<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 2000
REGISTRATION NO. 333-32614
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
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:
PATRICK O'BRIEN
DAVID C. CHAPIN
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
(617) 951-7000
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. /X/
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: / /
------------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 19, 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.
3,450,000 SHARES
[LOGO]
GENOME THERAPEUTICS CORP.
COMMON STOCK
$ PER SHARE
--------------------------------------------------------------------------
Genome Therapeutics Corp. is offering 3,450,000 shares of common stock.
Our common stock is listed on the Nasdaq National Market under the symbol
"GENE." On April 18, 2000, the last reported price of our common stock on the
Nasdaq National Market was $15.875 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................................ $ $
Proceeds to Genome Therapeutics................ $ $
</TABLE>
- --------------------------------------------------------------------------------
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.
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business of Genome Therapeutics............................. 25
Management.................................................. 43
Plan of Distribution........................................ 45
Validity of Common Stock.................................... 46
Experts..................................................... 46
Where You Can Find More Information......................... 46
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.
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 the 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 genomics 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......................... 3,450,000 shares
Common stock to be outstanding after the
offer...................................... 24,038,566 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:
- 2,386,628 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
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<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.
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
------------------------------ -----------------------------
1997 1998 1999 FEB. 27, 1999 FEB. 26, 2000
-------- -------- -------- ------------- -------------
(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 $11,513 $13,840
Costs and expenses:
Research and development.............. 26,524 31,977 26,700 13,486 11,750
Selling, general and administrative... 3,766 4,292 4,279 2,062 2,688
-------- -------- ------- ------- -------
Total costs and expenses............ 30,290 36,269 30,979 15,548 14,438
Loss from operations.................. (13,637) (17,052) (6,961) (4,035) (598)
Interest income....................... 2,966 2,386 1,587 874 799
Interest expense...................... (631) (1,147) (954) (529) (396)
-------- -------- ------- ------- -------
Net interest income..................... 2,335 1,239 633 345 403
-------- -------- ------- ------- -------
Net loss................................ $(11,302) $(15,813) $(6,328) $(3,690) $ (195)
======== ======== ======= ======= =======
Net loss per common share:
Basic and diluted..................... $ (0.64) $ (0.87) $ (0.34) $ (0.20) $ (0.01)
======== ======== ======= ======= =======
Weighted average common shares
outstanding:
Basic and diluted..................... 17,618 18,212 18,383 18,335 19,396
</TABLE>
<TABLE>
<CAPTION>
AS OF
FEBRUARY 26,
2000
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, marketable securities and restricted
cash...................................................... $35,891
Working capital............................................. 22,797
Total assets................................................ 51,034
Long-term obligations, net of current maturities............ 5,760
Shareholders' equity........................................ 31,054
</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 $195,000 for the twenty-six-week period ended
February 26, 2000, and, as of February 26, 2000, we had an accumulated deficit
of approximately $66,892,000. 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 you 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
twenty-six week period ended February 26, 2000, revenues from Schering-Plough
accounted for approximately 48%, 71%, 75% and 55%, respectively, of our total
revenue. If Schering-Plough fails to extend the funded research phase of the
agreements 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 you 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
6
<PAGE>
generate 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 limited from 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 or our collaborators. 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.
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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 genomics 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 genomics 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
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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 genomics 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,
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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 February 26, 2000, we had approximately $25.1 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 for at least one year. 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
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non-competition agreement or are the subject of key man life insurance, other
than Robert J. 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
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- the timing of achievement of our development milestones and other payments
under our strategic alliance agreements
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
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- inability to obtain required financing on favorable terms
- entering new markets in which we have little or no previous experience
- 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 24,038,566
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. Substantially all outstanding shares of our common
stock are 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.
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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.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock we are offering will be approximately $54.8 million. For the purpose of
estimating net proceeds, we are assuming that the public offering price will be
$15.875 per share.
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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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 February 26, 2000 and the statement of
operations data for the twenty-six week periods ended February 27, 1999 and
February 26, 2000 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>
TWENTY-SIX WEEK
YEAR ENDED AUGUST 31, PERIOD ENDED
---------------------------------------------------- -------------------------------------
1995 1996 1997 1998 1999 FEBRUARY 27, 1999 FEBRUARY 26, 2000
-------- -------- -------- -------- -------- ----------------- -----------------
(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 $11,513 $13,840
Costs and expenses:
Research and development......... 7,892 14,074 26,524 31,977 26,700 13,486 11,750
Selling, general and
administrative................. 2,644 5,047 3,766 4,292 4,279 2,062 2,688
------- ------- -------- -------- ------- ------- -------
Total costs and expenses....... 10,536 19,121 30,290 36,269 30,979 15,548 14,438
Income (loss) from operations.... 439 350 (13,637) (17,052) (6,961) (4,035) (598)
Interest income.................. 232 1,785 2,966 2,386 1,587 874 799
Interest expense................. (86) (214) (631) (1,147) (954) (529) (396)
------- ------- -------- -------- ------- ------- -------
Net interest income................ 146 1,571 2,335 1,239 633 345 403
Net income/(loss).................. $ 585 $ 1,921 $(11,302) $(15,813) $(6,328) $(3,690) $ (195)
======= ======= ======== ======== ======= ======= =======
Net income/(loss) per common share:
Basic.......................... $ 0.05 $ 0.11 $ (0.64) $ (0.87) $ (0.34) $ (0.20) $ (0.01)
======= ======= ======== ======== ======= ======= =======
Diluted........................ $ 0.04 0.11 (0.64) (0.87) (0.34) (0.20) (0.01)
======= ======= ======== ======== ======= ======= =======
Weighted average common equivalent
shares Outstanding
Basic.......................... 12,962 18,130 17,618 18,212 18,383 18,335 19,396
Diluted........................ 13,037 -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF AUGUST 31, FEBRUARY 26,
---------------------------------------------------- ------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <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 $ 35,891
Working capital............................................. 5,499 25,905 35,709 20,823 15,641 22,797
Total assets................................................ 11,529 63,279 60,688 51,465 39,485 51,034
Long-term obligations, net of current maturities............ 892 3,228 7,149 8,479 5,925 5,760
Shareholders' equity........................................ 7,239 54,313 43,948 29,248 23,411 31,054
</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 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 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 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. We have 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 develop new
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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 twenty-six week periods ended February 27, 1999 and
February 26, 2000, we recognized revenue accounting for approximately 48%, 71%,
75%, 74% and 55%, 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. Government grants as a percentage of total revenue will increase due
to these grants received from NHGRI.
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.
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 alliances that 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 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.
RESULTS OF OPERATIONS
TWENTY-SIX WEEK PERIODS ENDED FEBRUARY 27, 1999 AND FEBRUARY 26, 2000
REVENUE
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 grant with the National Human Genome Research Institute
to participate in the international Human Genome and Mouse Genome sequencing
projects, which was 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 expenses decreased 13%
from $13,486,000 in the twenty-six week period ended February 27, 1999 to
$11,750,000 for the twenty-six week period ended February 26, 2000. Research and
development expenses include research and development activities sponsored by us
and research funded pursuant to arrangements with our corporate alliances 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 30% from $2,062,000
for the twenty-six week period ended February 27, 1999 to $2,688,000 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 thirteen 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 twenty-six week period ended
February 26, 2000 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 alliance 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 alliances and the 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 our alliances,
subscription fees, 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 $11,984,000 in fiscal
1998 and 1999, and for the twenty-six week period ended February 26, 2000,
respectively, from our alliances 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 alliances 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 February 26, 2000, we had cash, cash equivalents, restricted cash and
short-term marketable securities of $35,891,000. We have various arrangements
under which we finance certain office and laboratory equipment and leasehold
improvements. We have an aggregate of $10,167,000 outstanding under our
borrowing arrangement at February 26, 2000. This amount is repayable over the
next 36 months and $4,407,000 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
indebtedness to tangible net worth, minimum cash level, debt service coverage
and minimum restricted cash balances. At February 26, 2000, we had $1,996,000
available under one of these arrangements for future borrowings.
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Our operating activities provided cash of $5,452,000 for the twenty-six week
period ended February 26, 2000 due to a decrease in net loss and an increase in
deferred revenue, and accrued expenses. The increase in deferred revenue
represents payments 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 the period. 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 $4,773,000 for the twenty-six week
period ended February 26, 2000 primarily through the conversion of our
marketable securities to cash and cash equivalents. Our investing activities
provided cash of approximately $10,241,000, $10,898,000 and $2,257,000 in fiscal
1999, 1998 and 1997, 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 $2,376,000 for the twenty-six week period ended
February 26, 2000. 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 $2,500,000 in capital
equipment in fiscal 2000 consisting primarily of computer and laboratory
equipment which we intend to finance the majority under existing equipment
financing arrangements.
Our financing activities provided cash of approximately $5,354,000 for the
twenty-six week period ended February 26, 2000 primarily from the sale of equity
securities to bioMerieux, exercise of stock options, partially offset by
payments of long-term obligations. Our financing activities used cash of
approximately $5,233,000 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 one year. 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;
- 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;
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- 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 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 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
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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 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.
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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 FEBRUARY 26, 2000 POTENTIAL PROCEEDS*
- ------------------ ------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Osteoporosis Wyeth-Ayerst Functional studies $1.3 million $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 $25.5 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 $18.8 million $42.8 million
Bacterial (December 1995) and screening
Infections assays transferred
to Schering-Plough
Fungal Infections Schering-Plough Targets identified $9.7 million $36.0 million
(September 1997) for screening;
research program
extended to
September 2001
Infectious Disease bioMerieux PathoGenome $5.4 million $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. As of
February 26, 2000, we had received payments of $1.3 million under this alliance
and have rights to receive, subject to the achievement of milestones, up to an
additional $116.7 million in license fees,
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milestone payments and research support, as well as royalties on sales of 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 February 26, 2000, we had received payments
of $25.5 million under this alliance and have rights to receive, based on
attainment of milestones, an additional $42.7 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
February 26, 2000, 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 February 26, 2000, we had received payments of $18.8 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 February 26, 2000 we had received payments of $9.7 million
under this alliance and have rights to receive, based on attainment of
milestones, an additional $26.3 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. We will receive a minimum of $6.2 million
in the first year under this alliance. As of February 26, 2000, we had received
payments of $5.4 million, including a completed equity investment, and have
rights to 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
AstraZeneca
Aventis
Biogen
Cubist Pharmaceuticals
Memorial Sloan-Kettering
Cancer Center
Phylos
Human Genome Project
Mouse Genome Sequencing Network
Cancer Research Center--Queen's University,
Ireland
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
Aventis
Bayer
bioMerieux
Bristol-Myers Squibb
Schering-Plough
Scriptgen Pharmaceuticals
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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. We may enter into alliances with other companies
to engage in the development, commercialization and marketing of leads
identified through our internal infectious disease program. Under certain
circumstances, we may have an obligation to give Schering-Plough a right of
first negotiation to develop certain of our infectious disease related
discoveries with us if we decide to seek a third party collaborator to develop
such discovery.
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
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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 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. As of February 26, 2000, we had received payments of
$1.3 million under this alliance. 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
February 26, 2000 of $25.5 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. Under certain circumstances, we may have an
obligation to give Schering-Plough a right of first negotiation to develop
with us certain of our asthma related discoveries if we decide to seek a
third party collaborator to develop such discovery. 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
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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 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
$42.8 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 $18.8 million
as of February 26, 2000. 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 $9.7 million as of
February 26, 2000.
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. Subject to certain limitations, we retain the rights to
make, use and sell diagnostic products resulting from our research under the
agreement.
ASTRAZENECA. In August 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 research portion of the alliance and transitioned the
program into AstraZeneca's pipeline for pre-clinical testing. In the course of
our research, 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.
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Under the alliance, we also granted AstraZeneca exclusive access to our H.
PYLORI genomic sequence database.
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
Feburary 26, 2000.
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 $3.8 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. As of February 26, 2000, we had received payments of $5.4 million
under this alliance, including the completed equity investment.
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 February 26, 2000, we had approximately
$25.1 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 $5.0 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
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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.
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
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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.
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.
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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 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.
40
<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; a new drug application,
or NDA, if the FDA classifies the product as a new drug; or a biologics
license application, or BLA, if the FDA classifies the product as biologic
- FDA review of the marketing application and NDA or BLA in order to
determine, among other things, whether the product is safe and effective
for its intended uses
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.
41
<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.
42
<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
43
<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. He is on the faculty of the Harvard Medical School as a clinical
Professor of Medicine and maintains a clinical practice at the Beth Israel
Deaconess Medical Center. From 1987 to 1994, Dr. Garnick was Vice President,
Clinical Development at Genetics Institute. From 1978 to 1996, 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.
44
<PAGE>
PLAN OF DISTRIBUTION
We may sell the shares offered by this prospectus through agents,
underwriters or dealers, or directly to one or more purchasers. We cannot assure
you that we will be successful in selling any or all of the shares offered
hereby. We have not fixed a minimum number of shares to be sold pursuant to this
prospectus. Therefore, we may sell less than all of the shares offered by this
prospectus, which may significantly reduce the amount of proceeds we receive. We
will not place funds that we receive on the sale of less than all of the shares
offered hereby in an escrow, trust of similar account.
AGENTS
We may designate agents who agree to use their reasonable efforts to solicit
purchases for the period of their appointment or to sell shares on a continuing
basis.
UNDERWRITERS
If we use underwriters for a sale of shares, the underwriters will acquire
the shares for their own account. The underwriters may resell the shares in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
obligations of the underwriters to purchase the shares will be subject to the
conditions set forth in the applicable underwriting agreement. Any initial
public offering price and any discounts or concessions allowed or re-allowed or
paid to dealers may be changed from time to time.
DIRECT SALES
We may also sell securities directly to one or more purchasers without using
underwriters or agents.
Underwriters, dealers and agents that participate in the distribution of the
securities may be underwriters as defined in the Securities Act and any
discounts or commissions they receive from us and any profit on their resale of
the shares may be treated as underwriting discounts and commissions under the
Securities Act. The applicable prospectus supplement will identify any
underwriters, dealers or agents and will describe their compensation. We may
have agreements with the underwriters, dealers and agents to indemnify them
against certain civil liabilities, including liabilities under the Securities
Act. Underwriters, dealers and agents may engage in transactions with or perform
services for us or our subsidiaries in the ordinary course of their business.
TRADING MARKETS AND LISTING OF SECURITIES
The shares offered by this prospectus have been listed on the Nasdaq
National Market. It is possible that one or more underwriters may make a market
in a class or series of our shares, but the underwriters will not be obligated
to do so and may discontinue any market making at any time without notice. We
cannot give any assurance as to the liquidity of the trading market for any of
the shares.
STABILIZATION ACTIVITIES
Any underwriter may engage in over allotment, stabilizing transactions,
short covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves sales in excess of the offering
size, which create a short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Short covering transactions involve purchases of the shares
in the open market after the distribution is completed to cover short positions.
Penalty bids permit the underwriters to reclaim a selling concession from a
dealer when the shares originally sold by the dealer are purchased in a covering
transaction to cover short positions. Those activities may cause the price of
the shares to be higher than it would otherwise be. If commenced, the
underwriters may discontinue any of the activities at any time.
45
<PAGE>
VALIDITY OF COMMON STOCK
Ropes & Gray, Boston, Massachusetts will pass upon the validity of the
shares of common stock we are offering.
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 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 Quarterly Report on Form 10-Q/A for the quarter ended November 27, 1999
as filed with the SEC on March 21, 2000;
5. Our Quarterly Report on Form 10-Q for the quarter ended February 26, 2000 as
filed with the SEC on March 22, 2000;
6. Our Proxy Statement as filed with the SEC on January 27, 2000; and
7. Our Current Report on Form 8-K dated March 8, 2000.
8. Our Current Report on Form 8-K dated April 4, 2000.
9. Our Current Report on Form 8-K/A dated April 10, 2000.
10. Our Current Report on Form 8-K dated April 18, 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
46
<PAGE>
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.
47
<PAGE>
INDEX TO CONSOLIDATED 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 February 26, 2000 (unaudited)......................... F-3
Consolidated Statements of Operations for the
Years Ended August 31, 1997, 1998 and 1999 and for the
Twenty-six Week
Periods Ended February 27, 1999 and February 26, 2000
(unaudited)............................................... F-4
Consolidated Statements of Shareholders' Equity for
the Years Ended August 31, 1997, 1998 and 1999 and for the
Twenty-six Week
Period Ended February 26, 2000 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the
Years Ended August 31, 1997, 1998 and 1999 and for the
Twenty-six Week
Periods Ended February 27, 1999 and February 26, 2000
(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 SHEETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 26,
--------------------------- ------------
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 10,978,176 $ 12,802,162 $ 28,381,795
Marketable securities..................................... 21,969,524 12,060,230 7,309,650
Interest receivable....................................... 742,411 448,192 454,467
Unbilled costs and fees................................... 150,299 35,328 81,077
Prepaid expenses and other current assets................. 721,239 324,211 669,342
Note receivable from former officer....................... -- 120,000 120,000
------------ ------------ ------------
Total current assets.................................. 34,561,649 25,790,123 37,016,331
------------ ------------ ------------
Equipment and Leasehold Improvements, At Cost:
Laboratory and scientific equipment....................... 14,434,808 15,844,262 18,134,397
Leasehold improvements.................................... 7,913,570 8,205,701 8,217,451
Equipment and furniture................................... 1,334,268 1,344,703 1,359,887
------------ ------------ ------------
23,682,646 25,394,666 27,711,735
Less--Accumulated depreciation............................ 8,579,440 12,173,500 14,145,172
------------ ------------ ------------
15,103,206 13,221,166 13,566,563
Restricted Cash............................................. 200,000 200,000 200,000
Long-term Marketable Securities............................. 1,029,569 -- --
Note Receivable from Former Officer......................... 160,000 -- --
Other Assets................................................ 410,267 273,708 251,458
------------ ------------ ------------
$ 51,464,691 $ 39,484,997 $ 51,034,352
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............... $ 5,611,186 $ 3,934,547 $ 4,406,862
Accounts payable.......................................... 977,610 987,958 941,736
Accrued expenses.......................................... 2,450,400 2,322,780 4,229,858
Deferred revenue.......................................... 4,699,137 2,903,534 4,641,041
------------ ------------ ------------
Total current liabilities............................. 13,738,333 10,148,819 14,219,497
------------ ------------ ------------
Long-term Obligations, net of Current Maturities............ 8,478,558 5,925,086 5,760,357
------------ ------------ ------------
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
20,588,566 shares at August 31, 1998 and 1999 and
February 26, 2000 (unaudited), respectively............. 1,831,259 1,854,214 2,058,856
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 96,862,049
Accumulated deficit....................................... (60,369,289) (66,697,384) (66,891,890)
Deferred compensation..................................... (178,693) (31,357) (974,517)
------------ ------------ ------------
Total shareholders' equity............................ 29,247,800 23,411,092 31,054,498
------------ ------------ ------------
$ 51,464,691 $ 39,484,997 $ 51,034,352
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
YEARS ENDED AUGUST 31, ---------------------------
----------------------------------------- FEBRUARY 27, FEBRUARY 26,
1997 1998 1999 1999 2000
------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research,
licenses, subscription
fees and royalties...... $ 16,652,764 $ 19,217,132 $24,018,165 $11,513,000 $13,840,173
Costs and Expenses:
Research and
development............. 26,523,824 31,977,381 26,699,910 13,485,667 11,749,546
Selling, general and
administrative.......... 3,765,755 4,292,471 4,279,480 2,062,423 2,687,949
------------ ------------ ----------- ----------- -----------
Total costs and
expenses............ 30,289,579 36,269,852 30,979,390 15,548,090 14,437,495
------------ ------------ ----------- ----------- -----------
Loss from operations...... (13,636,815) (17,052,720) (6,961,225) (4,035,090) (597,322)
Interest income........... 2,965,866 2,386,523 1,586,798 874,405 799,267
Interest expense.......... (631,442) (1,147,186) (953,668) (529,060) (396,451)
------------ ------------ ----------- ----------- -----------
Net interest income... 2,334,424 1,239,337 633,130 345,345 402,816
------------ ------------ ----------- ----------- -----------
Net loss.............. $(11,302,391) $(15,813,383) $(6,328,095) $(3,689,745) $ (194,506)
============ ============ =========== =========== ===========
Net Loss per Common Share:
Basic and diluted......... $ (.64) $ (.87) $ (.34) $ (.20) $ (.01)
============ ============ =========== =========== ===========
Weighted Average Common
Shares Outstanding:
Basic and diluted......... 17,617,614 18,212,365 18,382,707 18,335,058 19,395,565
============ ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated 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................ 1,367,810 136,781 3,499,311 -- -- 3,636,092
Deferred compensation from grant of stock
options................................ -- -- 1,528,698 -- (1,528,698) --
Amortization of deferred compensation.... -- -- -- -- 469,705 469,705
Reversal of deferred compensation related
to
termination of stock options........... -- -- (115,833) -- 115,833 --
Net loss................................. -- -- -- (194,506) -- (194,506)
----------- ---------- ----------- ------------ ----------- ------------
Balance, February 26, 2000 (unaudited)..... 20,588,566 $$2,058,856 $96,862,049 $(66,891,890) $ (974,517) $ 31,054,498
=========== ========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIODS ENDED
YEARS ENDED AUGUST 31, ---------------------------
------------------------------------------ FEBRUARY 27, FEBRUARY 26,
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................. $(11,302,391) $(15,813,383) $ (6,328,095) $(3,689,745) $ (194,506)
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 2,048,147 1,976,058
Loss on disposal of fixed assets....... 227,864 288,979 -- -- --
Deferred compensation.................. 79,370 131,405 146,311 86,575 469,705
Common stock issued for services
rendered............................. -- -- 80 -- --
Changes in assets and liabilities--
Interest receivable.................. 16,046 538,200 294,219 223,817 (6,275)
Unbilled costs and fees and accounts
receivable......................... 1,488,729 19,481 99,417 40,413 (45,749)
Prepaid expenses and other current
assets............................. 144,663 (287,317) 412,582 172,542 (345,131)
Loan to former officer............... (160,000) -- 40,000 --
Accounts payable..................... 424,112 (310,781) 10,348 (115,590) (46,222)
Accrued expenses..................... 642,568 76,612 (127,620) (31,959) 1,907,078
Deferred revenue..................... 1,300,191 2,363,442 (1,795,603) 1,274,263 1,737,507
------------ ------------ ------------ ------------ ------------
Total adjustments.................. 6,545,829 6,534,404 3,143,711 3,698,208 5,646,971
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities............. (4,756,562) (9,278,979) (3,184,384) 8,463 5,452,465
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities....... (20,575,625) (30,820,944) (21,858,137) (11,135,157) (21,125,970)
Maturities of marketable securities...... 24,530,000 46,761,250 32,797,000 19,608,000 25,876,550
Purchases of equipment and leasehold
improvements........................... (1,370,028) (5,162,311) (834,351) (424,997) --
(Increase) decrease in restricted cash... (106,000) 101,500 -- -- --
(Increase) decrease in other assets...... (220,850) 18,722 136,559 23,990 22,250
------------ ------------ ------------ ------------ ------------
Net cash provided by investing
activities....................... 2,257,497 10,898,217 10,241,071 8,071,836 4,772,830
------------ ------------ ------------ ------------ ------------
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 73,992 3,636,092
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) (2,829,361) (2,013,869)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities............. 422,476 756,240 (5,232,701) (2,755,369) 5,354,338
------------ ------------ ------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash
Equivalents.............................. (2,076,589) 2,375,478 1,823,986 5,324,930 15,579,633
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 $16,303,106 $ 28,381,795
============ ============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the period.......... $ 631,442 $ 1,147,186 $ 953,668 $ 529,060 $ 396,451
============ ============ ============ ============ ============
Income taxes paid during the period...... $ 36,612 $ 24,700 $ 33,019 $ 11,700 $ 7,800
============ ============ ============ ============ ============
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Equipment acquired under capital
leases................................. $ 5,843,037 $ 3,572,777 $ 1,347,586 $ 783,537 $ 2,376,272
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated 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. The Company's commercial strategy is to apply its
broad understanding of human and infectious disease genomics and its 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(l) 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, 3,739,971 and 2,533,967 at August 31, 1997,
1998, 1999, February 27, 1999 and February 26, 2000, 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
Twenty-six week periods ended,
February 27, 1999............................ 3 4 3 74
February 26, 2000............................ 2 -- 24 55
</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)
(I) RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform with
current year's presentation.
(J) 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.
(K) 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.
(L) 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 February 26, 2000. 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, 1998 and 1999 and February 26, 2000, the
Company's cash equivalents and
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)
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 ninety days. Marketable securities are investment securities with
original maturities of greater than ninety days. 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 market value and amortized cost of the marketable
securities are as follows:
<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1999 FEBRUARY 26, 2000
------------------------- ------------------------- -----------------------
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 $7,309,650 $7,295,043
=========== =========== =========== =========== ========== ==========
Greater than one year--
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
February 26, 2000 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>
Rental expense was approximately $949,000, $1,085,000, $899,000, $483,036 and
$412,557 in the years ended August 31, 1997, 1998 and 1999 and the twenty-six
week periods ended February 27, 1999 and February 26, 2000, respectively.
F-11
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(4) COMMITMENTS (CONTINUED)
(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 23, 2000, the Company entered into an equipment lease line of
credit under which it can finance up to $4,000,000 of computers and laboratory
equipment. The Company, at its discretion, can enter into either an operating or
a capital lease. 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 has borrowed $2,004,000 as a
capital lease. 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 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. On December 31, 1999, the line of credit 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 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 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.
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 $35,433 to operations for the years ended August 31, 1997,
1998, 1999 and the twenty-six week periods ended February 27, 1999 and
February 26, 2000, 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 the years ended
August 31, 1997, 1998 and 1999 and for the twenty six week period ended
February 26, 2000, the Company recorded $50,594, $91,874, $60,006 and
$1,528,698, respectively, of deferred compensation. The Company recorded
compensation expense of approximately $79,000, $131,000, $146,000, $87,000 and
$470,000 for the years ended August 31, 1997, 1998, 1999 and the twenty-six week
periods ended February 27, 1999 and February 26, 2000, respectively. During
fiscal 1999 and for the twenty-six week period ended February 26, 2000, in
connection with the termination of an employee, the Company reversed $64,495 and
$115,833 of unamortized deferred compensation due to the cancelation of the
options.
F-13
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
In September 1999 and in the twenty-six week period ended February 26, 2000,
the Company granted to certain employees the right to receive 125,716 and
26,700 shares of common stock, respectively. The employees will receive the
common stock in two equal installments on the anniversary of the grant date. The
Company recorded deferred compensation of $631,309 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 the twenty-six week period ended February 26,
2000, three employees resigned and forfeited 29,972 shares of restricted stock.
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 866,688 common shares available for future grant at February 26,
2000. 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............................... 735,149 .10-48.25 5.01
Exercised............................. (1,367,810) 1.53- 9.50 2.66
Canceled.............................. (281,719) 3.17- 9.50 5.89
---------- ------------------ -----
Outstanding, February 26, 2000.......... 2,386,628 $ .10-48.25 $4.26
========== ================== =====
Exercisable, February 26, 2000.......... 1,483,808 $ .10-14.50 $3.98
========== ================== =====
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 February 26, 2000 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>
$ 0.10-$ 2.25 3.17 669,237 $ 1.65 675,737 $ 1.64
$ 2.31-$ 3.38 7.27 275,675 2.87 122,739 2.49
$ 3.52-$ 4.88 9.27 966,653 4.27 321,345 4.26
$ 5.34-$ 7.50 6.58 91,076 6.83 60,766 6.98
$ 8.31-$ 9.50 6.35 366,237 8.90 302,721 8.87
$14.28-$20.13 9.57 6,750 16.04 500 14.50
$21.59 9.95 3,750 21.59 -- --
$39.38-$48.25 9.97 7,250 40.29 -- --
---- --------- ------ --------- ------
Total............... 6.74 2,386,628 $ 4.26 1,483,808 $ 3.98
==== ========= ====== ========= ======
</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 and for the twenty-six
week periods ended February 27, 1999 and February 26, 2000 using the
Black-Scholes option pricing model. The weighted average assumptions used for
fiscal 1997, 1998, 1999 and for twenty-six week periods ended February 27, 1999
and February 26, 2000 are as follows:
<TABLE>
<CAPTION>
TWENTY-SIX WEEK PERIODS ENDED
YEARS ENDED AUGUST 31, -------------------------------------
------------------------------------------------------------- FEBRUARY 27, FEBRUARY 26,
1997 1998 1999 1999 2000
------------------ -------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Risk-free interest
rate............... 6.20%-6.73% 5.36%-6.20% 4.46%-6.15% 5.25% 6.15%
Expected dividend
yield.............. -- -- -- -- --
Expected life........ 7 years 7 years 7 years 7 years 7 years
Expected volatility.. 65% 65% 65% 65% 65%
Weighted average fair
market value at
grant date......... $4.93 $3.61 $4.21 $6.25 4.56
</TABLE>
F-15
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
The total value of the options granted to employees during the years ended
August 31, 1997, 1998, 1999, and the twenty-six week periods ended February 27,
1999, and February 26, 2000 was computed as $3,857,026, $1,635,318, $1,255,868,
$1,031,915 and $3,318,856, respectively. Of these amounts, $2,951,660, $652,668,
$966,309, $575,973 and $1,148,258 would be charged to operations for the years
ended August 31, 1997, 1998 and 1999 and for the periods ended February 27, 1999
and February 26, 2000, respectively. The remaining amount, approximately
$1,483,813, will be amortized over the remaining vesting periods. The pro forma
effect of these option grants for the years ended August 31, 1997, 1998 and 1999
and for the twenty-six week periods ended February 27, 1999 and February 26,
2000 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)
============ ============ ============ ============ =========== ===========
<CAPTION>
FEBRUARY 27, 1999 FEBRUARY 26, 2000
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss............. (3,689,745) (4,265,718) (194,506) (1,342,764)
=========== =========== =========== ===========
Net loss per share... (.20) (.23) (.01) (.07)
=========== =========== =========== ===========
</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 granted as services are performed by members of the
Company's Board of Directors. Through February 26, 2000, the Company granted
25,702 shares of restricted common stock under the 1997 Directors Plan. These
shares are issued at the end of the three-year period or earlier if the
individual ceases to serve as a member of the Company's Board of Directors. In
the twenty-six week period ended February 26, 2000, 800 shares were issued.
(D) EMPLOYEE STOCK PURCHASE PLAN
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.
F-16
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(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, $116,190 and
$96,231 to the Plan for the years ended August 31, 1997, 1998, 1999 and for the
twenty-six week periods ended February 27, 1999 and February 26, 2000,
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, 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, $423,369 and
$22,119 in revenue under the agreement in the years ended August 31, 1997, 1998
and 1999 and for the twenty-six week periods ended February 27, 1999 and
February 26, 2000, respectively, which consisted of milestone payments and
collaborative research revenues.
F-17
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
(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 to the achievement of additional product development
milestones, Schering-Plough has agreed to pay the Company up to an additional
$24.0 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.
The Company has recognized $3,364,810, $3,435,807, $2,490,802, $1,331,782
and $1,118,565 in revenue in the years ended August 31, 1997, 1998, 1999 and for
the twenty-six week periods ended February 27, 1999 and February 26, 2000,
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
F-18
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
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, and
(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, $4,784,771 and $3,757,294 in revenue in the years ended
August 31, 1997, 1998, 1999 and for the twenty-six week periods ended
February 27, 1999 and February 26, 2000, respectively, 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 $36.0 million, excluding royalties. Of the total potential
payments, approximately $13.0 million represents sponsored research payments and
$23.0 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 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.
F-19
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
Under the third agreement, the Company has recognized $2,432,005,
$4,831,870, $2,024,786 and $2,274,970 in revenue for the years ended August 31,
1998 and 1999 and for the twenty-six week periods ended February 27, 1999 and
February 26, 2000, 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 twenty-six weeks ended February 26, 2000,
the Company has recognized approximately $340,000 and $2,648,368, 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 it will receive additional grants
or contracts in the future. The government's failure to fund the Company's
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 a 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 $3.8 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 (see Note 9), 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 twenty-six week period ended February 26, 2000,
the Company recorded revenue of $519,094 under this agreement, which consists of
research funding and the amortization of the upfront 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
twenty-six week period ended February 26, 2000, the Company recognized
approximately $505,074 with respect to this agreement. Funding under
F-20
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(8) ALLIANCES (CONTINUED)
the Company's 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 it will
receive additional grants or contracts in the future. The government's failure
to fund the Company's 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 twenty-six week period ended February 26,
2000, the Company recorded revenue of $250,000 under this agreement, which
consists of research funding and the amortization of the upfront license fee.
(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 (see Note 8).
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, $2,554,166 and
$2,224,995 in revenue under these agreements in the years ended August 31, 1997,
1998, 1999 and for the twenty-six week periods ended February 27, 1999 and
February 26, 2000, respectively, consisting of license and subscription fees.
F-21
<PAGE>
GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED)
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------- FEBRUARY 26,
1998 1999 2000
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related expenses............. $1,109,626 $1,065,311 $2,685,496
Facilities............................... 469,932 438,453 716,724
Professional fees........................ 285,058 269,553 271,094
License and other fees................... 185,434 160,434 160,434
Employee relocation...................... 162,519 143,843 133,095
All other................................ 237,831 245,186 263,015
---------- ---------- ----------
$2,450,400 $2,322,780 $4,229,858
========== ========== ==========
</TABLE>
F-22
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
GENOME THERAPEUTICS CORP.
3,450,000 SHARES
COMMON STOCK
------------------
PROSPECTUS
------------------
, 2000
- ----------------------------------------------------------------
YOU SHOULD RELY ONLY 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
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................................................... $485,107
========
</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>
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)
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 33-00127).
** Previously filed
(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.
The undersigned Registrant hereby undertakes (1) to file, during any period
in which offers or sales are being made, a post-effective amendment to this
Registration Statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; and (2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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; and (3) to remove from registration by means of
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waltham, Commonwealth of Massachusetts, on this 19th day of April, 2000.
<TABLE>
<S> <C> <C>
GENOME THERAPEUTICS CORP.
BY: /S/ ROBERT J. HENNESSEY
-----------------------------------------
Title:Chairman of the Board and Chief
Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the 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 April 19, 2000
Robert J. Hennessey Officer)
* Chief Financial Officer
------------------------------------------- (Principal Financial and April 19, 2000
Philip V. Holberton Accounting Officer)
* Director
------------------------------------------- April 19, 2000
Marc B. Garnick
* Director
------------------------------------------- April 19, 2000
Philip Leder
* Director
------------------------------------------- April 19, 2000
Lawrence Levy
* Director
------------------------------------------- April 19, 2000
Steven M. Rauscher
* Director
------------------------------------------- April 19, 2000
Norbert G. Riedel
</TABLE>
<TABLE>
<S> <C>
/s/ ROBERT J. HENNESSEY
-------------------------------------------
Robert J. Hennessey
*By: Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
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)
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 33-00127).
** Previously filed
<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
April 18, 2000
