<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended: FEBRUARY 26, 2000
Commission File No: 0-10824
GENOME THERAPEUTICS CORP.
-------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
------------- ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
100 BEAVER STREET
-----------------
WALTHAM, MASSACHUSETTS 02453
----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (781) 398-2300
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK 20,600,719
------------ ----------
<S> <C>
$.10 PAR VALUE Outstanding March 21, 2000
--------------
</TABLE>
<PAGE>
Genome Therapeutics Corp. and Subsidiaries
Index to Financial Information (Unaudited) and Other Information
<TABLE>
<CAPTION>
Page
<S> <C>
Part I
Financial Information (Unaudited):
Consolidated Condensed Balance Sheets as of 3
August 31, 1999 and February 26, 2000
Consolidated Condensed Statements of Operations 4
for the twenty-six week periods ended
February 27, 1999 and February 26, 2000
Consolidated Statements of Cash Flows for the 5
twenty-six week periods ended February 27, 1999
and February 26, 2000
Notes to Consolidated Condensed Financial Statements for the 6-14
twenty-six week periods ended February 27, 1999 and February 26, 2000
Management's Discussion and Analysis of Financial 15-20
Conditions and Results of Operations
Part II
Other Information:
Other Information 21
Signature 23
</TABLE>
2
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
August 31, February 26,
1999 2000
(Unaudited)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $12,802,162 $28,381,795
Marketable securities 12,060,230 7,309,650
Interest receivable 448,192 454,467
Unbilled costs and fees 35,328 81,077
Prepaid expenses and other current assets 324,211 669,342
Note receivable from former officer 120,000 120,000
------------------- ------------------
Total current assets 25,790,123 37,016,331
Equipment and leasehold improvements, at cost:
Laboratory and scientific equipment 15,844,262 18,134,397
Leasehold improvements 8,205,701 8,217,451
Equipment and furniture 1,344,703 1,359,887
------------------- ------------------
25,394,666 27,711,735
Less accumulated depreciation
and amortization 12,173,500 14,145,172
------------------- ------------------
13,221,166 13,566,563
Restricted cash 200,000 200,000
Other assets 273,708 251,458
------------------- ------------------
Total assets $39,484,997 $51,034,352
------------------- ------------------
------------------- ------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $987,958 $941,736
Accrued expenses 2,322,780 4,229,858
Deferred revenue 2,903,534 4,641,041
Current maturities of long-term obligations 3,934,547 4,406,862
------------------- ------------------
Total current liabilities 10,148,819 14,219,497
Long-term obligations, net of current maturities 5,925,086 5,760,357
Shareholders' equity 23,411,092 31,054,498
------------------- ------------------
Total liabilities and shareholders' equity $39,484,997 $51,034,352
------------------- ------------------
------------------- ------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
February 27, February 26, February 27, February 26,
1999 2000 1999 2000
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Contract research, licenses,
subscription fees and royalties $6,402,743 $7,805,171 $11,513,000 $13,840,173
Costs and Expenses:
Research and development 6,672,665 6,408,241 13,485,667 11,749,546
Selling,general and administrative 1,151,871 1,718,304 2,062,423 2,687,949
----------------- ----------------- ----------------- -----------------
Total costs and expenses 7,824,536 8,126,545 15,548,090 14,437,495
----------------- ----------------- ----------------- -----------------
Loss from operations (1,421,793) (321,374) (4,035,090) (597,322)
Interest income 462,405 435,596 874,405 799,267
Interest expense (258,715) (187,125) (529,060) (396,451)
----------------- ----------------- ----------------- -----------------
Net interest income 203,690 248,471 345,345 402,816
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Net loss ($1,218,103) ($72,903) ($3,689,745) ($194,506)
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Net Loss per Common Share:
Basic and diluted ($0.07) ($0.00) ($0.20) ($0.01)
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Weighted Average Common Shares Outstanding:
Basic and diluted 18,352,272 19,843,446 18,335,058 19,395,565
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Twenty-six Weeks Ended
February 27, February 26,
1999 2000
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($3,689,745) ($194,506)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,048,147 1,976,058
Deferred compensation 86,575 469,705
Changes in assets and liabilities:
Interest receivable 223,817 (6,275)
Unbilled costs and fees 40,413 (45,749)
Prepaid expenses and other current assets 172,542 (345,131)
Accounts payable (115,590) (46,222)
Accrued expenses (31,959) 1,907,078
Deferred revenue 1,274,263 1,737,507
------------------ ------------------
Total adjustments 3,698,208 5,646,971
------------------ ------------------
Net cash provided by operating activities 8,463 5,452,465
------------------ ------------------
Cash Flows from Investing Activities:
Purchases of marketable securities (11,135,157) (21,125,970)
Maturities of marketable securities 19,608,000 25,876,550
Purchases of equipment and leasehold improvements (424,997) 0
Decrease in other assets 23,990 22,250
------------------ ------------------
Net cash provided by investing activities 8,071,836 4,772,830
------------------ ------------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock 0 3,732,115
Proceeds from exercise of stock options 73,992 3,636,092
Payments on long-term obligations (2,829,361) (2,013,869)
------------------ ------------------
Net cash (used in) provided by financing activities (2,755,369) 5,354,338
------------------ ------------------
Net Increase in Cash and Cash Equivalents 5,324,930 15,579,633
Cash and Cash Equivalents, at beginning of period 10,978,176 12,802,162
------------------ ------------------
Cash and Cash Equivalents, at end of period $16,303,106 $28,381,795
------------------ ------------------
------------------ ------------------
Supplemental Disclosure of Cash Flow Information:
Taxes paid during period $11,700 $7,800
------------------ ------------------
Interest paid during period $529,060 $396,451
------------------ ------------------
------------------ ------------------
Supplemental Disclosure of Non-cash Investing Activities:
Property and equipment acquired under capital lease obligations $783,537 $2,376,272
------------------ ------------------
------------------ ------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the unaudited consolidated condensed financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of interim period results. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results of operations for the twenty-six week period ended
February 26, 2000 are not necessarily indicative of the results to be expected
for the full fiscal year. The accompanying consolidated condensed financial
statements should be read in conjunction with the Company's Form 10-K, which was
filed with the Securities and Exchange Commission on November 24, 1999.
2. 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-TM- 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. 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 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. The historical financial statements reflect payments of approximately
$17.0 million received in fiscal year 1995 through February 26, 2000. 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.
3. NET LOSS PER COMMON SHARE
The Company applies Statement of Financial Accounting Standards (SFAS)
No.128, EARNINGS PER SHARE. This statement established standards for computing
and
6
<PAGE>
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 the periods ended February 26, 2000 and February 27, 1999
as the effect of the potential common stock equivalents is antidilutive.
Potential common stock equivalents of 2,533,967 and 3,739,971 were excluded
from diluted loss per share at February 26, 2000 and February 27, 1999,
respectively.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company applies SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. At February 26, 2000 and August 31, 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 maturities of less than three months. Marketable
securities are investment securities with original maturities of greater than
three months. Cash equivalents are carried at cost, which approximates market
value, and consist of money market funds, repurchase agreements and debt
securities. Marketable securities are recorded at amortized cost, which
approximates market value. The Company has not recorded any realized gains or
losses on its marketable securities. Marketable securities consist of commercial
paper and U.S. government debt securities. The Company has $200,000 in
restricted cash at August 31, 1999 and February 26, 2000 in connection with
certain long-term obligations (see Note 8).
5. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6. COMPREHENSIVE INCOME
The Company applies 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 non-owner sources. The Company's total
comprehensive net loss for the twenty-six week periods ended February 26, 2000
and February 27, 1999 were the same as reported net loss for those periods.
7. 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>
Twenty-six week periods ended:
February 27, 1999 3 4% 3% 74%
February 26, 2000 2 - 24 55
</TABLE>
8. LONG-TERM OBLIGATIONS
On February 23, 2000, the Company entered into an equipment lease
line of credit under which it can finance up to $4,000,000 of laboratory,
computer and office equipment. The Company, at its discretion, can enter into
either an operating or capital lease.
7
<PAGE>
Borrowings under operating leases are payable in twenty-four monthly
installments and capital leases are payable in thirty-six monthly
installments. As of February 26, 2000, the Company borrowed $2,004,000 as a
capital lease which interest is payable at the prevailing three-year treasury
rate plus 2.75%-3.66%, as defined. The Company had approximately $1,996,000
available under this line at February 26, 2000.
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 fixed rate of 8.95%. 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 fixed
rate of 8.78%. The Company is required to maintain certain restricted cash
balances, as defined (see Note 4). In addition, the Company is required to
maintain certain financial ratios pertaining to minimum cash balances, tangible
net worth and debt service coverage. On December 31, 1999, the line of credit
had expired, at which time the Company had utilized a total of $8,347,000 of the
$10,300,000 available under this line of credit.
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 primary
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 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.
9. ALLIANCES
(a) ASTRAZENECA
In August 1995, the Company entered into a strategic alliance with
AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and
diagnostic products effective against peptic ulcers 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
8
<PAGE>
develop and annotate the Company's H. PYLORI genomic sequence database, identify
therapeutic and vaccine targets and develop appropriate biological assays. In
August 1999, the Company successfully concluded its portion of the research
alliance and transitioned the program into AstraZeneca's pipeline for
pre-clinical testing.
Under this agreement, Astra agreed to pay the Company 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. The Company received approximately $13.5 million in license
fees, expense allowances, milestone payments and research funding under the
Astra agreement through February 26, 2000. Of such fees, $500,000 is 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.
For the thirteen week periods ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $9,000 and $172,000, respectively, under
this agreement, which consisted of sponsored research funding.
For the twenty-six week periods ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $22,000 and $423,000, respectively, under
this agreement, which consisted of sponsored research funding.
9
<PAGE>
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic 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 and validate new gene targets for
development of drugs to target STAPH.AUREUS and other pathogens that have become
resistant to current antibiotics. 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 $18.8 million in an up-front license fee, research funding
and milestone payments. Subject 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.
For the thirteen week periods ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $532,000 and $621,000, respectively, under
this agreement, which consisted of sponsored research funding.
For the twenty-six week period ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $1,119,000 and $1,332,000 under this
agreement, which consisted of sponsored research funding.
10
<PAGE>
In December 1996, the Company entered into its second strategic
alliance and license agreement with Schering-Plough. This agreement calls for
the use of genomics to discover new pharmaceutical products for treating asthma.
As part of the agreement, the Company will employ its high-throughput disease
gene identification, bioinformatics, and genomics sequencing capabilities to
identify genes and associated proteins that can be utilized by Schering-Plough
to develop pharmaceuticals and vaccines for treating asthma. 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 alliance.
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.
For the thirteen week periods ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $2,318,000 and $2,841,000, respectively,
under this agreement, which consisted of sponsored research funding, subcontract
activity and milestone payments.
For the twenty-six week periods ended February 26, 2000 and February 27,
1999, the Company recorded revenue of $3,757,000 and $4,785,000, respectively,
under this agreement, which consisted of sponsored research funding, subcontract
activity and milestone payments.
On September 1997, the Company entered into a third strategic alliance
and license agreement with Schering-Plough to use genomics to discover and
develop new pharmaceutical products to treat fungal infections.
Under the agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the 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. In
December 1999,
11
<PAGE>
Schering-Plough extended this alliance through September 2001. 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,
PathoGenomeTM and associated information relating to microbial organisms (see
Note 10).
For the thirteen week period ended February 26, 2000, the Company
recorded revenue of $621,000 under this agreement, which consisted of sponsored
research funding. For the thirteen week period ended February 27, 1999, the
Company recorded revenue of $1,336,000 under this agreement, which consisted of
sponsored research funding and a milestone payment.
For the 26 week periods ended February 26, 2000 and February 27, 1999,
the Company recorded revenue of $2,275,000 and $2,025,000 under this agreement,
which consisted of sponsored research funding and milestone payments.
Under certain circumstances, the Company may have an obligation to
give Schering-Plough a right of first negotiation to develop with the Company
certain of its asthma and infectious disease related discoveries if it
decides to seek a third party collaborator to develop such discovery.
(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.
For the thirteen and twenty-six week periods ended February 26, 2000, the
Company has recognized revenue of approximately $1,736,000 and $2,648,000,
respectively, 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.
(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 PathoGenomeTM Database (see Note 9),
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 the proceeds from the sale of the common
stock, approximates $6.0 million. The research and development funding will be
recognized ratably over the four year term of the agreement. For the thirteen
and twenty-
12
<PAGE>
six week periods ended February 26, 2000, the Company recorded revenue of
$430,000 and $519,000, respectively, which consists of research funding and
the amortization of the up-front license fees.
(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 and twenty-six weeks ended February 26, 2000, the Company
recognized revenue of approximately $454,000 and $505,000, respectively, 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. For the thirteen and
twenty-six weeks ended February 26, 2000, the Company recognized revenue of
approximately $250,000, which consists of research funding and the
amortization of the up-front license fee.
10. DATABASE SUBSCRIPTIONS
The Company has entered into PathoGenomeTM Database subscriptions with
Bayer AG, Bristol-Myers Squibbs, Scriptgen Pharmaceuticals, Inc.,
Schering-Plough (see Note 8), Aventis, formerly Hoechst Marion Roussel and
bioMerieux (see Note 8). The database subscription provides nonexclusive access
to the Company's proprietary genome sequence database, PathoGenomeTM Database
and associated information relating to microbial organisms. The subscription
agreement calls for the Company to provide
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<PAGE>
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 PathoGenomeTM Database. The Company retains all rights
associated with protein therapeutic, diagnostic and vaccine use of bacterial
genes or gene products.
The Company has recognized $1,162,000 and $1,312,000 in revenue under
these subscription agreements for the thirteen week periods ended February 26,
2000 and February 27, 1999, respectively.
The Company has recognized $2,225,000 and $2,554,000 in revenue under
these subscription agreements for the twenty-six week periods ended February 26,
2000 and February 27, 1999, respectively.
11. SUBSEQUENT EVENT
On February 28, 2000, the Company adopted an Employee Stock Purchase
Plan under which eligible employees may contribute up to 15% of their
earnings toward the semi-annual purchase of the Company's common stock. The
employees purchase price will be 85% of the fair market value of the common
stock at (a) the time at grant of option or (b) the time at which the option
is deemed exercised, whichever is less. No compensation expense will be
recorded in connection with the plan.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genome Therapeutics Corp. ("GTC", "we", or "our") is a leader in the
commercialization of genomics-based drug discovery. We have over ten years of
experience in genomics 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 PathoGenomeTM 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 PathoGenomeTM Database pay access fees for the information they obtain. Once
a product resulting from a research collaboration or a subscriber's use of the
PathoGenomeTM 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 PathoGenomeTM
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
15
<PAGE>
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 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
PathoGenomeTM 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 the twenty-six week periods ended
February 27, 1999 and February 26, 2000 we recognized revenue accounting for
approximately 74% and 55%, respectively, of our total revenue.
In May 1997, we introduced our PathoGenomeTM 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 PathoGenomeTM
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 February 26, 2000, we had an accumulated deficit of approximately $66.9
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.
We are subject to risks common to companies in its industry including
unproven technology and business strategy,
16
<PAGE>
reliance upon collaborative partners and others, rapid technological change,
history of operating losses, need for future capital, competition, patent and
proprietary rights, dependence on key personnel, uncertainty of regulatory
approval, uncertainty of pharmaceutical pricing, healthcare reform and
related matters, availability of, and competition for, unique family
resources, and volatility of our stock price.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED FEBRUARY 27, 1999 AND FEBRUARY 26 , 2000
REVENUES
Revenues increased 22% from $6,403,000 for the thirteen week period
ended February 27, 1999 to $7,805,000 for the thirteen week period ended
February 26, 2000. This increase was the result of an increase in payments under
our government research grants with the National Human Genome Research Institute
to participate in the international Human Genome Project and Mouse Genome
Sequencing projects, partially offset by a decline in sponsored research
funding.
COSTS AND EXPENSES
Total costs and expenses increased 4% from $7,825,000 for the thirteen
week period ended February 27, 1999 to $8,127,000 for the thirteen week period
ended February 26, 2000. Research and development expense, which includes
internal research and development and research funded pursuant to arrangements
with our corporate alliances and U.S. government, decreased from $6,673,000
in the thirteen week period ended February 27, 1999 to $6,408,000 for the
thirteen week period ended February 26, 2000. 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 49% from
$1,152,0000 for the thirteen week period ended February 27, 1999 to $1,718,000
for the thirteen week period ended February 26, 2000. This increase stemmed from
an increase in salaries and related expenses, legal fees, as well as
compensation expense related to issuance of stock options and restricted stock.
INTEREST INCOME AND EXPENSE
Interest income decreased 6% from $462,000 for the thirteen week period
ended February 27, 1999 to $436,000 for the same period ended February 26, 2000.
This decrease reflects a reduction in investment income resulting from our use
of cash to fund our operations.
Interest expense decreased 28% from $259,000 for the thirteen week
period ended February 27, 1999 to $187,000 for the same period ended February
26, 2000 due primarily to a decrease in outstanding balances under our long-term
obligations.
17
<PAGE>
TWENTY-SIX WEEK PERIOD ENDED FEBRUARY 27, 1999 AND FEBRUARY 26 , 2000
REVENUES
Revenues increased 20% from $11,513,000 for the twenty-six week period
ended February 27, 1999 to $13,840,000 for the twenty-six week period ended
February 26, 2000. This increase was the result of an increase in payments under
our government research grants with the National Human Genome Research Institute
to participate in the international Human Genome and Mouse Genome sequencing
projects, partially offset by a decline in sponsored research funding.
COSTS AND EXPENSES
Total costs and expenses decreased 7% from $15,548,000 for the
twenty-six week period ended February 27, 1999 to $14,437,000 for the
twenty-six week period ended February 26, 2000. Research and development
expense, which includes internal research and development and research funded
pursuant to arrangements with our corporate alliances and U.S. government,
decreased 13% from $13,486,000 for the twenty-six week period ended February
27, 1999 to $11,750,000 for the twenty-six week period ended February 26,
2000. 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 30% from
$2,062,0000 for the twenty-six week period ended February 27, 1999 to $2,685,000
for the twenty-six week period ended February 26, 2000. This increase stemmed
from an increase in salaries and related expenses, legal fees, as well as
compensation expense related to issuance of stock options and restricted stock.
INTEREST INCOME AND EXPENSE
Interest income decreased 9% from $874,000 for the twenty-six week
period ended February 27, 1999 to $799,000 for the same period ended February
26, 2000. This decrease reflects a reduction in investment income resulting from
our use of cash to fund our operations.
Interest expense decreased 25% from $529,000 for the twenty-six week
period ended February 27, 1999 to $396,000 for the same period ended February
26, 2000 due primarily to a decrease in outstanding balances under our long-term
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have been received from alliances,
subscription fees, government grants and contracts, borrowings under
equipment lending facilities and capital leases and proceeds from sale of
equity securities.
As of February 26, 2000, we had cash, cash equivalents, restricted cash
and short-term marketable securities of approximately $35,891,000. We have
various arrangements
18
<PAGE>
under which we finance certain office and laboratory equipment and leasehold
improvements. At February 26, 2000, we had an aggregate of approximately
$10,167,000 outstanding under its borrowing arrangements which is repayable
over the next 36 months, of which $4,407,000 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
indebtedness to tangible net worth, minimum cash level, debt service coverage
and minimum restricted cash balances. At February 26, 2000, we had
approximately $1,996,000 available under one of these arrangements for future
borrowings.
Our operating activities provided cash of approximately $8,000 and
$5,452,000 for the twenty-six week periods ended February 27, 1999 and
February 26, 2000, respectively. For the twenty-six week period ended
February 26, 2000, our increase in cash provided by operations resulted from
a decrease in net loss and an increase in deferred revenue and accrued
expenses. The increase in deferred revenue represents cash received under the
bioMerieux and Wyeth-Ayerst alliances prior to revenue recognition. The
increase in accrued liabilities reflects an increase in payroll tax
withholdings which is attributable to the exercise of non-qualified stock
options during this period.
For the twenty-six week periods ended February 27, 1999 and February 26,
2000, our investing activities provided cash of approximately $8,072,000 and
$4,773,000, respectively, through the conversion of its marketable securities to
cash and cash equivalents.
Capital expenditures, including property and equipment acquired under
capital leases, totaled $2,376,000 for the twenty-six week period ended
February 26, 2000. Purchases consisted of laboratory and computer equipment.
We currently estimate that we will acquire an additional $2,500,000 in
capital equipment in fiscal 2000 consisting primarily of computer and
laboratory equipments which we intend to finance the majority under existing
equipment financing arrangements or use existing cash resources.
Our financing activities used cash of approximately $2,755,000 for
the twenty-six week period ended February 27, 1999 primarily for payments of
long-term obligations. Our financing activities provided cash of
approximately $5,354,000 for the twenty-six week period ended February 26,
2000 from the sale of equity securities to bioMerieux, 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 our existing capital resources are adequate to meet
our cash requirements for at least one year under our current rate of
investment in research and development. There is no assurance, however, that
changes in our plans or events affecting our operations will not result in
accelerated or unexpected expenditures.
19
<PAGE>
We may seek additional funding in the future through public or private
financings. Additional financing may not be available when needed, or if
available, it may not be 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.
Statements in this Form 10Q that are not strictly historical are "forward
looking" statements as defined in the Private Securities Litigation Reform Act
of 1995. The actual results may differ from those projected in the forward
looking statement due to risks and uncertainties that exist in the Company's
operations and business environment.
20
<PAGE>
Part II
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On December 16, 1999, the Company issued to Richard D. Gill an option on
340,000 shares of its common stock at an exercise price of $4.1410 per
share in connection with his entering into an employment agreement with
the Company to serve as its President and Chief Operating Officer. The
securities were issued under the exemption provided by Section 4(2) of the
Securities Act of 1933.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on February 28, 2000.
At the meeting, shareholders took the following actions:
1) Election of Directors
Shares Voted
<TABLE>
<CAPTION>
NAME OF NOMINEE FOR WITHHOLD AUTHORITY
--------------- -------------------------- ------------------
<S> <C> <C>
Marc Garnick 18,024,210 47,887
Robert J. Hennessey 18,023,110 48,987
Philip J. Leder 18,023,910 48,187
Lawrence Levy 17,952,5 60 119,537
Steven M. Rauscher 17,942,460 129,637
Norbert Riedel 18,023,550 48,547
</TABLE>
2) To approve the Company's Employees Stock Purchase Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
17,840,469 154,447 77,181
</TABLE>
3) To ratify the selection of Arthur Andersen LLP as the Company's auditors
for the fiscal year ending August 31, 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
17,970,741 41,331 60,025
</TABLE>
Item 5. OTHER INFORMATION
None.
21
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
Report on Form 8-K filed on March 8, 2000 to Report the
Company's strategic alliance with Wyeth-Ayerst
Laboratories.
22
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal financial
officer.
Genome Therapeutics Corp.
/s/ PHILIP V. HOLBERTON
----------------------
Philip V. Holberton
(Principal Financial Officer)
Date: March 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-26-2000
<CASH> 28,382
<SECURITIES> 7,310
<RECEIVABLES> 81,077
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,016
<PP&E> 27,712
<DEPRECIATION> 14,145
<TOTAL-ASSETS> 51,034
<CURRENT-LIABILITIES> 14,219
<BONDS> 5,760
0
0
<COMMON> 2,059
<OTHER-SE> 28,995
<TOTAL-LIABILITY-AND-EQUITY> 51,034
<SALES> 13,840
<TOTAL-REVENUES> 13,840
<CGS> 0
<TOTAL-COSTS> 14,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (402)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (195)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
