<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996 Commission File Number 0-14587
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GENETICS INSTITUTE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2718435
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
87 CambridgePark Drive, Cambridge, MA 02140
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (617)876-1170
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None
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(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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27,468,963 shares of Common Stock, par value $.01 (including 11,433,204 shares
represented by Depositary Shares) were outstanding on April 29, 1996
<PAGE> 2
GENETICS INSTITUTE, INC.
INDEX
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Page
PART I - FINANCIAL INFORMATION Number
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Item 1 - Financial Statements
Consolidated Condensed Balance Sheets at
March 31, 1996 and December 31, 1995................................ 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1996 and 1995.................. 4
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 1996 and 1995.................. 5
Notes to Consolidated Condensed Financial Statements.................. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 10
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings............................................. 14
Item 6 - Exhibits and Reports on Form 8-K.............................. 14
Signatures............................................................. 15
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<TABLE>
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - in thousands)
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 57,814 $ 33,164
Marketable securities 219,137 217,670
Accounts receivable 40,804 40,876
Inventories:
Materials and supplies 6,021 5,769
Work in progress 2,043 915
Finished goods 16,179 14,325
-------- --------
24,243 21,009
Other current assets 5,953 5,844
-------- --------
Total current assets 347,951 318,563
Property, plant and equipment 176,031 174,826
Less accumulated depreciation (68,834) (65,710)
-------- --------
107,197 109,116
Other assets 5,538 6,132
-------- --------
$460,686 $433,811
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 11,589 $ 8,936
Accrued merger consideration 4,274 7,615
Other accrued expenses 26,607 27,145
-------- --------
Total current liabilities 42,470 43,696
Shareholders' Equity:
Common stock, par value $.01;
authorized 50,000,000 shares 272 268
Additional paid-in capital 613,802 604,013
Accumulated deficit (195,858) (214,166)
-------- ---------
Total shareholders' equity 418,216 390,115
-------- --------
$460,686 $433,811
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands except per share data)
<CAPTION>
Three Months Ended March 31,
---------------------------
1996 1995
--------- ----------
<S> <C> <C>
REVENUE
Product sales $29,360 $23,878
Royalties 26,025 10,563
Collaborative research and development 16,463 17,330
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Total revenue 71,848 51,771
OPERATING EXPENSES
Cost of sales 11,761 13,464
Research and development 31,606 26,924
General and administrative 6,787 4,400
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Total operating expenses 50,154 44,788
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INCOME FROM OPERATIONS 21,694 6,983
OTHER INCOME (EXPENSE), NET
Investment income 4,375 4,177
Loss of affiliates, net (2,345) (2,755)
Other, net (702) (2,706)
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Total other income (expense), net 1,328 (1,284)
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INCOME BEFORE INCOME TAXES 23,022 5,699
Provision for taxes on income 694 -
------- -------
NET INCOME $22,328 $ 5,699
======= =======
NET INCOME PER COMMON SHARE
Primary $ .74 $ .21
======= =======
Fully diluted $ .73 $ .21
======= =======
Average shares outstanding
Primary 30,152 26,909
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Fully diluted 30,450 27,551
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
<TABLE>
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $22,328 $ 5,699
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities -
Depreciation and amortization 3,638 3,194
Equity in loss of affiliates 2,345 2,755
Compensation related to incentive plans 246 174
Changes in assets and liabilities (4,497) (24,218)
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Net cash provided by (used in)
operating activities 24,060 (12,396)
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INVESTING ACTIVITIES
Purchase of marketable securities (51,462) (46,702)
Proceeds from sale/maturity of
marketable securities 45,975 49,670
Additions to property, plant and equipment (6,717) (6,522)
Investments in affiliates (2,345) (2,755)
Other investing activities 397 (924)
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Net cash used in investing activities (14,152) (7,233)
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FINANCING ACTIVITIES
Proceeds from stock issuances 8,798 1,274
Proceeds from sale-leaseback transaction 5,035 -
Proceeds from exercise of warrants 909 -
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Net cash provided by financing activities 14,742 1,274
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Net increase (decrease) in cash and
cash equivalents 24,650 (18,355)
Cash and cash equivalents, beginning
of period 33,164 21,793
------- --------
Cash and cash equivalents, end of period $57,814 $ 3,438
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation: The accompanying consolidated condensed financial
statements are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of these financial statements have been
included. Such adjustments consisted only of normal recurring items. Interim
results are not necessarily indicative of results for a full year. Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation. The consolidated condensed
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and related footnotes for the year ended
December 31, 1995.
The consolidated condensed financial statements include all accounts of
Genetics Institute, Inc. and its wholly owned subsidiaries. Investments in
50% owned joint ventures are accounted for on the equity method. Under the
equity method, investments in such affiliated joint ventures are recorded at
cost and adjusted by the Company's share of the income and losses of and the
investments in and distributions from such affiliates. All significant
intercompany balances and transactions have been eliminated in consolidation.
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.
2. Transactions with American Home Products Corporation
On September 19, 1991, the Company and American Home Products Corporation
("AHP") entered into an Agreement and Plan of Merger (the "AHP Transaction")
that was consummated on January 16, 1992 through which AHP acquired a 60%
interest in the Company. In connection with the AHP Transaction, the Company
issued 9,466,709 new shares of Common Stock to AHP for an aggregate purchase
price of approximately $300.0 million and, for shares of Common Stock owned,
the Company's shareholders received a combination of cash and Depositary
Shares subject to a call option. Under the terms of the call option, AHP has
the right but not the obligation, to purchase the outstanding Depositary
Shares that it does not own, in whole but not in part, at any time until
December 31, 1996, at a call price of $81.32 per share for the period April
1, 1996 to June 30, 1996 and increasing by $1.84 on a quarterly basis to
$85.00 per share for the quarter ending December 31, 1996.
Independent of its right to call the Depositary Shares, AHP is permitted
to acquire additional Depositary Shares through open market purchases or
privately negotiated purchases, provided that during the term of the call
option its aggregate holdings do not exceed 75% of the Company's outstanding
equity, subject to certain exceptions. As of March 31, 1996, AHP's total
ownership position in the Company approximates 62%.
The Company is engaged in collaborations with AHP in the development and
commercialization of recombinant human interleukin-twelve (rhIL-12), an
immune system modulatory protein, and the commercialization of recombinant
human interleukin-eleven (rhIL-11), a blood cell growth factor. A
collaboration with AHP in the area of cellular adhesion discovery research
ended as scheduled during the second quarter of 1995. Collaborative research
and development revenue includes $4.7 million and $3.1 million for the three
month periods ended March 31, 1996 and 1995, respectively, relating to these
collaborations with AHP. Losses of affiliates includes $1.2 million and $0.6
million for the three month periods ended March 31, 1996 and 1995,
respectively, relating to these collaborations with AHP.
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<PAGE> 7
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
3. Investments in Debt Securities
<TABLE>
The Company's investment portfolio of debt securities consists of cash
equivalents classified as held-to-maturity and marketable securities
classified as available-for-sale. The fair value of cash equivalents
approximated the amortized cost of $53.1 million at March 31, 1996. Aggregate
fair value, amortized cost and average maturity for marketable securities
held at March 31, 1996 and December 31, 1995 are presented below. The average
maturities presented below include estimates of the effective life for
certain securities whose actual maturities will differ from contractual
maturities because the borrowers have the right to call or prepay the
obligations without call or prepayment penalties.
<CAPTION>
Amortized Gross Unrealized Fair
Cost Holding Gains (Losses) Value
---- ---------------------- -----
<S> <C> <C> <C> <C>
March 31, 1996
(In thousands)
U.S. Government and
Agency securities
(average maturity
of 3.2 years) $138,850 $ 844 $(1,150) $138,544
Corporate and other
debt securities
(average maturity
of 2.6 years) 80,535 531 (473) 80,593
-------- ------ ------- --------
$219,385 $1,375 $(1,623) $219,137
======== ====== ======= ========
December 31, 1995
(In thousands)
U.S. Government and
Agency securities
(average maturity
of 3.5 years) $138,498 $2,823 $ (266) $141,055
Corporate and other
debt securities
(average maturity
of 2.6 years) 75,400 1,292 (77) 76,615
-------- ------ ------- --------
$213,898 $4,115 $ (343) $217,670
======== ====== ======= ========
</TABLE>
The net unrealized loss on marketable securities for the three months ended
March 31, 1996, which has been recorded in shareholders' equity, was $4.0
million. Gross realized gains and losses on sales of marketable securities
for the three month periods ended March 31, 1996 and 1995 were not material
to the results of operations.
4. Loss of Affiliates, Net
Loss of affiliates, net consists of the Company's share of benchmark payments
or license fees received by the joint ventures, net of the Company's share of
research and development expenses incurred by affiliated joint ventures
(excluding any research and development or other services provided by the
Company to the joint ventures). The Company's share of the joint ventures'
revenues, which ranges from 50% to 62.5%, is generally distributed when
received by the joint venture. The Company's share of the joint ventures'
expenses, which ranges from 25% to 50%, is generally funded as incurred.
Investments in such affiliates are accounted for on the equity method and
amounted to $0.9 million and $1.6 million at March 31, 1996 and December 31,
1995, respectively.
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<PAGE> 8
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The more significant of these affiliates are GI-Yamanouchi, Inc. (GYJ), the
GI-Yamanouchi European Partnership (GYEP) and IL-12 Partners. The GYJ and the
GYEP are joint ventures with Yamanouchi Pharmaceutical Co., Ltd. (Yamanouchi)
formed to develop and commercialize certain of the Company's product
candidates in Japan and Europe, respectively. IL-12 Partners is a joint
venture with AHP formed to develop and commercialize rhIL-12 worldwide except
Japan.
<TABLE>
The Company's loss of affiliates, net for the three months ended March 31,
1996 and 1995 was as follows (in thousands):
<CAPTION>
Three months ended March 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Combined net loss of affiliated
joint ventures $(7,185) $(11,447)
======= ========
Company share of joint ventures' net
loss based on ownership percentage
share of revenues and expenses (3,530) (5,191)
Elimination of Company share of joint
venture expenses attributable
to services provided
by or benchmarks paid to the Company 1,185 2,436
------- --------
Loss of affiliates, net $(2,345) $ (2,755)
======= ========
</TABLE>
5. Contingencies
The Company is involved in various legal proceedings including patent
litigation of a nature considered normal to its business.
Patent infringement proceedings are pending in Europe between Boehringer
Mannheim, GmbH ("Boehringer Mannheim") the Company's licensee, and Ortho
Pharmaceutical Co., Ltd. and certain Ortho affiliates, licensees of
Kirin-Amgen, Inc.'s recombinant EPO patents, seeking injunctive relief and
damages for infringement of their respective erythropoietin ("EPO") patent
rights.
The patents which are at issue in these suits have also been the subject of
European Patent Office proceedings. In June 1994, a claim in the Company's
European patent covering homogeneous EPO compositions (the '539 patent) was
upheld by the Opposition Division of the European Patent Office. This
decision has been appealed. In September 1994, an appellate hearing was held
before the Board of Technical Appeals of the European Patent Office relating
to oppositions to Kirin-Amgen's European recombinant EPO patent. The Board
ruled that a modified version of certain of Kirin-Amgen's original claims in
the patent filing was valid. However, it is uncertain whether Kirin-Amgen's
claims cover the making, using or selling of Boehringer Mannheim's
recombinant EPO.
The Company can provide no assurance as to the outcome of these European
proceedings. If as a result of these proceedings Boehringer Mannheim is
forced to withdraw from any or all markets, the Company's future royalty
income from Boehringer Mannheim, which totaled $12.9 million in fiscal 1995
and which, absent an adverse outcome, is expected to increase in 1996, could
be reduced or eliminated.
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<PAGE> 9
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
In January 1996, the United States Patent and Trademark Office issued an
order to show cause why it should not rule in a patent interference
proceeding that the patents owned by Stryker Corporation purporting to cover
recombinant human bone morphogenetic protein-two ("rhBMP-2") do not
interfere with the Company's rhBMP-2 patent estate, and that the Stryker
Corporation patents are not invalid in view of certain prior art
publications. The Company believes the decision is incorrect and plans to
respond and appeal, as appropriate. Because the Company's discovery of
rhBMP-2 and its related rhBMP-2 patent filings substantially predate the
Stryker Corporation patent filings, the Company believes that it is unlikely
that rhBMP-2 products can be validly covered by Stryker Corporation patents.
However, the Company can provide no assurance as to the outcome of any future
legal proceeding.
In August 1992 and November 1994, respectively, the Company was issued U.S.
patents covering rhBMP-7 currently in development by Stryker Corporation and
Creative BioMolecules, Inc. under the name OP-1. Stryker Corporation also has
pending patent applications directed to rhBMP-7 which may become the subject
of a future patent interference proceeding with the Company's issued rhBMP-7
patents. The Company can provide no assurance as to the outcome of any future
interference or other legal proceeding with respect to these patents and
patent applications.
In the opinion of the Company, although the outcome of any currently pending
litigation cannot be predicted with certainty, the ultimate liability of the
Company in connection with pending litigation will not have a material
adverse effect on the Company's financial position but could be material to
the Company's future results of operations.
6. Acquisition of SciGenics, Inc.
In the fourth quarter of 1995, the Company acquired 100% of the callable
common stock of SciGenics, Inc. ("SciGenics"). The acquisition was made
pursuant to the terms of a cash tender offer in which the Company acquired
approximately 67% of the callable common stock of SciGenics at $14.00 per
share. The remaining equity interest in SciGenics was acquired upon the
merger of a wholly owned subsidiary of the Company into SciGenics, with
SciGenics being the surviving corporation. In the merger, each share of
callable common stock of SciGenics not held by the Company was converted into
the right to receive $14.00 in cash for a total purchase price of $29.3
million for the 2,090,909 shares acquired. As of December 31, 1995, SciGenics
shareholders holding 543,908 shares indicated their intention to demand an
appraisal of the fair value of their shares under Delaware law and the
Company accrued merger consideration of $14.00 per share for those shares.
During the first quarter of 1996, certain of these shareholders elected to
forego the appraisal process and tendered their shares. As a result, at March
31, 1996, the Company had a balance of $4.3 million of accrued merger
consideration, or 305,250 shares at $14.00 per share. On April 7, 1996, all
appraisal rights expired without any appraisal actions being filed. The
Company expects to complete the payment of all remaining merger consideration
of $14.00 per share in the second quarter of 1996.
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Genetics Institute, Inc. and subsidiaries (the "Company") are principally
engaged in discovering, developing and commercializing biopharmaceutical
products using recombinant DNA and related technologies.
The Company and American Home Products Corporation ("AHP") entered into a
transaction (the "AHP Transaction") through which AHP acquired a majority
interest in the Company effective January 16, 1992 (see Note 2 of Notes to
Consolidated Condensed Financial Statements). Under the terms of a call option,
AHP has the right, but not the obligation, to purchase the outstanding
Depositary Shares that it does not own, in whole but not in part, at any time
until December 31, 1996, at a call price of $81.32 per share for the period
April 1, 1996 to June 30, 1996 and increasing by $1.84 on a quarterly basis to
$85.00 per share for the quarter ending December 31, 1996 (the "Call Option").
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995. The Company reported net income of
$22.3 million for the first quarter of 1996, compared with net income of $5.7
million for the first quarter of 1995.
The Company's revenues include product sales from the supply of recombinant
human antihemophilic factor concentrate ("rhAHF") to Baxter Healthcare
Corporation ("Baxter"), royalties on sales of products by licensees, and
collaborative research and development revenue for activities conducted under
agreements with the Company's joint venture partners and certain licensees.
Revenues for the first quarter of 1996 totaled $71.8 million, an increase of
39%, or $20.1 million, from the first quarter of 1995.
Product sales increased 23%, or $5.5 million, to $29.4 million for the first
quarter of 1996 due primarily to increases in the unit volume of rhAHF shipped
to Baxter. Royalties increased $15.5 million to $26.0 million for the first
quarter of 1996. In January 1996, the company expanded and restructured its
license agreement with Boehringer Mannheim GmbH ("Boehringer Mannheim") for
erythropoietin ("EPO"). Under the amended agreement, the Company licensed
Boehringer Mannheim to sell EPO in additional countries in the Asia-Pacific area
and Boehringer Mannheim agreed to pay the Company license fees and future
benchmark payments for the expanded territories. The restructuring also provides
Boehringer Mannheim with greater financial responsibility for and control over
the prosecution and settlement of patent suits against third party infringers,
and Boehringer Mannheim agreed to release from escrow approximately $8.0 million
in royalties it previously withheld from the Company to finance such litigation
expenses, and to cease to withhold any additional royalties for this purpose.
The restructuring establishes a new royalty rate applicable to Boehringer
Mannheim's original territories that cannot be decreased by any future EPO
patent settlement or for any other reason. Royalties in the first quarter of
1996 include $11.4 million relating to the termination of the escrow
arrangement. Excluding this amount, royalties increased 39%, or $4.1 million, to
$14.7 million, primarily due to increases in the volume of Baxter's sales of
Recombinate [Trademark] Antihemophilic Factor (Recombinant) and in the volume
of licensees' sales of EPO. Effective April 1, 1996, the Japanese government
reduced the price of EPO products in Japan by 15.5% which may reduce the growth
rate of EPO royalty income from Japan in the near-term.
Collaborative research and development revenue decreased 5% to $16.5 million for
the first quarter of 1996. Collaborative research and development revenue for
1996 includes license fees and benchmark payments totaling $10.0 million
relating to the agreement with Boehringer Mannheim discussed above.
Collaborative research and development revenue for the first quarter of 1995
includes $12.5 million recognized in connection with an agreement between the
Company and Sofamor Danek Group, Inc. to commercialize recombinant human bone
morphogenetic protein-two ("rhBMP-2") in North America for use in certain
surgical procedures involving the spine. Collaborative research and development
revenue
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<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
includes $4.7 million and $3.1 million for the first quarter of 1996 and 1995,
respectively, relating to collaborations with AHP in the development and
commercialization of recombinant human interleukin-twelve ("rhIL-12"), an immune
system modulatory protein, and in 1995 in the area of cellular adhesion
discovery research.
Cost of sales includes royalties payable to third parties upon the receipt of
certain royalty revenues from licensees. Such third party royalties totaled $2.6
million and $1.2 million in the first quarters of 1996 and 1995, respectively.
Cost of sales excluding such third party royalties, as a percentage of product
sales was 31% and 51% for the first quarters of 1996 and 1995, respectively. The
significant percentage decrease in 1996 was primarily due to lower unit
manufacturing costs.
Research and development expense increased 17% to $31.6 million in the first
quarter of 1996 as compared to the first quarter of 1995, primarily due to
increases in development costs for recombinant Factor IX ("rFIX") and for
Neumega[Trademark] recombinant human interleukin eleven, product candidates
that are presently in pivotal clinical trials. Increases in clinical
manufacturing costs and the costs of the Company's genomics discovery research
program also contributed to the increase from the prior year in research and
development costs. General and administrative expenses increased 54% to $6.8
million in the first quarter of 1996 as compared to the first quarter of 1995,
primarily due to expansion of the Company's commercial operations function and
to an increase in market development and other activities preparatory to the
commercialization of rFIX. General and administrative expenses for 1996 are
expected to continue to exceed those recorded in 1995 as the Company puts in
place the commercial infrastructure to market and sell rFIX in North America.
Investment income increased 5% in the first quarter of 1996 due to a net
realized gain on sales of marketable securities as compared with a net realized
loss recorded in the first quarter of 1995.
Losses of affiliates, net, of $2.3 million and $2.8 million were recorded in
first quarters of 1996 and 1995, respectively. Certain of the Company's product
development activities in Japan are being conducted through GI-Yamanouchi, Inc.
(the "GYJ"), a joint venture with Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi"). In the second quarter of 1995, the GYJ assigned its rights to
the development and commercialization of rhBMP-2 in Japan to Yamanouchi. The
decrease in loss of affiliates, net, was primarily due to this restructuring of
the GYJ. In addition, the Company is conducting certain rhIL-12 product
development activities through IL-12 Partners, a joint venture with AHP. Loss of
affiliates, net includes $1.2 million and $0.6 million for the first quarter of
1996 and 1995, respectively, relating to the rhIL-12 collaboration with AHP.
LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings including patent litigation
of a nature considered normal to its business. See Note 5 of the Notes to
Consolidated Condensed Financial Statements which is incorporated by reference
herein.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities (recorded at fair market value) totaled $277.0
million at March 31, 1996, an increase of $26.1 million from December 31, 1995.
The total increase in cash and marketable securities of $30.1 million was offset
by a non-cash net unrealized loss on marketable securities of $4.0 million. For
the first quarter of 1996, $24.1 million in cash was provided by operations. In
addition, the Company received proceeds of $8.8 million from the issuance of
stock (primarily from the exercise of stock options), $0.9 million from the
exercise of warrants and $5.0 million from a sale-leaseback of equipment. These
sources of cash were offset by investments of $6.7 million in plant and
equipment and $1.9 million in affiliates and other activities.
At March 31, 1996, 2,065,609 warrants, which expire on May 31, 1996, were
outstanding. These warrants are exercisable for the same consideration received
by shareholders in the AHP Transaction. Assuming that the amount of such
consideration continues to exceed the exercise price of the warrants, their
exercise would provide an additional $74.2 million of cash proceeds to the
Company. In addition, in connection with the Company's acquisition of SciGenics,
Inc. in the fourth quarter of 1995, the Company accrued merger consideration for
shares held by shareholders who had indicated an intention to exercise appraisal
rights. During the first quarter of 1996, certain of these shareholders elected
to forego the appraisal process and tendered their shares. As a result, at March
31, 1996, the Company had a balance of $4.3 million of accrued merger
consideration, or 305,250 shares at $14.00 per share. On April 7, 1996, all
appraisal rights expired without any appraisal actions being filed. The
Company expects to complete the payment of all remaining merger consideration of
$14.00 per share in the second quarter of 1996.
The Company expects that its available cash and marketable securities, together
with operating revenues, investment income and lease and debt financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. Over the next several years, the
Company's working capital and capital requirements will be subject to change
depending upon numerous factors including the level of capital expenditures,
changes in the amount of expenditures committed to self-funded research and
development programs, results of research and development activities,
competitive and technological developments, the levels of resources which the
Company devotes to the expansion of its clinical testing, manufacturing and
marketing activities and the timing and cost of obtaining required regulatory
approvals for new products.
FINANCIAL OUTLOOK
The Company expects to be profitable in 1996. However, the level of the
Company's profitability in 1996 and thereafter depends upon a number of factors
including: the volume and cost of bulk rhAHF concentrate manufactured by the
Company and sold to Baxter; the Company's ability to manufacture sufficient
quantities of bulk rhAHF concentrate to meet Baxter's requirements; the volume
and price of Baxter's sales of Recombinate[Trademark] Antihemophilic Factor
(Recombinant); licensees' sales of EPO and the impact of infringement litigation
on EPO royalty income (as discussed in "Legal Proceedings" above); the success
of the Company's development collaborations with others (including AHP) and the
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<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
achievement of development benchmarks under existing collaborative
arrangements; and the ability of the Company to consummate new collaborative
agreements. For years after 1996, profitability will also depend on the
successful completion of clinical trials, subsequent regulatory approvals for
commercialization of biopharmaceuticals under development, including rFIX and
Nuemega[Trademark] rhIL-11, and the timing of any such regulatory approvals.
Future sales increases for Baxter's Recombinate[Trademark] and licensees' EPO
are primarily dependent on further penetration of existing markets, the
effects of competitive products and changes in reimbursement rates or the basis
of reimbursement by governmental agencies. Future sales increases for Baxter's
Recombinate[Trademark] may also be dependent on obtaining regulatory approvals
for changes in and improvements to the Company's rhAHF manufacturing processes.
Increases in licensees' sales of EPO are also dependent on product approvals in
and penetration of new markets and the timing and nature of additional
indications for which the product may be approved. In addition, international
sales of Baxter's Recombinate[Trademark] and licensees' sales of EPO will
continue to be subject to changes in foreign currency exchange rates.
Adverse developments with respect to these matters could have a material
adverse effect on the Company's results of operations. In addition, the
Company's consolidated results of operations have fluctuated from period to
period and may continue to fluctuate as a result of these factors.
Significant volatility of market valuations has been associated with the
business and operations of biopharmaceutical companies. Developments
involving the Company or its competitors concerning technological innovations,
new commercial products, results of clinical trials, patents, proprietary
rights and related infringement disputes, results of litigation, and the
expense and time associated with obtaining requisite government approvals may
have a significant impact on the Company's business and on its market
valuation. As of March 31, 1996, four of the Company's proprietary product
candidates were in human clinical trials. Phase I and phase II data are
preliminary measurements of a product's safety and efficacy and do not
necessarily assure positive phase III data or ultimate regulatory approval for
commercial sale. The Company's market valuation could be subject to volatility
based upon the outcome of clinical trials and as investors interpret the
results of the Company's current and future clinical trials. In addition, the
Call Option held by AHP, which expires on December 31, 1996, may have an impact
on the volatility of the Company's market valuation.
-13-
<PAGE> 14
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
See Note 5 of Notes to the Consolidated Condensed Financial Statements
provided in Part I of this Quarterly Report on Form 10-Q, which Note is
hereby incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) The Exhibits filed as part of this Form 10-Q are listed on the Exhibit
Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
(b) No reports were filed on Form 8-K during the quarter ended
March 31, 1996.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENETICS INSTITUTE, INC.
------------------------
(Registrant)
Date: May 1, 1996 By:
----------- -------------------------------------
Garen G. Bohlin,
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
-15-
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
10.1 Amended and Restated Addendum to Master
Equipment Lease Agreement between the Company
and Fleet Credit Corporation, dated February
23, 1996. 17
11 Computation of Earnings Per Share 18
27 Financial Data Schedule (EDGAR)
-16-
<PAGE> 1
EXHIBIT 10.1
FLEET CREDIT CORPORATION PURCHASE OPTION RIDER
50 Kennedy Plaza
Providence, Rhode Island 02903-2305
This Purchase Option Rider (the "Rider") is attached to and made a part of
that certain Lease Schedule No. 25391-77, dated as of February 23, 1996 - (the
"Lease Schedule"), by and between the undersigned parties.
1. Purchase Option. If no Event of Default (or event or condition which,
with the passage of time or giving of notice, or both, would become such an
Event of Default) shall have occurred and be continuing, and the Lease shall not
have been earlier terminated, Lessee shall have the option to purchase (the
"Purchase Option") all, but not less than all, of the Equipment at the
expiration of the Lease Term for an amount, payable in immediately available
funds on the last day of the Lease Term, equal to: (a) all Rental Payments, late
charges and other amounts due and owing under the Lease; plus (b) all taxes,
assessments and other charges due or payable in connection with the sale of the
Equipment to Lessee; plus (c) the Purchase Option Price (hereinafter defined).
Provided that Lessor shall have received all amounts payable hereunder on
the last day of the Lease Term, and that no Event of Default then exists and is
continuing under the Lease, Lessor shall convey all of its right, title and
interest in and to the Equipment to Lessee on the last day of the Lease Term, on
an "AS-IS", "WHERE-IS" BASIS WITHOUT REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, and without recourse to Lessor, except that the Equipment shall be free
and clear of all liens created by Lessor. If Lessee intends to exercise the
Purchase Option, Lessee shall give irrevocable written notice to Lessor (the
"Option Notice") not more than 240 days, nor less than 180 days, prior to the
expiration of the Lease Term. If Lessee fails to give such written notice to
Lessor, it shall be conclusively presumed that Lessee has elected not to
exercise the Purchase Option.
If, for any reason, Lessee does not exercise the Purchase Option, Lessee
shall, on the last day of the Lease Term, return all of the Equipment to Lessor
pursuant to and in the condition required by the terms of the Lease and pay to
Lessor a return fee equal to 6% of the Acquisition Cost of the Equipment.
2. Purchase Option Price. If Lessee has elected to exercise the Purchase
Option, then the "Purchase Option Price" shall be the Fair Market Value
(hereinafter defined) of the Equipment, provided, however, that the Purchase
Option Price shall not be less than 21% of the Acquisition Cost of the
Equipment. As soon as practicable following Lessor's receipt of the Option
Notice, Lessor and Lessee shall agree on the Fair Market Value of the Equipment
as of the end of the Lease Term. "Fair Market Value" of the Equipment shall be
the amount determined on the basis of, and equal in value to, the amount which
would be obtained in an arm's-length transaction between an informed and willing
buyer-user (other than a buyer-user currently in possession or a used equipment
or scrap dealer) and an informed and willing seller, under no compulsion to buy
or sell, and in such determination, costs of removal from the location of
current use shall not be a deduction from such value, and it shall be assumed
(whether or not the same be true) that the Equipment has been maintained and
would have been returned to Lessor in compliance with the requirements of the
Lease.
If Lessor and Lessee fail to agree upon Fair Market Value on or before one
hundred sixty (160) days prior to the expiration of the Lease Term, then such
value shall be determined by an independent certified appraiser, selected by
Lessee, whose determination, which shall be made in accordance with the
standards set forth in the preceding paragraph, shall be binding on both Lessee
and Lessor.
All capitalized terms used herein and not defined herein shall have the
meanings set forth or referred to in the Lease Schedule. Except as specifically
set forth herein, all of the terms and conditions of the Lease shall remain in
full force and effect and are hereby ratified and affirmed. To the extent that
the provisions of this Rider conflict with any provisions contained in the
Lease, the provisions of this Rider shall control.
Dated as of: FEBRUARY 23, 1996
FLEET CREDIT CORPORATION GENETICS INSTITUTE, INC.
By: ____________________________ By:_______________________________
Name:__________________________ Name:____________________________
Title:_______________________ Title:__________________________
-17-
<PAGE> 1
<TABLE>
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
EXHIBIT 11
Computation of Earnings Per Share
(unaudited-in thousands, except per share amounts)
Primary and fully diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist of stock options and
warrants.
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1995
------ ------
<S> <C> <C>
Primary Earnings per Share
--------------------------
Weighted average number of shares
outstanding 27,217 26,628
Shares deemed outstanding from the
assumed exercise of stock options
and warrants reduced by the number
of shares purchased with proceeds 2,935 281
------- -------
Total 30,152 26,909
------- -------
Net income applicable to common shares $22,328 $ 5,699
------- -------
Primary earnings per common share $ .74 $ .21
======= =======
Fully Diluted Earnings Per Share
--------------------------------
Weighted average number of shares
outstanding 27,217 26,628
Shares deemed outstanding from the
assumed exercise of stock options
and warrants reduced by the number
of shares purchased with proceeds 3,233 923
------- -------
Total 30,450 27,551
------- -------
Net income applicable to common shares $22,328 $ 5,699
------- -------
Fully diluted earnings per common share $ .73 $ .21
======= =======
</TABLE>
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF GENETICS INSTITUTE, INC. FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 57,814
<SECURITIES> 219,137
<RECEIVABLES> 40,804
<ALLOWANCES> 0
<INVENTORY> 24,243
<CURRENT-ASSETS> 347,951
<PP&E> 176,031
<DEPRECIATION> 68,834
<TOTAL-ASSETS> 460,686
<CURRENT-LIABILITIES> 42,470
<BONDS> 0
<COMMON> 272
0
0
<OTHER-SE> 417,944
<TOTAL-LIABILITY-AND-EQUITY> 460,686
<SALES> 29,360
<TOTAL-REVENUES> 71,848
<CGS> 11,761
<TOTAL-COSTS> 11,761
<OTHER-EXPENSES> 37,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,022
<INCOME-TAX> 694
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,328
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
