<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 Commission File Number 0-14587
------------- -------
GENETICS INSTITUTE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2718435
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
87 CambridgePark Drive, Cambridge, MA 02140
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (617) 876-1170
------------------------------
None
- --------------------------------------------------------------------------------
(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
----- -----
29,560,000 shares of Common Stock, par value $.01 (including 16,836,890 shares
represented by Depositary Shares) were outstanding on August 2, 1996.
<PAGE> 2
GENETICS INSTITUTE, INC.
<TABLE>
INDEX
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
<S> <C>
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets at
June 30, 1996 and December 31, 1995 ................................. 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1996 and 1995 ........... 4
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended June 30, 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 .......................... 11
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings ................................................ 15
Item 4 - Submission of Matters to a Vote of Security Holders .............. 15
Item 6 - Exhibits and Reports on Form 8-K ................................. 15
Signatures ................................................................ 16
</TABLE>
-2-
<PAGE> 3
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - in thousands except share amounts)
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 117,832 $ 33,164
Marketable securities 229,440 217,670
Accounts receivable 50,669 40,876
Inventories:
Materials and supplies 6,469 5,769
Work in progress 2,080 915
Finished goods 16,872 14,325
--------- ---------
25,421 21,009
Other current assets 6,316 5,844
--------- ---------
Total current assets 429,678 318,563
Property, plant and equipment 184,607 174,826
Less accumulated depreciation (73,291) (65,710)
--------- ---------
111,316 109,116
Other assets 5,348 6,132
--------- ---------
$ 546,342 $ 433,811
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 11,051 $ 8,936
Accrued merger consideration -- 7,615
Other accrued expenses 32,383 27,145
--------- ---------
Total current liabilities 43,434 43,696
Shareholders' Equity:
Common stock, par value $.01;
authorized 50,000,000 shares 295 268
Additional paid-in capital 691,680 604,013
Accumulated deficit (189,067) (214,166)
--------- ---------
Total shareholders' equity 502,908 390,115
--------- ---------
$ 546,342 $ 433,811
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands except per share data)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE
Product sales $32,979 $22,631 $ 62,339 $46,509
Royalties 17,503 13,396 43,528 23,959
Collaborative research and development 14,032 9,883 30,495 27,213
------- ------- -------- -------
Total revenue 64,514 45,910 136,362 97,681
OPERATING EXPENSES
Cost of sales 12,639 13,416 24,400 26,880
Research and development 38,051 31,621 69,657 58,545
General and administrative 7,497 5,068 14,284 9,468
------- ------- -------- -------
Total operating expenses 58,187 50,105 108,341 94,893
------- ------- -------- -------
INCOME (LOSS) FROM OPERATIONS 6,327 (4,195) 28,021 2,788
OTHER INCOME (EXPENSE), NET
Investment income 3,303 4,506 7,678 8,683
(Loss) income of affiliates, net (1,948) 4,926 (4,293) 2,171
Other, net (382) 203 (1,084) (2,503)
------- ------- -------- -------
Total other income (expense), net 973 9,635 2,301 8,351
------- ------- -------- -------
INCOME BEFORE INCOME TAXES 7,300 5,440 30,322 11,139
Provision for taxes on income 216 270 910 270
------- ------- -------- -------
NET INCOME $ 7,084 $ 5,170 $ 29,412 $10,869
======= ======= ======== =======
NET INCOME PER COMMON SHARE $ .23 $ .19 $ .96 $ .41
======= ======= ======== =======
Average shares outstanding 31,221 26,696 30,710 26,662
------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<CAPTION>
Six Months Ended June 30,
-----------------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,412 $ 10,869
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities -
Depreciation and amortization 8,071 9,279
Equity in loss (income) of affiliates 4,293 (2,171)
Compensation related to incentive plans 655 362
Changes in assets and liabilities (7,324) (20,224)
--------- ---------
Net cash provided by (used in) operating
activities 35,107 (1,885)
--------- ---------
INVESTING ACTIVITIES
Purchase of marketable securities (138,670) (108,359)
Proceeds from sale/maturity of
marketable securities 122,586 130,562
Payment of merger consideration (7,615) --
Additions to property, plant and equipment (15,296) (12,799)
Investments in affiliates (4,293) (1,829)
Other investing activities 775 (626)
--------- ---------
Net cash provided by (used in) investing activities (42,513) 6,949
--------- ---------
FINANCING ACTIVITIES
Proceeds from stock issuances 11,952 3,410
Proceeds from sale-leaseback transaction 5,035 --
Proceeds from exercise of warrants 75,087 --
--------- ---------
Net cash provided by financing activities 92,074 3,410
--------- ---------
Net increase in cash and cash
equivalents 84,668 8,474
Cash and cash equivalents, beginning of
period 33,164 21,793
--------- ---------
Cash and cash equivalents, end of period $ 117,832 $ 30,267
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<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 $83.16 per share for the period July
1, 1996 to September 30, 1996 and $85.00 per share for the period October 1,
1996 to 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. AHP's ownership position decreased
from approximately 62% at March 31, 1996 to approximately 60% as of June 30,
1996, due primarily to the issuance of Depositary Shares in connection with
the exercise of warrants discussed in Note 7.
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
Neumega[Registered Trademark] 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 $0.9 million and $5.7 million, respectively, for the three and six
month periods ended June 30, 1996 and $4.8 million and $7.9 million,
respectively, for the three and six month periods ended June 30, 1995,
relating to these collaborations with AHP. (Loss) income of affiliates,
net, includes losses of $0.5 million and $1.7 million for the three and six
month periods ended June 30, 1996 and $0.9 million and $1.5 million,
respectively, for the three and six month periods ended June 30, 1995,
-6-
<PAGE> 7
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
relating to these collaborations with AHP.
3. Investments in Debt Securities
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 $117.2 million at June 30, 1996.
Aggregate fair value, amortized cost and average maturity for marketable
securities held at June 30, 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.
<TABLE>
Amortized Gross Unrealized Fair
Cost Holding Gains (Losses) Value
---- ---------------------- -----
<CAPTION>
<S> <C> <C> <C> <C>
June 30, 1996
(In thousands)
U.S. Government and Agency
securities (average maturity
of 2.9 years) $105,993 $ 683 $ (939) $105,737
Corporate and other debt securities
(average maturity of 2.5 years) 123,988 394 (679) 123,703
-------- ------ ------- --------
$229,981 $1,077 $(1,618) $229,440
======== ====== ======= ========
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 holding loss on marketable securities at June 30, 1996
was $0.5 million. For the three and six month periods ended June 30, 1996,
changes in net unrealized holding losses of $0.3 million and $4.3 million,
respectively, are recorded in shareholders' equity. Gross realized gains and
losses on sales of marketable securities for the quarter ended June 30, 1996
were $0.1 million and $1.2 million, respectively, and for the six months
ended June 30, 1996 were $0.8 million and $1.5 million, respectively. Gross
realized gains and losses on sales of marketable securities for the three
and six month periods ended June 30, 1995 were not material to the results
of operations.
-7-
<PAGE> 8
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. (Loss) Income of Affiliates, Net
(Loss) income 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 $0.7 million and $1.6 million at
June 30, 1996 and December 31, 1995, respectively.
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) income of affiliates, net for the three and six months
ended June 30, 1996 and 1995 was as follows (in thousands):
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------ -------- -------
<S> <C> <C> <C> <C>
Combined net (loss) income of affiliated
joint ventures $(6,301) $3,461 $(13,483) $(6,895)
======= ====== ======== =======
Company share of joint ventures' net
(loss) income based on ownership percentage
share of revenues and expenses (3,118) 2,275 (6,647) (2,644)
Elimination of Company share of joint venture
expenses attributable to services provided
by or benchmarks paid to the Company 1,170 2,651 2,354 4,815
------- ------ -------- -------
(Loss) income of affiliates, net $(1,948) $4,926 $ (4,293) $ 2,171
======= ====== ======== =======
</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-
-8-
<PAGE> 9
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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, excluding $11.4 million recognized
in connection with the termination of an escrow arrangement, totaled $10.5
million for the six month period ended June 30, 1996), could be reduced or
eliminated.
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 ("Stryker")
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 patents are not invalid in view of certain prior art
publications. In August 1992 and November 1994, respectively, the Company
was issued U.S. patents covering rhBMP-7 currently in development by
Stryker and Creative BioMolecules, Inc. ("Creative") under the name OP-1.
Stryker also has pending patent applications directed to rhBMP-7. 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 July 1996, the Company, Stryker and Creative entered a cross-license
agreement. Under this agreement, which covers both issued patents and
pending patent applications, the Company and Yamanouchi Pharmaceutical Co.,
Ltd., its partner in the worldwide development of the Company's bone growth
factors, obtained, among other rights, exclusive rights to rhBMP-2 under
both their own and the Stryker/Creative patents; and Stryker and Creative
obtained, among other rights, exclusive rights to OP-1 under both their own
and the Company's patents. The cross-license agreement becomes effective as
of July 15, 1996, upon expiration of the waiting period under the
Hart-Scott-Rodino Act. The Company can provide no assurance as to the
timing or outcome of such regulatory review.
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 in any one
accounting period.
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. On April
7, 1996, all appraisal rights expired without any appraisal actions being
filed and as of June 30, 1996, substantially all SciGenics shares have been
tendered for $14.00 per share.
-9-
<PAGE> 10
GENETICS INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Warrants
Approximately 2.1 million warrants for the purchase of the Company's Common
Stock at an exercise price of $35.92 per share were outstanding at March 31,
1996. Substantially all of the warrants were exercised on or before May 31,
1996, the expiration date of the warrants, providing the Company with $75.1
million of proceeds. Upon exercise, each warrant was converted into
six-tenths of a Depositary Share and $20.00 in cash, which represented the
same consideration received by shareholders in the AHP Transaction. As a
result of the warrant exercises, the Company issued 836,149 shares of Common
Stock to AHP and 1,254,224 Depositary Shares to warrant holders which
decreased AHP's total ownership position from approximately 62% at March 31,
1996 to approximately 60% at June 30, 1996.
-10-
<PAGE> 11
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 $83.16 per share for the period July
1, 1996 to September 30, 1996 and $85.00 per share for the period October 1,
1996 to December 31, 1996 (the "Call Option").
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1996 and 1995. The Company reported net
income of $7.1 million for the second quarter ended June 30, 1996 and net income
of $29.4 million for the six months ended June 30, 1996, compared with net
income of $5.2 million for the second quarter ended June 30, 1995 and net income
of $10.9 million for the six months ended June 30, 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.
Revenue for the second quarter of 1996 totaled $64.5 million, an increase of
41%, or $18.6 million, from the second quarter of 1995. Six month revenue of
$136.4 million increased 40% from prior year levels.
Product sales increased 46%, or $10.3 million, to $33.0 million for the second
quarter of 1996 and increased 34% for the first six months of 1996, due
primarily to increases in the unit volume of rhAHF shipped to Baxter. Royalties
increased 31%, or $4.1 million, to $17.5 million for the second quarter of 1996
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 erythropoietin ("EPO"). Royalties for the first half of
1996 increased 82% to $43.5 million. In January 1996, the company expanded and
restructured its license agreement with Boehringer Mannheim GmbH ("Boehringer
Mannheim") for 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 $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 established 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 included $11.4 million (including the $8.0 million released from escrow)
relating to the termination of the escrow arrangement. Excluding this amount,
royalties for the first half of 1996 increased 34%, or $8.2 million, to $32.1
million, primarily due to the increases in the volume of licensees' sales
discussed above. 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 increased 42%, or $4.1 million,
to $14.0 million for the second quarter of 1996 and increased 12% for the first
six months of 1996. Collaborative research and development revenue includes
payments of $12.5 million in both the second quarter of 1996 and in
-11-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the first quarter of 1995 relating to 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 for the
first half of 1996 includes license fees and benchmark payments totaling $10.0
million, recorded in the first quarter of 1996, relating to the agreement with
Boehringer Mannheim discussed above. Collaborative research and development
revenue includes $0.9 million and $4.8 million for the second quarters of 1996
and 1995, respectively, and $5.7 million and $7.9 million for the first six
months 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
commercialization of Neumega[Registered Trademark] recombinant human
interleukin-eleven ("rhIL-11") and 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 $2.3
million and $1.4 million in the second quarters of 1996 and 1995, respectively.
Cost of sales excluding such third party royalties, as a percentage of product
sales, was 31% and 53% for the second quarters of 1996 and 1995, respectively,
and 31% and 52% for the first six months of 1996 and 1995, respectively. The
significant improvement in gross margin in 1996 was primarily due to lower unit
manufacturing costs.
Research and development expense increased 20% to $38.1 million in the second
quarter of 1996 as compared with the second quarter of 1995 and increased 19%
for the first half of 1996, primarily due to the expansion of certain discovery
research collaborations and increases in the cost of the Company's genomics
discovery research program. General and administrative expenses increased 48% in
the second quarter of 1996 to $7.5 million and increased 51% in the first half
of 1996, 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 BeneFIX[Trademark] recombinant Factor IX
("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 necessary to market and sell BeneFIX[Trademark] rFIX in North
America.
Investment income decreased 27% in the second quarter and 12% in the first half
of 1996 due to lower average balances of marketable securities and lower rates
of total return in 1996 than in the corresponding periods in 1995.
Losses of affiliates, net, of $1.9 million and $4.3 million were recorded in the
three and six months ended June 30, 1996, respectively, and income of
affiliates, net, of $4.9 million and $2.2 million were recorded in the three and
six months ended June 30, 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 and the
Company recognized income of affiliates of $7.3 million in connection with this
transaction. In addition, the Company is conducting certain rhIL-12 product
development activities through IL-12 Partners, a joint venture with AHP. (Loss)
income of affiliates, net includes $0.5 million and $0.9 million for the second
quarter of 1996 and 1995, respectively, and $1.7 million and $1.5
-12-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million for the first six months 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities (recorded at fair market value) totaled $347.3
million at June 30, 1996, an increase of $96.4 million from December 31, 1995.
For the first half of 1996, $35.1 million in cash was provided by operating
activities. In addition, the Company received proceeds of $75.1 million from the
exercise of warrants, $12.0 million from the issuance of stock (primarily from
the exercise of stock options), and $5.0 million from the sale-leaseback of
equipment. These sources of cash were offset primarily by investments of $15.3
million in plant and equipment and the payment of merger consideration of $7.6
million to complete the acquisition of SciGenics, Inc.
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 for $14.00 per share, or $3.3
million in the aggregate. On April 7, 1996, all appraisal rights expired without
any appraisal actions being filed and, during the second quarter of 1996,
substantially all the remaining SciGenics shares were tendered for $14.00 per
share, or $4.3 million.
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 for the second half of 1996 based on the
current outlook for existing core business arrangements. However, the level of
the Company's profitability for the second half of 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
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 BeneFIX[Trademark] rFIX and Nuemega[Registered
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 June 30,
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.
-14-
<PAGE> 15
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 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
<TABLE>
At the Company's Annual Meeting of Shareholders held on May 14, 1996,
the following proposals were adopted by the vote specified below:
<CAPTION>
Withheld
Proposal For Authority
-------- --- ---------
<S> <C> <C> <C>
1. Election of Class III Directors:
J. Richard Crout, M.D. 20,471,997 376,352
Fred Hassan 25,160,479 156,056
Gabriel Schmergel 20,438,504 408,917
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C> <C>
2. Ratification of Arthur Andersen LLP as
the Company's independent accountant for
the current fiscal year 25,189,511 23,211 12,813
<FN>
In addition, James G. Andress will continue to serve as Class I directors until the
Company's 1997 Annual Meeting and Anthony B. Evnin, Robert I. Levy, Ph.D. and
Thomas P. Maniatis, Ph.D. will continue to serve as Class II directors until the Company's
1998 Annual Meeting. Effective July 9, 1996, Benno C. Schmidt retired from the
Company's Board of Directors and Anthony B. Evnin was elected Chairman.
</TABLE>
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 June 30,
1996.
-15-
<PAGE> 16
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: August 8, 1996 By: /s/ Garen G. Bohlin
---------------- ------------------------------------
Garen G. Bohlin,
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
-16-
<PAGE> 17
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
11 Computation of Earnings Per Share 18
27 Financial Data Schedule (EDGAR)
</TABLE>
-17-
<PAGE> 1
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.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary Earnings per Share
- --------------------------
Weighted average number of shares
outstanding 28,203 26,696 27,710 26,662
Shares deemed outstanding from the
assumed exercise of stock options
and warrants reduced by the number
of shares purchased with proceeds 3,018 -- 3,000 --
------- ------- ------- -------
Total 31,221 26,696 30,710 26,662
------- ------- ------- -------
Net income applicable to common shares $ 7,084 $ 5,170 $29,412 $10,869
------- ------- ------- -------
Primary earnings per common share $ .23 $ .19 $ .96 $ .41
======= ======= ======= =======
Fully Diluted Earnings Per Share
- --------------------------------
Weighted average number of shares
outstanding 28,203 26,696 27,710 26,662
Shares deemed outstanding from the
assumed exercise of stock options
and warrants reduced by the number
of shares purchased with proceeds 3,018 570 3,000 444
------- ------- ------- -------
Total 31,221 27,266 30,710 27,106
------- ------- ------- -------
Net income applicable to common shares $ 7,084 $ 5,170 $29,412 $10,869
------- ------- ------- -------
Fully diluted earnings per common share $ .23 $ .19 $ .96 $ .40
======= ======= ======= =======
</TABLE>
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIADTED CONDENSED FINANCIAL STATEMENTS OF GENETICS INSTITUTE, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 117,832
<SECURITIES> 229,440
<RECEIVABLES> 50,669
<ALLOWANCES> 0
<INVENTORY> 25,421
<CURRENT-ASSETS> 429,678
<PP&E> 184,607
<DEPRECIATION> 73,291
<TOTAL-ASSETS> 546,342
<CURRENT-LIABILITIES> 43,434
<BONDS> 0
<COMMON> 295
0
0
<OTHER-SE> 502,613
<TOTAL-LIABILITY-AND-EQUITY> 546,342
<SALES> 62,339
<TOTAL-REVENUES> 136,362
<CGS> 24,400
<TOTAL-COSTS> 24,400
<OTHER-EXPENSES> 81,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,322
<INCOME-TAX> 910
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,412
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
