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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: November 29, 1997
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK 18,212,619
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$.10 PAR VALUE Outstanding January 9, 1998
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Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
PAGE
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Part I
Financial Information (Unaudited) :
Consolidated Condensed Balance Sheets as of 3
August 31, 1997 and November 29, 1997
Consolidated Condensed Statements of Operations 4
for the 13 week period ended November 30, 1996
and November 29,1997
Consolidated Statements of Cash Flows for the 5
13 week period ended November 30, 1996
and November 29,1997
Notes to Consolidated Condensed Financial 6-11
Statements for the 13 week period ended
November 30, 1996 and November 29,1997
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12-17
Part II
Other Information:
Other Information 18
Signature 19
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
August 31, November 29,
1997 1997
- ---------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,602,698 $ 9,422,246
Marketable securities 34,814,601 30,197,691
Interest receivable 1,280,611 1,314,268
Accounts receivable 55,142 11,940
Unbilled costs and fees 140,320 137,736
Note receivable from officer 160,000 160,000
Prepaid expenses and other current assets 408,240 742,701
----------- -----------
Total current assets 45,461,612 41,986,582
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 11,855,630 12,561,042
Leasehold improvements 1,964,981 1,830,864
Equipment and furniture 792,342 822,495
Construction-in-progress 1,111,526 3,952,142
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15,724,479 19,166,543
Less accumulated depreciation
and amortization 5,352,999 6,036,985
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10,371,480 13,129,558
Restricted cash 301,500 301,500
Long-term marketable securities 4,124,798 6,773,731
Other assets 428,989 451,500
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Total assets $60,688,379 $62,642,871
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,288,391 $ 2,074,063
Accrued expenses 2,373,788 2,851,558
Deferred revenue 2,335,695 3,523,794
Current maturities of long-term obligations 3,595,120 3,995,034
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Total current liabilities 9,592,994 12,444,449
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Capital lease obligations, net of current maturities 7,149,188 8,691,885
Shareholders' equity 43,946,197 41,506,537
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Total liabilities and shareholders' equity $60,688,379 $62,642,871
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Thirteen Weeks Ended
November 30, November 29,
1996 1997
(Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Collaborative research, licenses, subscription
fees and royalties $ 2,041,037 $ 3,995,942
Government research 1,974,410 261,371
Interest income 773,080 679,491
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Total revenues 4,788,527 4,936,804
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Costs and Expenses:
Research and development 3,878,290 6,630,915
Cost of government research 1,847,646 261,371
General, selling and administrative 731,031 1,022,137
Interest expense 125,926 249,611
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Total costs and expenses 6,582,893 8,164,034
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Net loss $(1,794,366) $(3,227,230)
=========== ===========
Net loss per common share $ (0.10) $ (0.18)
=========== ==========
Weighted average number of
common shares outstanding 17,476,170 18,055,877
=========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
November 30, November 29,
1996 1997
(Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,794,366) $(3,227,230)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 437,913 756,377
Loss on disposal of fixed assets 0 88,508
Deferred compensation 18,525 21,687
Changes in assets and liabilities:
Interest receivable 67,647 (33,657)
Accounts receivable 1,075,691 43,202
Unbilled costs and fees (163,814) 2,584
Prepaid expenses and other current assets 118,072 (334,461)
Accounts payable (415,754) 785,672
Accrued expenses 305,150 477,770
Deferred contract revenue (93,952) 1,188,099
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Total adjustments 1,349,478 2,995,781
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Net cash used in operating activities (444,888) (231,449)
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Cash Flows from Investing Activities:
Purchases of marketable securities (1,070,398) (6,252,023)
Proceeds from sale of marketable securities 1,800,000 8,220,000
Purchases of equipment and leasehold improvements (18,384) (2,722,862)
Decrease in other assets 10,235 (22,511)
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Net cash provided by (used in) investing activities 721,453 (777,396)
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Cash Flows from Financing Activities:
Proceeds from exercise of stock options and warrants 162,941 765,882
Proceeds from long-term obligations 0 2,000,000
Payments on long-term obligations (669,161) (937,489)
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Net cash provided by (used in) financing activities (506,220) 1,828,393
----------- -----------
Net Increase in Cash and Cash Equivalents (229,655) 819,548
Cash and Cash Equivalents, at beginning of period 10,679,287 8,602,698
----------- -----------
Cash and Cash Equivalents, at end of period $10,449,632 $ 9,422,246
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $ 14,400 $ 6,750
=========== ===========
Interest paid during period $ 125,926 $ 249,611
=========== ===========
Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital lease obligations $ 1,876,334 $ 880,101
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
unaudited consolidated condensed 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 interim period results. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results of operations for the 13 week period ended November 29, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying consolidated condensed financial statements should be read in
conjunction with the Company's Form 10-K which was filed with the Securities and
Exchange Commission on November 28, 1997.
2. REVENUE RECOGNITION
Research and contract revenues are derived from collaborative agreements
with pharmaceutical companies, as well as government research grants and
contract arrangements. Research revenues are recognized as earned under
government grants, which consist of cost-plus-fixed-fee contracts and
fixed-price contracts. Revenues are recognized under collaborative agreements as
earned. Milestone payments from collaborative research and development
arrangements are recognized when they are achieved. License fees are recognized
as earned. Unbilled costs and fees represent revenue recognized prior to
billing. Deferred revenue represents cash amounts received prior to revenue
recognition.
Subscription fee revenues from the PathoGenome(TM) database are recognized
ratably over the access period of the subscription agreement.
3. NET LOSS PER COMMON SHARE
Net loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the period.
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
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This statement is effective for fiscal years ending after December 15, 1997 and
early adoption is not permitted. When adopted, the statement will require
restatement of prior years' earnings per share. The Company will adopt this
statement for this fiscal year ending August 31, 1998. For the 13 week periods
ended November 30, 1996 and November 29, 1997, basic loss per share would have
been $(.10) and $(.18), respectively. Fully diluted loss per share would have
been the same as basic loss per share for the same periods.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At November 29, 1997, the Company's cash equivalents and
marketable securities are classified as held-to-maturity, as the Company has the
positive intent and ability to hold these securities to maturity. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Marketable securities are investment securities with
original maturities of greater than three months. Cash equivalents are carried
at cost, which approximates market value, and consist of money market funds,
repurchase agreements and debt securities. Marketable securities are recorded at
amortized cost, which approximates market value. The Company has not recorded
any realized holding gains or losses on its marketable securities. Marketable
securities consist of commercial paper and U.S. Government debt securities. The
Company has $301,500 in restricted cash at August 31, 1997 and November 29, 1997
in connection with certain long-term obligations (See Note 6).
5. 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.
6. LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment line of credit under
which it can finance up to $6,000,000 of laboratory, computer and office
equipment. Borrowings are payable in 48 monthly installments at a variable
interest rate of prime (8.5% as of November 29, 1997) plus one-quarter of one
percent. At any time during the term of this agreement, the Company may elect to
convert to a fixed rate loan at the prevailing interest rate. The Company is
required to maintain certain restricted cash balances, as defined (see Note 4).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage. The Company has approximately $2,040,000 available under this
equipment line of credit at November 29, 1997.
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On July 31, 1997, the Company entered into a financing arrangement under which
it can finance up to $6,000,000 of laboratory and office renovations at its
Beaver Street facility. The principal amount of the loan will be repaid over 48
consecutive months commencing July 1, 1998 at the prevailing 12 month Eurodollar
rate (12-month Eurodollar rate was 6.125% as of November 29, 1997) plus one and
a half percent. The Company is required to maintain certain financial ratios
pertaining to minimum cash balances, debt to net worth and tangible net worth.
At November 29, 1997, the Company borrowed $4,500,000 under this arrangement; of
which approximately $983,000 has not been utilized to finance the Company's
purchases, and is included in cash and cash equivalents. The Company has
approximately $1,483,000 available under this financing arrangement at November
29, 1997. The Company is required to maintain certain restricted cash balances,
upon the occurrence of certain events, as defined.
The Company had entered into other capital lease arrangements under which it
financed approximately $9,725,000 of certain laboratory, computer and office
equipment. These leases are payable in 36 monthly installments. The interest
rates range from 7.52% to 11.42%. The Company is required to maintain certain
restricted cash balances, as defined (see Note 4). In addition, the Company is
required to maintain certain financial ratios pertaining to minimum cash
balances, tangible net worth, debt to tangible net worth and debt service
coverage. The Company has approximately $511,000 available under one of these
capital lease agreements at November 29, 1997.
7. COLLABORATIVE AGREEMENTS
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 Company's
Staph aureus genomic database. The Company is sequencing to identify new gene
targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic sequence
databases. The Company also granted Schering-Plough a nonexclusive license to
use the Company's bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under the
agreement and other genomic databases Schering-Plough develops or acquires. The
Company also agreed to undertake certain research efforts to identify
bacteria-specific genes essential to microbial survival and to develop
biological assays to be used by Schering-Plough in screening natural product and
compound libraries to identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough has agreed to pay the Company a minimum of
$13.3 million for an up-front payment, research funding and milestone payments.
Subject to the achievement of additional product development milestones and
Schering-Plough's election to extend the research collaboration, Schering-Plough
has agreed to pay the Company up to an additional $30.2 million in research
funding and milestone payments.
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The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds that are targeted against,
as their primary indication, Staph. aureus, which 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.
For the 13 week period ended November 29, 1997, the Company recorded revenue of
$1,336,000 under this agreement, which consisted of sponsored research funding
and milestone payments . For the 13 week period ended November 30, 1996, the
Company recorded revenue of $817,000 under this agreement, which consisted of
sponsored research funding. The Company recorded $181,000 and $18,000 as
deferred revenue at November 29, 1997 and August 31, 1997, respectively.
In December 1996, the Company entered into its second research collaboration and
license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under the agreement, Schering-Plough has agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In addition, upon completion of certain scientific developments, Schering-Plough
will make milestone payments to the Company, as well as pay royalties to the
Company based on sales of therapeutics product developed from this
collaboration. If all milestones are met and the research program continues for
its full term, total payments to the Company will approximate $67 million,
excluding royalties. Of the total potential payments, approximately $22.5
million represents license fees and research payments, and $44.5 million
represents milestone payments based on achievement of research and product
development milestones.
For the 13 week period ended November 29 1997, the Company recorded revenue of
$1,152,000 under this agreement, which consisted primarily of sponsored research
and
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subcontract activity. The Company recorded $1,158,000 as deferred revenue at
November 29, 1997.
In September 1997, the Company entered into its third research collaboration and
license agreement with Schering-Plough to use genomics to discover and develop
new pharmaceutical products for treating fungal infections.
Under the agreement, the Company will employ its bioinformatics, high-throughput
sequencing and functional genomics capabilities to identify and validate genes
and associated proteins as drug discovery targets that can be utilized by
Schering-Plough to develop novel antifungal treatments. Schering-Plough will
receive exclusive access to the genomic information developed in the
collaboration related to two fungal pathogens, Candida albicans and Aspergillus
fumigatus . Schering-Plough will also receive exclusive worldwide right to make,
use and sell products based on the technology developed in the course of the
research program. In return, Schering-Plough has agreed to fund a research
program for a minimum number of years with an option to extend. If all
milestones are met and the research program continues for its full term, total
payments to the Company will approximate $30.7 million, excluding royalties. Of
the total potential payment, approximately $7.7 million represents license fees
and research payments and $23 million represents milestone payments based on
achievement of research and product development milestones. Additionally, the
Company entered into a database subscription agreement with Schering-Plough (See
Database Subscriptions).
For the 13 week period ended November 29, 1997, the Company recorded revenue of
$436,000 under this agreement, which consisted of sponsored research funding.
The Company recorded $437,000 as deferred revenue at November 29, 1997.
ASTRA AB
In August 1995, the Company entered into a collaboration agreement with Astra
Hassle AB ("Astra") to develop pharmaceutical, vaccine and diagnostic products
effective against gastrointestinal infection or any other disease caused by H.
pylori. The Company granted Astra exclusive access to the Company's H. pylori
genomic sequence database and exclusive worldwide rights to make, use and sell
products based on the Company's H. pylori technology. The agreement also
provides for a four-year research collaboration to further develop and annotate
the Company's H. pylori genomic sequence database, identify therapeutic and
vaccine targets and develop appropriate biological assays. This research is
being directed by a Joint Management Committee and a Joint Research Committee,
each consisting of representative from both parties.
Under this agreement, Astra agreed to pay the Company a minimum of approximately
$11 million and, subject to the achievement of certain product development
milestones, up to approximately $22 million ( and possibly a greater amount if
more than one product is developed under the agreement) in license fees, expense
allowances, research funding and milestone payments. Of such fees, $500,000 is
credited against any future royalties payable to the Company by Astra under the
agreement. Astra is obligated to provide
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funding for the research program for a minimum of two and one-half years. On
July 21, 1997, Astra elected to extend the research program to at least
September 1998.
The Company will also be entitled to receive royalties on Astra's sale of any
products (i) protected by claims of patents licensed exclusively to Astra by the
Company pursuant to the agreement, or (ii) the discovery of which was enabled in
a significant manner by the genomic database licensed to Astra by the Company.
The Company has the right, under certain circumstances, to convert Astra's
license to a nonexclusive license in the event Astra is not actively pursuing
commercialization of the technology.
For the 13 week period ended November 29, 1997, the Company recorded revenue of
$710,000 under this agreement, which consisted of sponsored research funding and
a milestone payment. For the 13 week period ended November 30, 1996, the Company
recorded revenue of $606,000 under this agreement, which consisted of sponsored
research funding. The Company recorded $536,000 and $503,000 as deferred revenue
at November 29, 1997 and August 31, 1997, respectively.
8. DATABASE SUBSCRIPTIONS
In May 1997, the Company entered into a license agreement with Bayer AG,
("Bayer") to provide Bayer with a nonexclusive access to the Company's
proprietary genome sequence database, PathoGenome(TM) and associated information
relating to microbial organisms. The subscription agreement calls for the
Company to provide Bayer with periodic data updates, analysis tools and software
support. Under the agreement, Bayer has agreed to pay a license fee, annual
subscription fees and royalties on any molecules developed as a result of access
to the information provided by the PathoGenome(TM) database. The Company retains
all rights associated with protein therapeutic, diagnostic and vaccine use of
bacterial genes or gene products.
In September 1997, the Company entered into license agreements with
Bristol-Myers Squibb and Schering-Plough to provide both companies with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenome(TM) and associated information relating to microbial organisms. The
subscription agreements call for the Company to provide both Bristol-Myers
Squibb and Schering-Plough with periodic data updates, analysis tools and
software support. Under the agreements, Bristol-Myers Squibb and Schering-Plough
have agreed to pay annual subscription fees and royalties on any molecules
developed as a result of access to the information provided by the
PathoGenome(TM) database. The Company retains all rights associated with protein
therapeutic, diagnostic and vaccine use of bacterial genes or gene products.
For the 13 week period ended November 29, 1997, the Company recognized revenue
of $375,000 under these agreements, which consisted of subscription fees. The
Company recorded deferred revenue of $1,208,000 under these agreements at
November 29, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("the Company") is a leader in the field of
genomics-based drug discovery--the identification and functional
characterization of genes. The Company has over ten years of experience in
positional cloning, having served as one of the primary researchers under genome
programs sponsored by the United States government, and has developed numerous
techniques and tools that are widely used in this field. The Company's
commercial gene discovery strategy capitalizes on its pioneering work in
genomics by applying its high-throughput sequencing technology and positional
cloning, its experience and skills in functional genomics and its bioinformatics
capabilities. The two areas of focus are: the discovery and characterization of
(i) genes of pathogens that are responsible for many serious diseases and (ii)
human disease genes. The Company believes that its genomic discoveries may lead
to the development of novel therapeutics, vaccines, and diagnostic products by
it and its strategic partners. The Company has entered into several corporate
collaborations in connection with its pathogen and human gene discovery
programs.
The Company does not anticipate revenues from product sales on a sustained basis
until such time that products based on the Company's research efforts are
commercialized, if any. The Company's product development strategy is to form
collaborations with pharmaceutical and biotechnology companies generating
revenues from licensing fees, sponsored research and milestone payments.
Additionally, the Company will sell nonexclusive access to its proprietary
genome sequence database, PathoGenome(TM). These collaborations are expected to
result in the discovery and commercialization of novel therapeutics, vaccines
and diagnostics, generating royalty payments to the Company from product sales
downstream. In order for a product to be commercialized based on the Company's
research, it will be necessary for the collaborators to conduct preclinical
tests and clinical trials, obtain regulatory clearances and make manufacturing,
distribution and marketing arrangements. Accordingly, the Company does not
expect to receive royalties based upon product revenues for many years.
For the past several years, the Company's primary sources of revenue have been
government research grants and contracts and collaborative agreements with
pharmaceutical company partners. As of November 29, 1997, the Company had signed
four such collaborative agreements. The Company entered into corporate
collaborations with Astra Hassle AB ("Astra") relating to H. Pylori in August
1995 and with Schering Corporation and Schering-Plough, Ltd. (collectively,
"Schering-Plough") in December 1995 providing for the use by Schering-Plough of
the Company's Staph. aureus genomic database to identify new gene targets for
the development of novel antibiotics. In December 1996, the Company entered into
its second research collaboration with Schering-Plough to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals for treating asthma. In September
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1997, the Company entered into its third research collaboration with
Schering-Plough to use genomics to discover and develop new pharmaceutical
products for treating fungal infections.
In May 1997, the Company introduced its proprietary genome sequence database,
PathoGenome(TM) and sold its first subscription to Bayer AG ("Bayer"). Under the
agreement, Bayer will receive nonexclusive access to the Company's
PathoGenome(TM) database and associated information relating to microbial
organisms. In September 1997, the Company sold two additional subscriptions to
its PathoGenomeTM database to Bristol-Myers Squibb and Schering-Plough.
As of November 29, 1997, the Company had outstanding approximately $2,707,000 of
government research grants and contracts under which services were yet to be
performed. These grants and contracts call for services to be performed over the
next 27 months. The Company's government research grants and contracts are
typically funded annually and are subject to appropriation by the United States
Congress each year. Funding may be discontinued or reduced at any time by
Congress. As of November 29, 1997, the funded portion of these grants and
contracts was $2,155,000. For the 13 week periods ended November 30, 1996 and
November 29, 1997, revenue recognized pursuant to United States government
research grants and research contracts accounted for approximately 41% and 5%,
respectively, of the Company's total revenues. The Company expects government
revenue, in absolute dollars and as a percentage of total revenues, to continue
to decline in the future periods as the Company focuses its resources towards
company-sponsored research and development programs in order to pursue its
strategy of attaining additional corporate partnerships with the goal of
advancing the Company's genomic technologies and gene discovery programs and of
obtaining revenues sufficient to cover a portion of the Company's cash
requirements. There can be no assurance that the Company will be able to pursue
this strategy successfully.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $47,783,000 at November 29, 1997. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under existing and new collaborative agreements and government research
grants and contracts. The Company is subject to risks common to companies in its
industry including unproven technology and business strategy, availability of,
and competition for, family resources, reliance upon collaborative partners and
others, history of operating losses, need for future capital, competition,
patent and proprietary rights, dependence on key personnel, uncertainty of
regulatory approval, uncertainty of pharmaceutical pricing, health care reform
and related matters, product liability exposure, and volatility of the Company's
stock price.
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RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 30, 1996 AND NOVEMBER 29, 1997
REVENUE
Total revenues increased 3% from $4,789,000 for the 13 week period ended
November 30, 1996 to $4,937,000 for the 13 week period ended November 29, 1997.
Collaborative research, licenses, subscription fees and royalties increased 96%
from $2,041,000 for the 13 week period ended November 30, 1996 to $3,996,000 for
the 13 week period ended November 29, 1997. The increase in collaborative
research, licenses, subscription fees and royalties was primarily attributable
to increased revenue recognized under the Company's collaborative research
agreements with Astra and Schering-Plough consisting of milestone payments and
sponsored research funding. The increase in collaborative research, licenses,
subscription fees and royalties was also attributable to subscription fee
revenue earned in fiscal 1998 under the Company's license agreements with Bayer,
Bristol-Myers Squibb and Schering-Plough providing each company with
nonexclusive access to the Company's proprietary genome sequence database,
PathoGenome(TM) and associated information relating to microbial organisms.
Government research revenue decreased 87% from $1,974,000 for the 13 week period
ended November 30, 1996 to $261,000 for the 13 week period ended November 29,
1997. The decrease in government research revenue was primarily attributable to
a shift in personnel from government research programs to company-sponsored
research and development programs, in particular, the microbial genetic database
program, PathoGenome(TM). Revenue derived from government research grants and
contracts is generally based upon direct cost such as labor, laboratory
supplies, as well as an allocation for reimbursement of a portion of overhead
expenses. The Company expects government research revenue to continue to
decrease, in absolute dollars and as a percentage of total revenues, in the
future periods as the Company continues to focus its resources in
company-sponsored research and development programs in order to obtain
additional corporate partnerships.
Interest income decreased 12% from $773,000 for the 13 week period ended
November 30, 1996 to $679,000 for the 13 week period ended November 29, 1997
reflecting a decrease in funds available for investment.
COST AND EXPENSES
Total cost and expenses increased 24% from $6,583,000 for the 13 week period
ended November 30, 1996 to $8,164,000 for the 13 week period ended November 29,
1997. Research and development expense, which includes company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators increased 71% from $3,878,000 for the 13 week
period ended November 30, 1996 to $6,631,000 for the 13 week period ended
November 29, 1997. The increase in research and development expenses was
primarily attributable to increases
14
<PAGE> 15
in both personnel and laboratory expenses associated with the Company's
expansion of its pathogen, microbial genetic database, human gene discovery and
functional genomics research programs. The increase consisted primarily of
increases in payroll and related expenses, laboratory supplies and overhead
expenses. The Company expects to continue to increase research and development
expenditures in the future periods, particularly with respect to its fungal,
osteoporosis, atherosclerosis, oncology and functional genomic projects.
The cost of government research decreased 86% from $1,848,000 for the 13 week
period ended November 30, 1996 to $261,000 for the 13 week period ended November
29, 1997. The decrease in cost of government research was primarily attributable
to the decrease in government research revenues. Cost of government research, as
a percentage of government research revenue, was 94% and 100% for the 13 week
periods ended November 30, 1996 and November 29, 1997, respectively.
Selling, general and administrative expenses increased 40% from $731,000 for the
13 week period ended November 30, 1996 to $1,022,000 for the 13 week period
ended November 29, 1997. The increase in selling, general and administrative
expenses was primarily due to increases in payroll and related expenses and
legal fees. The increase in legal fees was directly attributable to the
Company's new agreements with Schering-Plough and Bristol-Myers Squibb.
Interest expense increased 98% from $126,000 for the 13 week period ended
November 30, 1996 to $250,000 for the 13 week period ended November 29, 1997.
The increase in interest expense for was attributable to increases in the
Company's outstanding balance under its long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been revenue
from government research grants and contracts, revenue from collaborative
research agreements, borrowings under equipment lending facilities and capital
leases and proceeds from sale of equity securities.
In fiscal 1995, the Company received net proceeds of approximately $2,403,000
from the private sale of common stock and warrants and the exercise of stock
options. In fiscal 1996, the Company closed a public offering of 3,000,000
shares of its common stock at $13.00 per share, resulting in proceeds of
approximately $36,007,000, net of issuance costs. The Company also sold an
additional 450,000 shares of its common stock in the underwriter's
over-allotment, resulting in proceeds of $5,515,000, net of issuance costs.
15
<PAGE> 16
As of November 29, 1997, the Company had cash, cash equivalents, restricted cash
and long and short-term marketable securities of approximately $46,695,000. The
Company has various arrangements under which it can finance certain office and
laboratory equipment and leasehold improvements. Under these arrangements, the
Company is required to maintain certain financial ratios, including minimum
levels of tangible net worth, total indebtedness to tangible net worth, maximum
loss, debt service coverage and minimum restricted cash balances. At November
29, 1997, the Company had approximately $4,034,000 available under these
arrangements for future borrowings and had an outstanding balance of
approximately $12,687,000 which is repayable over the five year period ending
August 2002. Under one of these arrangements, the Company received a $4,500,000
advance to finance office and laboratory renovations at its Beaver Street
facility of which approximately $983,000 had not been expended at November 29,
1997.
The Company's operating activities used cash of approximately $445,000 and
$231,000 for the thirteen week period ended November 30, 1996 and November 29,
1997, respectively, primarily to fund operating losses.
The Company's investing activities provided cash of approximately $721,000 for
the 13 week period ended November 30, 1996 from the sale of marketable
securities, partially offset by purchases of marketable securities, and property
and equipment. The Company's investing activities for the 13 week period ended
November 29, 1997 used cash of approximately $777,000 for the purchases of
equipment and leasehold improvements, purchases of marketable securities,
partially offset by the sale of marketable securities.
Financing activities used cash of approximately $506,000 for the 13 week period
ended November 30, 1996 primarily for payments of capital lease obligations,
partially offset by the exercise of stock options. Financing activities provided
cash of approximately $1,828,000 for the 13 week period ended November 29 1997
primarily from proceeds from long-term obligations, sale of the exercise of
stock options, net of payments of long-term obligations.
Capital expenditures totaled $933,000 for the 13 week period ended November 29,
1997 consisting of laboratory, computer and office equipment. The Company
currently estimates that it will acquire an additional $4,067,000 in capital
equipment in fiscal 1998 consisting of primarily computer and laboratory
equipment which it intends to finance under existing and new financing
arrangements. The Company is also in the process of consolidating its operations
at its Beaver Street facility at an estimated cost of $6,500,000 which consists
of office and laboratory renovations. As of November 29, 1997, the Company had
incurred approximately $3,517,000 of capital improvements consisting of $847,000
during fiscal 1997 and $2,670,000 during the 13 week period ended November 29,
1997. The Company plans to spend an additional $2,983,000 during fiscal 1998 on
this renovation project. The Company plans to utilize existing and new capital
lease and equipment financing arrangements to finance substantially all of these
capital improvements.
16
<PAGE> 17
At August 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $49,065,000 and $1,128,000, respectively. These
losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, in future years, if any. These losses and
tax credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
ownership interests of significant shareholders over a three-year period in
excess of 50%. The Company does not believe it has experienced a cumulative
ownership change in excess of 50%. However, there can be no assurance that
ownership changes will not occur in future periods which will limit the
Company's ability to utilize the losses and tax credits.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There is no assurance,
however, that changes in the Company's plans or events affecting the Company's
operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing and
expects additional funding through collaborative or other arrangements with
corporate partners. There can be no assurance, however, that additional
financing will be available from any of these sources or will be available on
terms acceptable to the Company.
Statements in this Form 10Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment, described more fully in the Company's
Annual Report on Forms 10-K for the year ended August 31, 1997, filed with the
Securities and Exchange Commission.
17
<PAGE> 18
PART II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
None.
b) REPORTS ON FORM 8-K
None.
18
<PAGE> 19
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ Fenel M. Eloi
---------------------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: January 12, 1998
19
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