
agreement with Schering-Plough. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, GTC retained the rights to make, use, and sell diagnostic products
developed based on the Company's genomic database licensed to Schering-Plough or
the technology developed in the course of the research program.
Government Collaborations
Since 1989, the Company has been awarded a number of grants and contracts
by various agencies of the United States government pursuant to the government's
genomics programs. The scope of the research covered by the grants and contracts
encompasses technology development, sequencing production, technology automation
projects and positional cloning projects. Among other things, these grants and
contracts have provided significant funds for the Company's M. tuberculosis,
FSHD and manic depressive illness gene discovery programs. These grants and
contracts represent an important aspect of the Company's strategy because they
add to the Company's genomics technology and enable the Company to increase the
number and enhance the expertise of its scientific personnel.
Under the Company's government grants, the Company has, subject to certain
rights of the government described below, exclusive ownership rights to any
commercial applications of inventions first reduced to practice under the
grants, including all gene discoveries and technology improvements created or
discovered. The Company is strongly encouraged under certain of the government
grants to make data and materials resulting from the research public within 180
days from the date such data and materials are developed. Under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
inventions developed solely by the Company under the contracts. The government
also retains certain rights, described below under the caption "Patents and
Proprietary Technology", to the inventions first reduced to practice by the
Company under the government grants and contracts. The Company currently has two
principal government research contracts, one with the National Institute of
Neurological Disorders and Stroke relating to the preparation of DNA samples for
sequencing, the isolation of DNA fragments and genotyping, and one with the NIMH
relating to the identification of genes responsible for manic depressive
illness. See "Patent and Proprietary Technology" and "Human Gene Discovery
Programs -- Manic Depressive Illness."
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.
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<PAGE> 34
<TABLE>
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 $36 million. Listed below are the major government grants
and contracts under which the Company is currently performing services:
<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 are
subject to the appropriation by the United States Congress of funding in each
year. In addition, funding under these grants and contracts may be discontinued
or reduced at any time by the United States Congress.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will be dependent in part on its ability
to obtain patent protection on genes, or products based on genes, discovered by
it. The current criteria for obtaining patent protection for partially sequenced
genes and for genes whose biological functions have not been characterized are
unclear. The Company's current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous sequences. Where the biological function of a gene or gene fragment
has not been characterized at the time of filing a patent application, the
Company intends to supplement such patent filing as soon as additional
information with respect to the biological function of such gene or gene
fragment is available. However, there can be no assurance that the Company will
be able to obtain patent protection on such genes or gene fragments, and even if
such patents are issued, the scope of the coverage or protection provided by any
such patents is uncertain. In addition, there can be no assurance that any
patents, if issued, will provide protection against any competitors, will
provide the Company with competitive advantages, will provide protection for any
therapeutic, vaccine or diagnostic products based on the Company's gene
discoveries or will not be successfully challenged by others. Furthermore,
others have filed and are likely to file in the future patent applications which
have not yet been published covering genes or protein sequences similar or
identical to the Company's. No assurance can be given that any such patent
application will not have priority over patent applications filed by the Company
or that any patent applications filed by the Company will result in issued
patents.
There have been, and continue to be, intensive discussions on the scope of
patent protection for both gene fragments and full-length genes. In November
1995, the PTO scheduled a hearing and requested public comment on the patenting
of a complete genome of an organism as well as the patenting of human gene
fragments. Although the PTO canceled the hearings and request for comments, they
may be rescheduled at a future date. There can be no assurance that these or
other proposals will not result in changes in, or interpretations of, the patent
laws which will adversely affect the Company's patent position.
The PTO issued new Utility Guidelines in July 1995 that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics. While the guidelines do not require clinical efficacy data
for issuance of patents for human therapeutics, the guidelines have been issued
only recently and there can be no assurance that the PTO's interpretations of
such guidelines, and any changes to such interpretations will not delay or
adversely affect the Company's or its collaborators' ability to obtain patent
protection. The biotechnology patent situation outside the United States is even
more uncertain and is currently undergoing review and revision in many
countries.
The Company has filed patent applications 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
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<PAGE> 35
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 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 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 the Company's government grants and contracts, the government has a
statutory right to practice or have practiced, and, under certain circumstances
(including inaction on the part of the Company or its licensees to achieve
practical application of the invention or a need to alleviate public health or
safety concerns not reasonably satisfied by the Company or its licensees), to
grant to other parties licenses under, any inventions first reduced to practice
under the government grants and contracts. In addition, under the Company's
government research contracts, the government has ownership rights in the data,
clones, genes and other material derived from the material furnished to the
Company by the government, and the Company has ownership rights in other
technology developed solely by the Company under the contracts. Under the
Company's CRADA with the NIH, any inventions or discoveries made in whole or in
part by NIH researchers are the property, either solely or jointly with the
Company, of NIH, and the Company has the right to negotiate with the NIH to
obtain an exclusive license to such inventions and discoveries. The Company is
also strongly encouraged under certain government grants to make data and
materials resulting from the research public within 180 days from the date such
data and materials are developed. If this requirement results in premature
publication of the Company's discoveries and inventions, the Company's ability
to obtain patent protection for such discoveries and inventions may be adversely
affected.
The multiplex sequencing technology used by the Company was developed by
researchers at Harvard College and 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 counterpart applications
in certain countries but this technology is not covered by patents or patent
applications in all countries of the world. The Company has obtained an
exclusive worldwide license from Harvard College to use the multiplex
35
<PAGE> 36
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 a nonrefundable license fee of $100,000 and must pay Harvard
College sublicensing fees as well as royalties on products sold that include the
multiplex sequencing technology, services performed that utilize the multiplex
sequencing technology, income attributable to sublicenses of the multiplex
sequencing technology and certain other amounts. Under the license, 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 with its
own funds and funding provided under the Company's $10.4 million Genome
Sequencing Center grant from the NIH. Subject to the rights of the government
described above in the inventions developed by the Company under government
grants and the rights of Harvard College described below, the Company owns any
such improvements. The Company has granted Harvard College a license to use the
improvements the Company makes to the software component of the multiplex
sequencing technology for Harvard College's internal academic purposes. In the
event Harvard College desires to grant a sublicense to any such improvements,
the Company has agreed to negotiate with Harvard College 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 be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
COMPETITION
The Company faces intense competition both with respect to its human gene
and pathogen gene discovery programs. There is a finite number of genes in the
human genome and the Company believes virtually all of such genes will be
identified within two to three years albeit largely without known function. The
Company also believes that the primary genes that cause or predispose
individuals to most common diseases will be identified and characterized within
five to eight years. In addition, the Company believes that the genomes of many
commercially important pathogens will be sequenced within two to three years.
Competitors of the Company include pharmaceutical and biotechnology
companies both in the United States and abroad. In addition, significant
research to identify and sequence genes is being conducted by universities,
other non-profit research institutions and United States and foreign
government-sponsored entities. A number of commercial, scientific and
governmental entities are attempting to sequence human genes and the genomes of
other organisms. Other entities are utilizing positional cloning to identify and
characterize human disease genes. Certain of the Company's competitors' human
gene programs are more advanced than the Company's and any one of these
companies or other entities may discover and establish a competitive advantage
in one or more pathogen development programs which the Company has commenced.
The Company also faces competition in its human gene discovery programs in
gaining access to family DNA samples for use in positional cloning.
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<PAGE> 37
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 products developed by the Company
or its collaborators, or that any product developed by the Company or its
strategic collaboration partners will be preferred to any existing or newly
developed technologies.
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the development, manufacturing and
marketing of any products which may be developed by the Company or its
collaborators. The nature and the extent to which such regulation may apply to
the Company or its collaborators will vary depending on the nature of any such
products. Virtually all of the Company's or its collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic and vaccine products are
subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The process of obtaining
these approvals and the subsequent compliance with appropriate federal and
foreign statutes and regulations are time consuming and require the expenditure
of substantial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Products based on the
Company's technologies could potentially fall into all three categories.
Generally, in order to gain FDA pre-market approval of a new drug or biological
product, a company first must conduct pre-clinical studies in the laboratory and
in animal model systems to gain preliminary information on an agent's efficacy
and to identify any safety problems. The results of these studies are submitted
as a part of an investigational new drug application ("IND"), which the FDA must
review before human clinical trials of a drug or biologic can commence. In order
to commercialize any products, the Company or its collaborators will be required
to sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and are likely to take a number of years to
complete. After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is classified as a new drug, the
Company or its collaborators will be required to file a New Drug Application
("NDA") and receive approval before commercial marketing of the drug. If the
product is classified as a biologic (e.g., a vaccine), the Company or its
collaborator will be required to file a product license application and an
establishment license application ("ELA") and receive approval of both before
commercial marketing of the product can take place. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approvals will be granted on a timely basis, if at all.
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<PAGE> 38
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.
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.
FACILITIES
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.
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.
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<PAGE> 39
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.
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.
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<PAGE> 40
<TABLE>
MANAGEMENT
The Company's executive officers, significant employees and directors, are
as follows:
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. Hennessey............... 53 Chief Executive Officer, President and Chairman of
the Board of Directors
Fenel M. Eloi..................... 37 Vice President, Treasurer and Chief Financial
Officer
John P. Richard................... 38 Vice President -- Business Development
Gerald F. Vovis, Ph.D............. 52 Senior Vice President -- Research and Development
Tim P. Keith, Ph.D................ 46 Senior Research Manager
Peter T. Lomedico, Ph.D........... 47 Vice President -- Human Genetics Research
Jen-i Mao, Ph.D................... 43 Research Director
Donald T. Moir, Ph.D.............. 46 Research Director
Orrie M. Friedman, Ph.D........... 80 Director(1)(2)
Philip J. Leder, M.D.............. 61 Director(2)
Lawrence Levy..................... 72 Director(1)(2)(3)
Donald J. McCarren, Ph.D.......... 55 Director(1)(3)
Steven M. Rauscher................ 42 Director(3)
<FN>
- ---------------
(1) Member of Stock Option and Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
</TABLE>
ROBERT J. HENNESSEY, Chairman, President and Chief Executive Officer,
joined the Company as President, and Chief Executive Officer and a member of the
Board of Directors in March 1993. In May 1994, he was elected Chairman of the
Board. From 1990 to March 1993, Mr. Hennessey served as President of Hennessey &
Associates, Ltd., a private consulting firm in the biotechnology and
pharmaceutical industries. From 1980 to 1990, he served as a Corporate Vice
President of Sterling Drug, Inc., a pharmaceutical company, in charge of
strategic planning, acquisitions and licensing. Prior to working at Sterling
Drug, Inc., Mr. Hennessey held senior staff or operating positions at Abbott
Laboratories, Inc., SmithKline Beecham Corporation and Merck & Co., Inc., all of
which are pharmaceutical companies. Mr. Hennessey holds both a B.A. and an M.A.
from the University of Connecticut.
FENEL M. ELOI, Vice President, Treasurer and Chief Financial Officer,
joined the Company as Corporate Controller in September 1989 and was promoted to
his current position in October 1991. Prior to joining the Company, Mr. Eloi
held various financial management positions at GTE Corporation, a
telecommunications company, from 1984 to 1989. Prior to 1984, he held various
financial positions, both domestic and international, with Haemonetics
Corporation, a medical equipment company, and Simplex Time Recorder Company, a
time recording equipment company. Mr. Eloi holds a B.S. in accounting from Lee
College in Tennessee and an M.B.A. from Anna Maria College.
JOHN P. RICHARD, Vice President -- Business Development, joined the Company
in 1991. Prior to appointment to his current position in June 1993, Mr. Richard
served the Company as Vice President, Sales and Marketing for Collaborative
Diagnostics, Inc., a start-up genetic reference laboratory wholly owned by the
Company. In 1987, Mr. Richard founded IMPATH Laboratories Inc., one of the
country's leading cancer pathology laboratories, located in New York City. He
served as president of IMPATH Laboratories Inc. from 1987 to 1990. Mr. Richard
holds a B.S. in industrial engineering from Stanford University and an M.B.A.
from Harvard Business School.
GERALD F. VOVIS, PH.D., Senior Vice President -- Research and Development
since 1991, is the Company's chief scientist and has primary responsibility for
the Company's pathogen gene discovery programs. He has held positions of
increasing responsibility since joining the Company in 1980. Before joining
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<PAGE> 41
the Company, Dr. Vovis spent ten years in the Genetics Department of Rockefeller
University in New York City as a Research Associate and faculty member. He
earned his Ph.D. in molecular biology from Case Western Reserve University and a
B.A. in chemistry from Knox College.
TIM P. KEITH, PH.D., has served as Senior Research Manager of the Company
since September 1995. From 1989 to 1995, she served as a Research Manager and
served from 1986 to 1989 as a Senior Scientist. Dr. Keith focuses primarily on
the Company's human gene discovery programs. Dr. Keith received a B.S. in
biology from Tufts University, an A.M. in ecological genetics from Boston
University, and a Ph.D. in population genetics from Harvard University.
PETER T. LOMEDICO, PH.D., joined the Company in January 1996 as Vice
President -- Human Genetics Research and has primary responsibility for the
Company's human gene discovery programs. Prior to joining the Company, Dr.
Lomedico co-founded and served as the chief scientific officer of Morphogenesis,
Inc. a biopharmaceutical company. From 1980 to 1993, Dr. Lomedico held various
positions at Hoffman-LaRoche, Inc., a pharmaceutical company. Most recently he
was Senior Director of the Department of Molecular/Cellular Biology and
Biochemistry at Hoffman-LaRoche. Dr. Lomedico received a Ph.D. from the
University of Texas Graduate School of Biomedical Sciences and a B.S. in biology
from Villanova University.
JEN-I MAO, PH.D., has served as Director of Human Genetics Research of the
Company since 1989. Dr. Mao focuses primarily on work under the Company's
government grants and research contracts. From 1980 to 1989, Dr. Mao has held
several other positions with the Company. Dr. Mao received a B.S. in
agricultural chemistry from the National Taiwan University and a Ph.D. in
molecular biophysics and biochemistry from Yale University.
DONALD T. MOIR, PH.D., has served as a Research Director of the Company
since 1982 and served as Senior Research Scientist from 1980 to 1982. Dr. Moir
focuses primarily on the Company's pathogen gene discovery programs. Dr. Moir
received a B.S. in chemistry from the University of North Carolina and a Ph.D.
in biochemistry from Harvard University.
ORRIE M. FRIEDMAN, PH.D., the founder of the Company, has been a director
of the Company since its incorporation in 1961 and served as President and Chief
Executive Officer of the Company until March 1993 and as Chairman of the Board
until 1994. Prior to founding the Company, Dr. Friedman was Professor of
Chemistry at Brandeis University and Assistant Professor at the Harvard Medical
School. Dr. Friedman holds a Ph.D. in chemistry from McGill University in
Canada.
PHILIP J. LEDER, M.D. a director of the Company since 1994, has served as
the John Emory Andrus Professor of Genetics and Chairman of the Department of
Genetics at Harvard Medical School since 1980. He has also been a Senior
Investigator of the Howard Hughes Medical Institute since 1986. Dr. Leder is a
director of Monsanto Co., Inc.
LAWRENCE LEVY, became a director of the Company in 1986. He has served as
the Chairman of the Board of Directors and President of Northern Ventures
Corporation, an international management and business consulting firm since
1982.
DONALD J. MCCARREN, PH.D., became a director of the Company in 1993. He has
served as President and Chief Executive Officer of Tacora Corp., a drug delivery
company, since October 1994. From 1992 to 1994, Dr. McCarren was the President
and Chief Operating Officer of Immunogen, Inc., a pharmaceutical company; and
from 1990 to 1992, he served as President of Adria Laboratories, Division of
Erbamont, N.V., a biopharmaceutical company. From 1984 to 1990, Dr. McCarren
served as Vice President of Erbamont, N.V., a pharmaceutical company.
STEVEN M. RAUSCHER, became a director of the Company in 1993. He has served
as the Chief Executive Officer and a director of Affiliated Research Centers,
Inc., a clinical research management company, since 1995. From 1993 to 1995, Mr.
Rauscher was President and Chief Executive Officer of Pharmedic, Inc., a
biopharmaceutical company. From 1976 to 1993, he held various positions with
Abbott Laboratories, a pharmaceutical company, most recently as Vice President.
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<PAGE> 42
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Company 3,000,000 shares of Common Stock.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the Underwriter's obligations is such
that it is committed to purchase and pay for all of the above shares of Common
Stock if any are purchased. The Underwriter proposes to offer the shares of
Common Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus.
The Company has granted to the Underwriter a 30-day over-allotment option
to purchase up to 450,000 additional shares of Common Stock at the public
offering price less the underwriting discount. The Underwriter may exercise such
option only to cover over-allotments made in connection with the sale of the
shares of Common Stock offered hereby.
The Company has also agreed to sell to the Underwriter, for nominal
consideration, warrants (the "Underwriter Warrants") to purchase the number of
shares of the Company's Common Stock equal to 6.5% of the total number of shares
of Common Stock sold in this offering at a price per share equal to 120% of the
average bid price of the Common Stock for the five trading days prior to the
pricing of the shares offered hereby. The Underwriter Warrants will be
exercisable for a period of two years commencing one year following the closing
of this offering and will contain certain demand and "piggyback" registration
rights with respect to the Common Stock issuable upon the exercise of the
Underwriter Warrants. The Underwriter Warrants are not transferable (except to
certain employees and affiliates of the Underwriter). The exercise price and the
number of shares issuable upon exercise may, under certain circumstances, be
subject to adjustment pursuant to antidilution provisions.
The Company has agreed to indemnify the Underwriter against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriter may be required to make
in respect thereof. The Company also has agreed to reimburse the Underwriter for
certain out-of-pocket expenses incurred in connection with the offering.
The Underwriter has advised the Company that it does not intend to make
sales to discretionary accounts.
In connection with the offering, the Underwriter may engage in passive
market making transactions in the Company's Common Stock on the Nasdaq National
Market immediately prior to the commencement of the sale of shares in the
offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of market makers not connected with the offering and purchases
limited by such prices and effected in response to order flow. Net purchases by
a passive market maker on each day are limited in amount to 30% of the passive
market maker's average daily trading volume in the Common Stock during a period
of two months prior to the filing with the Commission of the Registration
Statement of which this Prospectus is a part and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
The Company's officers and directors and certain shareholders who in the
aggregate beneficially own 6,131,329 shares of Common Stock (including 2,182,700
shares issuable upon the exercise of outstanding options held by the Company's
directors and executive officers and their affiliates which are exercisable
within the 60-day period following January 4, 1996) have agreed, with respect to
5,666,329 shares of Common Stock, not to, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge or otherwise dispose of such
shares for a period of 120 days after the date of this Prospectus, without the
prior written consent of the Underwriter, subject to certain limited exceptions.
See "Risk Factors - Impact of Shares Eligible for Future Sale and Registration
Rights; Future Dilution." The Company has also agreed not to issue, sell or
register with the Commission for its own account or otherwise dispose of,
directly or indirectly, any equity securities of the
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<PAGE> 43
Company (or any securities convertible into or exercisable or exchangeable for
equity securities of the Company) for a period of 180 days after the date of
this Prospectus, without the prior written consent of the Underwriter, subject
to certain limited exceptions.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for the Company by Ropes & Gray,
Boston, Massachusetts. Certain legal matters in connection with the offering
will be passed upon for the Underwriter by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The audited consolidated financial statements and schedule included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The statements in this Prospectus under the captions "Risk
Factors--Uncertainty With Respect to Patents and Proprietary Rights; Risk of
Third Party Claims of Infringement" (other than those contained in the sixth and
eighth paragraphs thereof) and "Business--Patents and Proprietary Technology"
(other than those contained in the seventh and eighth paragraphs thereof) have
been reviewed and approved by Lahive & Cockfield, Boston, Massachusetts, patent
counsel to the Company, as experts on such matters, and are included in reliance
upon that review and approval.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the Company
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commissions's Regional offices at 7 World Trade Center, 13th Floor, New
York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may be obtained at
prescribed rates upon request from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20449.
43
<PAGE> 44
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 and
November 25, 1995 (Unaudited).................................................... F-3
Consolidated Statements of Operations for the Year Ended August 31, 1993, 1994 and
1995 and for the Thirteen-week Period Ended November 26, 1994 and
November 25, 1995 (Unaudited).................................................... F-4
Consolidated Statements of Shareholders' Equity for the Year Ended August 31, 1993,
1994 and 1995 and for the Thirteen-week Period Ended November 25, 1995
(Unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the Year Ended August 31, 1993, 1994 and
1995 and for the Thirteen-week Period Ended November 26, 1994 and
November 25, 1995 (Unaudited).................................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE> 45
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
F-2
<PAGE> 46
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
AUGUST 31,
------------------------- NOVEMBER 25,
1994 1995 1995
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 1,114,162 $ 5,886,184 $ 2,276,648
Marketable securities......................... 3,008,344 2,340,592 5,712,936
Accounts receivable (less allowances for
doubtful accounts of $229,000 in 1994)...... 391,151 360,793 399,069
Unbilled costs and fees....................... 229,045 259,005 171,380
Prepaid expenses and other current assets..... 22,386 50,140 80,387
----------- ----------- -----------
Total current assets..................... 4,765,088 8,896,714 8,640,420
----------- ----------- -----------
Equipment and Leasehold Improvements, at Cost:
Laboratory and scientific equipment........... 752,482 1,464,987 1,923,642
Leasehold improvements........................ 1,446,236 1,597,069 1,607,271
Office equipment and furniture................ 532,656 903,946 1,184,688
Construction-in-progress...................... 173,186 206,103 64,233
----------- ----------- -----------
2,904,560 4,172,105 4,779,834
Less accumulated depreciation................. 2,120,146 2,451,632 2,576,123
----------- ----------- -----------
784,414 1,720,473 2,203,711
Restricted Cash.................................... 94,674 784,471 776,360
Other Assets....................................... 266,506 127,016 123,315
----------- ----------- -----------
$ 5,910,682 $11,528,674 $11,743,806
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $ 450,854 $ 409,282 $ 327,812
Accrued expenses.............................. 838,595 1,736,569 1,546,046
Deferred contract revenue..................... 37,991 774,048 947,201
Current maturities of capital lease
obligations................................. 193,388 478,033 681,463
----------- ----------- -----------
Total current liabilities................ 1,520,828 3,397,932 3,502,522
----------- ----------- -----------
Capital Lease Obligations, Net of Current
Maturities....................................... 165,299 892,239 1,169,712
----------- ----------- -----------
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 1,370,308
Series B restricted stock, $.10 par value--
Authorized--625,000 shares
Issued and outstanding--57,512 shares....... 5,751 5,751 5,751
Additional paid-in capital.................... 38,905,080 41,138,147 41,608,453
Accumulated deficit........................... (35,759,429) (35,174,225) (35,835,974)
Deferred compensation......................... (27,775) (1,817) --
Series B subscriptions receivable............. (76,966) (76,966) (76,966)
----------- ----------- -----------
Total shareholders' equity............... 4,224,555 7,238,503 7,071,572
----------- ----------- -----------
$ 5,910,682 $11,528,674 $11,743,806
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 47
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THIRTEEN-WEEK PERIOD
ENDED
YEAR ENDED AUGUST 31, -------------------------
----------------------------------------- NOVEMBER NOVEMBER
1993 1994 1995 26, 1994 25, 1995
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Government research.................. $ 5,021,975 $ 6,077,346 $ 7,014,280 $1,525,957 $1,365,893
Collaborative research, license fees
and royalties...................... 361,494 314,428 3,923,944 35,560 716,536
Interest income...................... 173,788 141,584 231,662 41,082 118,385
Product and service.................. 893,083 85,559 37,217 11,943 12,565
----------- ----------- ----------- ---------- ----------
Total revenues..................... 6,450,340 6,618,917 11,207,103 1,614,542 2,213,379
----------- ----------- ----------- ---------- ----------
Costs and Expenses:
Cost of government research.......... 4,527,595 5,144,071 6,414,148 1,325,798 1,282,178
Research and development............. 422,535 365,208 1,475,601 255,630 1,078,995
Selling, general and
administrative..................... 2,801,633 2,175,910 2,729,504 482,063 513,449
Cost of product and service.......... 1,543,407 12,446 2,646 1,053 506
Loss on sale of diagnostics
business........................... 637,027 -- -- -- --
----------- ----------- ----------- ---------- ----------
Total costs and expenses........... 9,932,197 7,697,635 10,621,899 2,064,544 2,875,128
----------- ----------- ----------- ---------- ----------
Net income (loss).................. $(3,481,857) $(1,078,718) $ 585,204 $ (450,002) $ (661,749)
=========== =========== =========== ========== ==========
Net Income (Loss) Per Common Share:
Primary.............................. $(0.33) $(0.10) $0.05 $(0.04) $(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 11,778,946 13,539,632
=========== =========== =========== ========== ==========
Fully diluted........................ -- -- 13,036,741 -- --
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 48
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
SERIES B
RESTRICTED
COMMON STOCK STOCK ADDITIONAL SERIES B TOTAL
---------------------- --------------- PAID-IN ACCUMULATED DEFERRED SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION RECEIVABLE EQUITY
---------- ---------- ------ ------ ----------- ------------ ------------ ---------- ------------
<S> <C> <C> <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) $ (76,966) $ 7,081,311
Exercise of
stock options. 29,000 2,900 -- -- 2,900 -- -- -- 5,800
Amortization
of deferred
compensation.. -- -- -- -- -- -- 71,079 -- 71,079
Cancellation
of stock
options....... -- -- -- -- (30,469) -- 30,469 -- --
Net loss....... -- -- -- -- -- (3,481,857) -- -- (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) (76,966) 3,676,333
Exercise of
stock options. 84,276 8,428 -- -- 138,779 -- -- -- 147,207
Amortization
of deferred
compensation.. -- -- -- -- -- -- 26,344 -- 26,344
Sale of common
stock and
warrants...... 1,001,504 100,150 -- -- 1,353,239 -- -- -- 1,453,389
Net loss....... -- -- -- -- -- (1,078,718) -- -- (1,078,718)
---------- --------- ------ ------ ----------- ------------ --------- ---------- -----------
Balance, August
31, 1994........ 11,778,946 1,177,894 57,512 5,751 38,905,080 (35,759,429) (27,775) (76,966) 4,224,555
Exercise of
stock options. 244,166 24,417 -- -- 394,982 -- -- -- 419,399
Amortization
of deferred
compensation.. -- -- -- -- -- -- 25,958 -- 25,958
Sale of common
stock and
warrants...... 1,453,023 145,302 -- -- 1,838,085 -- -- -- 1,983,387
Net loss....... -- -- -- -- -- 585,204 -- -- 585,204
---------- --------- ------ ------ ----------- ------------ --------- ---------- -----------
Balance, August
31, 1995........ 13,476,135 1,347,613 57,512 5,751 41,138,147 (35,174,225) (1,817) (76,966) 7,238,503
Exercise of
stock options
(unaudited)... 218,950 21,895 -- -- 453,586 -- -- -- 475,481
Amortization
of deferred
compensation
(unaudited).... -- -- -- -- -- -- 1,817 -- 1,817
Exercise of
warrants
(unaudited).... 8,000 800 -- -- 16,720 -- -- -- 17,520
Net loss
(unaudited)..... -- -- -- -- -- (661,749) -- -- (661,749)
---------- --------- ------ ------ ----------- ------------ --------- ---------- -----------
Balance, November
25, 1995
(unaudited)..... 13,703,085 $1,370,308 57,512 $5,751 $41,608,453 $(35,835,974) $ -- $ (76,966) $ 7,071,572
========== ========== ====== ====== =========== ============ ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 49
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THIRTEEN-WEEK PERIOD ENDED
YEAR ENDED AUGUST 31, --------------------------
-------------------------------------- NOVEMBER 26, NOVEMBER 25,
1993 1994 1995 1994 1995
----------- ----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................. $(3,481,857) $(1,078,718) $ 585,204 $ (450,002) $ (661,749)
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 65,596 132,375
Deferred compensation........................ 49,306 26,344 25,958 6,489 1,817
Changes in assets and liabilities--
Accounts receivable........................ (141,691) 223,233 30,358 (103,215) (38,276)
Unbilled costs and fees.................... 25,284 (86,281) (29,960) 59,672 87,625
Prepaid expenses and other current
assets................................... (32,862) 70,727 (27,754) (20,140) (30,247)
Accounts payable........................... (127,331) 176,178 124,568 36,636 (81,470)
Accrued expenses........................... (197,305) (128,912) 897,974 (49,445) (119,398)
Deferred contract revenue.................. (308,537) (47,289) 736,057 (11,740) 173,153
----------- ----------- ---------- ----------- -----------
Total adjustments........................ 229,482 439,889 2,107,431 (16,147) 125,579
----------- ----------- ---------- ----------- -----------
Net cash provided by (used in) operating
activities............................... (3,252,375) (638,829) 2,692,635 (466,149) (536,170)
----------- ----------- ---------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of marketable securities............. (5,422,374) (4,985,970) (5,332,248) (1,000,544) (3,872,344)
Proceeds from the sale of marketable
securities................................... 3,400,000 4,000,000 6,000,000 3,000,000 500,000
(Increase) decrease in restricted cash......... -- (94,674) (689,797) (58,886) 8,111
Purchases of equipment and leasehold
improvements................................. (158,657) (191,907) (97,016) (80,154) (15,876)
(Increase) decrease in other assets............ -- (277,398) 124,687 (8,278) --
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 1,852,138 (3,380,109)
----------- ----------- ---------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and
warrants..................................... -- 1,453,389 1,983,387 -- 17,520
Proceeds from exercise of stock options........ 5,800 147,207 419,399 -- 404,356
Payments on capital lease obligations.......... (456,399) (190,588) (329,025) (63,343) (115,133)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities............................... (450,599) 1,410,008 2,073,761 (63,343) 306,743
----------- ----------- ---------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (5,251,208) (778,770) 4,772,022 1,322,646 (3,609,536)
Cash and Cash Equivalents, Beginning of Period..... 7,144,140 1,892,932 1,114,162 1,114,162 5,886,184
----------- ----------- ---------- ----------- -----------
Cash and Cash Equivalents, End of Period........... $ 1,892,932 $ 1,114,162 $5,886,184 $ 2,436,808 $ 2,276,648
=========== =========== ========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid during period.................... $ 44,100 $ 19,482 $ 85,759 $ 10,938 $ 40,740
=========== =========== ========== =========== ===========
Supplemental Disclosure of Noncash Investing
Activities:
Property and equipment acquired under capital
leases....................................... $ 318,151 $ 264,379 $1,340,611 $ 333,948 $ 591,853
=========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 50
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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) Interim Financial Statements
The accompanying consolidated balance sheet as of November 25, 1995 and the
consolidated statements of operations and cash flows for the 13-week period
ended November 26, 1994 and November 25, 1995 and the consolidated statement of
shareholders' equity for the 13-week period ended November 25, 1995 are
unaudited but, in the opinion of management, have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of results for the interim periods. The results of operations for
the 13-week period ended November 25, 1995 are not necessarily indicative of
results to be expected for the fiscal year ending August 31, 1996.
(b) 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.
(c) 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.
(d) 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.
(e) 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> 51
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
<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%
13-week Period Ended:
November 26, 1994.................... 1 95%
November 25, 1995.................... 2 31% and 62%
</TABLE>
(f) 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.
(g) 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 to nine
months. The Company has $94,674, $784,471 and $776,360 in restricted cash at
August 31, 1994 and 1995 and November 25, 1995, respectively, 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> 52
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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,
--------------------- NOVEMBER 25,
1994 1995 1995
-------- -------- ------------
<S> <C> <C> <C>
Intangible assets, net of
accumulated amortization of
$10,892, $25,695 and $29,396,
respectively...................... $105,525 $ 48,110 $ 44,409
Deposits............................ 60,981 78,906 78,906
Other............................... 100,000 -- --
-------- -------- --------
$266,506 $127,016 $123,315
======== ======== ========
</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> 53
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) ACCRUED EXPENSES
<TABLE>
Accrued expenses consist of the following:
<CAPTION>
AUGUST 31,
--------------------- NOVEMBER 25,
1994 1995 1995
-------- ---------- ------------
<S> <C> <C> <C>
Payroll and related expenses........... $330,654 $ 630,290 $ 538,003
Severance.............................. -- 326,723 239,768
Employee relocation.................... -- 230,468 196,341
License and other fees................. 227,391 283,971 308,971
All other.............................. 280,550 265,117 262,963
-------- ---------- ----------
$838,595 $1,736,569 $1,546,046
======== ========== ==========
</TABLE>
(6) COMMITMENTS
(a) Lease Commitments
<TABLE>
At August 31, 1995, the Company has operating leases for office and
laboratory facilities, the last of which expires on July 31, 1999. Minimum lease
payments under the leases at August 31, 1995 are as follows:
<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, $411,000, $104,000 and
$102,000 in the year ended August 31, 1993, 1994 and 1995 and for the 13-week
period ended November 26, 1994 and November 25, 1995, respectively. Rental
expense for the year ended August 31, 1994 was offset by approximately $100,000
of sublease rental income.
(b) Employment Agreements
The Company has employment agreements with certain executive officers which
provide for bonuses 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 $4,000,000 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 $1,400,000 available under these
various capital lease agreements at November 25, 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> 54
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
<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>
Subsequent to August 31, 1995, the Company entered into approximately
$592,000 of additional capital lease obligations under the capital lease line
arrangements discussed above.
(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. On November 16, 1995, the
Board of Directors, subject to shareholder approval, adopted the 1995 Stock
Option Plan (the 1995 Plan) covering 750,000 options. The purchase price and
vesting schedule applicable to each option grant are determined by the stock
option and compensation committee of the Board of Directors. Under separate
agreements not covered by any plan, the Company has granted 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> 55
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
$71,000, $26,000, $26,000, $6,000 and $2,000 for the year ended August 31, 1993,
1994 and 1995 and for the 13-week period ended November 26, 1994 and November
25, 1995, respectively.
<TABLE>
There were 750,000 common shares available for future grants, subject to shareholder approval, at November 25, 1995 under
the 1995 Plan. The following is a summary of all stock option activity:
<CAPTION>
THIRTEEN-WEEK
YEARS ENDED AUGUST 31, PERIOD ENDED
--------------------------------------------- NOVEMBER 25,
1993 1994 1995 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Options shares--
Granted............................. 1,791,350 970,100 355,275 139,275
Exercised........................... (29,000) (84,276) (244,166) (218,950)
Canceled............................ (157,798) (108,288) (70,624) (625)
------------- ------------ ------------ ------------
Outstanding......................... 2,722,166 3,499,702 3,540,187 3,459,887
============= ============ ============ ============
Price range of outstanding options,
end of period....................... $.20 - $11.94 $.20 - $8.00 $.20 - $8.00 $.20 - $8.00
============= ============ ============ ============
Price range of exercised options
during the period................... $.20 $.88 - $2.94 $.81 - $4.00 $.20 - $6.00
============= ============ ============ ============
</TABLE>
On November 16, 1995, the Board of Directors of the Company granted,
subject to shareholder approval, nonqualified stock options outside the 1995
Plan for the purchase of an aggregate of 80,000 shares of common stock to four
members of the Board of Directors. The options were granted with an exercise
price of $7.25 per share, the fair market value on the date of grant and vest at
the end of five years or earlier as follows: (i) 50% will become fully vested if
the average closing price of the stock for a period of 10 out of 20 consecutive
trading days is $9.425 or higher; and (ii) an additional 50% will become fully
vested if the average closing price for the stock for a period of 10 out of 20
consecutive trading days is $11.60 or higher.
On December 21, 1995, the Board of Directors of the Company granted,
subject to shareholder approval, nonqualified stock options outside the 1995
Plan for the purchase of 300,000 shares of common stock to the Company's Chief
Executive Officer. The options were granted with an exercise price of $8.87 per
share, the fair market value on the date of grant and vest at the end of five
years or earlier as follows: (i) 75,000 vest if the average closing price of the
common stock for a period of 10 out of 20 consecutive trading days is $10.25 or
higher; (ii) 100,000 vest if the average closing price of common stock for a
period of 10 out of 20 consecutive trading days is $12.25 or higher and (iii)
125,000 vest if the average closing price of the common stock for a period of 10
out of 20 consecutive trading days is $14.25 or higher.
On January 2, 1996, the Board of Directors of the Company granted, subject
to shareholder approval of the 1995 Plan, stock options for the purchase of
60,000 shares of common stock to an employee. The options were granted with an
exercise price of $9.56 per share, the fair market value on the date of grant
and vest over a four year period.
In connection with 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, $43,533, $10,305 and $12,163 to the Plan for the years ended
August 31, 1993, 1994 and 1995 and for the 13-week period ended November 26,
1994 and November 25, 1995, respectively.
F-12
<PAGE> 56
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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. In addition, in the
13-week period ended November 25, 1995, the Company recorded approximately
$692,000 of collaborative research revenue under this agreement.
(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 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 above) in research funding and
milestone payments.
F-13
<PAGE> 57
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds 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, 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.
(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> 58
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................... 2
Incorporation of Certain Documents by
Reference............................... 2
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 15
Price Range of Common Stock............... 15
Dividend Policy........................... 16
Capitalization............................ 16
Selected Consolidated Financial Data...... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18
Business.................................. 23
Management................................ 40
Underwriting.............................. 42
Legal Matters............................. 43
Experts................................... 43
Available Information..................... 43
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
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3,000,000 SHARES
[GENOME THERAPEUTICS CORPORATION LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OPPENHEIMER & CO., INC.
FEBRUARY 15, 1996
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