<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
__________________ to __________________.
COMMISSION FILE NO. 0-19222
GENELABS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3010150
(State or other jurisdiction of (I.R.S. employer
identification number) incorporation or organization)
505 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 369-9500
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 .
--- ---
There were 39,215,971 shares of the Registrant's Common Stock issued and
outstanding on April 30, 1997.
================================================================================
1
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,238 $4,377
Cash held in escrow -- 6,953
Short-term investments 26,068 19,135
--------- --------
Cash, cash equivalents and short-term investments 28,306 30,465
Accounts receivable 2,599 3,170
Inventories 3,154 3,535
Other current assets 481 726
--------- --------
Total current assets 34,540 37,896
Property and equipment, net 1,296 1,463
Investment in Genelabs Biotechnology, Ltd. 4,519 4,628
Other assets 115 132
--------- --------
$ 40,470 $44,119
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 4,535 $4,778
Accrued compensation and related expenses 1,073 1,694
Unearned contract revenue 1,106 1,200
--------- --------
Total current liabilities 6,714 7,672
Long-term obligations 356 523
--------- --------
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 137,084 129,591
Common stock to be issued -- 6,953
Accumulated deficit (113,366) (110,302)
--------- --------
Total shareholders' equity 33,400 35,924
--------- --------
$ 40,470 $ 44,119
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 1996 has been
derived from the audited financial statements at that date but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements.
2
<PAGE> 3
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the
three months ended
March 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Product sales $ 2,575 2,742
Contract and other 817 213
-------- --------
Total revenues 3,392 2,955
-------- --------
Operating costs and expenses:
Cost of product sales 1,620 1,469
Research and development 2,793 2,445
Selling, general and administrative 2,190 2,222
-------- --------
Total operating costs and expenses 6,603 6,136
-------- --------
Operating loss (3,211) (3,181)
-------- --------
Interest income, net 338 241
Equity in loss of Genelabs Biotechnology, Ltd. (109) (77)
-------- --------
Net loss $ (2,982) $ (3,017)
======== ========
Net loss per share $ (0.08) $ (0.09)
======== ========
Weighted average shares outstanding 37,978 33,712
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
three months ended
March 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,982) $ (3,017)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 142 207
Amortization of unearned contract revenue (544) --
Equity in loss of Genelabs Biotechnology, Ltd. 109 77
Changes in assets and liabilities:
Receivables 571 (839)
Inventories 381 86
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (1,031) (526)
Additions to unearned contract revenue 450 --
Other -- 157
-------- --------
Net cash used in operating activities (2,904) (3,855)
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale (10,228) --
Proceeds from sales and maturities of securities
available-for-sale 3,501 --
Other 14 8
-------- --------
Net cash (used in)/provided by investing activities (6,713) 8
-------- --------
Cash flows from financing activities:
Payments on long-term obligations -- (2,919)
Proceeds from issuance of common stock, net 7,493 11,096
-------- --------
Net cash provided by financing activities 7,493 8,177
-------- --------
Effect of exchange rate change on cash (15) 5
-------- --------
Net (decrease)/increase in cash and cash equivalents (2,139) 4,335
Cash and cash equivalents, beginning of the period 4,377 22,557
-------- --------
Cash and cash equivalents, end of the period 2,238 26,892
Short-term investments, end of the period 26,068 --
-------- --------
Cash, cash equivalents and short-term investments,
end of the period $ 28,306 $ 26,892
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Genelabs Technologies, Inc. and its wholly-owned subsidiaries
("Genelabs" or the "Company") after elimination of all significant intercompany
accounts and transactions. These financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Certain prior
year amounts have been reclassified to conform to the current year
presentation. Operating results for the three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
These unaudited condensed consolidated financial statements are meant to be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
2. INVENTORIES
The components of inventory are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1997 1996
------ ------
<S> <C> <C>
Raw materials $1,948 $2,126
Work-in-process 467 389
Finished goods 739 1,020
------ ------
$3,154 $3,535
====== ======
</TABLE>
3. ISSUANCE OF COMMON STOCK
In connection with a 1996 private offering, the Company agreed to issue
1,900,000 shares of Common Stock to Veron International Limited ("Veron") for
net proceeds of $7.0 million, which the Company held in escrow at December 31,
1996 pending expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. In February 1997, upon
termination of this waiting period, the funds held in escrow were released to
Genelabs and the shares, reported as Common Stock to be Issued at December 31,
1996, were issued to Veron.
4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS No. 128"), which is required to be adopted in
the Company's December 31, 1997 financial statements. SFAS No. 128 requires a
change in the method currently used to compute earnings per share and
restatement of prior periods, excluding the dilutive effect of stock options.
The implementation of this statement is not expected to impact Genelabs'
earnings per share for the quarters ended March 31, 1997 and March 31, 1996
since the Company incurred net losses in those periods and, accordingly, the
calculation of earnings per share already excluded stock options because their
effect was antidilutive.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements in Management's Discussion and Analysis of Financial Condition
and Results of Operations that are not historical are forward-looking
statements which involve a number of risks and uncertainties, including, but
not limited to, those statements concerning the Company's ongoing clinical
trials, the U.S. Food and Drug Administration ("FDA") regulatory process, the
Company's anticipated expenditures and the timing and need for additional
funds. Among the factors that could cause actual results of the Company's
activities to differ materially are product non-approval or delays by the FDA
and foreign regulatory authorities, product development, manufacturing and
market acceptance risks, the Company's early stage of development, the impact
of competitive products, pricing and intellectual property rights, the results
of current and future licensing and other collaborative relationships and other
factors and risks detailed under the caption "Risk Factors" in the Company's
1996 Annual Report on Form 10-K and other filings with the U.S. Securities and
Exchange Commission.
OVERVIEW
Genelabs Technologies, Inc. is a global biopharmaceutical and diagnostics
company focused on gene-regulating drug discovery, infectious diseases
including hepatitis and immunological disorders including lupus. Using
Genelabs' core technologies and expertise in drug and viral discovery, the
Company is engaged in the research and development of potential new
therapeutics, diagnostic tests and vaccines, both internally and through
collaborations with academic institutions and corporations.
The Company's lead pharmaceutical product, GL701, is in Phase III clinical
trials as a new therapy for systemic lupus erythematosus ("lupus"). The lead
research program is based on a proprietary enabling technology, Merlin, for
creating gene-specific, small organic, DNA-binding molecules. The Company
conducts its diagnostic business through its wholly-owned subsidiary Genelabs
Diagnostics (Pte.) Ltd., located in Singapore ("GLD"). GLD's products are a
focused mix of Western Blot assays and rapid and ELISA tests, primarily sold in
major markets in Europe and Asia. Genelabs has a 40% interest in a
Taiwan-based company, Genelabs Biotechnology, Ltd. ("GBL"), which is focused on
late-stage development, manufacture and commercialization of newly developed or
formulated pharmaceuticals for the rapidly expanding Asian market.
On April 25, 1997, the Company announced preliminary results of its first Phase
III trial of GL701 for lupus. The results indicated a treatment response in a
group of women with clinically active lupus, which constituted a majority of
patients enrolled in the study. However, the study did not achieve statistical
significance when all patients were included in the analysis, as an
unexpectedly high placebo response rate was observed among those patients with
minimal or no disease activity at baseline.
The Company expects to continue to invest in biopharmaceutical product research
and development. Revenue from the sale of biopharmaceutical products is not
expected until the launch of its first biopharmaceutical product, which is not
expected to occur for several years, if at all. The Company has several
collaborations and is seeking additional collaborations with other
pharmaceutical companies for some of its technologies to maximize sales of
products that may result from those technologies and to obtain funding for a
portion of its research and development expenses. However, Genelabs expects to
continue to incur operating losses for at least the next several years.
6
<PAGE> 7
RESULTS OF OPERATIONS
Revenues
Total revenues for the quarter ended March 31, 1997 were $3.4 million, compared
to $3.0 million for the same period in 1996. Total revenues include both
diagnostic product sales and contract and other revenue. Diagnostic product
sales were $2.6 million for the quarter ended March 31, 1997, compared to $2.7
million for the same period in 1996.
Contract and other revenues were $0.8 million for the quarter ended March 31,
1997, compared to $0.2 million for the same period in 1996. Contract and other
revenues include licensing, milestone and research and development payments.
The increase in contract and other revenues in the first quarter of 1997,
compared to the first quarter of 1996, was primarily due to recognition of
revenue under a gene-regulating drug discovery collaboration that the Company
began in January 1997. Contract and other revenues recognized in the future
will be dependent in part upon the continuation of this agreement, achievement
of milestones under this and other existing agreements and establishment of new
research, development and/or licensing agreements with corporate collaborators.
Cost of Product Sales
Cost of product sales were $1.6 million for the quarter ended March 31, 1997,
compared to $1.5 million for the same period in 1996. Gross margins decreased
to 37% for the first quarter of 1997 from 46% for the same period a year ago.
The decline in gross margins was primarily due to a decline in sales of higher
margin products combined with a lower production yield on certain products.
Research and Development Expenses
The Company's research and development expenses were $2.8 million for the
quarter ended March 31, 1997, compared to $2.4 million for the same period in
1996. The increase was primarily due to additional expenditures related to a
gene-regulating drug discovery collaboration and higher patient enrollment in
the Company's second Phase III trial of GL701 for lupus, offset by reduced
spending in other research areas, most notably the hepatitis G virus program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.2 million for each of the
quarters ended March 31, 1997 and March 31, 1996.
Net Loss
The Company has operated at a loss since its inception and had an accumulated
deficit of $113.4 million as of March 31, 1997. The net loss was $3.0 million
for each of the three months ended March 31, 1997 and March 31, 1996. Higher
contract and other revenues for the quarter ended March 31, 1997 were offset by
lower gross margins on diagnostic product sales and increased research and
development spending.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investment balances totaling $28.3 million
at March 31, 1997, compared to $30.5 million at December 31, 1996. The $2.2
million decrease in cash and short-term investments was primarily attributable
to $2.9 million used in operations, partially offset by funds received upon
exercise of stock options. The cash and short-term investments balance at
December 31, 1996 included $7.0 million from a 1996 private placement that was
held in escrow by the Company pending expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
These funds were released to the Company in February 1997 and are shown as
proceeds from issuance of common stock in the first quarter 1997 Condensed
Consolidated Statement of Cash Flows.
7
<PAGE> 8
The Company has funded its operations since inception primarily through public
and private offerings of its equity securities, contract revenues and product
sales. The Company has no bank debt or open credit lines. Genelabs expects to
incur substantial additional costs, including costs for clinical trials of
product candidates and costs for further research on gene-regulating drug
discovery. The amount of the additional costs, as well as increased
expenditures necessary for working capital and capital requirements, will
depend on numerous factors including the timing and outcome of any clinical
trials and regulatory actions related to the Company's products. In addition,
funding requirements will depend on the progress of the Company's research and
development programs as well as its ability to establish and maintain
collaborations with other pharmaceutical companies to fund these programs.
The Company anticipates that its current resources and expected revenues from
existing collaborative agreements will enable it to maintain its current and
planned operations through 1998. The Company anticipates realizing a net loss
at least through 1998, and profitability thereafter is subject to significant
uncertainty. There can be no assurance that revenues from product sales or
royalties or from other sources will be sufficient to fund operations or that
the Company will achieve profitability or positive cash flow. Additional
financing may be required to fund the Company's continuing operations and
research and development activities in the form of debt or equity securities,
which may result in substantial dilution to existing shareholders. There can be
no assurance that such financing will be available on acceptable terms, if at
all. The unavailability of such financing could delay or prevent the
development, testing, regulatory approval, manufacturing or marketing of some
or all of the Company's products and technologies and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The foregoing are forward looking statements which involve a number
of risks and uncertainties.
CERTAIN BUSINESS RISKS
Genelabs is at an early stage of development. The Company has experienced
significant operating losses since its inception and expects to incur
significant operating losses over the next several years. The development of
the Company's proposed products will require a commitment of substantial funds
to conduct these costly and time-consuming activities. The Company's
technologies, including DNA-binding and gene regulating drug discovery
technology, are in many cases new and still under development. All of Genelabs'
proposed therapeutic products, including GL701 for the treatment of lupus, are
in research or development and will require substantial additional research and
development efforts prior to any commercial use, including extensive clinical
testing as well as potentially lengthy regulatory approval. Genelabs currently
is seeking additional drug discovery research collaborations using its gene
regulating technology with various pharmaceutical companies. No assurance can
be given as to the ability of the Company to complete an agreement with such a
collaborator on a timely basis or at all.
On April 25, 1997, the Company announced preliminary results of its first Phase
III trial of GL701 for lupus. The results indicated a treatment response in a
group of women with clinically active lupus, which constituted a majority of
patients enrolled in the study. However, the study did not achieve statistical
significance when all patients were included in the analysis, as an
unexpectedly high placebo response rate was observed among those patients with
minimal or no disease activity at baseline. The Company currently is conducting
a second Phase III clinical trial for GL701. No assurance can be given as to
the results of these trials, the safety or efficacy of this drug candidate or,
in any event, the ability of Genelabs to obtain regulatory approval for the
commercialization of the drug candidate.
8
<PAGE> 9
The active ingredient in GL701 is dehydroepiandrosterone ("DHEA"). DHEA is
currently being marketed by others as an over the counter dietary supplement.
The Company believes that DHEA is a drug that is subject to regulation and
approval by the FDA. The Company further believes that in several instances
these supplements do not contain true DHEA, but instead contain related
substances that are not biologically equivalent. However, to date the FDA has
taken no action to limit or regulate the sale of these dietary supplements, and
no assurance can be given as to the willingness or ability of the FDA to do so
in the future. In the event that clinical trials for GL701 are promising and
the drug candidate receives FDA marketing approval, the concurrent sale of
these dietary supplements could adversely affect the market for or selling
prices of GL701.
The Company is continuing limited research and development efforts related to
the hepatitis G virus, and has substantially reduced expenditures on this
program. While the presence of this virus has been detected in blood samples
contained in the U.S., Europe, Japan and elsewhere, the Company and its
collaborators are still seeking to determine the nature and severity of any
diseases specifically caused by HGV. In order to test for HGV generally in the
blood banks, the Company and its licensors are continuing efforts to develop a
serological assay. To date, no such assay has been introduced.
The Company has only limited sales, marketing and distribution capabilities. If
the Company successfully develops any new products, Genelabs must either rely
on large pharmaceutical companies to market such products or must develop a
marketing and sales force with technical expertise and supporting distribution
capability in order to market such products directly. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding protection or patents and proprietary
rights and the possibility of infringement of the proprietary rights of others,
government regulation, and uncertainties regarding health care reform.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,
1997.
9
<PAGE> 10
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.
GENELABS TECHNOLOGIES, INC.
(Registrant)
Chief Executive Officer:
Date: May 8, 1997 /s/ IRENE A. CHOW
-----------------------------------
IRENE A. CHOW
President and Chief Executive Officer
Chief Accounting Officer:
Date: May 8, 1997 /s/ MATTHEW M. LOAR
-----------------------------------
MATTHEW M. LOAR
Director of Finance and Controller
10
<PAGE> 11
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GENELABS TECHNOLOGIES, INC. FOR THE QUARTER
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,238
<SECURITIES> 26,068
<RECEIVABLES> 2,599
<ALLOWANCES> 0
<INVENTORY> 3,154
<CURRENT-ASSETS> 34,540
<PP&E> 11,537
<DEPRECIATION> 10,241
<TOTAL-ASSETS> 40,470
<CURRENT-LIABILITIES> 6,714
<BONDS> 0
0
9,682
<COMMON> 137,084
<OTHER-SE> (113,366)
<TOTAL-LIABILITY-AND-EQUITY> 40,470
<SALES> 2,575
<TOTAL-REVENUES> 3,392
<CGS> 1,620
<TOTAL-COSTS> 1,620
<OTHER-EXPENSES> 5,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (338)
<INCOME-PRETAX> (2,982)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,982)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
