<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENOME THERAPEUTICS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2297484
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
100 BEAVER STREET
WALTHAM, MA 02453
(781)-398-2300
(Address, of principal executive offices, including zip code)
PHILIP V. HOLBERTON
CHIEF FINANCIAL OFFICER
GENOME THERAPEUTICS CORP.
100 BEAVER STREET
WALTHAM, MA 02453
(781)-398-2300
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
Please send copies of all communications to:
<TABLE>
<S> <C>
PATRICK O'BRIEN MICHAEL LYTTON
DAVID C. CHAPIN MARC A. RUBENSTEIN
ROPES & GRAY PALMER & DODGE LLP
ONE INTERNATIONAL PLACE ONE BEACON STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MA 02108
(617) 951-7000 (617) 573-0100
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after the effectiveness of the Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement under the earlier effective
registration statement for the same offering. / /
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock--$.10 Par Value 3,450,000 Shares $41.72 $143,934,000 $37,999
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. The maximum
price per share information is based on the average of the high and the low
sale price on March 13, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 15, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
3,000,000 SHARES
[LOGO]
GENOME THERAPEUTICS CORP.
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------
Genome Therapeutics Corp. is offering 3,000,000 shares of common stock.
Our common stock is listed on the Nasdaq National Market under the symbol
"GENE." On March 15, 2000, the last reported price of our common stock on the
Nasdaq National Market was $36.875 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Price to Public................................ $ $
Underwriting Discount.......................... $ $
Proceeds to Genome Therapeutics................ $ $
</TABLE>
Genome Therapeutics Corp. has granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase a
maximum of 450,000 additional shares from Genome Therapeutics Corp. within
30 days following the date of this prospectus to cover over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
WARBURG DILLON READ LLC
DAIN RAUSCHER WESSELS
TUCKER ANTHONY CLEARY GULL
The date of this prospectus is , 2000
<PAGE>
[Description of Graphic]
A chart entitled "Integrated Genomics Technologies." In the center of the
chart is a schematic of a funnel, showing how the "gene pool" is narrowed to
"candidate targets" to "validated targets." Around this image are pictures
and words corresponding to key technologies utilized by Genome Therapeutics.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 16
Price Range of Common Stock................................. 17
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 26
Management.................................................. 44
Underwriting................................................ 46
Validity of Common Stock.................................... 47
Experts..................................................... 47
Where You Can Find More Information......................... 48
Index to Financial Statements............................... F-1
</TABLE>
------------------------
Genome Therapeutics Corp.'s principal executive offices are located at 100
Beaver Street, Waltham, Massachusetts 02453. Our telephone number is
(781) 398-2300. Our website can be found at www.genomecorp.com. Our website does
not constitute part of this prospectus.
"PathoGenome-TM- Database" is our trademark. All other trademarks or trade
names referred to in this prospectus are the property of their respective
owners.
As used in this prospectus, the terms "we," "us," "our," and "GTC" refer to
Genome Therapeutics Corp., and the term "common stock" refers to our common
stock, $.10 par value per share. Unless otherwise stated, all information
contained in this prospectus assumes no exercise of the over-allotment option
granted to the underwriters.
The underwriters are offering the shares subject to various conditions and
may reject all or part of any order.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY.
OUR COMPANY
OVERVIEW
We are a leader in commercialization of genomics-based drug discovery. We
have over ten years of experience in genomic research and have been selected as
the only commercial genomics company to participate in the Human Genome Project
sponsored by the United States government. Our commercial strategy is to apply
our broad understanding of human and infectious disease genomics and our
integrated proprietary technologies to identify and validate novel drug targets
for commercialization through alliances with pharmaceutical companies. We
currently have six alliances to develop drugs to treat or diagnose a variety of
human and infectious diseases. Our multi-year alliances with Wyeth-Ayerst,
Schering-Plough, AstraZeneca, and bioMerieux combine our genomic expertise with
our partners' small molecule drug libraries and world-class commercialization
franchises. We are working with our partners to develop drugs for major
indications such as osteoporosis, asthma, ulcers, drug resistant bacterial
infections and fungal infections as well as genomic-based diagnostics for
infectious diseases.
Our depth of experience in the genomics field has permitted us to emerge as
a leader in creating industrial scale genomics tools for product development.
Our tools include:
- high-throughput sequencing
- sequence finishing
- bioinformatics
- functional genomics
- assay development
Our fully-integrated genomics technologies, highly automated processes and
information systems are designed to rapidly generate comprehensive information
about gene sequences, gene expression, and biological pathways that we use to
identify and validate targets for the development of new therapeutic and
diagnostic products. We are concentrating our product discovery efforts in two
principal areas: human diseases believed to have a significant genetic component
and infectious diseases caused by pathogens, including bacteria and fungi. We
are pursuing the discovery of products based on our genomic discoveries both
through strategic alliances with corporate partners and through internal
research programs.
In the area of human diseases, we have alliances with Wyeth-Ayerst
Laboratories, the pharmaceutical division of American Home Products Corporation,
to develop treatments for osteoporosis and with Schering-Plough Corporation to
develop treatments for asthma. In the area of infectious diseases, we have
ongoing alliances with Schering-Plough to develop treatments for drug resistant
bacterial infections, including STAPH. AUREUS, and to develop novel antifungals.
We are working with AstraZeneca PLC to develop treatments for ulcers caused by
H. PYLORI and have partnered with bioMerieux Incorporated to develop diagnostics
for infectious diseases. As part of our emerging businesses, we are continuing
to invest in our internal infectious disease franchise and build our
pharmacogenomics program. We are typically entitled to receive a combination of
up-front license fees,
1
<PAGE>
research funding, milestone payments, and royalty payments on product sales in
exchange for a license to our genetic research data and other information in our
alliances.
We have extensive experience in high-throughput sequencing. In addition to
the sponsored genomic sequencing research done on behalf of the U.S. government,
we also provide customized sequencing services to biotechnology companies and
pharmaceutical companies that need industrial scale, high quality customized
sequencing capability but may lack the expertise or in-house capacity to carry
out the project. Since the launch of our GTC Sequencing Center in July 1999, we
have entered into sequencing contracts with thirteen commercial, government and
research customers.
In 1997, we introduced our PathoGenome Database, a database consisting of
genetic information from over thirty microbial organisms, a substantial part of
which is proprietary to us. We have granted to six companies non-exclusive
access to a large volume of highly organized and functionally annotated sequence
information related to some of the most medically important microbial organisms
and fungi. We are continuing to explore ways to leverage this genomic asset by
pursuing alliances that will facilitate broader access to our PathoGenome
Database.
We are also internally funding programs to create additional value from our
existing competitive strengths in genomics. We are seeking to develop new, more
effective drugs through both our pharmacogenomics and infectious disease
programs. We plan to work with collaborators to identify more appropriate
patient populations using pharmacogenomics to enable the development of more
effective, safer drugs and "rescue" promising drugs that could succeed in trials
using pre-selected populations based upon genetically determined responsiveness.
We are also mining our PathoGenome Database to identify genes that are novel
targets for our internally funded infectious disease program. Our proprietary
technology has enabled our scientists to discover genes that are essential for
the survival of pathogenic organisms and to identify broad spectrum microbial
targets that are essential in bacteria.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 3,000,000 shares
Common stock to be outstanding after the
offer...................................... 23,588,566 shares
Use of proceeds.............................. We intend to use the net proceeds from this
offering to fund research and development
activities, including investment in our
emerging pharmacogenomics program and
expansion of our infectious disease
franchise, and for general corporate purposes
including capital expenditures, working
capital, possible acquisitions and other
general purposes.
Nasdaq National Market symbol................ GENE
</TABLE>
The share amounts in the table above are based on the number of shares
outstanding at February 26, 2000 and exclude:
- 2,386,621 shares of common stock issuable upon exercise of outstanding
options at a weighted average price of $4.26 per share
- 147,346 restricted shares of common stock granted but not yet issued
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following financial data should be read in conjunction with, and are
qualified by reference to, "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes included in this prospectus.
The balance sheet data as of November 27, 1999 are presented:
- on an actual basis
- assuming our sale in this offering of 3,000,000 shares of common stock at
an assumed public offering price of $36,875 per share less our costs
associated with this offering
<TABLE>
<CAPTION>
THIRTEEN WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
------------------------------ -----------------------------
1997 1998 1999 NOV. 28, 1998 NOV. 27, 1999
-------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract research, licenses,
subscription fees and royalties..... $ 16,653 $ 19,217 $24,018 $ 5,110 $6,035
Costs and expenses:
Research and development.............. 26,524 31,977 26,700 6,813 5,341
Selling, general and administrative... 3,766 4,292 4,279 911 970
-------- -------- ------- ------- ------
Total costs and expenses............ 30,290 36,269 30,979 7,724 6,311
Loss from operations.................. (13,637) (17,052) (6,961) (2,614) (276)
Interest income....................... 2,966 2,386 1,587 412 363
Interest expense...................... (631) (1,147) (954) (270) (209)
-------- -------- ------- ------- ------
Net interest income..................... 2,335 1,239 633 142 154
-------- -------- ------- ------- ------
Net loss................................ $(11,302) $(15,813) $(6,328) $(2,472) $ (122)
======== ======== ======= ======= ======
Net loss per common share:
Basic and diluted..................... $ (0.64) $ (0.87) $ (0.34) $ (0.13) $(0.01)
======== ======== ======= ======= ======
Weighted average common shares
outstanding:
Basic and diluted..................... 17,618 18,212 18,383 18,318 18,948
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 27,
1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, marketable securities and restricted
cash...................................................... $30,309 $133,797
Working capital............................................. 17,819 121,307
Total assets................................................ 46,569 150,057
Long-term obligations, net of current maturities............ 5,354 5,354
Shareholders' equity........................................ 27,216 130,704
</TABLE>
4
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. THE RISKS
AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL
RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS WERE TO OCCUR, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN
THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT THESE LOSSES TO
CONTINUE IN THE FUTURE.
We have experienced significant operating losses since our inception and
expect these losses to continue for the foreseeable future. We had a net loss of
approximately $6,328,000 for the fiscal year ended August 31, 1999 and a net
loss of approximately $122,000 for the thirteen-week period ended November 27,
1999, and, as of November 27, 1999, we had an accumulated deficit of
approximately $66,819,000. The losses have resulted primarily from costs
incurred in research and development and from general and administrative costs
associated with our operations. These costs have exceeded our revenues which to
date have been generated principally from collaborations and government grants.
We anticipate incurring additional losses this year and in future years and
cannot predict when, if ever, we will achieve profitability. These losses may
increase in the near future as we expand our research and development
activities. In addition, our partners' product development efforts which utilize
our products are at an early stage and, accordingly, we do not expect our losses
to be substantially mitigated by revenues from milestone payments or royalties
under those agreements for a number of years, if ever.
USE OF GENOMIC INFORMATION TO DEVELOP OR COMMERCIALIZE PRODUCTS IS UNPROVEN.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Our business strategy is based on the assumption that
identifying and characterizing genes and sequencing select human genes and the
genomes of select pathogens may help scientists better understand complex
disease processes and develop drugs to treat these diseases. There is limited
understanding of the roles of genes in diseases. Few therapeutic vaccine or
diagnostic products based on genomic information have been developed and
commercialized. To date, no one has developed or commercialized any
pharmaceutical, diagnostic or vaccine products based on our technologies. If we
fail to identify genes useful for the discovery and development of such
products, or if partners are unable to use the genomic information that we
provide to them to develop such products, our current and potential customers
may lose confidence in our products or their value for drug discovery, and our
business may suffer as a result.
WE RELY HEAVILY UPON EXISTING AND PROSPECTIVE ALLIANCE PARTNERS AND LICENSEES,
AND A SIGNIFICANT PORTION OF OUR REVENUE HAS BEEN DERIVED FROM ONE ALLIANCE
PARTNER.
Our strategy for developing and commercializing therapeutic, vaccine and
diagnostic products depends, in large part, on strategic alliances and licensing
arrangements with pharmaceutical and biotechnology partners. We currently have
alliances with AstraZeneca, bioMerieux, Schering-Plough, and Wyeth-Ayerst. We
have received a substantial portion of our revenue from these alliances, and we
expect to continue to do so. Under these arrangements we are entitled to receive
payments and royalties based on the achievement by us and our partners of
certain development milestones and the successful development of products
arising from the collaborations. Although we have achieved many of the
scientific milestones under our agreements, we cannot assure that we will
continue these
5
<PAGE>
achievements in the future or that milestones dependent on our partners'
development and commercialization activities will be attained.
In addition, we cannot assure you that we will maintain our current
collaborations or establish additional collaborations. Competition among
genomics companies for collaborations with pharmaceutical companies is intense.
This competition is enhanced by the trend towards consolidation among large
pharmaceutical companies. Consequently, we cannot be sure that we will be able
to enter into new collaborations or maintain our existing ones and any new or
renewed collaborations may be on terms less favorable to us than past
collaborations. Our failure to maintain existing collaborations or to enter into
additional collaborations would have a material adverse effect on our business.
In particular, if funding from partners was not available or was reduced, we
would need to devote additional internal resources to our research programs or
possibly scale back or terminate some programs.
Since 1996, we have received a significant amount of revenues based on
payments under our alliances with Schering-Plough. We have two infectious
disease alliances with Schering-Plough and a third alliance with Schering-Plough
that relates to asthma genetics. The funded research phase under these
agreements is scheduled to end in March 2000, September 2001 and June 2000,
respectively. In addition, Schering-Plough is a subscriber to our PathoGenome
Database. For the fiscal years ended August 31, 1997, 1998 and 1999 and the
thirteen week period ended November 27, 1999, revenues from Schering-Plough
accounted for approximately 48%, 71%, 75% and 64%, respectively, of our total
revenue. If Schering-Plough fails to extend the funded research phase of the
agreement scheduled to end in June 2000 or September 2001, we would lose
significant research funding, which could have a material adverse effect on us.
Our strategy includes entering into multiple, concurrent alliances. We
cannot assure you that we will be able to continue to manage multiple alliances
successfully. The risks we face in managing multiple alliances include
maintaining confidentiality among partners, avoiding conflicts between partners
and avoiding conflicts between us and our partners. If we fail to manage our
alliances effectively, or if any of the problems described above arise, one or
more of the following could occur which could have a material adverse effect on
our business:
- use of significant resources to resolve conflicts
- delay in research
- legal claims involving significant time
- expense
- loss of reputation
- termination of one or more alliances
- loss of capital and loss of revenues
If our partners develop products using our genomic information, we will rely
on these partners for product development, regulatory approval, manufacturing
and marketing of those products before we can receive some of the milestone
payments, royalties and other payments to which we may be entitled under the
terms of some of our collaboration agreements. Our agreements with our partners
typically allow the partners significant discretion in electing whether to
pursue any of these activities. We cannot control the amount and timing of
resources our partners may devote to our programs or potential products. As a
result, we cannot assure that our partners will perform their obligations as
expected. In addition, if a partner is involved in a business combination, such
as a merger or acquisition, or changes its business focus, its performance in
our agreement may suffer and, as a result, we may not generate
6
<PAGE>
any revenues from the royalty, milestone and similar payment provisions of our
alliance agreement with that partner.
OUR ALLIANCE PARTNERS MAY NOT BE SUCCESSFUL IN DEVELOPING OR COMMERCIALIZING
THERAPEUTIC, DIAGNOSTIC OR VACCINE PRODUCTS UNDER OUR AGREEMENTS WITH THEM.
Development of therapeutic, diagnostic and vaccine products based on our
discoveries will be subject to the high risks of failure inherent in the
development or commercialization of health care products. These risks include
the possibility that any such products will be found to be toxic, be found to be
ineffective, fail to receive and maintain necessary regulatory approvals, be
difficult or impossible to manufacture on a large scale, be uneconomical to
market, fail to be developed prior to the successful marketing of similar
products by competitors or infringe on proprietary rights of third parties.
OUR CURRENT AND POTENTIAL ALLIANCE PARTNERS ARE PRIMARILY FROM, AND ARE SUBJECT
TO RISKS FACED BY, THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.
We derive a substantial portion of our revenues from fees paid by
pharmaceutical companies for our information products and services. We expect
that pharmaceutical and biotechnology companies will be our primary source of
revenues for the foreseeable future. As a result, we are subject to risks and
uncertainties that affect the pharmaceutical and biotechnology industries and to
reduction and delays in research and development expenditures by companies in
these industries. These effects on the pharmaceutical and biotechnology
industries may affect our ability to conclude deals with collaborative partners.
In addition, our future revenues may be adversely affected by mergers and
consolidation in the pharmaceutical and biotechnology industries, which will
reduce the number of our potential customers. Large pharmaceutical and
biotechnology customers could also decide to conduct their own genomic programs,
rely on publicly available information or join consortia or seek other providers
instead of using our products and services.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING.
There is intense competition among entities attempting to sequence segments
of the human genome and identify genes associated with specific diseases and
develop products and services based on these discoveries. We face competition in
these areas from genomic, pharmaceutical, biotechnology and diagnostic
companies, academic and research institutions and government or other
publicly-funded agencies, both in the United States and abroad. One of our
competitors has announced that it expects to complete the sequencing of the
entire human genome before the end of 2000, which could adversely affect our
business. Some of our competitors are developing databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing or plan to market their data to pharmaceutical companies.
Additional competitors may attempt to establish databases containing this
information in the future. In addition, some entities are attempting to identify
and patent randomly sequenced genes and gene fragments, while others are
pursuing a gene identification, characterization and product development
strategy based on other genomic technologies. Numerous pharmaceutical companies
also are developing genomic research programs, either alone or in partnership
with our competitors. Competition among these entities to sequence genes,
identify and characterize genes of interest, obtain patent protection and market
this genomic information is intense and is expected to increase. In order to
compete against existing and future technologies, we will need to demonstrate to
potential customers that our technologies and capabilities are superior to those
of our competitors.
7
<PAGE>
Many of our competitors have substantially greater capital resources,
sequencing capabilities, research and developmental staffs, facilities,
manufacturing and marketing experience, distribution channels and human
resources than us. These competitors may discover, characterize or develop
important genes, drug targets or leads, drug discovery technologies or drugs
before us or our customers or which are more effective than those developed by
us or our customers, or may obtain regulatory approvals of their drugs more
rapidly than our customers do, any of which could have a material adverse effect
on any of our similar programs. Moreover, these competitors may obtain patent
protection or other intellectual property rights that would limit our rights or
our customers' ability to use our products to commercialize therapeutic,
diagnostic or vaccine products.
In addition, in our internal development efforts we may compete with our
customers to whom we have granted access to our proprietary databases.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. In the area of bioinformatics, we also face
competition from providers of software. A number of companies have announced
their intent to develop and market software to assist pharmaceutical companies
and academic researchers in managing and analyzing their own genomic data and
publicly available data.
WE FACE RAPID TECHNOLOGICAL CHANGE IN THE GENOMICS INDUSTRY WHICH COULD RESULT
IN DRUG DEVELOPMENT TECHNOLOGY SUPERIOR TO THAT WHICH WE ARE DEVELOPING.
The field of genomics is characterized by significant and rapid
technological change. Many of our competitors have greater research and
development capabilities and experience, as well as greater financial resources
than do we. They may develop techniques for genomic-based drug discovery that
are superior to those we are developing and render our technologies
non-competitive or obsolete even before they generate revenue.
WE PLAN TO MAKE A SUBSTANTIAL INVESTMENT TO BUILD A NEW PHARMACOGENOMICS PROGRAM
AND INCREASE OUR INVESTMENT IN OUR INFECTIOUS DISEASE FRANCHISE, BOTH OF WHICH
ARE COMMERCIALLY UNPROVEN, AND ARE AREAS IN WHICH WE LACK EXTENSIVE OPERATING
EXPERIENCE.
The area of pharmacogenomics is relatively new and it has not been proven to
be commercially viable. We intend to make a significant investment to build a
new pharmacogenomics program. We lack extensive experience in utilizing
pharmacogenomics in drug development programs or in marketing our
pharmacogenomics capabilities to pharmaceutical companies. In the area of
infectious disease, we plan to move further down the drug development process
toward identifying and validating compounds internally. This activity will
require increased research and development investment in an area where we lack
experience. If our new product programs in either of these areas prove
unsuccessful, our results of operations may be materially adversely affected.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS.
Our success will depend, in part, on our ability to obtain commercially
valuable patent claims and protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. Legal standards relating to the validity and scope of claims in our
technology field are still evolving. Therefore, the degree of future protection
for our proprietary rights is uncertain.
8
<PAGE>
The risks and uncertainties that we face with respect to our patents and other
proprietary rights include the following:
- the pending patent applications we have filed or to which we have exclusive
rights may not result in issued patents or may take longer than we expect
to result in issued patents
- the claims of any patents which are issued may be more limited than those
in our patent applications as filed and may not provide meaningful
protection
- we may not be able to develop additional proprietary technologies that are
patentable
- the patents licensed or issued to us or our customers may not provide a
competitive advantage
- other companies may challenge patents licensed or issued to us or our
customers
- patents issued to other companies may substantially impair our ability to
conduct our business
- other companies may independently develop similar or alternative
technologies or duplicate our technologies
- other companies may design around technologies we have licensed or
developed
We may apply for patent protection for compositions and methods relating to
gene expression and disease-specific patterns of gene expression that we
identify and individual disease genes and targets that we discover. These patent
applications may include claims relating to novel genes, gene fragments or
encoded protein and to novel uses for known genes, gene fragments or proteins
identified from the use of our genomic information and our databases.
We may not be able to obtain meaningful patent protection for our
discoveries. Even if patents are issued, their scope of coverage or protection
is uncertain. For example, we or our collaborators have filed patent
applications with respect to a number of full length genes and corresponding
proteins and partial genes of H. PYLORI, of M. LEPRAE and several other
organisms. These applications seek to protect these full length and partial gene
sequences and corresponding proteins, as well as equivalent sequences and
products and uses derived from these sequences and proteins. Some court
decisions indicate that disclosure of a partial sequence may not be sufficient
to support the patentability of a full length sequence.
In addition, we are aware that companies have published patent applications
relating to nucleic acids encoding several H. PYLORI proteins and, in other
disease programs, relating to genes for which we have found mutations of
interest. If these companies are issued patents, their patents may limit our
ability and the ability of our collaborators to practice under any patents that
may be issued to us. Because of this, we or our collaborators may not be able to
obtain patents with respect to the genes of infectious agents such as H. PYLORI,
or the value of certain other patents issued to us or our collaborators that are
the subject of other collaborations may be limited. Also, even if a patent were
issued to us, the scope of coverage or protection afforded to such patent may be
limited.
OUR PROPRIETARY POSITION MAY DEPEND ON OUR ABILITY TO PROTECT TRADE SECRETS.
We rely on trade secret protection for our confidential and proprietary
information and procedures, including procedures related to sequencing genes and
to searching and identifying important regions of genetic information. We
currently protect such information and procedures as trade secrets. We protect
our trade secrets through recognized practices, including access control,
confidentiality agreements with employees, consultants, collaborators, and
customers, and other security measures. These confidentiality agreements may be
breached, however, and we may not have adequate remedies for any such breach. In
addition, our trade secrets may otherwise become known or be independently
developed by competitors.
9
<PAGE>
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND MAY BECOME
INVOLVED IN EXPENSIVE INTELLECTUAL PROPERTY LITIGATION.
The intellectual property rights of biotechnology companies, including our
company, are generally uncertain and involve complex legal, scientific and
factual questions. Our success in the functional genomic field may depend, in
part, on our ability to operate without infringing on the intellectual property
rights of others and to prevent others from infringing on our intellectual
property rights.
There has been substantial litigation regarding patents and other
intellectual property rights in the genomic industry. We may become party to
patent litigation or proceedings at the U.S. Patent and Trademark Office or a
foreign patent office to determine our patent rights with respect to third
parties which may include subscribers to our database information services.
Interference proceedings in the U.S. Patent Office or opposition proceedings in
a foreign patent office may be necessary to establish which party was the first
to discover such intellectual property. We may become involved in patent
litigation against third parties to enforce our patent rights, to invalidate
patents held by such third parties, or to defend against such claims. The cost
to us of any patent litigation or similar proceeding could be substantial, and
it may absorb significant management time. If an infringement litigation against
us is resolved unfavorably to us, we may be enjoined from manufacturing or
selling certain of our products or services without a license from a third
party. We may not be able to obtain such a license on commercially acceptable
terms, or at all.
The U.S. Patent and Trademark Office has begun issuing patents to third
parties relating to single nucleotide polymorphisms, commonly referred to as
SNPs. We believe that many patent applications covering SNPs have been filed
with the U.S. PTO. Therefore, our ability to obtain patent protection on SNPs
could be reduced.
PUBLIC DISCLOSURE OF GENOMICS SEQUENCE DATA COULD JEOPARDIZE OUR INTELLECTUAL
PROPERTY PROTECTION AND HAVE AN ADVERSE EFFECT ON THE VALUE OF OUR PRODUCTS AND
SERVICES.
The federally funded Human Genome Project and other research consortia
engaged in similar research have committed to make available to the public basic
human sequence data. These disclosures might limit the scope of our claims or
make subsequent discoveries related to full-length genes unpatentable. We cannot
be certain that such publication of sequence data has not affected and will not
affect the ability to obtain patent protection. Customers may conclude that
uncertainties about this type of protection decrease the value of our
information products and services, and as a result, we may be required to reduce
the fees we charge for these products and services. In addition, there has been
recent public discussion questioning whether patent protection should be
available for gene sequences. If we or our partners are unable to obtain patents
for gene sequences, our business could be materially adversely affected.
WE MAY NOT BE ABLE TO OBTAIN MEANINGFUL PATENT PROTECTION FOR DISCOVERIES UNDER
OUR GOVERNMENT CONTRACTS.
Under our government grants and contracts, the government has a statutory
right to practice or have practiced any inventions developed under the
government research contracts. In addition, under certain circumstances, such as
inaction on our part or the part of our licensees to achieve practical
application of the invention or a need to alleviate public health or safety
concerns not reasonably satisfied by us or our licensees, the government has the
right to grant to other parties licenses to any inventions first reduced to
practice under the government grants and contracts. If the government grants
such a license to a third party, our patent position may be jeopardized. In
addition, the government has ownership rights in the data, clones, genes and
other material derived from the material furnished to us by the government,
while we have ownership rights in other technology developed solely by us. We
are also obligated under certain government grants to submit sequencing
10
<PAGE>
data and materials resulting from our research to public databases within
24 hours from the date such data and materials are developed. Our ability to
obtain patent protection for our discoveries and inventions may be adversely
affected by this publication.
INTERNATIONAL PATENT PROTECTION IS UNCERTAIN.
Patent law outside the United States is uncertain and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts. Finally, some forms of patent
protection available in the United States are not available to us in foreign
countries due to the laws of those countries.
THE USE OF OUR GENOMIC PRODUCTS AND SERVICES BY OUR CUSTOMERS MAY BE SUBJECT TO
GOVERNMENT REGULATION.
The manufacture and marketing of products which may be developed by us or
our collaborators are subject to certain U.S. Food and Drug Administration or
other regulatory approvals. For example, any new drug developed by our efforts
or the efforts of our customers must undergo an extensive regulatory review
process. This process can take many years and require substantial expense. Also,
changes in FDA policies and the policies of similar foreign regulatory bodies
can increase the delay for each new drug, product license and biological license
application. We expect similar delays in the regulatory review process for any
diagnostic or agricultural product, where similar review or other approval is
required. Even if marketing clearance is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market.
Furthermore, we may be directly subject to regulations as a provider of
diagnostic information. To the extent that such regulations restrict the sale of
our products or impose other costs, our business may be materially adversely
affected.
OUR RESEARCH AND PRODUCT DEVELOPMENT DEPENDS ON ACCESS TO TISSUE SAMPLES AND
OTHER BIOLOGICAL MATERIALS AND GENE DATA FROM INDIVIDUALS.
To continue to build our database products, we will need access to normal
and diseased human and other tissue samples, other biological materials and
related clinical and other information, which may be in limited supply. We
compete with many other companies for these materials and information. We may
not be able to obtain or maintain access to these materials and information on
acceptable terms. In addition, government regulation in the United States and
foreign countries could result in restricted access to, or use of, human and
other tissue samples. If we lose access to sufficient numbers or sources of
tissue samples, or if tighter restrictions are imposed on our use of the
information generated from tissue samples, our business may be harmed.
Competition among genetics companies is also increasing for access to unique
data from related individuals that we use to identify genes for specific human
diseases.
ETHICAL, LEGAL AND SOCIAL ISSUES RELATED TO THE USE OF GENETIC INFORMATION AND
GENETIC TESTING MAY CAUSE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised issues regarding confidentiality and the
appropriate uses of the resulting information. For example, concerns have been
expressed towards insurance carriers and employers using such tests to
discriminate on the basis of such information, resulting in barriers to the
acceptance of such tests by consumers. This could lead to governmental
authorities calling for limits on or regulation of the use of genetic testing or
prohibit testing for genetic predisposition to certain diseases,
11
<PAGE>
particularly those that have no known cure. Any of these scenarios could reduce
the potential markets for our products.
WE RELY ON FUNDING FROM THE UNITED STATES GOVERNMENT.
As of November 27, 1999, we had approximately $27.4 million of government
research contracts outstanding under which we had not yet completed all of the
services. Funding under our government grants and research contracts is subject
to appropriation each year by the United States Congress and can be discontinued
or reduced at any time. In addition, we cannot be certain that we will receive
additional grants or contracts in the future. The government's failure to fund
our research in this area not only would end our participation in the program,
but might adversely affect the industry-wide perception of genomics and the
utility of genomic information.
WE MAY NOT SUCCEED IN REALIZING ANY ADDITIONAL REVENUE FROM THE PATHOGENOME
DATABASE.
In 1997, we introduced the PathoGenome Database which consists of genetic
information from more than thirty microbial organisms. Our strategy for our
database depends on entering into subscription agreements with pharmaceutical,
biotechnology and other companies for the use of our database. Each of the
agreements that we have with our customers is for a specific term, and we expect
that they may not be renewed upon expiration. If any agreements expire and are
not renewed and we are unsuccessful in broadening access to our database, our
business could suffer.
OUR SALES CYCLE IS LENGTHY AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL NEGOTIATION EFFORTS OR MAY NOT BE ABLE TO COMPLETE DEALS ON THE
SCHEDULE ANTICIPATED.
Our ability to obtain new customers for genomic information products depends
on our customers' belief that we can help accelerate their drug discovery
efforts. Our negotiation cycle is typically lengthy because we need to educate
potential customers and sell the benefits of our products and services to a
variety of constituencies within companies. In addition, each agreement involves
the negotiation of unique terms. We may expend substantial funds and management
effort with no assurance that an agreement will result. Actual and proposed
consolidations of pharmaceutical companies have affected and may in the future
affect the timing and progress of our ability to conclude deals with
collaborative partners.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE.
We believe that the net proceeds of this offering together with existing
cash and marketable securities, borrowings under equipment financing
arrangements and anticipated cash flow from operations will be sufficient to
support our current plans. However, we may choose to raise additional capital
due to market conditions or strategic considerations even if we have sufficient
funds for our operating plan. In particular, we may need additional funds to
increase our research and development activities. We may seek funding through
additional public or private equity offerings, debt financings or agreements
with customers. If we raise additional capital by issuing equity or convertible
debt securities, the issuances may dilute share ownership of existing investors
and future investors may be granted rights superior to those of current
shareholders. Additional financing may not be available when needed, or, if
available, may not be available on favorable terms. If we cannot obtain adequate
financing on acceptable terms when such financing is required, our business will
be adversely affected.
WE DEPEND ON KEY PERSONNEL IN A HIGHLY COMPETITIVE MARKET FOR SKILLED PERSONNEL.
We are highly dependent on the principal members of our senior management
and key scientific and technical personnel. None of our employees are bound by a
long term employment agreement, a non-competition agreement or are the subject
of key man life insurance, other than Robert J.
12
<PAGE>
Hennessey who has a non-competition agreement. The loss of any of these
personnel could have a material adverse effect on our ability to achieve our
goals. Our future success is also dependent upon our ability to attract and
retain additional qualified scientific, technical and managerial personnel. Our
plan to build our pharmacogenomics program will require us to hire a number of
new personnel with expertise in this area. We experience intense competition for
qualified personnel and may not be able to continue to attract and retain
skilled personnel necessary for the development of our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO ENVIRONMENTAL
LIABILITY.
Our research and development involve the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident, we could be held liable for damages or penalized with fines, and this
liability could exceed our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience growth in the number of our employees
and customers and the scope of our operations. In particular, we plan
significant growth in our sequencing and pharmacogenomics business. This growth
may continue to place a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to broaden our
management team and our ability to attract, hire and retain skilled employees.
Our success will also depend on the ability of our officers and key employees to
continue to implement and improve our operational and other systems, to manage
multiple, concurrent customer relationships and to hire, train and manage our
employees. In addition, we must continue to invest in customer support resources
as the number of database customers and their requests for support increase. Our
customers may have worldwide operations and require support at multiple U.S. and
foreign sites.
RISKS RELATED TO THE SECURITIES MARKET AND THIS OFFERING
OUR STOCK PRICE IS HIGHLY VOLATILE.
The market price of our stock has been and is likely to continue to be
highly volatile due to the risks and uncertainties described in this section of
the prospectus, as well as other factors, including:
- conditions and publicity regarding the genomics or life sciences industries
generally
- termination of, or an adverse development in, our strategic alliances,
subscription agreements, or commercial or governmental contract sequencing
arrangements
- price and volume fluctuations in the stock market at large which do not
relate to our operating performance
- comments by securities analysts, or our failure to meet market expectations
- the level of investment in our new pharmacogenomics program
- the timing of achievement of our development milestones and other payments
under our strategic alliance agreements
13
<PAGE>
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the subject of securities class action litigation. If litigation
were instituted on this basis, it could result in substantial costs and a
diversion of management's attention and resources.
MULTIPLE FACTORS BEYOND OUR CONTROL MAY CAUSE FLUCTUATIONS IN OUR OPERATING
RESULTS AND MAY CAUSE OUR BUSINESS TO SUFFER.
Our revenues and results of operations may fluctuate significantly,
depending on a variety of factors, including the following:
- our success in concluding deals for, and changes in the demand for, our
products
- variations in the timing of payments from partners and customers and the
recognition of these payments as revenues
- the terms we are able to negotiate in our deals
- the timing of our new product introductions, if any
- changes in the research and development budgets of our customers and
potential customers
- the introduction of new products and services by our competitors
- regulatory actions
- expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights
- the cost and timing of our adoption of new technologies
- the cost, quality and availability of cell and tissue samples, reagents and
related components and technologies, including those supplied to us
pursuant to contractual arrangements
- our sales cycle for concluding alliances and other deals is lengthy
We will not be able to control many of these factors. In addition, if our
revenues in a particular period do not meet expectations, we may not be able to
adjust our expenditures in that period, which could cause our business to
suffer. We believe that period-to-period comparisons of our financial results
will not necessarily be meaningful. You should not rely on these comparisons as
an indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price may fall, possibly by a significant amount.
FUTURE ACQUISITIONS MAY ABSORB SIGNIFICANT RESOURCES AND MAY BE UNSUCCESSFUL.
As part of our strategy, we may pursue acquisitions, investments and other
relationships and alliances. Acquisitions may involve significant cash
expenditures, debt incurrence, additional operating losses, dilutive issuances
of equity securities, and expenses that could have a material adverse effect on
our financial condition and results of operations. For example, to the extent
that we elect to pay the purchase price for such acquisitions in shares of our
stock, the issuance of additional shares of our stock will be dilutive to our
stockholders. Acquisitions involve numerous other risks, including:
- difficulties integrating acquired technologies and personnel into our
business
- diversion of management from daily operations
- inability to obtain required financing on favorable terms
- entering new markets in which we have little or no previous experience
14
<PAGE>
- potential loss of key employees or customers of acquired companies
- assumption of the liabilities and exposure to unforseen liabilities of
acquired companies
- amortization of the intangible assets of acquired companies
It may be difficult for us to complete these types of transactions quickly
and to integrate the businesses efficiently into our current business. Any
acquisitions or investments by us may ultimately have a negative impact on our
business and financial condition.
FOLLOWING THE OFFERING, OUR SHAREHOLDERS MAY BE ABLE TO SELL SHARES WHICH COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Upon completion of this offering, we will have approximately 23,588,566
shares of common stock outstanding, assuming no exercise of outstanding options
to purchase common stock and excluding the restricted shares of common stock
granted but not yet issued. Our officers and directors, in the aggregate,
beneficially own 1,257,648 shares of common stock (including 1,207,148 shares
issuable upon the exercise of outstanding options held by our directors and
executive officers and their affiliates which are exercisable within the 60-day
period following March 15, 2000) have agreed, with respect to 1,257,648 shares
of common stock, not to sell or otherwise transfer such shares for a period of
90 days after the date of this prospectus, which is referred to as the lock-up
period.
Following expiration of the lock-up period, substantially all outstanding
shares of our common stock will be eligible for an 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 our common stock could adversely affect the prevailing
market price of our common stock.
SOME OF OUR SHAREHOLDERS HAVE REGISTRATION RIGHTS THAT COULD DILUTE OUR COMMON
STOCK.
Pursuant to an agreement between us and bioMerieux, in the event we elect to
register any of our equity securities under the Securities Act for our
shareholders, subject to certain exceptions and limitations, we are obligated to
use our best efforts to include any shares requested to be registered by
bioMerieux in the registration if the registration occurs after September 30,
2001. We are required to bear all registration expenses incurred in connection
with the registration of these shares. We may have an obligation to pay the
costs incurred by Robert J. Hennessey in connection with an underwritten public
offering of some or all of Robert J. Hennessey's shares of common stock.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus and the documents we have filed with the Securities and
Exchange Commission contain forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements represent our management's judgment regarding future
events. Forward-looking statements typically are identified by use of terms such
as "may," "will," "should," "plan," "expect," "intend," "anticipate," "estimate"
and similar words, although some forward-looking statements are expressed
differently. All forward-looking statements other than statements of historical
fact included in this prospectus regarding our financial position, business
strategy and plans or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking statements,
nor do we plan to update these forward-looking statements. You should be aware
that our actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including those described
in "Risk Factors" and elsewhere in this prospectus.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"GENE." The following table sets forth for the periods indicated the high and
low sale prices per share of our common stock, as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---------
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1998
First Quarter............................................. 9 7/8 7 1/4
Second Quarter............................................ 9 6
Third Quarter............................................. 9 1/2 6 1/2
Fourth Quarter............................................ 6 3/4 2 1/8
FISCAL YEAR ENDED AUGUST 31, 1999
First Quarter............................................. 3 7/8 1 3/4
Second Quarter............................................ 3 7/8 2 1/8
Third Quarter............................................. 4 5/16 3
Fourth Quarter............................................ 4 3/4 2 2/3
FISCAL YEAR ENDED AUGUST 31, 2000
First Quarter............................................. 5 2/5 3 3/8
Second Quarter............................................ 51 1/2 3 3/4
Third Quarter (through March 15, 2000).................... 75 3/8 30 1/4
</TABLE>
There were approximately 1,203 shareholders of record of our common stock as
of February 26, 2000. On March 15, 2000, the last sale price for our common
stock as reported by Nasdaq was $36.875.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock we are offering will be approximately $103.5 million. If the underwriters
fully exercise the over-allotment option, the net proceeds of the shares we sell
will be $119.1 million. For the purpose of estimating net proceeds, we are
assuming that the public offering price will be $36.875 per share. "Net
proceeds" is what we expect to receive after paying the underwriting discount
and other expenses of the offering.
We intend to use the net proceeds to fund research and development
activities, including investing in our emerging pharmacogenomics program and
expanding our infectious disease franchise, and for general corporate purposes
including capital expenditures, working capital and the possible acquisition of
businesses, products or technologies that are complementary to our own. We do
not have any understandings or agreements with respect to any such acquisitions.
We have not yet determined the amount of net proceeds to be used for each of
the purposes indicated above. Accordingly, our management will retain broad
discretion in the allocation of net proceeds.
Until we use the net proceeds of this offering, we will invest the funds in
government securities and other short-term, investment-grade, interest-bearing
instruments.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock. We expect to
retain earnings to support operations and to finance the growth and development
of our business. Therefore, we do not intend to pay any cash dividends on our
common stock in the foreseeable future. Certain of our equipment lease
facilities prevent us from paying any cash dividends while there are amounts
outstanding under these facilities without consent of the lessor.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of November 27, 1999:
- On an actual basis
- On an as adjusted basis assuming our sale in the offering of 3,000,000
shares of common stock at an assumed public offering price of $36.875 per
share less our costs associated with this offering
- Based on shares outstanding as of November 27, 1999, which excludes
3,371,766 shares of common stock issuable upon exercise of outstanding
options at a weighted average price of $3.48 per share, and also excludes
147,346 restricted shares of common stock granted but not yet issued
<TABLE>
<CAPTION>
NOVEMBER 27, 1999
-------------------------------
ACTUAL AS ADJUSTED
----------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term obligations.............. $ 4,064 $ 4,064
================= ========
Long-term obligations, net of current maturities......... $ 5,354 $ 5,354
Stockholders' equity:
Common stock, $0.10 par value, 34,375,000 shares
authorized, 19,264,381 shares issued and outstanding
and 22,264,381 shares issued and outstanding, as
adjusted............................................. 1,926 2,226
Series B restricted stock, $0.10 par value, 625,000
shares authorized, no shares issued and
outstanding.......................................... -- --
Additional paid-in capital............................. 92,564 195,752
Accumulated deficit.................................... (66,819) (66,819)
Deferred compensation.................................. (455) (455)
----------------- --------
Total stockholders' equity............................ $ 27,216 $130,704
----------------- --------
Total capitalization............................... $ 32,570 $136,058
================= ========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents selected historical data. You should read carefully
the consolidated financial statements included in this prospectus, including the
notes to the consolidated financial statements. The selected data in this
section is not intended to replace the consolidated financial statements. We
derived the selected consolidated financial data set forth below as of
August 31, 1998 and 1999 and for the three years in the period ended August 31,
1999 from our consolidated financial statements which have been audited by
Arthur Andersen LLP, independent public accountants, which we have included
elsewhere in this prospectus. We derived the selected consolidated financial
data set forth below as of August 31, 1995, 1996, 1997 and for the years ended
August 31, 1995 and 1996 from our consolidated financial statements which have
been audited by Arthur Andersen LLP which are not included in this prospectus.
We derived the balance sheet data as of November 27, 1999 and the statement of
operations data for the thirteen week period ended November 28, 1998 and
November 27, 1999 from our unaudited consolidated financial statements. We
believe that the unaudited historical financial statements contain all
adjustments needed to present fairly the information included in those financial
statements and that the adjustments made consist only of normal recurring
adjustments. Historical results are not necessarily indicative of results that
may be expected in the future.
<TABLE>
<CAPTION>
THIRTEEN WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
---------------------------------------------------- -----------------------------
1995 1996 1997 1998 1999 NOV. 28, 1998 NOV. 27, 1999
-------- -------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Contract research, licenses, subscription
fees and royalties..................... $10,975 $19,471 $ 16,653 $ 19,217 $24,018 $ 5,110 $6,035
Costs and expenses:
Research and development................. 7,892 14,074 26,524 31,977 26,700 6,813 5,341
Selling, general and administrative...... 2,644 5,047 3,766 4,292 4,279 911 970
------- ------- -------- -------- ------- -------- ------
Total costs and expenses............... 10,536 19,121 30,290 36,269 30,979 7,724 6,311
Income (loss) from operations............ 439 350 (13,637) (17,052) (6,961) (2,614) (276)
Interest income.......................... 232 1,785 2,966 2,386 1,587 412 363
Interest expense......................... (86) (214) (631) (1,147) (954) (270) (209)
------- ------- -------- -------- ------- -------- ------
Net interest income........................ 146 1,571 2,335 1,239 633 142 154
Net income/(loss).......................... $ 585 $ 1,921 $(11,302) $(15,813) $(6,328) $ (2,472) $ (122)
======= ======= ======== ======== ======= ======== ======
Net income/(loss) per common share:
Basic.................................. $ 0.05 $ 0.11 $ (0.64) $ (0.87) $ (0.34) $ (0.13) $(0.01)
======= ======= ======== ======== ======= ======== ======
Diluted................................ $ 0.04 -- -- -- -- -- --
======= ======= ======== ======== ======= ======== ======
Weighted average common equivalent shares
Outstanding
Basic.................................. 12,962 18,130 17,618 18,212 18,383 18,318 18,948
Diluted................................ 13,037 -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
---------------------------------------------------- AS OF NOV.
1995 1996 1997 1998 1999 27, 1999
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities and restricted cash............ $ 9,011 $53,769 $ 47,844 $ 34,177 $25,062 $ 30,309
Working capital............................. 5,499 25,905 35,709 20,823 15,641 17,819
Total assets................................ 11,529 63,279 60,688 51,465 39,485 46,569
Long-term obligations, net of current
maturities................................ 892 3,228 7,149 8,479 5,925 5,354
Shareholders' equity........................ 7,239 54,313 43,948 29,248 23,411 27,216
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE FOLLOWING DISCUSSION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leader in the commercialization of genomics-based drug discovery.
We have over ten years of experience in genomic research and have been one of
the original recipients of funding from the United States government under its
genome programs. Our commercial strategy is to use our genomics and related
proprietary technologies to identify and validate novel drug targets for
commercialization through alliances with pharmaceutical companies. Our two areas
of scientific focus are the discovery and characterization of novel targets for
human diseases and serious infectious diseases. We also commercialize our
sequencing capabilities through the GTC Sequencing Center, which we established
in July 1999 to provide high quality, industrial scale sequencing to
pharmaceutical and biotechnology companies on a contract basis. In May 1997, we
introduced a non-exclusive genetic database, the PathoGenome Database, which
provides subscribers with genetic information to identify gene targets. We
believe that our genomic discoveries and information from our database will lead
to the development of novel therapeutics, vaccines, and diagnostic products by
us and our strategic partners.
We receive payments from our collaborators based on license fees, sponsored
research and milestone payments during the term of the collaboration. We also
receive ongoing royalties from the licensing of certain parts of our
intellectual property portfolio to third parties. In addition, subscribers to
our PathoGenome Database pay access fees for the information they obtain. Once a
product resulting from a research collaboration or a subscriber's use of the
PathoGenome Database is commercialized, we are entitled to receive royalty
payments based upon product revenues. We expect that our collaborations will
result in the discovery and commercialization of novel pharmaceutical, vaccine
and diagnostic products. In order for a product to be commercialized based on
our research, it will be necessary for the collaborators to conduct preclinical
tests and clinical trials, obtain regulatory clearances, manufacture, sell, and
distribute the product. Accordingly, we do not expect to receive royalties based
upon product revenues for many years, if at all. Additionally, we sell, as a
contract service business, high quality genomic sequencing information to third
parties, including pharmaceutical companies, biotechnology companies,
governmental agencies, and academic institutions.
Our primary sources of revenue are collaborative agreements with
pharmaceutical company partners, subscription agreements to our PathoGenome
Database and government research grants and contracts. As of February 2000, we
had six collaborative research agreements. In August 1995, we entered into a
collaboration with AstraZeneca to develop pharmaceutical, vaccine and diagnostic
products effective against gastrointestinal infections or any other disease
caused by H. PYLORI. In August 1999, the sponsored research under the
collaboration concluded and the program transitioned into AstraZeneca's
pipeline. We are entitled to receive additional milestone payments and royalties
based upon the development by AstraZeneca of any products from the research
collaboration. We entered into a collaboration with Schering-Plough in
December 1995. Under this collaboration, Schering-Plough can use our STAPH.
AUREUS genomic database to identify new gene targets for the development of
novel antibiotics. In December 1996, we entered into our second research
collaboration with Schering-Plough to identify genes and associated proteins
that Schering-Plough can utilize to
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develop new pharmaceuticals for treating asthma. In September 1997, we
established our third research alliance with Schering-Plough for the development
of new pharmaceutical products to treat fungal infections. In September 1999, we
entered into a strategic alliance with bioMerieux to develop, manufacture and
sell IN VITRO pathogen diagnostic products for human clinical and industrial
applications. As part of the strategic alliance, bioMerieux has purchased a
subscription to our PathoGenome Database and has made an equity investment. In
December 1999, we entered into a strategic alliance with Wyeth-Ayerst to develop
drugs based on our genetic research to treat osteoporosis. Under our strategic
alliance agreements with Schering-Plough, for our fiscal years ended August 31,
1997, 1998, and 1999 and the thirteen week periods ended November 28, 1998 and
November 27, 1999 we recognized revenue accounting for approximately 48%, 71%,
75%, 63% and 64%, respectively, of our total revenue.
In May 1997, we introduced our PathoGenome Database and sold our first
subscription. Since that date, we have continued to contract with subscribers on
a non-exclusive basis, and, as of February 2000, we had a total of six
subscribers. Under our agreements, the subscribers receive non-exclusive access
to information relating to microbial organisms in our PathoGenome Database.
Subscriptions to the database generate revenue over the term of the subscription
with the potential for royalty payments to us from future product sales.
Since 1989, the United States government has awarded us a number of research
grants and contracts related to government genomics programs. The scope of the
research covered by grants and contracts encompasses technology development,
sequencing production, technology automation, and disease gene identification.
These programs strengthen our genomics technology base and enhance the expertise
of our scientific personnel. In July 1999, the government named us as one of the
nationally funded DNA sequencing centers of the international Human Genome
Project. We are participating in an international consortium in a full-scale
effort to sequence the human genome. We will receive funding from the National
Human Genome Research Institute (NHGRI) under the Human Genome Project of up to
$15.6 million over a three-year period, of which $5.0 million is guaranteed over
the initial twelve months. In October 1999, NHGRI appointed us as one of the
initial centers in the Mouse Genome Sequencing Network. We will participate in
deciphering the genetic makeup of the mouse. We will receive funding from the
NHGRI under this program of up to $12.9 million over a three-year period, of
which $2.4 million is guaranteed over the initial seven months. These programs
are subject to annual appropriations by the government based upon the
availability of government funds and the achievement by us of certain
milestones.
We have incurred significant operating losses since our inception. As of
November 27, 1999, we had an accumulated deficit of approximately $66.8 million.
Our losses have resulted primarily from costs associated with prior operating
businesses and research and development expenses. These costs have often
exceeded our revenues generated by our alliances, subscription agreements and
government contracts and grants. Our results of operations have fluctuated from
period to period and may continue to fluctuate in the future based upon the
timing, amount and type of funding. We expect to incur additional operating
losses in the future.
NEW ACCOUNTING PRONOUNCEMENT
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued
in December 1999. SAB 101 will require companies to recognize certain upfront
non-refundable fees and milestone payments over the life of the related
alliances when such fees are received in conjunction with these alliances which
have multiple elements. We are required to adopt this new accounting principle
through a cumulative charge to our statement of operations, in accordance with
Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING CHANGES, no later
than the first quarter of fiscal 2001. We believe that the adoption of SAB 101
will have an impact on our future operating results as it relates to the upfront
non-refundable payments and milestone payments received in connection with our
alliances.
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The historical financial statements reflect payments of approximately
$17.0 million received in fiscal year 1995 through November 27, 1999. Based on
guidance currently available, upon the adoption of SAB 101, we will be required
to record these fees as revenue over the life of the related agreement.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIODS ENDED NOVEMBER 27, 1999 AND NOVEMBER 28, 1998
REVENUE
Revenues increased 18% from $5,110,000 for the thirteen week period ended
November 28, 1998 to $6,035,000 for the thirteen week period ended November 27,
1999. This increase was the result of an increase in payments under our
government research grant with the National Human Genome Research Institute to
participate in the international Human Genome Project, as well as milestone
payments received from Schering-Plough under our antifungal collaboration.
COSTS AND EXPENSES
Total costs and expenses decreased 18% from $7,724,000 for the thirteen week
period ended November 28, 1998 to $6,311,000 for the thirteen week period ended
November 27, 1999. This reduction was primarily due to a decrease in research
and development expenses. Research and development expenses decreased from
$6,813,000 in the thirteen week period ended November 29, 1998 to $5,431,000 for
the thirteen week period ended November 27, 1999. Research and development
expenses include research and development activities sponsored by us and
research funded pursuant to arrangements with our corporate collaborators and
the U.S. government. The reduction was primarily attributable to our decision to
focus on fewer internally funded programs. The reduction in these expenses
consisted of decreases in payroll and related expenses, laboratory supplies and
overhead expenses.
Selling, general and administrative expenses increased slightly from
$911,000 for the thirteen week period ended November 28, 1998 to $970,000 for
the thirteen week period ended November 27, 1999. This increase stemmed from an
increase in our compensation expense related to our restricted stock plan.
INTEREST INCOME AND EXPENSE
Interest income decreased 12% from $412,000 for the thirteen week period
ended November 28, 1998 to $364,000 for the same period ended November 27, 1999.
This decrease reflects a reduction in investment income resulting from our use
of cash to fund our operations.
Interest expense decreased 23% from $270,000 for the thirteen week period
ended November 28, 1998 to $209,000 for the thirteen week period ended
November 27, 1999 due primarily to a decrease in outstanding balances under our
long-term obligations.
FISCAL YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
REVENUE
Total revenues increased 25% from $19,217,000 in fiscal 1998 to $24,018,000
in fiscal 1999 and increased 15% from $16,653,000 in fiscal 1997 to $19,217,000
in fiscal 1998. This increase in both fiscal year 1999 and 1998 was primarily
attributable to increased payments recognized under our collaborative research
agreements with Schering-Plough, as well as increased subscription fees earned
under our subscription agreements to the PathoGenome Database.
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COSTS AND EXPENSES
Total costs and expenses decreased 15% from $36,270,000 in fiscal 1998 to
$30,979,000 in fiscal 1999 and increased 20% from $30,290,000 in fiscal 1997 to
$36,270,000 in fiscal 1998. Research and development expense, which includes
internal research and development and research funded pursuant to arrangements
with our corporate collaborators and U.S. government, decreased 17% from
$31,977,000 in fiscal 1998 to $26,700,000 in fiscal 1999. The reduction in
research and development expenses was primarily attributable to our decision to
focus on fewer internally funded programs, specifically in the area of microbial
genetics, human gene discovery and functional genomics. The decrease from fiscal
1998 to fiscal 1999 consisted primarily of decreases in payroll and related
expenses, laboratory supplies and overhead expenses. Research and development
expenses increased 21% from $26,524,000 in fiscal 1997 to $31,977,000 in fiscal
1998 due primarily to increases in both personnel and laboratory expenses
associated with our expansion of our microbial genetics, human gene discovery
and functional genomics research programs, as described above.
Selling, general and administrative expenses decreased slightly from
$4,292,000 in fiscal 1998 to $4,279,000 in fiscal 1999 and increased 14% from
$3,766,000 in fiscal 1997 to $4,292,000 in fiscal 1998. The increase in selling,
general and administrative expenses from fiscal 1997 to fiscal 1998 primarily
represented increases in payroll and related expenses.
INTEREST INCOME AND EXPENSE
Interest income decreased 34% from $2,387,000 in fiscal 1998 to $1,587,000
in fiscal 1999 and decreased 20% from $2,966,000 in fiscal 1997 to $2,387,000 in
fiscal 1998. Both of these decreases were due to the reduction in funds
available for investment as a result of cash being utilized by us to fund our
operations.
Interest expense decreased 17% from $1,147,000 in fiscal 1998 to $954,000 in
fiscal 1999 due to the decrease in our outstanding balances under long-term
obligations. Interest expense increased 82% from $631,000 in fiscal 1997 to
$1,147,000 in fiscal 1998 due to an increase in our financing arrangements as a
result of the consolidation of our operations into our Beaver Street facility.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have been payments received from collaborative
research agreements, subscription fees and government grants and contracts,
borrowings under equipment lending facilities and capital leases and proceeds
from the sale of equity securities.
We received payments of $19,705,000, $21,255,000 and $6,781,000 in fiscal
1998 and 1999, and for the thirteen week period ended November 27, 1999,
respectively, from our collaborative partners consisting of sponsored research
funding, subscription fees, milestone payments and expense reimbursement, all of
which are included in research funding. In fiscal 1997, we received payments of
$13,496,000 from our collaborative partners consisting of an up-front license
fee, sponsored research funding, subscription fee, milestone payments and
expense reimbursement, all of which are included in research funding.
As of November 27, 1999, we had cash, cash equivalents, restricted cash and
short-term marketable securities of $30,309,000. We have various arrangements
under which we can finance certain office and laboratory equipment and leasehold
improvements. At November 27, 1999, we had $1,953,000 available under these
arrangements for future borrowings. We have an aggregate of $9,418,000
outstanding under our borrowing arrangement at November 27, 1999. This amount is
repayable over the next 36 months and $4,064,000 of this amount is repayable
within the next 12 months. Under these arrangements, we are required to maintain
certain financial ratios, including minimum levels of tangible net worth, total
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indebtedness to tangible net worth, minimum cash level, debt service coverage
and minimum restricted cash balances.
Our operating activities provided cash of $3,873,000 for the thirteen week
period ended November 27, 1999 due to an increase in deferred revenue, accounts
payable and accrued expenses. The increase in accounts payable reflects the
purchase of laboratory equipment which will eventually be financed through our
existing or new equipment financing arrangements. The increase in deferred
revenue represents payments received under the bioMerieux alliance prior to
revenue recognition. Our operating activities used cash of approximately
$3,184,000, $9,279,000 and $4,757,000 in fiscal 1999, 1998 and 1997,
respectively to fund our operations.
Our investing activities provided cash of $3,398,000 for the thirteen week
period ended November 27, 1999 primarily through the conversion of our
marketable securities to cash and cash equivalents. The cash provided during
this period was partially offset by the purchase of laboratory and computer
equipment. Our investing activities provided cash of approximately $10,241,000,
$10,898,000 and $2,257,000 in fiscal 1999, 1998 and 1999, respectively,
primarily through the conversion of marketable securities to cash and cash
equivalents, partially offset by the purchase of equipment and additions to
leasehold improvements.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $2,025,000 for the thirteen week period ended
November 27, 1999. Our capital expenditures totaled $2,182,000, $8,735,000 and
$7,213,000 for the fiscal years ended 1999, 1998 and 1997, respectively.
Purchases consisted of equipment and additions to leasehold improvements. We
currently estimate that we will acquire an additional $3,000,000 in capital
equipment in fiscal 2000 consisting primarily of computer and laboratory
equipment which we intend to finance under existing equipment financing
arrangements.
Our financing activities provided cash of approximately $3,018,000 for the
thirteen week period ended November 27, 1999 primarily from the sale of equity
securities, exercise of stock options, partially offset by payments of long-term
obligations. Our financing activities used cash of approximately $5,223,000 in
fiscal 1999 primarily for payments of long-term obligations, partially offset by
proceeds from the exercise of stock options. Our financing activities provided
cash of approximately $756,000 and $422,000 in fiscal 1998 and 1997,
respectively, primarily from proceeds received from long-term obligations
partially offset by proceeds from the exercise of stock options, net of payments
of long-term obligations.
As of August 31, 1999, we had net operating loss and tax credits (investment
and research) carryforwards of approximately $63,785,000 and $3,137,000,
respectively, available to reduce federal taxable income and federal income
taxes, respectively, if any. Net operating loss carryforwards and credits are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in ownership interests
of significant shareholders over a three-year period in excess of 50%.
Additionally, certain of these losses are expiring due to the limitation of the
carryforward period.
We believe that the net proceeds of this offering, together with our
existing capital resources, are adequate to meet our cash requirements for at
least two years. However, these are estimates which involve risks and
uncertainty. Our actual future capital requirements and the adequacy of our
available funds and the proceeds from this offering will depend on many factors,
including those discussed under "Risk Factors" and the following:
- progress of our genomic discovery programs;
- the number and breadth of our alliances;
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- the costs and uncertainty of success of our emerging businesses in
pharmacogenomics and infectious diseases;
- the progress of the development and commercialization efforts of our
alliance partners;
- the level of our activities relating to our programs and to the development
and commercialization rights we retain in our arrangements with alliance
partners;
- competing technological and market developments;
- the costs associated with obtaining access to tissue samples and related
information; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights.
We may seek additional funding in the future through public or private
financing. Additional financing may not be available when needed, or if
available, it may not be available on terms acceptable to us. To the extent that
we raise additional capital by issuing equity or convertible debt securities,
ownership dilution to stockholders will result.
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high quality credit instruments, as
specified in our investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue, issuer, and type of instrument. We do not
expect any material loss from our marketable security investments and therefore
believe that our potential interest rate exposure is limited.
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BUSINESS OF GENOME THERAPEUTICS
OVERVIEW
We are a leader in the commercialization of genomics-based drug discovery.
Through the identification of genes and the characterization of the function of
those genes, we are seeking to accelerate the discovery and development of
products to treat and diagnose a number of diseases. The United States
government has selected us to participate in a number of government sponsored
gene discovery programs, including the Human Genome Project and the Mouse Genome
Sequencing Network. Our depth of experience in the genomics field has permitted
us to emerge as a leader in creating industrial scale genomics tools for product
development. Our tools include:
- high-throughput sequencing
- sequence finishing
- bioinformatics
- functional genomics
- assay development
We have combined our genomics tools into an integrated platform of highly
automated technologies which allows us to rapidly generate high quality genomic
information that we use to identify and validate targets for the development of
new therapeutic and diagnostic products.
We concentrate our product discovery efforts in two principal areas: human
diseases believed to have a significant genetic component and infectious
diseases caused by pathogens, including bacteria and fungi. We are pursuing the
discovery of products based on our genomic discoveries both through strategic
alliances with corporate partners and through internal research programs. In the
area of human diseases, we have alliances with Wyeth-Ayerst to develop
treatments for osteoporosis and with Schering-Plough to develop treatments for
asthma. In the area of infectious diseases, we have ongoing collaborations with
Schering-Plough to develop treatments for drug resistant bacterial infections,
including STAPH. AUREUS, and to develop novel anti-fungals. We are working with
AstraZeneca to develop treatments for ulcers caused by H. PYLORI. We have also
partnered with bioMerieux to develop diagnostics for infectious diseases. As
part of our emerging businesses, we are continuing to invest in our internal
infectious disease franchise and build our pharmacogenomics program.
In addition to our drug discovery programs, we have formed the GTC
Sequencing Center to provide industrial scale, high quality customized
sequencing services to pharmaceutical companies and biotechnology companies on a
contract basis. Since the launch of the GTC Sequencing Center in July 1999, we
have entered into 11 sequencing contracts with pharmaceutical and biotechnology
companies and other research institutions, in addition to our work in the United
States government's genomics programs. We are also seeking to increase access to
our PathoGenome Database beyond our initial six subscribers by making it
available to a broader spectrum of users.
SCIENTIFIC BACKGROUND
Genes define the inherited characteristics of an organism and are found in
all living cells, including human, animal and pathogen cells. Each gene is
responsible for producing a specific protein that performs a specific biological
function in the body. A variety of factors cause human disease, including
genetic defects, pathogens and environmental factors, with many of the most
common life threatening and chronic diseases believed to have a genetic
component. Genetic defects in humans may lead to overproduction or
underproduction of proteins, resulting in disease. Consequently, the
identification and characterization of genes and the proteins associated with
these genes may lead to new therapies and diagnostic tests. In the case of
diseases caused by pathogens, the identification and characterization
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of the genes essential to the survival of the pathogen may lead to the
development of new drugs and vaccines to combat the pathogen. An individual's
genetic makeup may also predetermine his or her susceptibility to types of
treatments or specific drugs. This genomic profile may permit the application of
pharmacogenomics to optimize the efficacy or minimize the toxicity of novel or
existing drugs.
While efforts to identify and characterize the genes responsible for various
diseases by the Human Genome Project and genomics companies have resulted in the
generation of tremendous amounts of gene sequence and other genetic information,
the discovery of new products based on this information has been limited. The
U.S. government and several private companies are spending enormous resources
toward the completion of the entire human genomic sequence containing over
100,000 gene pairs. This has led to a further effort to identify those genetic
abnormalities or mutations that have a relationship to a specific disease state.
These mutations add millions of potential genetic sequence combinations to the
universe of potential drug targets. Identifying genes that cause or are
associated with a specific disease and determining how those genes contribute to
the disease has been a formidable challenge. Therefore, industrialized discovery
technologies that can convert this large amount of genomic data into actual drug
candidates is critical to translate these early-stage discoveries into actual
treatments for human disease.
An integrated suite of technologies, tools and data management and analysis
capabilities is required to bridge this gap between data inputs and drug
candidates. We have designed an integrated platform of highly automated,
industrial scale technologies that permits us to rapidly analyze and draw
conclusions from high quality genomic information. Our approach will allow us
and our collaborators to effectively use genomic information to identify and
validate targets that will then be successfully developed into novel
therapeutics and diagnostic products.
OUR STRATEGY
We intend to use our integrated suite of genomics technologies to accelerate
drug discovery both in our internal research programs and those of our
collaborators. The key elements of our strategy include:
ESTABLISH AND EXPAND ALLIANCES WITH INDUSTRY LEADERS IN SPECIFIC DISEASES
We believe our current alliances with Wyeth-Ayerst, Schering-Plough,
AstraZeneca, and bioMerieux, all industry leaders in their fields, provide us
the best opportunity to convert our genomics expertise into product
opportunities. We have met or exceeded our development schedule with all of our
collaborators and will continue to deliver high quality genomic information on a
timely basis to our collaborators. We will also seek to expand these alliances.
We will also seek to enter into additional alliances with partners that have
franchises in the treatment of major disease indications. We believe companies
that have major research efforts and/or commercial products focused on a
particular disease will be motivated to utilize genomic information to develop
novel products that will allow them to maintain their market leadership
position.
USE OUR CONTRACT SEQUENCING BUSINESS TO GENERATE NEAR-TERM REVENUE AND BUILD
RELATIONSHIPS WITH POTENTIAL COLLABORATORS
Our reputation for rapid, high quality sequencing has been recognized by the
U.S. government, which has selected us as one of ten U.S. centers for the Human
Genome Project and one of five initial centers for the Mouse Genome Sequencing
Network, and the only commercial entity involved in either project. In order to
leverage fully our sequencing capabilities, in July 1999 we launched the GTC
Sequencing Center to provide high quality, industrial scale customized
sequencing services to pharmaceutical and biotechnology companies on a contract
basis. We intend to use our contract sequencing business to generate near-term
revenues and as an opportunity to familiarize customers
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with our genomics capabilities. In this way, our customized sequencing business
may permit us to broaden our business relationships with our biotechnology and
pharmaceutical customers, extending our relationships into more comprehensive
strategic alliances.
LEVERAGE PATHOGENOME DATABASE
We intend to maximize the potential of our PathoGenome Database. In 1997, we
introduced the PathoGenome Database, a database containing both proprietary and
publicly available genetic information on over thirty microbial organisms. To
date we have commercialized the PathoGenome Database through non-exclusive
subscriptions to pharmaceutical companies, including Aventis (formerly known as
Hoechst Marion Roussel), Bayer, Bristol-Myers Squibb, Schering-Plough and
Scriptgen Pharmaceuticals. Going forward, we intend to increase access to the
PathoGenome Database by making it available to a larger universe of scientific
and other users. We are pursuing alliances that will facilitate broader access
to our PathoGenome Database. We believe this will increase the value of the
PathoGenome Database by enhancing our exposure to scientific and pharmaceutical
researchers and solidifying our reputation as a leader in pathogen genomics.
EXPAND INTERNAL DEVELOPMENT PROGRAMS IN PHARMACOGENOMICS AND INFECTIOUS
DISEASES
We have ongoing internal development programs to build businesses in
pharmacogenomics and expand our existing infectious disease franchise. In the
pharmacogenomics area, we intend to form alliances with pharmaceutical and
biotechnology companies to use our integrated platform of technologies to detect
genetic variations that affect individual drug response. We believe that our
technology will allow us both to select the best leads for drug development and
to "rescue" drugs that have foundered. In the field of infectious diseases, we
plan to expand our internal program to pursue leads for novel drugs based upon
the results of our genomic research.
PHARMACEUTICAL AND DIAGNOSTIC PROGRAMS
We are building on our experience and knowledge in high-throughput
sequencing, bioinformatics, disease gene identification and functional genomics
to identify and characterize genes that we believe will lead to discoveries of
new or improved drugs, vaccines or diagnostic products that represent
significant commercial opportunities. The following table describes our existing
collaborations with pharmaceutical companies to develop drugs to treat human and
infectious diseases and to develop infectious disease diagnostics.
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PHARMACEUTICAL AND DIAGNOSTIC PRODUCT PROGRAMS
<TABLE>
<CAPTION>
PARTNER PROCEEDS RECEIVED AS
DISEASE INDICATION (DATE OF AGREEMENT) STATUS OF ALLIANCE OF NOVEMBER 27, 1999 POTENTIAL PROCEEDS*
- ------------------ ------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Osteoporosis Wyeth-Ayerst Functional studies N/A (new program) $118.0 million
Division of to confirm identity
American Home of target gene
Products ongoing; project
(December 1999) planning commenced
Asthma Schering-Plough Identification of $23.1 million $68.2 million
(December 1996) candidate genes
ongoing
Ulcers AstraZeneca Target $13.5 million $23.3 million
(September 1995) identification
completed; program
transferred to
AstraZeneca for
pre-clinical
testing
Drug Resistant Schering-Plough Validated targets $18.5 million $42.5 million
Bacterial (December 1995) and screening
Infections assays transferred
to Schering-Plough
Fungal Infections Schering-Plough Targets identified $9.1 million $36.0 million
(September 1997) for screening;
research program
extended to
September 2001
Infectious Disease bioMerieux PathoGenome N/A (new program) $6.2 million
Diagnostics (September 1999) Database delivered; guaranteed in first
identification of year (includes
gene markers completed equity
ongoing investment)
</TABLE>
- --------------------------
* Assumes receipt of all license fees, funded research and contingent payments
for achieving milestones; excludes potential royalties
OSTEOPOROSIS. Osteoporosis is a major health problem characterized by low
bone mass that affects more than 200 million people worldwide and approximately
one-third of post-menopausal women. In the U.S. alone, osteoporosis contributes
to more than 1.5 million bone fractures per year. Estimated national direct
expenditures for osteoporotic and associated fractures is $13.8 billion, and the
cost is rising in the Unites States. Twin and family studies suggest a strong
genetic component to the disease. Under a collaboration with Creighton
University of Omaha, Nebraska, we have gained access to data from related
individuals identified by Creighton that exhibit high bone mass. We believe the
identification of genes regulating bone density and disease progression will
lead to the discovery of novel drugs for treating osteoporosis by increasing
bone mass, as well as the development of diagnostic tests.
In December 1999, we formed an alliance with Wyeth-Ayerst to develop drugs
to treat osteoporosis based on our genetic research. Wyeth-Ayerst is a leader in
the field of women's health with a broad array of products, including
Premarin-Registered Trademark-, a leading estrogen replacement therapy. Under
our agreement with Wyeth-Ayerst, we could receive, subject to the achievement of
milestones, up to $118 million in license fees, milestone payments and research
support, as well as royalties on sales of
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any products developed. Under this alliance, we are carrying out functional
studies to confirm the identity of target genes.
ASTHMA. Asthma affects over 155 million people worldwide according to the
World Health Organization. The incidence appears to be rising dramatically
worldwide; in the United States, the incidence has doubled over the past two
decades. Asthma affects approximately 4% to 10% of the United States population,
and accounts for $12.6 billion in direct and indirect costs. Published research
suggests that multiple genetic factors as well as environmental influences play
a role in the disease. We believe that the asthma genes that we have identified
will facilitate the development of superior diagnostics and novel drugs.
In December 1996, we formed an alliance with Schering-Plough to use our
disease gene identification strategies to identify genes involved in the origin
of asthma. Schering-Plough is a leader in the field of allergy and respiratory
care products, with products such as Afrin-Registered Trademark- nasal spray,
the leading product in the branded nasal spray market, and the
Claritin-Registered Trademark- line of antihistamines, which generated
$2.3 billion of sales in 1998. As of November 27, 1999, we had received payments
of $23.1 million under this alliance and have rights to receive, based on
attainment of milestones, an additional $45.1 million of payments as well as
potential royalties. We are using our proprietary genomics tools, bioinformatics
and high-throughput sequencing to identify candidate genes believed to be
involved in the development of asthma in certain individuals.
ULCERS. H. PYLORI infection affects an estimated 30% of the United States
population, causing more than 5 million cases of peptic ulcer disease per year.
Industry sources estimate that the market for ulcer disease products worldwide
was $11.5 billion in 1999. The pathogen H. PYLORI is believed to be responsible
for 90% of duodenal ulcers, the most common type of ulcer, and approximately 80%
of gastric peptic ulcers. The World Health Organization has estimated that H.
PYLORI is responsible for 550,000 new cases of stomach cancer per year
worldwide. Using our sequencing technology, we completed the random sequencing
and finishing of the genome of H. PYLORI. The most common forms of treatment of
H. PYLORI, antibiotics and antisecretory drugs, do not eradicate H. PYLORI. We
believe that drugs targeted at genes essential to the survival of H. PYLORI will
provide novel treatments for peptic ulcers.
In September 1995, we formed an alliance with AstraZeneca to identify genes
critical to the survival of H. PYLORI and proteins on the surface of the
bacterium that we believe to be likely targets for drugs and vaccines.
AstraZeneca is a leader in the field of products to treat peptic ulcer disease.
Its anti-ulcer drug, Prilosec-Registered Trademark-, was the world's biggest
selling prescription drug in 1999 with sales of $5.9 billion. As of
November 27, 1999, we had received payments of $13.5 million under this alliance
and have rights to receive, based on attainment of milestones, an additional
$9.8 million of payments in addition to potential royalties. As of August 1999,
we had completed our research obligations under this alliance and had turned
over validated drug and vaccine targets to AstraZeneca for pre-clinical testing.
DRUG RESISTANT BACTERIAL INFECTIONS. Infectious diseases remain the world's
leading cause of premature death. Each year approximately 2 million patients in
the U.S. develop antibiotic resistant infections while being treated in
hospitals. These infections are caused by antibiotic resistant organisms, many
of which have multiple antibiotic resistance. Industry sources estimate that the
market for anti-infective products worldwide was $58 billion in 1999. The
pathogen STAPH. AUREUS is a common cause of skin, wound and blood infections.
STAPH. AUREUS infections are typically treated with antibiotics. In recent
decades, the incidence of STAPH. AUREUS infections that are resistant to
traditional antibiotic treatments has risen. Using our high-throughput
sequencing capabilities, we have sequenced the genome of antibiotic-resistant
STAPH. AUREUS. We believe that drugs targeted at genes essential to the survival
of STAPH. AUREUS will provide novel treatments for skin, wound and blood
infections contracted in hospitals.
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In December 1995, we formed an alliance with Schering-Plough to identify and
validate gene targets for the development of drugs to target STAPH. AUREUS and
other pathogens that have become resistant to current antibiotics.
Schering-Plough is an established participant in the anti-infective market, and
a leader in the utilization of genomics to discover novel anti-infective
products. As of November 27, 1999, we had received payments of $18.5 million
under this alliance and have rights to receive, based on attainment of
milestones, an additional $24.0 million of payments in addition to potential
royalties. To date, we have delivered numerous validated drug targets to
Schering-Plough for pre-clinical testing. Schering-Plough is continuing to
screen validated targets to identify drug candidates.
FUNGAL INFECTIONS. In the past twenty years, we have seen dramatic changes
in the pattern of fungal infections in humans. These pathogens have assumed a
much greater importance because of their increasing incidence in
immunocompromised patients, such as AIDS patients, transplant recipients, cancer
patients and other groups of immunocompromised individuals. Increased
international travel and misuse of antimicrobial agents have also contributed to
this trend and the emerging resistance to certain treatments. Industry sources
estimate that the market for prescription antifungal drugs worldwide was
approximately $1.8 billion in 1999, with non-prescription fungal treatments
adding significantly to overall market size. Currently, there are a limited
number of antifungals available for use against hospital related fungal
infections, and many of the products currently on the market have serious side
effects. We believe that drugs targeted at genes that are essential to the
survival of fungal pathogens will provide novel and effective treatments for
fungal infections.
In September 1997, we formed an alliance with Schering-Plough to use our
high-throughput sequencing capabilities and genomic tools to identify new,
validated fungal targets for the development of drugs to treat fungal
infections. Schering-Plough has extended our alliance through September 2001.
Schering-Plough is a leader in the field of drugs targeted against fungal
infections, with market leading products such as the Lotrimin
AF-Registered Trademark- and Tinactin-Registered Trademark- lines of topical
antifungals. As of November 27, 1999 we had received payments of $9.1 million
under this alliance and have rights to receive, based on attainment of
milestones, an additional $26.9 million of payments in addition to potential
royalties. In the course of the program, we identified multiple essential fungal
genes, and in October 1999, we delivered multiple assays for validated targets
to Schering-Plough for drug candidate screening.
INFECTIOUS DISEASE DIAGNOSTICS. The World Health Organization estimates
that more than 17 million people die of an infectious disease each year, with
many of those infections acquired in hospitals. There has been a global
resurgence of infectious diseases, including the identification of new
pathogens, the re-emergence of old infectious agents and the rapid spread of
resistance to anti-infective agents. The ability to rapidly identify the
specific microorganisms involved in disease is becoming increasingly important
and complex, providing challenges and opportunities for infectious disease
testing. Highly sophisticated and versatile methods are needed to identify a
larger and more diverse list of pathogens, including variants with drug
resistant characteristics. According to industry sources, the global market for
IN VITRO diagnostics for infectious disease was approximately $3.2 billion in
1997.
In September 1999, we entered into a strategic alliance with bioMerieux to
develop, manufacture and sell IN VITRO pathogen diagnostics for human clinical
and industrial applications. A privately held company based in France,
bioMerieux is one of the top 10 diagnostics companies in the world and the
leader in the field of microbiology. Under this collaboration, we will receive a
minimum of $6.2 million in the first year, including an equity investment that
has been completed, and could receive future milestone payments and royalties
based upon successful commercialization of diagnostic products. We have
delivered the PathoGenome Database to bioMerieux and are currently identifying
gene markers that can be employed in diagnostic product development.
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GENOMIC SEQUENCING AND DATABASES
We launched the GTC Sequencing Center in July 1999, capitalizing on our
sequencing strengths by providing sequencing services to customers on a
contractual basis. Our business focuses on providing customized sequencing
services to biotechnology companies and pharmaceutical companies that need
industrial scale, high quality customized sequencing capability.
We have extensive experience in high-throughput sequencing. With
approximately fifty full-time sequencers on staff and our highly automated
sequencing center operating twenty-four hours per day, seven days per week, we
are currently sequencing over 10 million base pairs (10 megabases) per day. The
U.S. government has recognized the quality of our sequencing work by naming us
as one of ten U.S. centers for the Human Genome Project and one of five initial
centers for the Mouse Genome Sequencing Network. We are the only commercial
entity selected for either project.
Since the launch of the GTC Sequencing Center in July 1999, we have entered
into sequencing contracts with thirteen commercial, government and research
customers, including the companies and institutions that we are able to disclose
publicly as follows:
SELECTED CONTRACT SEQUENCING CUSTOMERS
<TABLE>
<S> <C>
Aventis Phylos
Biogen Human Genome Project
Cubist Pharmaceuticals Mouse Genome Sequencing Network
Memorial Sloan-Kettering Cancer Research Center--Queen's
Cancer Center University, Ireland
</TABLE>
The GTC Sequencing Center is a key component of our strategy because it
provides us with near-term revenues and the ability to defray a portion of the
expenses associated with our sequencing operations. We believe the GTC
Sequencing Center permits us to establish business relationships with a broader
variety of participants in the biotechnology and pharmaceutical industries,
which may lead to more comprehensive strategic alliances.
PATHOGENOME DATABASE. In 1997, we introduced to the market the PathoGenome
Database, a database consisting of proprietary and publicly available genetic
information from over thirty microbial organisms, including organisms
responsible for the most prevalent bacterial infections. The PathoGenome
Database provides subscribers with non-exclusive access to a large volume of
highly organized and functionally annotated sequence information related to some
of the most medically important microbial organisms and fungi. We designed the
PathoGenome Database to be accessed at the client site using our proprietary
bioinformatics software. It enables researchers to search for new genes among
multiple pathogens and cross-reference genomic information for the development
of new anti-infective products. The following six companies have subscribed to
the PathoGenome Database:
SUBSCRIBERS TO PATHOGENOME DATABASE
<TABLE>
<S> <C>
Aventis Bristol-Myers Squibb
Bayer Schering-Plough
bioMerieux Scriptgen Pharmaceuticals
</TABLE>
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We received payments for access to the PathoGenome Database for a specified
term for all subscribers, and we have rights to receive royalties from future
product sales if the subscriber develops a product based on proprietary
information in the PathoGenome Database.
We are currently exploring opportunities to broaden access to the
PathoGenome Database by commercial and academic researchers from all over the
world. We are considering alliances to facilitate this access and extend the
market for our PathoGenome Database.
EMERGING BUSINESSES
Expenditures for new drug development have been steadily increasing and
there continues to be a shortfall in the number of new pharmaceutical product
introductions in the market. In addition, adverse drug events together with poor
side effect profiles may limit the success of existing pharmaceuticals. We are
seeking to employ our platform of genomics technologies to develop new, more
effective drugs through both our pharmacogenomics and infectious disease
programs.
PHARMACOGENOMICS. Understanding the differences in responses to drug
therapy related to single nucleotide polymorphisms, commonly referred to as
SNPs, in the genetic make-up of individuals can play a significant role in
improving the overall safety and efficacy of drugs. We have developed a highly
accurate and efficient platform to support our pharmacogenomics program. We are
using our technology platform, based on our high quality, high throughput
sequencing capability and a proprietary SNP screening assay, to search for
genetic causes responsible for variations among individuals in response to
drugs. As a first step in our pharmacogenomics program we have entered into a
contract with a biotechnology company to determine genetic variations to
validate that company's target. We plan to work with collaborators to identify
more appropriate patient populations using pharmacogenomics to enable the
development of more effective, safer drugs and the recovery of promising drugs
that could succeed in trials using pre-selected populations based upon
genetically determined responsiveness.
INFECTIOUS DISEASES. We are mining the sequence information contained in
our PathoGenome Database to identify genes that are novel targets and, as a
result, good candidates for internally funded infectious disease drug
development. Using our proprietary functional genomics technology, our
scientists have been able to discover genes that are essential for the survival
of pathogenic organisms. This technology, when combined with our bioinformatics
capabilities, enables us to identify broad-spectrum microbial targets that are
essential in bacteria. Thus, our gene discovery approach generates validated
microbial targets that possess both selectivity and specificity, which are ideal
attributes for drug intervention. These targets serve as the basis for our
emerging internal drug discovery efforts. In this regard, we have drawn upon our
strengths in microbial genetics to develop both biochemical and cell based
assays for these targets for use in high-throughput compound screens. We will
continue to pursue joint ventures similar to our joint venture with ArQule, a
combinatorial chemistry company, where we have screened ArQule's proprietary
chemical libraries against our assays to identify small molecule
anti-infectives. In addition, we intend to build internal capabilities through
the acquisition of novel compound libraries, technologies and/or products. It is
anticipated that these efforts will lead to the further growth of our own
infectious disease franchise.
OUR TECHNOLOGY
We have created an integrated high quality platform of genomic technologies
that can identify and validate novel targets for drug, vaccine and diagnostic
product development. Proteins, expressed by genes, are the targets of most
current drugs. We believe identification of human disease genes and genes
essential to the functioning of pathogens should enable the development of new
drugs and other products. We believe our technology platform will allow us to
accelerate drug, vaccine and diagnostic development for both our human and
infectious disease directed programs. Our integrated technology
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platform includes high quality, industrial scale sequencing and sequence
finishing, bioinformatics, functional genomics technologies, and assay
development.
The following chart illustrates the principal steps in the discovery and
development of novel targets for drug development using genomic-based discovery
tools. As demonstrated by the chart, our integrated platform of technologies
spans the drug discovery landscape, from gene identification to compound
optimization.
DRUG DISCOVERY & DEVELOPMENT PROCESS
[LOGO]
HIGH-THROUGHPUT SEQUENCING. We have developed a high-quality, industrial
scale process for sequencing. The GTC Sequencing Center utilizes a fully
automated process which makes use of DNA sequencing instruments and computers to
sequence and analyze genes. Our current sequencing production is over
10 million base pairs (10 megabases) of raw sequence daily. We maintain high
quality standards for all steps of our sequencing process by strictly
controlling the quality of the raw data generated. Using our technology, we have
sequenced and continue to sequence the genomes of bacterial and fungal pathogens
and various regions of the human, mouse and other genomes.
SEQUENCE FINISHING. Finishing is the final step to organizing the genomic
data once the the majority of the sequence information has been generated.
Finishing is necessary because the individual clones sequenced contain small,
randomly selected fragments of the complete genome. We assemble these fragments
using sophisticated proprietary computer software that identifies overlapping
regions and arranges the fragments into large contiguous regions. We also employ
a directed sequencing approach in order to specifically target and obtain
sequences for the missing regions to facilitate completion of the full genome
sequence. We have developed a proprietary finishing platform that utilizes
integrated computational and biochemical approaches to specify the required
quality of the end-product sequence and then directs the process to achieve the
desired quality level. As a result of our emphasis on quality, we currently have
a finished data accuracy of 99.99%.
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BIOINFORMATICS. Vast amounts of data result from DNA sequencing, finishing,
microarray and other genomic technologies that we employ. In order to determine
the biological significance and function of the genomic data that we compile, it
must be organized, managed, and analyzed. Bioinformatics involves the use of
computers, software, and databases to track, process, store, retrieve and
analyze data generated by genomic research. We were one of the first companies
to develop a significant bioinformatics capability due to our early work in
large-scale genetic linkage and sequence analysis. A central focus of our
current bioinformatics program is the development and application of genomic
data mining and visualization software to strengthen our gene and drug discovery
programs. The objective of our bioinformatics program is to accelerate the
discovery of genes and the determination of their function.
FUNCTIONAL GENOMICS. Functional genomics is the process of assigning
biochemical functions and disease roles to genes. In the target discovery and
validation stages of our pharmaceutical and diagnostic programs, functional
genomics confirms that specific gene targets are appropriate for the development
of pharmaceutical, vaccine, or diagnostic products. We have developed a number
of technologies to accelerate the functional analysis of important disease
genes, including gene expression, micro arrays, high throughput protein-protein
interaction technologies and gene knockouts. When we combine our expertise in
bioinformatics with these technologies, we bridge the gap between gene discovery
and drug discovery.
ASSAY DEVELOPMENT. After determining that a gene target is susceptible to
treatment by a small molecule drug and, in the case of a pathogen gene,
essential for the survival or virulence of a pathogen, we then develop screening
assays or tests for chemical compounds which interact with these targets. The
development of screening assays involves confirming the consistency of the
validated target under conditions that are pertinent to its viability for
treatment of humans. Following successful completion of the assay development
stage, we are then able to identify chemical compound leads that could enter
into clinical testing and that could ultimately result in a marketable drug.
STRATEGIC ALLIANCES
The primary focus of our commercialization strategy is to pursue strategic
alliances with pharmaceutical companies that are leaders in particular fields
for the development and commercialization of products resulting from our genomic
discoveries. This strategy provides us access to the substantial resources and
product development expertise of our partners and permits us to benefit
financially from the commercialization of products based on our gene
discoveries, without incurring the substantial costs required for pharmaceutical
product development and commercialization. We generally expect to license
(either exclusively or non-exclusively) to a partner most rights in a specific
field to therapeutic products and vaccines and, depending upon the gene,
diagnostic products that may be developed by the partner from the particular
genetic information that we provided to the partner. In exchange for a license
to our genetic research data and other information in a certain area, we are
typically entitled to receive a combination of:
- up-front license fees
- research funding
- milestone payments
- royalty payments on product sales
To date, we have entered into strategic alliances with Wyeth-Ayerst,
Schering-Plough (three distinct disease focused alliances), AstraZeneca, and
bioMerieux. We also have government collaborations specifically focusing on our
gene sequencing capability. Our strategic alliances are described in more detail
below.
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WYETH-AYERST/AHP. In December 1999, we entered into a strategic alliance
with Wyeth-Ayerst to develop novel drugs and other therapeutics for the
prevention and treatment of osteoporosis. Our alliance will focus on developing
drugs utilizing targets based on the characterization of a gene associated with
a unique high bone mass trait, the mirror image of osteoporosis. Under the
agreement, we granted Wyeth-Ayerst an exclusive worldwide license to make, use
and sell pharmaceutical and vaccine products based on this gene in the field of
osteoporosis. We have commenced functional studies to confirm the identity of
the gene responsible for the high bone mass trait. We are focusing on the
validation of gene targets in preparation for drug development utilizing the
extensive experience and capabilities of Wyeth-Ayerst in bone research.
Under this agreement, Wyeth-Ayerst has agreed to pay us up to $118 million
in up-front licensing fees, funded research and contingent payments for
achieving milestones. We also have the right to receive royalty payments on
Wyeth-Ayerst's sales of products based on technologies they have licensed from
us under the agreement. Wyeth-Ayerst has the right to terminate the alliance
prior to its completion in certain circumstances when we are not in breach under
the agreement, including if Wyeth-Ayerst determines that the prospects for drug
discovery under the alliance are minimal, or if Wyeth-Ayerst determines that
third party intellectual property rights are likely to impair development or
commercialization of a product under this alliance. In the event of such a
termination all licensed intellectual property rights revert to us. Certain
technologies licensed to Wyeth-Ayerst will be exclusively licensed by us from
Creighton University and sublicensed to Wyeth-Ayerst. We will owe Creighton
royalties under the license.
SCHERING-PLOUGH. We have three strategic alliances in place with
Schering-Plough, focusing on asthma, drug resistant bacterial infections and
fungal infections.
ASTHMA. In December 1996, we established a strategic alliance with
Schering-Plough to use our genomics research abilities to help discover new
pharmaceutical products to treat asthma. Under this alliance, we employ our
high-throughput disease gene identification, bioinformatics, and genomics
sequencing capabilities to identify genes and associated proteins that
Schering-Plough can use to develop pharmaceuticals and vaccines for treating
asthma. We are using our proprietary genomics tools, bioinformatics and
high-throughput sequencing to identify candidate genes believed to be
involved in the development of asthma in certain individuals. The research
phase of this alliance is scheduled to end in June 2000.
Under the agreement, Schering-Plough agreed to pay us up to
$68.2 million in initial license fees, funded research and contingent
payments for achieving milestones. Of the total potential payments,
approximately $23.7 million represents license fees and funded research
payments and $44.5 million represents milestone payments based on
achievement of research and product development objectives. We have achieved
a number of milestones under this agreement and have received payments as of
November 27, 1999 of $23.1 million. In November 1998, Schering-Plough
accelerated the program to increase funding and development in earlier
years. The agreement also obligates Schering-Plough to pay us royalties
based upon any sales of therapeutic products developed from this
collaboration.
Under the agreement, we granted Schering-Plough an exclusive worldwide
license to make, use and sell pharmaceutical and vaccine products that may
result from this collaboration. We retain the rights to make, use and sell
diagnostic products resulting from our research under the agreement.
DRUG RESISTANT BACTERIAL INFECTIONS. In December 1995, we entered into
a strategic alliance with Schering-Plough to identify and validate gene
targets for the development of drugs to target STAPH. AUREUS and other
pathogens that have become resistant to current antibiotics and are a
primary cause of hospital-based infections. In March 1998, Schering-Plough
elected to extend the
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research program through March 31, 2000. In August 1999, we delivered
numerous validated drug targets to Schering-Plough for pre-clinical testing.
Under this agreement, Schering-Plough has agreed to pay us up to
$42.5 million in initial license fees, funded research and contingent
payments for achieving milestones. We have achieved all of the research
milestones under this agreement and have received payments of $18.5 million
as of November 27, 1999. Subject to the achievement of additional product
development milestones, Schering-Plough has agreed to pay us up to an
additional $24 million in milestone payments.
As part of this program, we granted Schering-Plough exclusive worldwide
access to our proprietary STAPH. AUREUS genomic sequence database to make,
use and sell pharmaceutical and vaccine products based on these databases
and the technology developed during the course of the research program. We
will be entitled to receive royalties on Schering-Plough's sale of
therapeutic products and vaccines developed using the technology we licensed
to Schering-Plough. We also granted Schering-Plough a non-exclusive license
to use our bioinformatics systems for Schering-Plough's internal use in
connection with the genomic databases licensed to Schering-Plough under our
agreement and other genomic databases Schering-Plough develops or acquires.
Subject to certain limitations, we retain the rights to make, use, and sell
diagnostic products developed utilizing our genomic database licensed to
Schering-Plough and the technology developed during the course of the
research program. The research phase of this alliance is scheduled to end in
March 2000.
FUNGAL INFECTIONS. In September 1997, we established our third
strategic alliance with Schering-Plough to use genomics to discover and
develop new pharmaceutical products to treat fungal infections. In
December 1999, Schering-Plough extended this alliance with us through
September 2001. The alliance calls for us to use our bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify
and validate genes and associated proteins as drug discovery targets that
Schering-Plough can utilize to develop novel antifungal treatments.
Schering-Plough receives exclusive access to certain genomic information
developed in the collaboration related to two fungal pathogens, CANDIDA
ALBICANS and ASPERGILLUS FUMIGATUS. In October 1999, we delivered multiple
assays for validated targets to Schering-Plough, and Schering-Plough began
high-throughput screening for new drug candidates. The research phase of
this alliance is scheduled to end in September 2001.
Under this agreement, Schering-Plough has agreed to pay us up to
$36 million in initial license fees, funded research and contingent payments
for achieving milestones. We have achieved all of the research milestones
under this agreement and have received payments of $9.1 million as of
November 27, 1999.
Schering-Plough receives the exclusive worldwide right to make, use, and
sell pharmaceutical products to treat human and animal diseases based on the
technology developed during the course of the research program. We will be
entitled to receive royalties on Schering-Plough's sale of therapeutic
products and vaccines developed using the technology we licensed to
Schering-Plough. We retain the rights to make, use and sell diagnostic
products resulting from our research under the agreement.
ASTRAZENECA. In September 1995, we entered into a strategic alliance with
AstraZeneca to develop drugs, vaccines and diagnostic products effective against
peptic ulcers or any other disease caused by H. PYLORI. In August 1999, we
successfully concluded our portion of the research collaboration and
transitioned the program into AstraZeneca's pipeline for pre-clinical testing.
In the course of the research collaboration, we identified and validated a
number of undisclosed targets and vaccine antigens. We delivered these targets,
as well as screening assays, to AstraZeneca for high-throughput drug candidate
screening. Under the alliance, we also granted AstraZeneca exclusive access to
our H. PYLORI genomic sequence database.
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Under this agreement, AstraZeneca has agreed to pay us up to $23.3 million
in license fees, funded research and contingent payments for achieving
milestones. We have received approximately $13.5 million in license fees,
milestone payments and research funding under this agreement through
November 27, 1999.
Under the alliance, AstraZeneca holds the exclusive worldwide rights to
make, use and sell products based on H. PYLORI technology licensed to
AstraZeneca. We have rights to receive royalties on AstraZeneca's sale of any
products protected by patent claims that we have licensed exclusively to
AstraZeneca pursuant to the agreement, or resulting from a discovery enabled by
our genomic database licensed to AstraZeneca. AstraZeneca has the rights to
make, use and sell diagnostic products resulting from our research under the
agreement.
BIOMERIEUX. In September 1999, we entered into a strategic alliance with
bioMerieux to develop, manufacture and sell IN VITRO pathogen diagnostics for
human clinical and industrial applications. Under the terms of the alliance, we
granted bioMerieux all rights not previously granted to others in the area of
pathogen genetics for the development of diagnostic products. We have delivered
the PathoGenome Database to bioMerieux and are currently identifying gene
markers that can be employed in diagnostic product development.
Under this collaboration, bioMerieux has guaranteed us payments of at least
$6.2 million in the first year, which includes a $3.75 million equity investment
that has been completed. bioMerieux also agreed to fund research in the area of
infectious disease diagnostics for four years. We will receive future milestone
payments and royalties based upon successful commercialization of diagnostic
products.
GOVERNMENT COLLABORATIONS
Since 1989, various agencies of the United States government have awarded us
a number of research grants and contracts under government genomics programs.
The scope of our research covered by grants and contracts includes technology
development, sequencing production, technology automation projects and disease
gene identification projects. These programs strengthened our genomics
technology base and increased the number and enhanced the expertise of our
scientific personnel. As of November 27, 1999, we had approximately
$27.4 million of government research grants and contracts outstanding under
which we had not yet completed all of the services. These grants and contracts
call for us to perform services through October 2002. These programs are subject
to annual appropriations by the government based upon the availability of
government funds and our achievement of certain milestones. The government may
discontinue or reduce our funding at any time.
In July 1999, the government named us one of ten funded DNA sequencing
centers in the U.S. for the international Human Genome Project. The government
based the award on a peer review process that evaluated our industrial scale
sequencing facility for production capacity, cost effectiveness and quality
standards. We are the only commercial entity to have been chosen to participate
in the project. We will participate in an international consortium in a
full-scale effort to sequence the human genome. We will receive funding from the
NHGRI of up to $15.6 million over a three-year period of which $5 million is
guaranteed for the initial twelve months.
In October 1999, the government named us as one of five initial centers in
the Mouse Genome Sequencing Network. The government based the award on a peer
review process that evaluated our industrial scale sequencing facility for
production capacity, cost effectiveness and quality standards. We are the only
commercial entity to have been chosen to participate in deciphering the genetic
makeup of the mouse. We will receive funding from the NHGRI of up to
$12.9 million over a three-year period of which $2.4 million is guaranteed for
the initial seven months.
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Under both these research contracts, the government has ownership rights to
the data, clones, genes and other material derived from material furnished to us
by the government. We have ownership rights in other inventions that we develop
on our own under the contracts.
PATENTS AND PROPRIETARY TECHNOLOGY
Our ultimate commercial success depends in part on our ability to obtain
patent protection on our methods, technologies and discoveries, including genes,
proteins encoded by genes, patentable human single nucleotide polymorphisms or
products based on genes or our proprietary gene technology. To that end, our
policy is to protect our proprietary technology through patents, in spite of the
fact that the current criteria for obtaining patent protection for partially
sequenced genes and for genes are unclear. Our 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 or orthologous sequences. If at the time of filing a
patent application we have not characterized the biological function of a gene
or gene fragment we supplement our patent filing as soon as additional
biological function information about such gene or gene fragment becomes
available.
We have filed patent applications and will continue to do so with respect to
a number of full-length genes and corresponding proteins and partial genes
resulting from our pathogens program. Along with our collaborators, we file
foreign counterparts of these U.S. applications within the appropriate time
frames. Our patent applications seek to protect these full length and partial
gene sequences and corresponding proteins, as well as equivalent sequences, and
products derived from and uses of these sequences.
There have been, and continue to be, intensive discussions on the scope of
patent protection for gene fragments, single nucleotide polymorphisms, and
full-length genes. In 1996, the U.S. Patent and Trademark Office issued
guidelines limiting the number of nucleic acid sequences that can be covered in
a single patent application. In addition, the U.S. courts continue to redefine
and narrow the enforceable scope of claims to genes, gene fragments, and
proteins. The U.S. PTO also issued new Utility Guidelines that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics, and proposed Written Description guidelines that address the
amount of disclosure required to support claims to nucleotide sequences.
Consequently, we continually must assess our patent applications to determine
those that we can support for prosecution.
While the guidelines do not require clinical efficacy data for issuance of
patents for human therapeutics, the guidelines have been in effect for only a
short period of time and it is possible that the U.S. PTO may interpret them in
a way that could delay or adversely affect our ability or the ability of our
collaborators 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.
We are free to apply for patents on the results of our research conducted
with government funds. Under the government grants, subject to the limitations
described below, we have exclusive ownership rights to any commercial
applications of inventions that we first reduce to practice under the grants,
including all gene discoveries and technology improvements created or
discovered. We are under an obligation under some of the government grants to
submit sequencing data resulting from the research to public databases within
24 hours from the date we generate such data and materials. The governmental
grants also restrict us from applying for blanket patents on large numbers of
human or mouse genes. In addition, the government has a statutory right to
practice or permit others to practice inventions that we first reduce to
practice under a government grant or contract. In addition, under our government
research contracts, the government has ownership rights in the data, clones,
genes and other material derived from the material the government furnished to
us.
39
<PAGE>
The patent positions of biotechnology and pharmaceutical companies are
generally uncertain and involve complex legal and factual issues. No assurance
can be given that any patent issued to or licensed by us or our collaborators
will provide protection that has commercial significance. We cannot assure you
that:
- our patents will afford protection against competitors with similar
compounds or technologies
- our patent applications will issue
- others will not obtain patents having claims similar to the claims in our
patents or applications
- the patents of others will not have an adverse effect on our ability to do
business or
- the patents issued to or licensed by us will not be infringed, challenged,
opposed, narrowed, invalidated or circumvented
Moreover, we believe that obtaining foreign patents may, in some cases, be
more difficult than obtaining domestic patents because of differences in patent
laws. We also recognize that our patent position may generally be stronger in
the U.S. than abroad.
In particular, we are aware that companies have published patent
applications relating to nucleic acids encoding several H. PYLORI proteins and,
in other disease programs, relating to genes for which we have found mutations
of interest. If these companies are issued patents, their patents may limit our
ability and the ability of our collaborators to practice under any patents that
may be issued to us. Because of this, we or our collaborators may not be able to
obtain a patent with respect to the genes of H. PYLORI or the value of certain
other patents issued to us or our collaborators that are the subject of other
collaborations may be limited. Also, even if a patent were issued to us or our
collaborators, the scope of coverage or protection afforded to such patent may
be limited.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We generally protect this information with confidentiality
agreements that provide that all confidential information developed or made
known to others during the course of the employment, consulting or business
relationship shall be kept confidential except in specified circumstances.
Agreements with employees provide that all inventions conceived by the
individual while employed by us are our exclusive property. We cannot guarantee,
however, that these agreements will be honored, that we will have adequate
remedies for breach if they are not honored or that our trade secrets will not
otherwise become known or be independently discovered by competitors.
COMPETITION
The biotechnology industry generally, and our human genetics and pathogen
genetics and drug discovery programs specifically, are characterized by rapidly
evolving technology and intense competition. Our competitors include
pharmaceutical and biotechnology companies both in the United States and abroad.
We believe that our principal competitors include Human Genome Sciences, Incyte
Pharmaceuticals, Millennium Pharmaceuticals and Myriad Genetics.
In addition, universities and other non-profit research institutions and
United States and foreign government-sponsored entities are conducting
significant research to identify and sequence genes. These entities are becoming
more aggressive in their pursuit of patent protections and licensing
arrangements. Many of these institutions and other consortia, such as the SNP
Consortium, are also working to make large amounts of genetic information
publicly available, shrinking the pool of information available for proprietary
protection.
Many of our competitors have greater research and product development
capabilities and financial, scientific, marketing and human resources than we
do, and some competitors' human genome programs
40
<PAGE>
are more advanced than our program. Therefore, our competitors may succeed in
identifying or sequencing genes or developing products earlier, in obtaining
authorization from the FDA for products more rapidly and in developing products
that are more effective than those proposed by us or our collaborators. Any
potential products based on genes that we identify will face competition both
from companies developing gene-based products and from companies developing
other forms of diagnosis or treatment for the particular diseases.
Accordingly, competition with respect to our technologies and product
candidates is and will be based on, among other things:
- our ability to create and maintain advanced technology
- the speed with which we can identify and characterize the genes involved in
human diseases
- our ability to rapidly sequence the genomes of selected pathogens
- our partners' ability to develop and commercialize therapeutic, vaccine and
diagnostic products based upon our gene discoveries
- our ability to attract and retain qualified personnel
- our ability to obtain patent protection
- our ability to develop proprietary technology or processes
- our ability to secure sufficient capital resources to fund our research
operations
We also face increasing competition for strategic alliances with leading
pharmaceutical and biotechnology companies. We cannot be certain that we will be
able to obtain such strategic alliances in the future or that we will be able to
obtain them on terms comparable with existing alliances. Competition among
genetics companies is also increasing for access to unique data from related
individuals that we employ to identify genes for specific human diseases.
Our competitive position will also depend upon our ability to attract and
retain qualified personnel, to obtain patent protection or otherwise develop
proprietary product or processes, and to secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales. Competitive disadvantages in any of these factors could materially harm
our business and financial condition.
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 that we or our collaborators develop. The extent to which such
regulation may apply to us or our collaborators will vary depending on the
nature of the product. Virtually all of our or our collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, the FDA in the United States and similar
health authorities in foreign countries subject human therapeutic and vaccine
products to rigorous preclinical and clinical testing and other approval
procedures. Various federal and, in some cases, state statutes and regulations
also govern or influence the manufacturing, safety, labeling, storage, record
keeping and marketing of human therapeutic and vaccine products. Obtaining these
approvals and complying with appropriate federal and foreign statutes and
regulations requires a substantial amount of time and financial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Products based on our
technologies could potentially fall into all three categories.
41
<PAGE>
The FDA generally requires the following steps for pre-market approval of a new
drug or biological product:
- preclinical laboratory and animal tests
- submission to the FDA of an investigational new drug application, or IND,
which must become effective before clinical trials may begin
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product for its intended indication
- submission to the FDA of a marketing application and new drug application,
or NDA, if the FDA classifies the product as a new drug
- FDA review of the marketing application and NDA in order to determine,
among other things, whether the product is safe and effective for its
intended uses
- submission to and receipt of approval from the FDA of a product license
application and an establishment license if the FDA classifies the product
as a biologic (e.g., a vaccine)
We or our collaborators also may develop diagnostic products based upon the
human or pathogen genes that we identify. We believe that the FDA is likely to
regulate these diagnostic products as devices rather than drugs or biologics.
The nature of the FDA requirements applicable to diagnostic devices depends on
how the FDA classifies the diagnostic devices. The FDA most likely will classify
a diagnostic device that we or our collaborators develop as a Class III device,
requiring pre-market approval. Obtaining pre-market approval involves the
following process, which may be costly and time-consuming:
- pre-clinical studies
- obtain an investigational device exemption to conduct clinical tests
- filing a pre-market approval application
- FDA approval
Products on the market are subject to continual review by the FDA;
therefore, subsequent discovery of previously unknown problems, or failure to
comply with the applicable regulatory requirements may result in restricted
marketing or withdrawal of the product from the market and possible civil or
criminal sanctions. The FDA also may subject biologic products to batch
certification and lot release requirements. To the extent that any of our
products involve recombinant DNA technology, additional layers of government
regulation and review are possible. Similarly, there are additional regulatory
requirements for products marketed outside the United States governing the
conduct of clinical trials, product licensing, pricing and reimbursement.
MANUFACTURING AND MARKETING
We do not expect to manufacture or market pharmaceutical products in the
near term. However, in the future, we may consider manufacturing and marketing
if we believe they are appropriate under the circumstances. We have no recent
experience in developing pharmaceutical products or in manufacturing or
marketing pharmaceutical products. We may not have the resources to develop or
manufacture or market by ourselves any products based on genes identified by us.
In the event we decide to establish a manufacturing facility, we will require
substantial additional funds and will need to hire and train significant
additional personnel and will need to comply with the extensive "good
manufacturing practice" regulations applicable to such a facility. In addition,
if the FDA regulated any products produced at our facility as biologics, we
would need to file and obtain approval of an ELA for our facility.
42
<PAGE>
HUMAN RESOURCES
As of February 26, 2000, we had 174 full-time equivalent employees; 151 of
these employees engaged in research and development activities and 23 of them
conducted general and administrative functions. Thirty-six of our employees hold
Ph.D. degrees and 49 more hold other advanced degrees.
None of our employees is covered by a collective bargaining agreement, and
we consider our relations with our employees to be good.
FACILITIES
Our executive offices and laboratories are located at 100 Beaver Street,
Waltham, Massachusetts. We lease approximately 80,000 square feet of space and
our lease expires on November 15, 2006 with options to extend for two
consecutive five-year periods. During fiscal 1999, we incurred aggregate rental
costs, excluding maintenance, taxes and utilities, for our facility of
approximately $900,000.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their respective ages and positions
as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Robert J. Hennessey....... 58 Chief Executive Officer Chairman of the Board of
Directors
Richard D. Gill, Ph.D. ... 43 President and Chief Operating Officer
Philip V. Holberton....... 57 Treasurer and Chief Financial Officer
Christopher T. Kelly...... 53 Senior Vice President, Strategic Planning and
Business Development
Marc B. Garnick, M.D. 53 Director
(1) ....................
Philip Leder, M.D. ....... 65 Director
Lawrence Levy (1)(2)...... 76 Director
Steven M. Rauscher 46 Director
(1)(2)..................
Norbert G. Riedel, Ph.D. 42 Director
(2).....................
</TABLE>
- ------------------------------
(1) Member of audit committee
(2) Member of stock option and compensation committee
Set forth below is information about the professional experience of each of
our directors and executive officers.
ROBERT J. HENNESSEY has served as Chief Executive Officer and President of
Genome Therapeutics Corp. since March 1993 and became Chairman of the Board in
May 1994. From 1990 to March 1993, Mr. Hennessey served as President of
Hennessey & Associates, Ltd., a consulting firm, and from 1980 to 1990 he served
as a Vice President of Sterling Drug, Inc., a pharmaceutical company.
Mr. Hennessey is a director of Penwest Pharmaceuticals and Repligen, Inc.
RICHARD D. GILL, PH.D., has served as President and Chief Operating Officer
of Genome Therapeutics Corp. since December 1999. Dr. Gill joined us following
ten years with BTG International Inc., a subsidiary of BTG plc. Dr. Gill was
instrumental in establishing BTG USA in 1990 and served as Senior Vice President
and General Manager of BTG's North American Biosciences business. Prior to BTG,
Dr. Gill held positions of increasing responsibility in science and management
with Unilever plc in the United Kingdom from 1980 to 1989.
PHILIP V. HOLBERTON has served as Treasurer and Chief Financial Officer of
Genome Therapeutics since July 1999. Since 1995, he has been an independent
contractor, serving corporations as its Chief Financial Officer. He served as a
contract Chief Financial Officer for BioSepra, Inc. from August 1998 to
December 1999. From 1991 to 1995, he was Chief Financial Officer of Cambridge
NeuroScience, Inc., a biotechnology company.
CHRISTOPHER T. KELLY has served as Senior Vice President--Strategic Planning
and Business Development of Genome Therapeutics since 1997. Prior to joining us,
Mr. Kelly served as President and Chief Executive Officer of Spectral
Pharmaceuticals, Inc., a company which he co-founded in 1993. Prior to Spectral,
he served as Vice President of Commercial Development at Triplex Pharmaceutical
Corporation. From 1986 to 1992, Mr. Kelly held senior strategic planning and
business development
44
<PAGE>
positions at Sterling Drug, Inc.. Mr. Kelly previously held senior marketing
positions with Boehringer Mannheim Corporation, CooperBiomedical, Inc. and
Hoffmann-LaRoche Inc.
MARC B. GARNICK, M.D., a director of Genome Therapeutics Corp., currently
serves as Executive Vice President and Chief Medical Officer at Praecis
Pharmaceuticals, Inc. and Clinical Professor of Medicine at Harvard Medical
School. From 1987 to 1994, Dr. Garnick was Vice President, Clinical Development
at Genetics Institute. From 1978 to 1998, Dr. Garnick held various academic and
hospital appointments at Harvard Medical School, the Dana Farber Cancer
Institute and the Brigham and Women's Hospital.
PHILIP LEDER, M.D., a director of Genome Therapeutics Corp., has served as
the John Emery 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 Company, Inc.
LAWRENCE LEVY, a director of Genome Therapeutics Corp., is Chairman of the
Board of Directors and President of Northern Ventures Corporation, international
management and business consulting firm. He has held this position since 1982.
STEVEN M. RAUSCHER, a director of Genome Therapeutics Corp., has served as
Chief Executive Officer of AmericasDoctor.com, an Internet based health
information company, since January 2000. From 1995 to January 2000, he served as
the Chief Executive Officer and a director of Affiliated Research Centers, Inc.
From 1993 to 1995, Mr. Rauscher was President and Chief Executive Officer of
Pharmedic Company, a biopharmaceutical company, and from 1976 to 1993, he was
Vice President of Abbott Laboratories, a biopharmaceutical company.
NORBERT G. RIEDEL, PH.D., a director of Genome Therapeutics Corp., currently
serves as President of the Recombinant Strategic Business Unit for Baxter Hyland
Immuno, a division of Baxter Healthcare Corp. From 1991 to 1998, Dr. Riedel
served in various research and management positions at Hoechst Marion
Roussel, Inc. where his most recent responsibility was Head of Global
Biotechnology and the Hoechst Ariad Genomic Center. From 1984 to 1992,
Dr. Riedel held various academic appointments at Harvard University, Boston
University School of Medicine and Massachusetts Institute of Technology.
45
<PAGE>
UNDERWRITING
Genome Therapeutics has entered into an underwriting agreement with the
underwriters named below. CIBC World Markets Corp., Warburg Dillon Read LLC,
Dain Rauscher Incorporated and Tucker Anthony Incorporated are acting as
representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
CIBC World Markets Corp.....................................
Warburg Dillon Read LLC.....................................
Dain Rauscher Incorporated..................................
Tucker Anthony Incorporated.................................
---------------
Total................................................... 3,000,000
===============
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if any underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The underwriters have advised us that they propose to offer the shares
directly to the public at the public offering price that appears on the cover
page of this prospectus. In addition, the underwriters may offer some of the
shares to other securities dealers at such price less a concession of $ per
share. The underwriters may also allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares from
us to cover over-allotments. If the underwriters exercise all or part of this
option, they will purchase shares covered by the option at the public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$ , and the total proceeds to us will be $ . The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
they will each purchase a number of additional shares proportionate to the
underwriter's initial amount reflected in the foregoing table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE TOTAL WITH FULL EXERCISE
PER SHARE OF OVER-ALLOTMENT OPTION OF OVER-ALLOTMENT OPTION
---------- ------------------------ ------------------------
<S> <C> <C> <C>
Genome Therapeutics.................... $ $ $
</TABLE>
We will pay all of the expenses of this offering, excluding the underwriting
discounts and commissions referred to above, the total of which we estimate will
be approximately $ million.
46
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, our officers and directors have agreed to a 90-day "lock-up" with
respect to approximately 1,257,648 shares of common stock and other of our
securities that we beneficially own, including securities that are convertible
into shares of common stock and securities that are exchangeable or exercisable
for shares of common stock. This means that for a period of 90 days following
the date of this prospectus, we and such persons may not offer, sell, pledge or
otherwise dispose of these our securities without the prior written consent of
CIBC World Markets Corp. or, subject to certain exceptions, enter into any
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of common stock.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- - Stabilizing transactions--The representatives may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- - Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option.
- - Penalty bids--If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who
sold those shares as part of this offering.
- - Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to limitations, until the time, if ever, at which a stabilizing bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters makes any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
VALIDITY OF COMMON STOCK
Ropes & Gray, Boston, Massachusetts will pass upon the validity of the
shares of common stock we are offering. Palmer & Dodge LLP will pass upon legal
matters in connection with the offering for the underwriters.
EXPERTS
The consolidated financial statements of Genome Therapeutics Corp. as of
August 31, 1998 and 1999 and for the years ended August 31, 1997, 1998 and 1999
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public
47
<PAGE>
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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities and
Exchange Commission for the stock we are offering by this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information. Whenever we make reference in this prospectus to any of
our contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and the information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
1. Our Annual Report on Form 10-K for the fiscal year ended August 31, 1999 as
filed with the SEC on November 24, 1999;
2. Our Annual Report on Form 10-K/A for the fiscal year ended August 31, 1999
as filed with the SEC on February 15, 2000;
3. Our Quarterly Report on Form 10-Q for the quarter ended November 27, 1999 as
filed with the SEC on January 11, 2000;
4. Our Proxy Statement as filed with the SEC on January 27, 2000; and
5. Our Current Report on Form 8-K dated March 8, 2000.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Genome Therapeutics Corp.
100 Beaver Street
Waltham, Massachusetts 02453
Attention: Chief Financial Officer
(781) 398-2300
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; Seven World Trade
Center, Thirteenth Floor, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also
obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of public reference facilities.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of August 31, 1998 and 1999
and November 27, 1999 (unaudited)......................... F-3
Consolidated Statements of Operations for the
Years Ended August 31, 1997, 1998 and 1999 and for the
Thirteen Week
Periods Ended November 28, 1998 and November 27, 1999
(unaudited)............................................... F-4
Consolidated Statements of Shareholders' Equity for
the Years Ended August 31, 1997, 1998 and 1999 and for the
Thirteen Week
Periods Ended November 28, 1998 and November 27, 1999
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the
Years Ended August 31, 1997, 1998 and 1999 and for the
Thirteen Week
Periods Ended November 28, 1998 and November 27, 1999
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
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, 1998 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Genome Therapeutics Corp.
and subsidiaries as of August 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1999, in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
October 6, 1999
F-2
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 27,
--------------------------- ------------
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 10,978,176 $ 12,802,162 $ 23,091,486
Marketable securities..................................... 21,969,524 12,060,230 7,017,740
Interest receivable....................................... 742,411 448,192 746,809
Unbilled costs and fees................................... 150,299 35,328 92,103
Prepaid expenses and other current assets................. 721,239 324,211 749,990
Note receivable from former officer....................... -- 120,000 120,000
------------ ------------ ------------
Total current assets.................................. 34,561,649 25,790,123 31,818,128
------------ ------------ ------------
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment....................... 14,434,808 15,844,262 17,843,653
Leasehold improvements.................................... 7,913,570 8,205,701 8,217,451
Equipment and furniture................................... 1,334,268 1,344,703 1,353,953
------------ ------------ ------------
23,682,646 25,394,666 27,415,057
Less--Accumulated depreciation............................ 8,579,440 12,173,500 13,129,739
------------ ------------ ------------
15,103,206 13,221,166 14,285,318
Restricted cash............................................. 200,000 200,000 200,000
Long-term marketable securities............................. 1,029,569 -- --
Note receivable from former officer......................... 160,000 -- --
Other assets................................................ 410,267 273,708 265,083
------------ ------------ ------------
$ 51,464,691 $ 39,484,997 $ 46,568,529
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............... $ 5,611,186 $ 3,934,547 $ 4,064,376
Accounts payable.......................................... 977,610 987,958 2,457,047
Accrued expenses.......................................... 2,450,400 2,322,780 2,570,044
Deferred revenue.......................................... 4,699,137 2,903,534 4,907,543
------------ ------------ ------------
Total current liabilities............................. 13,738,333 10,148,819 13,999,010
------------ ------------ ------------
Long-term obligations, net of current maturities............ 8,478,558 5,925,086 5,353,830
------------ ------------ ------------
Commitments and contingencies (Note 4)
Shareholders' Equity:
Common stock, $.10 par value--Authorized--34,375,000
shares;
Issued and outstanding--18,312,589, 18,542,146 and
19,264,381 shares at August 31, 1998 and 1999 and
November 27, 1999 (unaudited), respectively............. 1,831,259 1,854,214 1,926,438
Series B restricted stock, $.10 par value--
Authorized--625,000 shares
Issued and outstanding--none............................ -- -- --
Additional paid-in capital................................ 87,964,523 88,285,619 92,563,562
Accumulated deficit....................................... (60,369,289) (66,697,384) (66,818,987)
Deferred compensation..................................... (178,693) (31,357) (455,324)
------------ ------------ ------------
Total shareholders' equity............................ 29,247,800 23,411,092 27,215,689
------------ ------------ ------------
$ 51,464,691 $ 39,484,997 $ 46,568,529
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
YEARS ENDED AUGUST 31, ---------------------------
----------------------------------------- NOVEMBER 28, NOVEMBER 27,
1997 1998 1999 1998 1999
------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research,
licenses and
subscription fees....... $ 16,652,764 $ 19,217,132 $24,018,165 $ 5,110,257 $ 6,035,002
Costs and Expenses:
Research and
development............. 26,523,824 31,977,381 26,699,910 6,813,002 5,341,305
Selling, general and
administrative.......... 3,765,755 4,292,471 4,279,480 910,552 969,645
------------ ------------ ----------- ----------- -----------
Total costs and
expenses............ 30,289,579 36,269,852 30,979,390 7,723,554 6,310,950
------------ ------------ ----------- ----------- -----------
Loss from operations...... (13,637) (17,052) (6,961) (2,614) (276)
Interest income........... 2,965,866 2,386,523 1,586,798 412,000 363,671
Interest expense.......... (631,442) (1,147,186) (953,668) (270,345) (209,326)
------------ ------------ ----------- ----------- -----------
Net interest income... 2,334,424 1,239,337 633,130 141,655 154,345
------------ ------------ ----------- ----------- -----------
Net loss.............. $(11,302,391) $(15,813,383) $(6,328,095) $(2,471,642) $ (121,603)
============ ============ =========== =========== ===========
Net Loss per Common Share:
Basic and diluted......... $ (.64) $ (.87) $ (.34) $ (.13) $ (.01)
============ ============ =========== =========== ===========
Weighted Average Common
Shares outstanding:
Basic and diluted......... 17,617,614 18,212,365 18,382,707 18,317,843 18,947,684
============ ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL TOTAL
NUMBER $.10 PAR PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT COMPENSATION EQUITY
---------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1996.................... 17,460,966 $1,746,097 $86,067,176 $(33,253,515) $(247,000) $ 54,312,758
Exercise of stock options................. 321,963 32,196 824,264 -- -- 856,460
Deferred compensation from grant of stock
options................................. -- -- 50,594 -- (50,594) --
Amortization of deferred compensation and
other compensation expense.............. -- -- -- -- 79,370 79,370
Net loss.................................. -- -- -- (11,302,391) -- (11,302,391)
---------- ---------- ----------- ------------ --------- ------------
Balance, August 31, 1997.................... 17,782,929 1,778,293 86,942,034 (44,555,906) (218,224) 43,946,197
Exercise of stock options................. 529,660 52,966 930,615 -- -- 983,581
Deferred compensation from grant of stock
options................................. -- -- 91,874 -- (91,874) --
Amortization of deferred compensation and
other compensation expense.............. -- -- -- -- 131,405 131,405
Net loss.................................. -- -- -- (15,813,383) -- (15,813,383)
---------- ---------- ----------- ------------ --------- ------------
Balance, August 31, 1998.................... 18,312,589 1,831,259 87,964,523 (60,369,289) (178,693) 29,247,800
Exercise of stock options................. 228,757 22,875 322,121 -- -- 344,996
Issuance of stock under directors deferred
stock plan.............................. 800 80 -- -- -- 80
Deferred compensation from grant of stock
options................................. -- -- 60,006 -- (60,006) --
Amortization of deferred compensation and
other compensation expense.............. -- -- -- -- 142,847 142,847
Compensation expense related to grant of
stock options........................... -- -- 3,464 -- -- 3,464
Reversal of deferred compensation related
to termination of stock options......... -- -- (64,495) -- 64,495 --
Net loss.................................. -- -- -- (6,328,095) -- (6,328,095)
---------- ---------- ----------- ------------ --------- ------------
Balance, August 31, 1999.................... 18,542,146 1,854,214 88,285,619 (66,697,384) (31,357) 23,411,092
Sale of common stock...................... 678,610 67,861 3,664,254 -- -- 3,732,115
Exercise of stock options................. 43,625 4,363 94,514 -- -- 98,877
Deferred compensation from grant of
stock................................... -- -- 519,175 -- (519,175) --
Amortization of deferred compensation..... -- -- -- -- 95,208 95,208
Net loss.................................. -- -- -- (121,603) -- (121,603)
---------- ---------- ----------- ------------ --------- ------------
Balance, November 27, 1999 (unaudited)...... 19,264,381 $1,926,438 $92,563,562 $(66,818,987) $(455,324) $ 27,215,689
========== ========== =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
YEARS ENDED AUGUST 31, ---------------------------
------------------------------------------ NOVEMBER 28, NOVEMBER 27,
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................. $(11,302,391) $(15,813,383) $ (6,328,095) $(2,471,642) $ (121,603)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities--
Depreciation and amortization.......... 2,382,286 3,714,383 4,063,977 1,013,122 960,624
Loss on disposal of fixed assets....... 227,864 288,979 -- -- --
Deferred compensation.................. 79,370 131,405 146,311 40,762 95,208
Common stock issued for services
rendered............................. -- -- 80 -- --
Changes in assets and liabilities--
Accounts receivable.................. 1,283,276 29,460 (15,554) 15,141 (36,364)
Interest receivable.................. 16,046 538,200 294,219 98,421 (298,617)
Unbilled costs and fees.............. 205,453 (9,979) 114,971 (61,688) (56,775)
Prepaid expenses and other current
assets............................. 144,663 (287,317) 412,582 107,842 (389,415)
Loan to former officer............... (160,000) -- 40,000 -- --
Accounts payable..................... 424,112 (310,781) 10,348 (58,510) 1,469,089
Accrued expenses..................... 642,568 76,612 (127,620) 210,365 247,264
Deferred revenue..................... 1,300,191 2,363,442 (1,795,603) 1,808,601 2,004,009
------------ ------------ ------------ ----------- -----------
Total adjustments.................. 6,545,829 6,534,404 3,143,711 3,174,056 3,995,023
------------ ------------ ------------ ----------- -----------
Net cash (used in) provided by
operating activities............. (4,756,562) (9,278,979) (3,184,384) 702,414 3,873,420
------------ ------------ ------------ ----------- -----------
Cash Flows from Investing Activities:
Purchases of marketable securities....... (20,575,625) (30,820,944) (21,858,137) (5,657,554) (5,353,510)
Maturities of marketable securities...... 24,530,000 46,761,250 32,797,000 8,290,000 10,396,000
Purchases of equipment and leasehold
improvements........................... (1,370,028) (5,162,311) (834,351) (55,222) (1,652,777)
(Increase) decrease in restricted cash... (106,000) 101,500 -- -- --
(Increase) decrease in other assets...... (220,850) 18,722 136,559 7,085 8,625
------------ ------------ ------------ ----------- -----------
Net cash provided by investing
activities....................... 2,257,497 10,898,217 10,241,071 2,584,309 3,398,338
------------ ------------ ------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock....... -- -- -- -- 3,732,115
Proceeds from exercise of stock
options................................ 856,460 983,581 344,996 64,167 98,877
Proceeds from long-term obligations...... 2,500,000 4,011,000 -- -- --
Payments on long-term obligations........ (2,933,984) (4,238,341) (5,577,697) (1,327,717) (813,426)
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in)
financing activities............. 422,476 756,240 (5,232,701) (1,263,550) 3,017,566
------------ ------------ ------------ ----------- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents.............................. (2,076,589) 2,375,478 1,823,986 2,023,173 10,289,324
Cash and Cash Equivalents, beginning of
period................................... 10,679,287 8,602,698 10,978,176 10,978,176 12,802,162
------------ ------------ ------------ ----------- -----------
Cash and Cash Equivalents, end of period... $ 8,602,698 $ 10,978,176 $ 12,802,162 $13,001,349 $23,091,486
============ ============ ============ =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the year............ $ 631,442 $ 1,147,186 $ 953,668 $ 270,345 $ 209,326
============ ============ ============ =========== ===========
Income taxes paid during the year........ $ 36,612 $ 24,700 $ 33,019 $ 7,200 $ 4,800
============ ============ ============ =========== ===========
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Equipment acquired under capital
leases................................. $ 5,843,037 $ 3,572,777 $ 1,347,586 $ 592,987 $ 372,000
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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. (GTC or the Company) is a leader in
commercialization of genomics-based drug discovery. GTC has over ten years of
experience in genomic research and has been selected as the only commercial
genomics company to participate in the Human Genome Project sponsored by the
United States government. Our commercial strategy is to apply GTC's broad
understanding of human and infectious disease genomics and GTC's integrated
proprietary technologies to validate novel drugs for commercialization through
alliances with pharmaceutical companies.
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) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(B) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include, in the opinion of
management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of interim period results. The results for the
interim periods presented are not necessarily indicative of results to be
expected for the full fiscal year.
(C) REVENUE RECOGNITION
Revenues are from contract research and licenses derived from alliances with
pharmaceutical companies and from government grants and contracts. Upfront
license fees are recognized as earned. Revenues from research and development
and alliances are recognized over their respective contract periods.
Subscription fees from the PathoGenome Database are recognized ratably over the
life of the subscription. Milestone payments from research and development
alliances are recognized when they are achieved. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued
in December 1999. The Company believes that SAB 101 will have an impact on
future operating results. See Note 1(j) for additional discussion.
(D) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful life for
leasehold improvements is the lesser of the term of the lease or the estimated
useful life of the assets. Equipment and all other depreciable assets' useful
lives vary from three to seven years. The majority of the Company's equipment
and leaseholds are financed through bank equipment lines of credit.
F-7
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE, which establishes standards for computing and
presenting earnings per share. Basic and diluted earnings per share were
determined by dividing net loss by the weighted average common shares
outstanding during the period. Diluted loss per share is the same as basic loss
per share for all periods presented as the effect of the potential common stock
is antidilutive. Antidilutive securities which consist of stock options and
warrants that are not included in diluted net loss per common share were
4,869,938, 4,089,226, 3,301,008, 3,631,756 and 3,385,715 at August 31, 1997,
1998, 1999, November 28, 1998 and November 27, 1999, respectively.
(F) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet or
concentrations of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company maintains its cash,
cash equivalents and marketable securities balances with several nonaffiliated
institutions.
The Company had revenues from the following significant customers:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE OF
OF TOTAL REVENUES
SIGNIFICANT ------------------------------
CUSTOMERS A B C
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended August 31,
1997......................................... 3 17% 27% 48%
1998......................................... 3 9 9 71
1999......................................... 3 4 4 75
Thirteen week periods ended:
November 28, 1998............................ 3 5% 5% 63%
November 27, 1999............................ 2 -- 17 64
</TABLE>
(G) 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.
(H) FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable, accounts
payable and long-term debt, approximates carrying value.
F-8
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) COMPREHENSIVE LOSS
The Company has adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS
No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Comprehensive loss is the same
as net loss for all periods presented.
(I) SEGMENT REPORTING
The Company applies SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The Company's
chief decision-makers, as defined under SFAS No. 131, are the chief executive
officer, chief operating officer and chief financial officer. To date, the
Company has viewed its operations and manages its business as principally one
operating segment. As a result, the financial information disclosed herein,
represents all of the material financial information related to the Company's
principal operating segment. All of the Company's revenues are generated in the
United States and substantially all assets are located in the United States.
(J) NEW ACCOUNTING PRONOUNCEMENT
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued
in December 1999. SAB 101 will require companies to recognize certain upfront
non-refundable fees and milestone payments over the life of the related alliance
when such fees are received in conjunction with alliances which have multiple
elements. The Company is required to adopt this new accounting principle through
a cumulative charge to the statement of operations, in accordance with
Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING CHANGES, no later
than the first quarter of fiscal 2001. The Company believes that the adoption of
SAB 101 will have an impact on its future operating results as it relates to the
upfront non-refundable payments and milestone payments received in connection
with alliances (see Note 8). The historical financial statements reflect
payments of approximately $17.0 million received in the year ended August 31,
1995 through November 27, 1999. Based on guidance currently available, upon
adoption of SAB 101, the Company will be required to record these fees as
revenue over the life of the related agreement, as defined.
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. At August 31, 1999 and November 27, 1999, 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
F-9
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
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 and
consist of commercial paper and U.S. government debt securities. The Company has
not recorded any realized gains or losses on its marketable securities.
The aggregate fair value and cost of the marketable securities are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1999 NOVEMBER 27, 1999
------------------------- ------------------------- -----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than one year--
Corporate and other debt securities.......... $21,969,524 $21,958,963 $12,060,230 $12,043,522 $7,017,740 $7,004,413
=========== =========== =========== =========== ========== ==========
Corporate and other debt securities (average
maturity of 1 year in 1998)................ $ 1,029,569 $ 1,029,687 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ========== ==========
</TABLE>
The Company has $200,000 in restricted cash at August 31, 1998 and 1999 and
November 27, 1999 in connection with certain capital lease obligations (see
Note 5).
(3) INCOME TAXES
The Company applies SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse. SFAS
No. 109 requires deferred tax assets and liabilities to be adjusted when the tax
rates or other provisions of the income tax laws change.
At August 31, 1999, the Company had net operating loss and tax credit
carryforwards of approximately $63,785,000 and $3,137,000, respectively,
available to reduce federal taxable income and federal income taxes,
respectively, if any. Net operating loss carryforwards and credits are subject
to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in the ownership interest of
significant shareholders over a three-year period in excess of 50%.
F-10
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(3) INCOME TAXES (CONTINUED)
The net operating loss carryforwards and tax credits expire approximately as
follows:
<TABLE>
<CAPTION>
NET OPERATING RESEARCH INVESTMENT TAX
LOSS TAX CREDIT CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
- --------------- ------------- ------------- --------------
<S> <C> <C> <C>
2000.................................. $ 5,039,000 $ 273,000 $143,000
2001.................................. 3,829,000 84,000 75,000
2002.................................. 4,811,000 24,000 3,000
2003.................................. 2,254,000 -- --
2004-2019............................. 47,852,000 2,498,000 37,000
----------- ---------- --------
$63,785,000 $2,879,000 $258,000
=========== ========== ========
</TABLE>
The components of the deferred tax assets at the respective dates are as
follows:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................. $ 23,154,000 $ 24,237,000
Research and development credits................. 1,310,000 2,879,000
Investment tax credits........................... 347,000 258,000
Other, net....................................... 1,856,000 2,318,000
------------ ------------
26,667,000 29,692,000
Valuation allowance.............................. (26,667,000) (29,692,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The valuation allowance has been provided due to the uncertainty surrounding
the realization of the deferred tax assets.
(4) COMMITMENTS
(A) LEASE COMMITMENTS
At August 31, 1999, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006. Minimum
lease payments and facilities charges under the leases at August 31, 1999 are as
follows:
<TABLE>
<S> <C>
Year ending August 31,
2000........................................................ $ 917,488
2001........................................................ 949,138
2002........................................................ 1,179,393
2003........................................................ 1,138,797
2004........................................................ 1,115,653
Thereafter.................................................. 2,603,526
----------
$7,903,995
==========
</TABLE>
F-11
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(4) COMMITMENTS (CONTINUED)
Rental expense was approximately $949,000, $1,085,000, $899,000, $242,000 and
$206,000 in the years ended August 31, 1997, 1998 and 1999 and the thirteen week
periods ended November 28, 1998 and November 27, 1999, respectively.
(B) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain of its executive officers
which provide for bonuses, as defined, and severance benefits upon termination
of employment, as defined.
(C) LOAN TO FORMER OFFICER
On December 6, 1996, the Company loaned $160,000 to a former officer of the
Company. The loan bears interest at prime plus 1% and has been amended to be due
on June 30, 2000. The Company forgave and expensed $40,000 of the loan during
the year ended August 31, 1999.
(5) LONG-TERM OBLIGATIONS
On February 28, 1997, the Company entered into an equipment lease line of
credit under which it financed $6,000,000 of laboratory, computer and office
equipment. The lease is payable in 48 monthly installments from the point of
takedown, at a variable interest rate of LIBOR (5.375% as of August 31, 1999)
plus 2%. On March 9, 1998, the Company increased the equipment lease line of
credit by $4,300,000 to $10,300,000. The additional borrowings under the
equipment lease line of credit will be utilized to finance laboratory, computer
and office equipment. Borrowings under the new credit line are payable in 15
quarterly installments commencing March 31, 1999, at a variable rate of LIBOR
plus 1.75%. At any time during the term of this agreement, the Company may elect
to convert to a fixed rate loan at the prevailing interest rate. The Company is
required to maintain certain restricted cash balances, as defined (see Note 2).
In addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth and debt service
coverage. The Company had approximately $1,953,000 available under the modified
line of credit at November 27, 1999.
On July 31, 1997, the Company entered into a financing arrangement under
which it financed $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 on July 1, 1998. The interest rates range from
7.19% to 8.16%. The Company is required to maintain certain financial ratios
pertaining to minimum cash balances, debt to net worth and tangible net worth.
The Company has no additional availability under this financing arrangement at
November 27, 1999.
The Company has entered into other capital lease line 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 10.29%. The Company is required to maintain
certain financial ratios pertaining to minimum cash balances, tangible net
worth, debt to tangible net worth and debt service coverage. The Company has no
additional borrowing capacity under these capital lease agreements at
November 27, 1999.
F-12
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(5) LONG-TERM OBLIGATIONS (CONTINUED)
Payments under long-term obligations at August 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending August 31,
2000........................................................ $ 4,596,401
2001........................................................ 3,975,585
2002........................................................ 2,154,381
2003........................................................ 261,087
-----------
Total minimum lease payments................................ 10,987,454
Less--Amount representing interest.......................... 1,127,821
-----------
Present value of total minimum lease payments............... 9,859,633
Less--Current portion....................................... 3,934,547
-----------
$ 5,925,086
===========
</TABLE>
(6) SHAREHOLDERS' EQUITY
(A) STOCK OPTIONS
The Company has granted stock options to key employees and consultants under
its 1988, 1991, 1993, 1995 and 1998 Stock Option Plans. The purchase price and
vesting schedule applicable to each option grant are determined by the stock
option and compensation committee of the Board of Directors. In addition, under
separate agreements not covered by any plan, the Company has granted certain key
employees and certain directors of the Company, options to purchase common
stock.
The Company granted nonqualified stock options for the purchase of 65,000
and 10,000 shares of common stock to consultants in the years ended August 31,
1997 and 1999, respectively. The options were granted with an exercise price
equal to the fair market value price at the date of grant and vest ratably over
the contract period, as defined. In accordance with Emerging Issues Task Force
(EITF) No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING GOODS OR SERVICES,
the Company will measure the value of options as they vest using the
Black-Scholes option pricing model. The Company has charged $5,270, $12,648,
$16,113, $3,162 and $10,302 to operations for the year ended August 31, 1997,
1998, 1999 and the thirteen week periods ended November 28, 1998 and
November 27, 1999, respectively related to the grant of these options.
The Company records deferred compensation when stock options are granted at
an exercise price per share that is less than the fair market value on the date
of the grant. 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 is being recognized as an expense over
the estimated vesting period of the underlying options. In 1997, 1998 and 1999,
the Company recorded $50,594, $91,874 and $60,006 respectively, of deferred
compensation. The Company recorded compensation expense of approximately
$79,000, $131,000, $146,000, $41,000 and $95,000 for the years ended August 31,
1997, 1998, 1999 and the thirteen week periods ended November 28, 1998 and
November 27, 1999, respectively. During fiscal 1999, in connection with the
termination of an
F-13
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
employee, the Company reversed $64,495 of unamortized deferred compensation due
to the cancelation of the options.
In September 1999, the Company granted to certain employees the right to
receive 125,716 shares of common stock. The employees will receive the common
stock in two equal installments on the anniversary of the grant date. The
Company recorded deferred compensation of $502,861 related to the grant of these
rights to receive the common stock, which will be amortized to expense over the
period the shares are earned.
In November 1998, the Board of Directors authorized a Stock Option Repricing
Program (the Program). Under the terms of the Program, all current employees
excluding the chairman, president and CEO had the option to request that the
Company cancel their existing options and replace them with a new option to
purchase 85%-90% of the original number of shares of common stock granted, at
the new option exercise price and vesting schedule. The new exercise price was
calculated using the Black-Scholes option pricing model, which was greater than
the fair market value on the date of grant. The repriced shares could not be
exercised for 12 months from the date of grant. The repriced options are
reflected as grants and cancelations in the stock activity below.
There were 1,205,735 common shares available for future grant at
November 27, 1999. The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
---------- ------------------ -------------
<S> <C> <C> <C>
Outstanding, August 31, 1996............ 4,348,214 $ .20-14.50 $3.85
Granted................................. 797,950 6.19- 9.69 8.58
Exercised............................... (321,963) .88- 7.25 2.66
Canceled................................ (178,513) 1.56-14.50 6.86
---------- ------------------ -----
Outstanding, August 31, 1997............ 4,645,688 .20-14.50 4.63
Granted................................. 468,900 4.88- 9.50 6.30
Exercised............................... (529,660) 1.31- 8.31 1.86
Canceled................................ (719,952) 2.03-14.50 7.77
---------- ------------------ -----
Outstanding, August 31, 1998............ 3,864,976 .20-14.50 4.63
Granted................................. 1,016,379 2.31- 4.23 3.95
Exercised............................... (228,757) .20- 2.62 1.51
Canceled................................ (1,351,590) .20-14.50 7.22
---------- ------------------ -----
Outstanding, August 31, 1999............ 3,301,008 1.53-14.50 3.57
Granted................................. 330,007 3.81- 4.44 4.41
Exercised............................... (43,625) 2.03- 3.41 2.27
Canceled................................ (215,624) 3.38- 9.50 6.53
---------- ------------------ -----
Outstanding, November 27, 1999.......... 3,371,766 $ 1.53-14.50 $3.48
========== ================== =====
Exercisable, November 27, 1999.......... 2,286,435 $ 1.53-14.50 $2.92
========== ================== =====
Exercisable, August 31, 1999............ 2,426,749 $ 1.53-14.50 $3.16
========== ================== =====
Exercisable, August 31, 1998............ 2,674,323 $ .20-14.50 $3.43
========== ================== =====
Exercisable, August 31, 1997............ 2,795,938 $ .20-14.50 $2.78
========== ================== =====
</TABLE>
F-14
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
The range of exercise prices for options outstanding and options exercisable
at November 27, 1999 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING OPTIONS OUTSTANDING OPTIONS EXERCISABLE
CONTRACTUAL -------------------- --------------------
LIFE OF WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE
EXERCISE OUTSTANDING EXERCISE EXERCISE
PRICES (IN YEARS) NUMBER PRICE NUMBER PRICE
- --------------------- ----------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.53- 2.25....... 3.46 1,500,977 $ 1.69 1,479,977 $ 1.68
$2.31- 3.41....... 6.82 469,150 2.76 243,250 2.37
$3.52- 5.00....... 9.18 915,275 4.34 235,444 4.29
$5.31-$ 7.50....... 6.53 177,076 6.71 146,467 6.73
$8.31- 9.50....... 6.25 308,788 8.86 180,922 8.86
$14.50............. 6.22 500 14.50 375 14.50
---- --------- ------ --------- ------
Total.............. 5.90 3,371,766 $ 3.48 2,286,435 $ 2.92
==== ========= ====== ========= ======
</TABLE>
(B) PRO FORMA DISCLOSURE OF STOCK-BASED COMPENSATION
The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which requires the measurement of the fair value of stock options or warrants
granted to employees to be included in the consolidated statement of operations
or, alternatively, disclosed in the notes to consolidated financial statements.
The Company has determined that it will continue to account for stock-based
compensation for employees and nonemployee directors under Accounting Principles
Board Opinion No. 25 and elect the disclosure-only alternative under SFAS
No. 123. The Company has computed the pro forma disclosures required under SFAS
No. 123 for stock options granted in 1997, 1998 and 1999 using the Black-Scholes
option pricing model. The weighted average assumptions used for 1997, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ -------------------- -----------------
<S> <C> <C> <C>
Risk-free interest rate....... 6.20%-6.73% 5.36%-6.20% 4.46%-6.15%
Expected dividend yield....... -- -- --
Expected life................. 7 years 7 years 7 years
Expected volatility........... 65% 65% 65%
Weighted average fair market
value at grant date......... $4.93 $3.61 $4.21
</TABLE>
The total value of the options granted to employees during 1997, 1998 and
1999 was computed as $3,857,026, $1,635,318 and $1,255,868, respectively. Of
these amounts, $2,951,660, $652,668 and $966,309 would be charged to operations
for the years ended August 31, 1997, 1998 and 1999, respectively. The remaining
amount, approximately $1,407,072, will be amortized over the remaining
F-15
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
vesting periods. The pro forma effect of these option grants for the years ended
August 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- --------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss.................................. $(11,302,391) $(14,254,051) $(15,813,383) $(16,466,051) $(6,328,095) $(7,294,404)
============ ============ ============ ============ =========== ===========
Net loss per share........................ $ (0.64) $ (0.81) $ (0.87) $ (0.90) $ (0.34) $ (0.40)
============ ============ ============ ============ =========== ===========
</TABLE>
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years, as the pro forma expense may vary
based on the number of options granted. The Black-Scholes option pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
(C) 1997 DIRECTORS DEFERRED STOCK PLAN
In January 1998, the Company's stockholders approved the 1997 Directors
Deferred Stock Plan (the 1997 Directors Plan) covering 150,000 shares of common
stock. The stock will be issued as services are performed by members of the
Company's Board of Directors. As of August 31, 1999 and November 27, 1999, 800
and 25,702 shares, respectively, of common stock were issued under the 1997
Directors Plan.
(7) INCENTIVE SAVINGS PLAN 401(K)
The Company maintains an incentive savings plan (the Plan) for the benefit
of all employees. On October 1, 1996, the Company changed its matching
contribution from 50% of the first 2% of salary and 25% of the next 4% of
salary, limited to the first $50,000 of annual salary to 100% of the first 2% of
salary and 50% of the next 2% of salary, limited to the first $100,000 of annual
salary. The Company contributed $165,778, $229,460, $241,587, $55,677 and
$46,885 to the Plan for the years ended August 31, 1997, 1998, 1999 and for the
thirteen week periods ended November 28, 1998 and November 27, 1999,
respectively.
(8) ALLIANCES
(A) ASTRAZENECA
In August 1995, the Company entered into an alliance with AstraZeneca
(Astra), formerly Astra Hassle AB, to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infection or any other
disease caused by H. PYLORI. The Company granted Astra exclusive access to the
Company's H. PLYORI genomic sequence database and exclusive worldwide rights to
make, use and sell products based on the Company's H. PYLORI technology. The
agreement also provides for a four-year research alliance to further develop and
annotate the Company's H. PYLORI genomic sequence database,
F-16
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
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 an initial license fee, expense
allowance, milestone payments, and fund a research program for a minimum of two
and a half years with an option to extend. On June 4, 1998, Astra exercised its
option to extend the research program for a second time which will carry the
agreement through August 1999. Under this agreement as extended, Astra agreed to
pay the Company a minimum of approximately $13.5 million and, subject to the
achievement of certain product development milestones, up to approximately
$23.3 million (and possibly a greater amount if more than one product is
developed under the agreement) in license fees, expense allowances, research
funding and milestone payments. Of such fees, $500,000 are creditable against
any future royalties payable to the Company by Astra under the agreement.
The Company will also be entitled to receive royalties on Astra's sale of
products (i) protected by the claims of patents licensed exclusively to Astra by
the Company pursuant to the agreement, or (ii) the discovery of which was
enabled in a significant manner by the genomic database licensed to Astra by the
Company. The Company has the right, under certain circumstances, to convert
Astra's license to a nonexclusive license in the event Astra is not actively
pursuing commercialization of the technology.
The Company has recognized $2,859,262, $1,653,623, $909,870, $251,292 and
$12,909 in revenue under the agreement in the years ended August 31, 1997, 1998
and 1999 and for the thirteen week periods ended November 28, 1998 and
November 27, 1999, respectively, which consisted of milestone payments and
collaborative research revenues.
(B) SCHERING-PLOUGH
In December 1995, the Company entered into an alliance 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 STAPH.AUREUS to identify new gene targets for development of
antibiotics effective against drug-resistant infectious organisms. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's proprietary STAPH.AUREUS genomic sequence database. 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 this agreement, Schering-Plough agreed to pay an initial license fee
and fund a research program for a minimum of two-and-a-half years with an option
to extend. On March 4, 1998, Schering-Plough elected to extend the research
program to the full term of the agreement which expires on March 31, 2000. Under
the agreement as extended, Schering-Plough has agreed to pay the Company a
minimum of $18.5 million in an up-front license fee, research funding and
milestone payments. Subject
F-17
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
to the achievement of additional product development milestones, Schering-Plough
has agreed to pay the Company up to an additional $24 million in milestone
payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough by the Company and on the technology
developed in the course of the research program. The Company has also granted
Schering-Plough a right of first negotiation if during the term of the research
plan the Company desires to enter into an alliance with a third party with
respect to the development or sale of any compounds that are targeted against,
as their primary indication, the pathogen that is the principal subject of the
Company's agreement with Schering-Plough. The Company will be entitled to
receive royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed from the Company. Subject to certain
limitations, the Company retained the rights to make, use and sell diagnostic
products developed based on the Company's genomic database licensed to
Schering-Plough or the technology developed in the course of the research
program.
Under the December 1995 agreement, the Company has recognized $3,364,810,
$3,435,807, $2,490,802, $710,542 and $586,954 in revenue in the years ended
August 31, 1997, 1998, 1999 and for the thirteen week periods ended
November 28, 1998 and November 27, 1999, respectively, under this alliance
agreement, which consisted of a license fee, alliance research revenue and
milestone payments.
In December 1996, the Company entered into its second research alliance and
license agreement with Schering-Plough. This agreement calls for the use of
genomics to discover new therapeutics for treating asthma. As part of the
agreement, the Company will employ its high-throughput positional cloning,
bioinformatics, and genomics sequencing capabilities to identify genes and
associated proteins that can be utilized by Schering-Plough to develop new
pharmaceuticals. Under this agreement, the Company has granted Schering-Plough
exclusive access to (i) certain gene sequence databases made available under
this research program, (ii) information made available to the Company under
certain third-party research agreements, (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this collaboration.
Under this agreement, Schering-Plough agreed to pay an initial license fee
and an expense allowance to the Company. Schering-Plough is also required to
fund a research program for a minimum number of years with an option to extend.
In July 1998, Schering-Plough amended the original agreement in order to
accelerate the research effort being undertaken. In addition, upon completion of
certain scientific developments, Schering-Plough will make milestone payments to
the Company, as well as pay royalties to the Company based on sales of
therapeutics products developed from this collaboration. If all milestones are
met and the research program continues for its full term, total payments to the
Company will approximate $68.2 million, excluding royalties. Of the total
potential payments, approximately $23.7 million represents license fees and
research payments, and $44.5 million represents milestone payments based on
achievement of research and product development milestones.
Under this second agreement, the Company has recognized $4,603,805,
$7,099,911, $9,926,776, $1,944,129 and $1,439,044 in revenue in the years ended
August 31, 1997, 1998, 1999 and for the
F-18
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
thirteen week periods ended November 28, 1998 November 27, 1999, respectively,
under this agreement, which consisted of a license fee, expense allowance,
alliance research funding and milestone payments.
On September 24, 1997, the Company entered into a third research alliance
and license agreement with Schering-Plough to use genomics to discover and
develop new pharmaceutical products to treat fungal infection.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the alliance 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 $36 million, excluding royalties. Of
the total potential payments, approximately $13.0 million represents sponsored
research payments and $23 million represents milestone payments based on
achievement of research and product development milestones. Additionally, the
Company entered into a subscription agreement with Schering-Plough to provide
Schering-Plough with nonexclusive access to the Company's proprietary genome
sequence database, PathoGenome-TM- and associated information relating to
microbial organisms (see Note 9).
Under the third agreement, the Company has recognized $2,432,005,
$4,831,870, $689,036 and $1,654,362 in revenue for the years ended August 31,
1998 and 1999 and for the thirteen week periods ended November 28, 1998 and
November 27, 1999, respectively, which consisted of research funding and
milestone payments.
(C) NATIONAL HUMAN GENOME RESEARCH INSTITUTE
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company will
participate in an international consortium in a full scale effort to sequence
the human genome. The Company is entitled to receive research and development
funding from the National Human Genome Research Institute (NHGRI) of up to
$15.6 million over a three year period of which $5 million is expected to be
received over the initial 12 months as the Company performs research under the
project. As of August 31, 1999 and the thirteen weeks ended November 27, 1999,
the Company has recognized approximately $340,000 and $912,000 in connection
with the international Human Genome Project. Funding under our government grants
and research contracts is subject to appropriation each year by the United
States Congress and can be discontinued or reduced at any time. In addition, the
Company cannot be certain that we will receive additional grants or contracts in
the future. The government's failure to fund our research in this area not only
would end the Company's participation in the program, but might adversely affect
the industry-wide perception of genomics and the utility of genomic information.
F-19
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
(D) BIOMERIEUX ALLIANCE
In September 1999, the Company entered into strategic alliance with
bioMerieux to develop, manufacture and sell IN VITRO diagnostic products for
human clinical and industrial applications. As part of the alliance, bioMerieux
purchased a subscription to the Company's PathoGenome Database, agreed to fund a
research program for at least four years and pay royalties on future products.
In addition, bioMerieux purchased $3.75 million of the Company's common stock at
$5.53 per share. The total amount of guaranteed research and development funding
and PathoGenome Database subscription for the first year, and the proceeds from
the sale of the common stock, approximates $6.2 million. The research and
development funding will be recognized ratably over the four year term of the
agreement. For the thirteen weeks period ended November 27, 1999, the Company
recorded revenue of $88,888 under this agreement.
(E) MOUSE GENOME SEQUENCING NETWORK
In October 1999, the NHGRI named the Company as a pilot center to the Mouse
Genome Sequencing Network. The Mouse Genome Sequencing Network will be composed
of several facilities that will be responsible for deciphering the genetic
makeup of the mouse. The Company is entitled to receive $12.9 million in funding
over the next three years with respect to this agreement of which the Company is
expected to receive $2.4 million during the first fiscal period, which ends
April 30, 2000 as the Company performs research under the project. For the
thirteen weeks ended November 27, 1999, the Company recognized approximately
$51,000 with respect to this agreement. Funding under our government grants and
research contracts is subject to appropriation each year by the United States
Congress and can be discontinued or reduced at any time. In addition, the
Company cannot be certain that we will receive additional grants or contracts in
the future. The government's failure to fund our research in this area not only
would end the Company's participation in the program, but might adversely affect
the industry-wide perception of genomics and the utility of genomic information.
(F) WYETH-AYERST LABORATORIES
In December 1999, the Company entered into a strategic alliance with
Wyeth-Ayerst Laboratories to develop novel therapeutics for the prevention and
treatment of osteoporosis. The alliance will focus on developing therapeutics
utilizing targets based on the characterization of a gene associated with a
unique high bone mass trait.
The agreement calls for the Company to employ its established capabilities
in positional cloning, bioinformatics and functional genomics in conjunction
with Wyeth-Ayerst's drug discovery capabilities and its expertise in bone
biology and the osteroporotic disease process to develop new pharmaceuticals.
Under the terms of the agreement, Wyeth-Ayerst will pay the Company an up-front
license fee, fund a multi-year research program, make milestone payments and pay
royalties on sales of therapeutics products developed from this collaboration.
If the research program continues for its full term and substantially all of the
milestone payments are met, total payments to the Company, excluding royalties,
would exceed $118 million.
F-20
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(9) DATABASE SUBSCRIPTIONS
The Company has entered into PathoGenome Database subscriptions with Bayer
AG, Bristol-Myers Squibbs, Scriptgen Pharmaceuticals, Inc., Schering-Plough (see
Note 8), Aventis, formerly Hoechst Marion Roussel and bioMerieux. The database
subscription provides nonexclusive access to the Company's proprietary genome
sequence database, PathoGenome Database and associated information relating to
microbial organisms. The subscription agreement calls for the Company to provide
periodic data updates, analysis tools and software support. Under the
subscription agreements, the customer has agreed to pay an annual subscription
fee and royalties on any molecules developed as a result of access to the
information provided by PathoGenome Database. The Company retains all rights
associated with protein therapeutic, diagnostic and vaccine use of bacterial
genes or gene products.
The Company has recognized $666,667, $2,766,671, $4,845,832, $1,241,666 and
$1,062,500 in revenue under these agreements in the years ended August 31, 1997,
1998, 1999 and for the thirteen week periods ended November 28, 1998 and
November 27, 1999, respectively, consisting of license and subscription fees.
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------- NOVEMBER 27,
1998 1999 1999
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related expenses............. $1,109,626 $1,065,311 $1,224,674
Facilities............................... 469,932 438,453 529,041
Professional fees........................ 285,058 269,553 242,298
License and other fees................... 185,434 160,434 160,434
Employee relocation...................... 162,519 143,843 143,843
All other................................ 237,831 245,186 269,754
---------- ---------- ----------
$2,450,400 $2,322,780 $2,570,044
========== ========== ==========
</TABLE>
F-21
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
GENOME THERAPEUTICS CORP.
3,000,000 SHARES
COMMON STOCK
------------------
PROSPECTUS
------------------
, 2000
CIBC WORLD MARKETS
WARBURG DILLON READ LLC
DAIN RAUSCHER WESSELS
TUCKER ANTHONY CLEARY GULL
- ----------------------------------------------------------------
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. ("NASD") filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- --------
<S> <C>
SEC Registration Fee........................................ $ 37,999
NASD Filing Fee............................................. $ 14,893
Nasdaq National Market Listing Fee.......................... $ 17,500
Transfer Agent and Registrar Fees........................... $ 15,000
Accounting Fees and Expenses................................ $ 50,000
Legal Fees and Expenses..................................... $250,000
Printing Expenses........................................... $ 90,000
Miscellaneous............................................... $ 24,608
--------
Total................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is organized under the laws of The Commonwealth of
Massachusetts. The Massachusetts Business Corporation Law provides that
indemnification of directors, officers, employees, and other agents of another
organization, or who serve at its request is any capacity with respect to any
employee benefit plan, may be provided by the corporation to whatever extent
specified in its charter documents or votes adopted by its shareholders, except
that no indemnification may be provided for any person with respect to any
matter as to which the person shall have been adjudicated in any proceeding not
to have acted in good faith in the reasonable belief that his action was in the
best interest of the corporation. Under Massachusetts law, a corporation can
purchase and maintain insurance on behalf of any person against any liability
incurred as a director, officer, employee, agent, or person serving at the
request of the corporation as a director, officer, employee, or other agent of
another organization or with respect to any employee benefit plan, in his
capacity as such, whether or not the corporation would have power to itself
indemnify him against such liability.
The Company's Restated Articles of Organization, as amended to date, provide
that its directors shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that the exculpation from liabilities is not permitted under the
Massachusetts Business Corporation Law as in effect at the time such liability
is determined. The By-Laws provide that the Company shall indemnify its
directors and officers to the full extent permitted by the laws of The
Commonwealth of Massachusetts. In addition, the Company holds a Directors and
Officer Liability and Corporate Indemnification Policy.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following is a list of exhibits filed as a part of this registration
statement.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1 Underwriting Agreement (to be filed by amendment)
4.1* Specimen Certificate for shares of common stock, $.10 par
value, of the Registrant
5 Opinion of Ropes & Gray with respect to the validity of the
securities being offered
10.1 Employment Agreement of Richard D. Gill, Ph.D.
10.2 Restricted Stock Award Agreement for Richard D. Gill, Ph.D.
10.3 Registration Rights Agreement between the Registrant and
bioMerieux Alliance sa dated September 30, 1999
10.4 Employment Agreement of Christopher T. Kelly
23.1 Consent of Ropes & Gray (contained in its opinion filed as
Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of attorney (included on the page II-4 of this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 33-00127).
(B) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes to the
Financial Statements.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 15--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waltham, Commonwealth of Massachusetts, on this 15th
day of March, 2000.
<TABLE>
<S> <C> <C>
GENOME THERAPEUTICS CORP.
BY: /S/ RICHARD D. GILL
-----------------------------------------
Title: President and Chief Operating
Officer
</TABLE>
The registrant and each person whose signature appears below constitutes and
appoints Richard D. Gill, Robert J. Hennessey and Philip V. Holberton and each
of them, with full power to act without the other, his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign
(i) any or all amendments to this registration statement, including
post-effective amendments, and to file the same with all exhibits thereto, and
other documents in connection therewith and (ii) a registration statement, and
any amendments thereto, relating to the offering covered hereby files pursuant
to Rule 462(b) under the Securities Act of 1933, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each of
them full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any substitutes
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chairman of the Board and
/s/ ROBERT J. HENNESSEY Chief Executive Officer
------------------------------------------- (Principal Executive March 15, 2000
Robert J. Hennessey Officer)
/s/ PHILIP V. HOLBERTON Chief Financial Officer and
------------------------------------------- (Principal Financial and March 15, 2000
Philip V. Holberton Accounting Officer)
/s/ MARC B. GARNICK Director
------------------------------------------- March 15, 2000
Marc B. Garnick
/s/ PHILIP LEDER Director
------------------------------------------- March 15, 2000
Philip Leder
/s/ LAWRENCE LEVY Director
------------------------------------------- March 15, 2000
Lawrence Levy
/s/ STEVEN M. RAUSCHER Director
------------------------------------------- March 15, 2000
Steven M. Rauscher
/s/ NORBERT G. RIEDEL Director
------------------------------------------- March 15, 2000
Norbert G. Riedel
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1 Underwriting Agreement (to be filed by amendment)
4.1* Specimen Certificate for shares of common stock, $.10 par
value, of the Registrant
5 Opinion of Ropes & Gray with respect to the validity of the
securities being offered
10.1 Employment Agreement of Richard D. Gill, Ph.D.
10.2 Restricted Stock Award Agreement for Richard D. Gill, Ph.D.
10.3 Registration Rights Agreement between the Registrant and
bioMerieux Alliance sa dated September 30, 1999
10.4 Employment Agreement of Christopher T. Kelly
23.1 Consent of Ropes & Gray (contained in its opinion filed as
Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of attorney (included on the page II-4 of this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 33-00127).
<PAGE>
Exhibit 5
[ROPES & GRAY LETTERHEAD]
March 15, 2000
Genome Therapeutics Corp.
100 Beaver Street
Waltham, MA 02453
Re: Genome Therapeutics Corp.
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-3 (the "Registration Statement"), filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, for the registration of 3,450,000 shares of Common Stock, $.10 par
value (the "Shares"), of Genome Therapeutics Corp., a Massachusetts
corporation (the "Company"). The Shares are to be sold pursuant to an
underwriting agreement (the "Underwriting Agreement") to be entered into
among the Company and CIBC World Markets, as representatives of the
underwriters named therein.
We have acted as counsel for the Company in connection with its
proposed issuance and sale of the Shares. For purposes of this opinion, we have
examined and relied upon such documents, records, certificates and other
instruments as we have deemed necessary.
We express no opinion as to the applicability or compliance with or
effect of Federal law or the law of any jurisdiction other than The Commonwealth
of Massachusetts and the corporate laws of The Commonwealth of Massachusetts.
Based on the foregoing, we are of the opinion that the shares have been
duly authorized and, when the Shares have been issued and sold and the Company
has received the consideration in accordance with the terms of the Underwriting
Agreement, the Shares will be validly issued, fully paid and non-assessable.
<PAGE>
Name of Company -2- [date]
We hereby consent to your filing this opinion as an exhibit to the
Registration Statement and to the use of our name therein and in the related
prospectus under the caption "Validity of Common Stock."
It is understood that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
<PAGE>
Exhibit 10.1
REVISED OFFER
November 22, 1999
Richard D. Gill, Ph.D.
937 Morris Avenue
Bryn Mawr, PA 19010
Dear Richard:
On behalf of Bob Hennessey, Chief Executive Officer, and the Board of Directors,
I am pleased to confirm our revised offer of employment for the position of
President and Chief Operating Officer for Genome Therapeutics Corporation,
reporting directly to Bob. We hope to have you assume your new role as soon as
you conclude your current commitments.
As President and Chief Operating Officer, you will have broad responsibility to
lead GTC business and scientific efforts and assume overall management
responsibility for all but the Human Resource function, which will continue to
report to Bob with a dotted line to you.
Our job offer includes the following components:
1. BASE SALARY: $9,038.46 biweekly, which is $235,000 per annum.
2. MANAGEMENT INCENTIVE PLAN: You will be eligible for an annual incentive of
0 - 30% of base salary based on company performance. Incentive will most
likely be paid in company stock.
3. SIGNING BONUS: $15,000 cash bonus will be paid to you upon completion of 90
days employment.
4. RESTRICTED SHARES: You will be granted 20,000 restricted shares priced at
the fair market value at date of acceptance. The shares will become
exercisable in two (2) increments, 10,000 on your first anniversary with
GTC and 10,000 at the conclusion of your second year of employment.
5. STOCK OPTIONS: You will be nominated for a non-qualified stock option award
equal to 240,000 options, which will vest in equal installments over four
(4) years. The option price will be the fair market value of GTC stock at
date of acceptance. Additionally you will be granted 100,000 performance
based options which also vest in equal installments over four (4) years but
can immediately vest in 50% increments if the stock price closes at $8.00
and $10.00 respectively for 10 of 20 consecutive trading days. The option
price for this grant will be the fair market value at date of acceptance.
6. RELOCATION: Reasonable and customary relocation expenses with receipts and
temporary living allowance will be covered up to $60,000 with full tax
gross up. The allowance amount commitment will expire one (1) year from
date of hire.
7. BENEFITS: Eligibility to participate in our standard benefits program,
which includes an initial five (5) weeks vacation. You will also be
provided with Company paid executive life insurance equivalent to 3X base
salary. A Company paid cellular telephone and in home computer will be
provided to you.
<PAGE>
8. MISC. ALLOWANCE: Annual (fiscal year) miscellaneous allowance of $4,500.
9. SALARY PROTECTION: If you are terminated from the company for reasons other
than cause within two (2) years from date of hire, you will be entitled to
receive up to twelve (12) months salary and benefits continuation or until
such time you are re-employed, whichever occurs first. Cause is defined as:
a) Commission of any act of dishonesty or misconduct in respect of Employer or
any person(s) either associated with Employer's business or with whom
Employer does business.
b) Absence from work for an extended period without permission of Employer.
c) Consistent failure to obey directives of Employer.
d) Dissemination without Employer's approval of any confidential information
obtained in the course of employment to any person not employed by
Employer.
e) Failure to provide services in substantial compliance with the terms and
provisions of this engagement.
1. CHANGE OF CONTROL: If, within two (2) years following a change of control
of the Company by a merger or if any person or group acquires a majority of
the outstanding common stock of the Company, you are terminated, or you
experience a material reduction in responsibilities or compensation, you
will receive salary and benefits continuation for a period of twelve (12)
months. Additionally, your remaining unvested options and non-exercisable
restricted shares will immediately fully vest and become exercisable.
2. BOARD SEAT: Based on your performance as determined by the Board and Bob
Hennessey, over the course of six (6) months from date of hire, you will be
considered for nomination to the Board. However, as President and COO, you
will be a regularly invited guest to Board meetings except on matters
deemed as Board only topics for discussions (i.e., your own compensation,
CEO succession plan).
3. PERFORMANCE REVIEW: Your first performance and merit review will be
September 2000.You and I will discuss and agree on performance objectives
shortly after you commence your employment with GTC.
Our offer of employment is contingent upon completion of positive references,
signing of this at will employment offer letter and acceptance of the terms and
conditions set forth in the company's Intellectual Property Policy, one of which
is enclosed for your review and signature. The top sheet of the IP Policy and
last page of Appendix I will need to be signed. Please note your acceptance of
our offer and terms by returning these signed documents to me. Once you have
confirmed your start date with me, arrangements will be made for your
orientation and public statement of your employment with the company.
This offer is valid until Wednesday, November 24, 1999.
Richard, Bob and the Board very much look forward to a positive response from
you, and anticipate your contributions to Genome Therapeutics Corporation.
Please call me with any questions you may have regarding this offer.
Sincerely,
Joseph A. Pane
Vice President, Human Resources
Genome Therapeutics Corporation
By signing below I accept the terms and conditions of this employment offer:
________________________ __________ ____________
Richard D. Gill, Ph.D. Date Start Date
<PAGE>
Exhibit 10.2
GENOME THERAPEUTICS CORP.
RESTRICTED STOCK AWARD AGREEMENT
Pursuant to this Restricted Stock Award Agreement between the undersigned
and Genome Therapeutics Corp. (the "Company"), the undersigned is advised that
the Board of Directors of the Company (the "Board") has voted to award the
undersigned 20,000 shares of common stock of the Company, $.10 par value
("Stock"), subject to the restrictions and conditions set forth below. The date
of this Award, set forth above, is hereinafter referred to as the "date of
grant". Please note that in order for this Agreement to be valid, the
undersigned must execute two copies and forward one copy to Joseph A. Pane, Vice
President, Human Resources, at Genome Therapeutics Corp., 100 Beaver Street,
Waltham, Massachusetts 02154, not later than [30 DAYS AFTER DATE OF THE AWARD].
In consideration of the Company's transferring to the undersigned the
shares of Stock provided for herein, the undersigned hereby agrees with the
Company as follows:
1. The shares of Stock issued by the undersigned hereunder pursuant to this
Restricted Stock Award Agreement shall not be sold, transferred, pledged,
assigned or otherwise encumbered or disposed of except as provided below.
2. In the event the undersigned ceases to be employed by the Company for any
reason other than death or disability (as hereinafter defined), the Stock
issued hereunder, less any shares that have previously vested, shall be
immediately forfeited to the Company. In the event the undersigned
involuntarily ceases to be employed by the Company for any reason other
than for cause, the Company, at its discretion, may distribute all of the
unvested Stock issued hereunder. The undersigned shall deliver to the
Company one or more stock powers, endorsed in blank, with respect to shares
of Stock under this award that have not yet vested. For purposes of this
Agreement, "disability" shall mean the inability of the undersigned to
perform the services normally rendered due to any physical or mental
impairment that can be expected to be of either permanent or indefinite
duration, as determined by the Board or one of its committees on the basis
of appropriate medical evidence and that results in the termination of
employment of the undersigned; PROVIDED, that if the undersigned has
entered into an employment agreement with the Company, the term of which
has not expired at the time a determination concerning disability hereunder
is to be made, disability for purposes of this Agreement shall have the
meaning, if any, attributed to "permanent disability" in such employment
agreement.
3. The shares of Stock issued hereunder shall vest in accordance with the
provisions of this Paragraph 3, as follows:
<PAGE>
as to 50% of the shares on December 16, 2000, and as to the remaining 50%
of the shares on December 16, 2001.
provided in each case that the undersigned is then, and since the date of grant
has continuously been, employed by the Company. In the event of a Change of
Control of the Company, all shares of Stock issued hereunder that have not
previously been forfeited shall immediately vest, provided that the undersigned
remains employed by the Company at least 120 days following such Change of
Control. For purposes of the Agreement, "Change of Control" shall mean (i) the
acquisition of 35% or more of the outstanding common stock of the Company by a
person, group, or entity; (ii) a merger or other business combination in which
the Company is not the surviving corporation; or (iii) diminution of employment
status in either responsibility or compensation as a direct result of a Change
in Control.
4. Unvested shares shall be represented by certificates, which shall be held
by the Company, containing the following legend:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED
HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF A
RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER
AND GENOME THERAPEUTICS CORP. COPIES OF SUCH AGREEMENT ARE ON FILE IN THE
OFFICES OF GENOME THERAPEUTICS CORP.
As soon as practicable following the vesting of any such shares the Company
shall cause a new certificate or certificates covering such shares, without the
aforesaid legend, to be issued and delivered to the undersigned, subject to the
payment by the undersigned by cash or other means acceptable to the Company of
any withholding taxes due in connection with such vesting.
5. The undersigned shall be entitled to any and all dividends or other
distributions paid with respect to all shares of Stock issued hereunder
which have not been forfeited or otherwise disposed of and shall be
entitled to vote any such shares; PROVIDED, HOWEVER, that any property
(other than cash) distributed with respect to a share of Stock (the
"associated share") issued hereunder, including without limitation a
distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an
associated share, shall be subject to the restrictions of this Restricted
Stock Award Agreement in the same manner and for so long as the associated
share remains subject to such restrictions, and shall be promptly forfeited
to the Company if and when the associated share is so forfeited.
6. The undersigned understands that once a certificate has been delivered to
the undersigned in respect of shares of Stock issued hereunder which have
vested, the
<PAGE>
undersigned will be free to sell the shares of Stock evidenced by such
certificate, subject to applicable requirements of federal and state
securities laws.
7. The undersigned expressly acknowledges that the award or vesting of the
shares of Stock issued hereunder will give rise to "wages" subject to
withholding. The undersigned expressly acknowledges and agrees that his
rights hereunder are subject to his paying to the Company in cash (or by
such other means as may be acceptable to the Company in its discretion,
including, if the Board or one of its committees so determines, by the
delivery of previously issued Stock or shares of Stock issued hereunder)
all taxes required to be withheld in connection with such award or vesting.
IN WITNESS WHEREOF, each of the Company and the undersigned hereby executes
this agreement as of the date first written above.
GENOME THERAPEUTICS CORP.
By: ___________________________ ____________________________
Title: Name: Richard D. Gill
<PAGE>
EXHIBIT 10.3
Execution Copy
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") dated as of
September 30, 1999, is made between GENOME THERAPEUTICS CORP., a corporation
organized under the laws of the Commonwealth of Massachusetts having its
principal offices at 100 Beaver Street, Waltham, Massachusetts (the "Company"),
and bioMerieux Alliance sa, a societe anonyme organized under the laws of France
having its principal offices at Chemin de l'Orme, 69280 Marcy-l'Etiole, France
("Investor").
WHEREAS, Investor desires to purchase, and the Company desires
to issue and sell to Investor 678,610 shares of the Company's Common Stock, $.10
par value per share, upon the terms and conditions set forth in that certain
Common Stock Purchase Agreement dated September 30, 1999 (the "Stock Purchase
Agreement");
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual covenants and agreements herein contained, the parties hereto agree
as follows:
1. DEFINITIONS. As used in these provisions, the following
terms shall have the following meanings:
"COMMON STOCK" shall mean the common stock, par value
$.10 per share, of the Company and any other securities into which or
for which such common stock has been converted or exchanged pursuant to
a plan of recapitalization, reorganization, merger, sale of assets, or
otherwise.
The terms "REGISTER," "REGISTERED," and
"REGISTRATION" shall mean a registration effected by the preparation
and filing of a Registration Statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of
such Registration Statement by the SEC.
"REGISTRABLE SECURITIES" shall mean the shares of
Common Stock beneficially owned by the Investor and all shares of
common stock issued with respect to, in exchange for, or in replacement
of such shares of Common Stock. The term "Registrable Securities"
excludes, however, any security (i) the sale of which has been
effectively registered under the Securities Act and which has been
disposed of in accordance with a Registration Statement, (ii) that has
been sold by the Investor in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act under
Section 4(1) thereof (including, without limitation, transactions
pursuant to Rules 144 and 144A) such that the further disposition of
such securities by the transferee or assignee is not restricted under
the Securities Act, or (iii) that have been sold by the Investor in a
transaction in which the Investor's rights hereunder are not, or cannot
be, assigned.
1
<PAGE>
"REGISTRATION EXPENSES" shall mean all expenses
incident to the Company's performance of or compliance with these
provisions, including without limitation all (i) registration,
qualification and filing fees; (ii) fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of
any Registrable Securities being registered); (iii) printing expenses,
messenger, telephone and delivery expenses; (iv) internal expenses of
the Company (including, without limitation, all salaries and expenses
of employees of the Company performing legal or accounting duties); (v)
fees and disbursements of counsel for the Company and customary fees
and expenses for independent certified public accountants retained by
the Company (including the expenses of any comfort letters or costs
associated with the delivery by independent certified public
accountants of comfort letters customarily requested by underwriters);
(vi) reasonable fees and expenses of one counsel for the Investor;
(vii) fees and expenses of listing any Registrable Securities on any
securities exchange on which the shares of Common Stock are then
listed; and (viii) fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding any
underwriting fees, stock transfer taxes, discounts or commissions
attributable to the sale of any Registrable Securities and any fees and
expenses of underwriters' counsel (other than as provided in clause
(ii) above).
"REGISTRATION RIGHTS" shall mean the rights of the
Investor to cause the Company to register Registrable Securities
pursuant to Section 2 of this Agreement.
"REGISTRATION STATEMENT" shall mean any registration
statement or similar document that covers any of the Registrable
Securities pursuant hereto, including the prospectus or preliminary
prospectus included therein, all amendments and supplements to such
Registration Statement, including post-effective amendments, all
exhibits to such Registration Statement and all material incorporated
by reference in such Registration Statement.
"SEC" shall mean the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
2. INCIDENTAL REGISTRATION.
(a) If at any time the Company proposes to register
any of its Common Stock under the Securities Act as an underwritten
secondary registration on behalf of holders of such securities, the
Company shall, each such time, give written notice to the Investor of
its intent to do so; provided, however, that such notification shall
not be required during the two-year period commencing on the date
hereof (and the Investor shall have no Registration Rights) unless at
least one director and/or officer is selling shares in such
registration. Upon the written request of the Investor given within
twenty (20) days after mailing of any such
2
<PAGE>
notice by the Company, the Company shall, subject to Section 2(b), use
its best efforts to cause a Registration Statement covering all of the
Registrable Shares that the Investor has requested to be registered to
become effective under the Securities Act. The Company shall be under
no obligation to complete any offering of its securities it proposes to
make and shall incur no liability to the Investor for its failure to do
so.
(b) If the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold
in an orderly manner in such offering within a price range acceptable
to the holders initially requesting such registration, the Company will
include in such registration (i) first, the securities to be included
in such registration by the Company, (ii) second, the securities
requested to be included therein by the holders requesting such
registration, the Registrable Shares requested to be included in such
registration by the Investor and the securities requested to be
included therein by holders having piggyback registration rights
granted by the Company, pro rata among the holders of such securities
on the basis of the number of securities owned by each such holder, and
(iii) third, other securities requested to be included in such
registration.
3. REGISTRATION PROCEDURE. Whenever required under these
provisions to effect the registration of any Registrable Securities,
the Company shall, as expeditiously as possible:
(a) prepare and file with the SEC, as soon as
practicable, a Registration Statement with respect to such Registrable
Securities and use its reasonable best efforts to cause such
Registration Statement to become effective, and keep such Registration
Statement effective for up to six months or such shorter period as
shall be required to sell all of the Registrable Securities covered by
such Registration Statement;
(b) prepare and file with the SEC such amendments,
post-effective amendments and supplements to such Registration
Statement and the prospectus used in connection with such Registration
Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable
Securities covered by such Registration Statement;
(c) furnish to the Investor, without charge, such
number of copies of a prospectus, including a preliminary prospectus,
and any amendments or supplements thereto as the Investor may
reasonably request and a reasonable number of copies of the then-
effective Registration Statement and any post-effective amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those
incorporated by reference);
(d) promptly after the filing of any document that is
to be incorporated by reference into a Registration Statement or
prospectus, provide copies of such document to the Investor and any
underwriter;
3
<PAGE>
(e) use its reasonable best efforts to register and
qualify the securities covered by such Registration Statement under
such other securities or blue sky laws of such jurisdictions as shall
be reasonably requested by the Investor; provided, however, that the
Company shall not be required to qualify to do business, file a general
consent to service of process or subject itself to taxation in any such
states or jurisdictions where it would not otherwise be required to so
qualify to do business or consent to service of process or subject
itself to taxation;
(f) cooperate with the Investor and the underwriters
participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be
made with the National Association of Securities Dealers, Inc.;
(g) enter into and perform its obligations under any
underwriting agreement, in usual and customary form, with the
underwriter(s) of such offering, in accordance with such terms and
conditions as the Company and the underwriter(s) may agree. The
Investor shall also enter into and perform its obligations under such
an agreement;
(h) notify the Investor at any time when a prospectus
relating thereto is required to be delivered under the Securities Act,
of the occurrence of any event as a result of which the prospectus
included in such Registration Statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing
and, at the request of the Investor, the Company will prepare a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or
omit to state any fact necessary to make the statements therein not
misleading;
(i) cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange or
automated quotation system on which the Company's shares of Common
Stock are then listed;
(j) furnish, at the request of the Investor, on the
date that such Registrable Securities are delivered to the underwriters
for sale in connection with a registration pursuant to these
provisions, (A) an opinion of counsel representing the Company for the
purposes of such registration, and (B) a letter addressed to the
underwriters from independent certified public accountants of the
Company, in each case to be dated such date and to be in form and
substance as is customarily given by counsel or independent certified
public accountants, as the case may be, to underwriters in an
underwritten public offering;
(k) permit a representative of the Investor, any
underwriter participating in any disposition pursuant to such
registration and any attorney or accountant retained by the Investor or
underwriter, to participate, at each person's own expense, in the
preparation
4
<PAGE>
of the Registration Statement, and cause the Company's employees to
supply all information reasonably requested by any such representative,
underwriter, attorney or accountant in connection with such
registration; provided, however, that such representatives,
underwriters, attorneys or accountants shall enter into a
confidentiality agreement, in form and substance reasonably
satisfactory to the Company, prior to the release or disclosure of any
such information; and
(l) cooperate with the Investor and the managing
underwriters to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not
bearing any restrictive legends, and enable such Registrable Securities
to be in such denominations and registered in such names as the
managing underwriters may request at least two (2) business days prior
to any sale of Registrable Securities to the underwriters.
4. RIGHT TO WITHDRAW REGISTRATION. Notwithstanding anything
herein to the contrary, the Company may delay, suspend or withdraw any
registration or qualification of Registrable Securities at any time without
liability or obligation to the Investor.
5. OBLIGATION OF THE INVESTOR TO FURNISH INFORMATION. It shall
be a condition precedent to the obligations of the Company to take any action
pursuant to these provisions with respect to any Registrable Securities that the
Investor furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such Registrable Securities as shall be required to effect the registration of
the Investor's Registrable Securities.
The Investor agrees that, upon receipt of any notice from the
Company of the occurrence of any event of the kind described in Section 3(h)
hereof, the Investor shall forthwith discontinue disposition of Registrable
Securities pursuant to the then current prospectus until (i) the Investor is
advised in writing by the Company that a new Registration Statement covering the
reoffer of Registrable Securities has become effective under the Securities Act,
or (ii) the Investor receives copies of a supplemented or amended prospectus
contemplated by Section 3 hereof, or (iii) until the Investor is advised in
writing by the Company that the use of the then current prospectus may be
resumed. The Company shall use its reasonable best efforts to limit the duration
of any discontinuance of disposition of Registrable Securities pursuant to this
paragraph.
6. REGISTRATION EXPENSES. In the case of any registration of
Registrable Securities required pursuant to these provisions, the Company shall
pay all Registration Expenses regardless of whether the Registration Statement
becomes effective.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. In the event any
Registrable Securities are included in a Registration Statement pursuant to
these provisions, the Company hereby agrees to indemnify and hold harmless the
Investor, its directors, officers and employees and each
5
<PAGE>
person, if any, who "controls" (within the meaning of the Securities Act) the
Investor (the "Investor Indemnitees") against all losses, claims, damages, or
liabilities, joint or several, or actions in respect thereof ("Losses") to which
such Investor Indemnitees may become subject under the Securities Act, or
otherwise, insofar as such Losses arise out of, or are based upon, any untrue
statement or alleged untrue statement of any material fact contained in such
Registration Statement, any related preliminary prospectus, or any related
prospectus or any amendment or supplement thereto, or arise out of, or are based
upon, the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse such Investor Indemnitees for any legal or other expenses
reasonably incurred by it or them in connection with investigating or defending
any such Losses; provided, however, that the Company will not be so liable to
the extent that any such Losses arise out of, or are based upon, an untrue
statement or alleged untrue statement of a material fact or an omission or
alleged omission to state a material fact in such Registration Statement, such
preliminary prospectus, or such prospectus, or any such amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by or on behalf of the Investor or an underwriter specifically
for use therein; provided further, that the Company shall not be liable, and
this indemnification agreement shall not apply, to the extent that any such
Losses are solely attributable to the failure of the Investor (or underwriter or
agent acting on its behalf) to deliver a final prospectus (or amendment or
supplement thereto) that corrects a material misstatement or omission contained
in the preliminary prospectus (or final prospectus). The Company hereby agrees
to indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
respective officers and directors and each person who "controls" (within the
meaning of the Securities Act) such persons to the same extent as provided above
with respect to the indemnification of the Investor Indemnitees, if so
requested, except with respect to information furnished in writing specifically
for use in any prospectus or Registration Statement by the Investor or any such
underwriters.
(b) INDEMNIFICATION BY THE INVESTOR. With respect to
written information furnished to the Company in connection with any registration
pursuant to the terms of these provisions by or on behalf of the Investor
specifically for use in a Registration Statement, any related preliminary
prospectus, or any related prospectus or any supplement or amendment thereto,
the Investor shall severally indemnify and hold harmless the Company, its
directors, officers and employees and each person, if any, who "controls"
(within the meaning of the Securities Act) the Company (the "Company
Indemnitees") against any Losses to which the Company or such other person
entitled to indemnification hereunder may become subject under the Securities
Act, or otherwise, insofar as such Losses arise out of, or are based upon, any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, such preliminary prospectus, or such prospectus, or
any such amendment or supplement thereto, or arise out of, or are based upon,
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
the Investor shall reimburse the Company Indemnitees for any legal or other
expenses reasonably incurred by it or them in connection with investigating or
defending any such Losses, in each case to the extent, but only to the extent,
that the same arises out of, or is based upon, an untrue statement or alleged
untrue statement of a material fact or an omission or alleged omission to state
a material fact in such
6
<PAGE>
Registration Statement, such preliminary prospectus, or such prospectus or any
such amendment or supplement thereto in reliance upon, and in conformity with,
such written information. In no event shall the liability of the Investor
hereunder be greater in amount than the dollar amount of the proceeds (net of
the payment of all expenses by the Investor) received by the Investor upon the
sale of the Registrable Securities giving rise to such indemnification
obligation. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to the information so furnished in writing by such persons
specifically for inclusion in any prospectus or Registration Statement. The
Investor shall also indemnify underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers and directors and each person who "controls" (within the meaning
of the Securities Act) such persons to the same extent as provided above with
respect to the indemnification of the Company, if so requested.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly
after receipt by an indemnified party hereunder of notice of any claim or the
commencement of any action by a claimant not an indemnified party hereunder
("Third-Party Claim"), the indemnified party shall, if a claim for
indemnification in respect thereof is to be made by such indemnified party
against an indemnifying party, promptly notify such indemnifying party in
writing of such Third-Party Claim as soon as is reasonably practicable after
said claim is actually known to the indemnified party; provided, however, that
the right of an indemnified party to be indemnified hereunder in respect of
Third-Party Claims shall not be adversely affected by such indemnified party's
failure to notify the indemnifying party of such Third-Party Claim unless, and
then only to the extent that, an indemnifying party is actually damaged or
suffers any loss or incurs any additional expense as a result thereof. If any
such Third-Party Claim is brought against an indemnified party, and it promptly
notifies the indemnifying party thereof, the indemnifying party shall be
entitled to assume the defense thereof with counsel selected by the indemnifying
party and reasonably satisfactory to the indemnified party. After the
indemnifying party gives notice to the indemnified party of its election to
assume the defense of such Third-Party Claim, (i) the indemnifying party shall
not, except as provided below, be liable to the indemnified party for any legal
or other expense subsequently incurred by the indemnified party in connection
with the defense thereof, (ii) the indemnifying party shall not be liable for
the costs and expenses of any settlement of such claim or action unless such
settlement was effected with the written consent of the indemnifying party or
the indemnified party waived any rights to indemnification hereunder in writing,
in which case the indemnified party may effect a settlement without such consent
at its own cost and expense, and (iii) the indemnified party shall be obligated
to cooperate with the indemnifying party in the investigation of such claim or
action; provided, however, that the Investor Indemnitees may employ their own
counsel to participate in the defense of a Third-Party Claim if they have been
advised by counsel in writing that, in the reasonable judgment of such counsel,
it is advisable for such Investor Indemnitees to be represented by separate
counsel due to the presence of a conflict of interest between such Investor
Indemnitees and the indemnifying party, and in such event the fees and expenses
of such separate counsel shall be paid by the Company; provided further, that
the Company shall not be liable for the reasonable fees and expenses of more
than one separate counsel at any time for all such Investor Indemnitees. An
indemnifying party shall not, without the prior written consent
7
<PAGE>
of the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened Third-Party Claim in respect
of which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such Third-Party
Claim) unless such settlement, compromise or consent includes a release of such
indemnified party reasonably acceptable to such indemnified party from all
liability arising out of such Third-Party Claim, or unless the indemnifying
party shall confirm in a written agreement reasonably acceptable to such
indemnified party that, notwithstanding any federal, state or common law, such
settlement, compromise or consent shall not adversely affect the right of any
indemnified party to indemnification or contribution as provided in these
provisions.
(d) CONTRIBUTION. If for any reason the
indemnification provided for in Sections 7(a) or (b) hereof is unavailable to an
indemnified party or is insufficient to hold it harmless as contemplated
therein, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnifying party and the indemnified party, but also
the relative fault of the indemnifying party and the indemnified party, as well
as any other relevant equitable considerations. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) SURVIVAL OF INDEMNIFICATION. The obligations
under this Section 7 shall survive the completion of any offering of Registrable
Securities in a Registration Statement pursuant to these provisions, and
otherwise.
8. ASSIGNMENT OF REGISTRATION RIGHTS. Neither this Agreement
nor any of the rights and obligations contained herein may be assigned or
otherwise transferred by either party without the written consent of the other
party.
9. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of these provisions, the Company shall not, without the prior
written consent of the Investor, enter into any agreement, understanding or
other arrangement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to require the
Company to effect a registration, unless under the terms of such agreement, the
rights of such holder or prospective holder to participate in such registration
shall permit registration on no greater basis than that of the Investor.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended or the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
11. NOTICES. Any consent, notice or report required or
permitted to be given or made under this Agreement by one of the parties hereto
to the other shall be in writing, delivered personally or by facsimile (and
promptly confirmed by telephone, personal delivery or courier) or courier,
postage prepaid (where applicable), addressed to such other party at its address
indicated
8
<PAGE>
below, or to such other address as the addressee shall have last furnished in
writing to the addresser and shall be effective upon receipt by the addressee.
If to the Company: Genome Therapeutics Corp.
100 Beaver Street
Waltham, MA
Attention: Chief Executive Officer
Telephone: (781) 398-2300
Telecopy: (781) 893-8277
with a copy to: Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: David C. Chapin, Esq.
Telephone: (617) 951-7000
Telecopy: (617) 951-7050
If to Investor: bioMerieux Alliance sa
Chemin de l'Orme
69280 Marcy-l'Etiole
France
Attention: Paul Caroly
Telephone: 33-4-7887-2000
Telecopy: 33-4-7887-5370
with a copy to: Bryan Cave LLP
211 North Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Attention: James L. Nouss, Jr., Esq.
Telephone: (314) 259-2000
Telecopy: (314) 259-2020
12. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts,
excluding choice-of-law principles of the law of such Commonwealth that would
require the application of the laws of a jurisdiction other than such
Commonwealth.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
BIOMERIEUX ALLIANCE sa
By: ___________________________
Name: ___________________________
Title: ___________________________
GENOME THERAPEUTICS CORP.
By: ___________________________
Name: ___________________________
Title: ___________________________
10
<PAGE>
Exhibit 10.4
[GENOME THERAPEUTICS CORPORATION LETTERHEAD]
March 14, 1997
Christopher Kelly
One South Mossrock Road
Woodland, TX 77380
Dear Chris,
It is my pleasure to offer you the position of Senior Vice President of
Business Development and Strategic Planning reporting to the Chief Executive
Officer. Specific terms of our offer are as follows:
INITIAL SALARY: $6,346.15 biweekly, which is $165,000 annually. You will be
eligible for an annual salary review.
CASH BONUS: You will be eligible for an annual cash bonus, assuming a high
level of both personal and company performance, of 0-25% prorated for 1997.
The criteria for bonus payout will be jointly determined by you and the Chief
Executive Officer, to whom you will report, subject to Compensation Committee
approval.
SIGNING BONUS: A $15,000 cash bonus will be paid to you thirty (30) days
after your start date.
BENEFITS: The Company offers a comprehensive benefits package including
medical and dental insurance, life insurance, and short and long term
disability, and a 401(k) plan. Full details of the benefits program will be
provided for you.
STOCK OPTIONS: In recognition of the significant role that you will assume,
you will be granted stock options covering 150,000 shares of Company stock at
an exercise price equal to the fair market value on the date you accept this
offer. 75,000 options will be vested in equal installments over four years,
with the first 18,750 vesting on the anniversary of your start date as a
regular employee. The remaining 75,000 will vest as follows: 25,000 when the
closing price of GTC stock, as reported on the NASDAQ National Market, is
$14.25 for any 20 of 40 consecutive trading days following your start date;
25,000 when the closing price of GTC stock, as reported on the NASDAQ
National Market, is $18.25 for any 20 of 40 consecutive trading days
following your start date; and the remaining 25,000 when the closing price of
GTC stock as reported on the NASDAQ National Market, is $20.25 for any 20 of
40 consecutive trading days following your start date.
<PAGE>
START DATE: Your expected start date will be March 24, 1997.
VACATION: In addition to the Company-designated holidays, you will initially
be entitled to 15 business days vacation annually.
RELOCATION: We will reimburse documented relocation expenses, to a maximum of
$30,000. Taxable and non-deductible items will be grossed up by a factor of
25%.
SEPARATION: In the event that (i) you are discharged for reasons other than
cause (ii) the Company experiences a change of control which resulted in your
dismissal, or a considerable reduction in your role or job responsibilities,
the company agrees that its practice of giving employees at the Vice
President level not less than six (6) months of severance will be extended to
you.
CHANGE OF CONTROL: In the event of a change of control of the Company by
merger or if any person or group acquires a majority of the outstanding
common stock of the Company, your remaining unvested stock options will be
recommended to the Board of Directors for immediate vesting.
Genome Therapeutics Corporation maintains an Employment at Will Relationship
with all of its employees. This means that either you or the Company always
maintain the right to end the employment relationship at any time for any
reason. Nothing in this letter is to be construed as a contract or guarantee.
Having said this, I especially want to say that I look forward to your
joining us, and to working closely with you in capitalizing on the exciting
opportunities ahead for Genome Therapeutics Corporation.
Sincerely,
/s/ Fenel M. Eloi
Fenel M. Eloi
Treasurer and Chief Financial Officer
Accepted:
/s/ Christopher Kelly 3/16/97
- -------------------------------------- -------------------------
Signature Date
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 15, 2000
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