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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19222
GENELABS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-3010150
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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505 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 369-9500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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AS OF FEBRUARY 28, 1997
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Aggregate market value of the voting stock held by non-affiliates of
the Registrant: $218,500,000
Number of shares of Common Stock outstanding: 39,212,846
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III (Items 10,
11, 12 and 13) hereof.
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GENELABS TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 1996
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 13
Item 3. Legal Proceedings........................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......................... 14
Item 4A. Executive Officers of the Registrant........................................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters....... 15
Item 6. Selected Consolidated Financial Data........................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 16
Operations..................................................................
Item 8. Consolidated Financial Statements and Supplementary Data.................... 19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial 19
Disclosure..................................................................
PART III
Item 10. Directors and Executive Officers of Registrant.............................. 19
Item 11. Executive Compensation...................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 19
Item 13. Certain Relationships and Related Transactions.............................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 20
SIGNATURES............................................................................. 23
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Genelabs(R) and Merlin(TM) are trademarks of Genelabs Technologies, Inc. This
Form 10-K also includes trade names and trademarks of companies other than
Genelabs Technologies, Inc.
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PART I
ITEM 1. BUSINESS.
All statements in this 10-K 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 commencement and completion of
clinical trials and the announcement of trial data and results, the Company's
strategic plans, 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 include, but are not limited to, those discussed
in "Risk Factors" at the end of this Item 1 (page 10 through 13 of this Report).
Shareholders and prospective investors in the Company should carefully consider
these risk factors.
Genelabs Technologies, Inc. (together with its subsidiaries, "Genelabs" or
the "Company") 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. The lead research
program is based on a proprietary enabling technology, Merlin, for creating
genespecific, 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"). This biopharmaceutical alliance is focused
on late-stage development, manufacture and commercialization of newly developed
or formulated pharmaceuticals, vaccines and other health care products for the
rapidly expanding Asian market.
The Company's business is comprised of its discovery technologies, drug
development programs, diagnostic business and its Asian biopharmaceutical
alliance.
The following discussion reviews each of these areas of the Company's
business.
Discovery Technologies
Genelabs' expertise and proprietary technology are directed toward the
discovery of gene-regulating drugs, novel immunomodulatory genes and new
viruses.
Gene Regulating Drugs
The main focus of the Company's research program is to discover
sequence-specific, low molecular weight DNA-binding molecules which target the
regulatory regions of certain disease-causing genes. The Company's aim is for
these sequence specific DNA-binding molecules to be used to inhibit the binding
of critical regulatory proteins to these regulatory regions and produce changes
in the activity of the disease-causing genes. The Company believes that this
approach has the potential for therapeutic application in a wide variety of
disease indications. A fundamentally enabling element of Genelabs' approach to
the design of DNA-binding molecules is provided through the use of the Company's
proprietary Merlin technology, which is able to identify DNA-binding molecules
and determine the DNA sequence preference effective in protein displacement. The
Company believes that Merlin can enable the discovery of novel DNA-binding
chemistries from complex mixtures and the characterization of these molecules,
which could permit the design of molecules that can be optimized and targeted to
specific gene sequences.
The list of human genes that have been identified and characterized as
having an association with various disease states is growing rapidly. This
wealth of information must be translated, and the functions of disease-
associated genes must be elucidated in order for conventional drug discovery
processes to be used to combat these diseases. Genelabs' approach is to directly
target the regulatory regions of disease-associated genes.
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These regulatory or promoter regions are sequences that lie adjacent to the
coding sequences of a gene. Merlin is designed to operate by evaluating small
molecules for their effectiveness in displacing proteins from DNA, which
provides important information about the molecules' function concerning their
desirable properties for DNA-binding. The ability to control gene expression
offers the potential opportunity to create an entirely new class of drugs,
sequence-specific DNA-binding drugs, targeted to the regulatory sequences of
disease-causing genes.
The characterization of DNA-binding molecules using Merlin has demonstrated
different sequence preferences for different molecules. Through collaborative
efforts with a molecular modeling firm, several compounds have been designed,
synthesized and tested to demonstrate that the concept of building sequence-
specific DNA-binding drugs is valid. This first series of sequence-specific,
DNA-binding molecules are research tools which have allowed Genelabs scientists
to demonstrate experimentally that the treatment of human cells with these
molecules results in the altered expression of a few genes while exerting little
effect on the expression of other genes. Furthermore, preliminary evidence
indicates specific effects on the expression of two predicted target genes.
Collectively, these data suggest that pharmaceuticals developed using this
technology can be targeted to specific genes; and due to sequence-specificity
and high binding affinity, it is anticipated that these pharmaceuticals can be
more efficacious and less toxic than the currently known DNA-binding drugs. The
Merlin technology is in the early stage and still under development. See Risk
Factor "Early Stage of Development".
In December 1996, the Company signed a collaborative research and license
agreement with The DuPont Merck Pharmaceutical Company ("DuPont Merck") to
jointly develop small molecule gene-regulating drugs using technology developed
by Genelabs, including its Merlin assay system. Under this collaboration, the
Company and DuPont Merck will jointly conduct a drug discovery program directed
towards a number of target genes. Each company will have the right to develop or
out-license products resulting from a shared database of compounds and
chemistries developed by the collaboration, although DuPont Merck will have
certain exclusive rights to pharmaceutical products resulting from the
collaboration. Under the terms of the agreement, the Company received an
up-front payment and will receive research funding for at least two years. The
Company will also receive payments for milestones reached for each gene target
as well as royalty payments for each successful product resulting from this
collaboration. However, there can be no assurance that the milestones will be
achieved or that the Company or DuPont Merck will be successful in identifying
DNA-binding compounds for the selected target genes.
Genelabs currently is discussing the possibility of additional drug
discovery research collaborations using its DNA-binding technology with various
other pharmaceutical companies. No assurance can be given as to the ability of
the Company to complete an agreement with any additional collaborators on a
timely basis or at all.
The Company has received two U.S. patents with claims relating to the
Merlin assay technology and for therapies in which a small molecule drug acts by
binding to a sequence-specific region of a gene and displacing a regulatory
protein from its binding site. Patents with claims relating to the Merlin assay
technology also have issued in Canada and Australia. In addition, the Company
has filed several U.S. and foreign patent applications containing claims
relating to various aspects of the technology. See Risk Factor "Uncertainties
Regarding Patents and Trade Secrets".
Novel Immunomodulatory Genes
The Company's scientists have used advanced technologies to isolate novel
human genes encoding immunomodulatory molecules such as cytokines, cytokine
receptors, and immunomodulatory transcription factors from a large cluster of
immunomodulatory genes encoded on human chromosome 5.
Using a positional cloning method called direct selection, the Company's
researchers have selected cDNAs from genes encoded within the immunomodulatory
gene cluster on chromosome 5. The cDNAs are then prioritized by several methods
in order to select the genes of potential commercial interest for further
investigation. During this prioritization process, the cDNAs were subjected to
simple tests to determine which of the cDNAs are encoded by novel genes from
chromosome 5 and further, which of the novel genes are expressed selectively in
immunomodulatory cell types, such as bone marrow, activated T cells or B cells.
Using
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this approach, the Company's researchers have identified numerous cDNAs encoded
by human chromosome 5 that are expressed in immunomodulatory cells. Patent
applications have been filed in the United States to claim these novel
sequences. The Company is actively pursuing funding through potential external
collaborators to investigate the biological function and commercial potential of
these genes and to isolate additional novel human genes. No assurance can be
given as to the ability of the Company to complete an agreement with any
additional collaborators on a timely basis or at all.
Novel Viruses
Although diagnostic products for certain hepatitis viruses have existed
since the 1970s, Genelabs believed that there were additional types of
blood-borne viral hepatitis for which the causative agent had not yet been
identified. Based on this belief, Genelabs initiated a collaboration with
investigators at the Centers for Disease Control and Prevention ("CDC") and the
National Institutes of Health ("NIH") to identify residual cases of viral
hepatitis that remained unaccounted for following the implementation of testing
for known hepatitis viruses.
Genelabs scientists, together with scientific collaborators from the CDC,
were the first to isolate and identify hepatitis E virus ("HEV"), the major
causative agent of orally transmitted non-A, non-B hepatitis which is
principally associated with contaminated water in developing countries. In
August 1992, Genelabs granted SmithKline Beecham ("SKB") a worldwide license
under certain Genelabs patents and know-how to make, use and sell an HEV
vaccine. Preliminary studies of a prototype HEV vaccine in monkeys have shown
indications of efficacy in preventing infection and disease. SKB has indicated
to Genelabs that SKB intends to initiate a Phase I human clinical trial of a
vaccine candidate in 1997. In its agreement with SKB, Genelabs has retained
co-marketing rights to any HEV vaccine in Asia and has the co-marketing rights
to combine SKB's existing hepatitis A virus vaccine with an HEV vaccine in Asia.
In August 1990, Genelabs granted Abbott a worldwide exclusive license under
certain Genelabs patents and know-how to make, use and sell tests for the
diagnosis of HEV. Again, Genelabs retained certain co-exclusive rights to market
HEV diagnostic tests in certain Asian countries and GLD has been marketing HEV
diagnostic tests in Asia for several years. In 1996, Abbott and Genelabs amended
the terms of their license agreement so that Abbott now has a non-exclusive
worldwide license and Genelabs has the ability to sell HEV diagnostic tests
worldwide and to license its intellectual property to other third parties to
sell HEV diagnostic tests.
In 1995, Genelabs announced the discovery of a new human virus called
hepatitis G virus ("HGV"). The Company's findings indicate that this virus is
associated with hepatitis and can be transmitted through transfusion of
contaminated blood. Genelabs has entered into a limited co-exclusive,
royalty-bearing licensing agreement with Boehringer Mannheim to develop and
commercialize diagnostic screening products for new hepatitis viruses, including
HGV. The Company also has entered into an agreement with Chiron Corporation and
Ortho Diagnostic Systems Inc., which, among other things, provides them a
worldwide, limited co-exclusive, royalty-bearing license to develop and
commercialize diagnostic screening products specifically for HGV. While the
Company is continuing its research and development efforts related to HGV,
Genelabs has recently reduced expenditures on this program. Although the
presence of HGV 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 be able 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 developed.
Drug Development
Genelabs has focused its internal biopharmaceutical product programs on the
development of its therapeutic product for the treatment of lupus, on a
potential therapeutic agent for cancer and on the identification of novel drug
candidates through its discovery research efforts.
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GL701: Systemic Lupus Erythematosus
Systemic lupus erythematosus ("lupus") is a severe, chronic and frequently
debilitating autoimmune disease that can affect the skin, joints, kidneys and
nervous system. Industry sources estimate that there is a 10 percent mortality
rate within ten years of diagnosis. Current treatment is often inadequate, due
either to limited benefits or to severe adverse side effects. With an estimated
prevalence of 40 to 50 cases per 100,000 people, lupus affects approximately
150,000 patients in the United States according to the American College of
Rheumatology, and Genelabs believes that there are at least three times that
number of patients worldwide. Industry sources have estimated that lupus is ten
times more common in women than men and more severe in Asian and
African-American populations.
GL701, Genelabs' therapeutic candidate for lupus, is a pharmaceutical
formulation designed for oral administration that contains
dehydroepiandrosterone ("DHEA") as the active ingredient. DHEA is a naturally
occurring hormone that is produced by the adrenal glands.
Studies by Genelabs' scientific collaborators at Stanford University have
indicated that oral use of DHEA may be effective and safe for the treatment of
lupus. Lupus patients generally have abnormally low levels of DHEA, and studies
have shown that hormonal influences play a role in the development and
progression of lupus. A Phase II clinical study conducted at Stanford University
in 1993 involved 28 women with lupus who received either DHEA or a placebo over
the three-month study period. Results of this study, published in Arthritis and
Rheumatism in December 1995, indicated that DHEA-treated patients showed
improvement on the basis of the patients' own assessments, the physicians'
clinical assessments and a commonly accepted disease activity index, while
placebo-treated patients did not. In addition, mean prednisone dose was
decreased in patients treated with DHEA. Prednisone, a glucocorticoid drug that
is commonly used to treat lupus, has many serious side effects and is a cause of
disability and death in lupus patients.
Genelabs has exclusive worldwide rights under a U.S. patent granted to
Stanford for the use of DHEA to treat lupus and to use Stanford's clinical trial
results. The Company filed a Investigational New Drug Application ("IND") with
the U.S. Food and Drug Administration ("FDA") in December 1993. In January 1997,
the Company announced completion of a 192 patient randomized, double-blind,
placebo controlled, multi-center, Phase III human clinical trial for the
treatment of mild to moderate lupus in women who require prednisone or other
steroids for their treatment. The Company currently expects to be able to
announce the results from this trial in the second quarter of 1997. The
Company's second Phase III trial, which started in March 1996, currently has
over 200 patients enrolled. Genelabs anticipates that 300 women with clinically
active lupus will enroll in this study designed to determine whether GL701 can
improve clinical outcome or disease symptoms. Genelabs has licensed certain
Asian development and marketing rights to GL701 to GBL and a third Phase III
trial is currently being initiated by GBL in Taiwan. See Risk Factor
"Uncertainties Related to Clinical Trials".
The FDA has recognized the severely debilitating nature of lupus and the
lack of adequate treatment by granting Subpart E designation to GL701. This
designation permits the possibility of expedited development of the candidate
drug and has typically only been granted for products addressing life
threatening diseases, such as cancer and AIDS therapies. FDA also granted Orphan
Drug status to GL701 for the treatment of lupus, a designation that provides
seven years of U.S. marketing exclusivity for this indication to Genelabs if it
is the first company to sponsor an approved new drug application for such
indication. See Risk Factor "No Assurance of Regulatory Approvals; Uncertainty
of Government Regulation".
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 a few
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 the
selling price of GL701. While the Company has obtained a U.S. patent for the use
of GL701 steroid dosage of lupus patients, it is not able to obtain patent
protection for the compound itself.
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GL331: Multiple Drug Resistant Cancers
Genelabs and its affiliate GBL are currently developing GL331, an etoposide
analog, as a potential treatment for multiple drug resistant cancers. In
laboratory and animal tests, GL331 has demonstrated anti-cancer activity against
malignant cells that had already developed resistance to chemotherapeutic agents
most frequently used for the treatment of small cell lung cancer. Genelabs has
completed a Phase I human clinical safety study at M.D. Anderson Cancer Center
in Houston, Texas. The study achieved its objective to determine the maximum
tolerable dose of the drug. Because the later stage development of cancer drugs
is a resource intensive process, Genelabs' strategy is to license GL331 to a
third party for further development in North America and Europe. GBL recently
has received approval from the Taiwan Department of Health for a new Phase IIa
study of this agent in patients with gastric carcinomas and currently intends to
initiate the study in 1997.
Diagnostic Business
Genelabs has used its technological expertise in molecular virology to
build an international diagnostics business with a global infrastructure. The
headquarters and manufacturing facility of its diagnostic subsidiary, GLD, are
located in Singapore, and also serve as its Asian sales office. Marketing, sales
and distribution for Europe, the Middle East and Africa are centralized in
Geneva, Switzerland and Brussels, Belgium. Marketing, sales and distribution for
the Americas are managed from Genelabs' headquarters in Redwood City,
California. Affiliate offices are also established in Thailand and Taiwan, and a
sales office is currently being established in China. Genelabs has focused its
diagnostics business on the Asian, European and Middle East markets. In
particular, the Company believes that its presence in Asia is of strategic
importance because of its rapid growth potential.
GLD is engaged in virology blood testing with a product mix of Western Blot
assays and rapid and ELISA tests, for the diagnosis of human retroviruses,
principally Human Immunodeficiency Virus ("HIV") and human T-cell leukemia virus
("HTLV"), and hepatitis viruses including hepatitis C virus and HEV, in addition
to others. Recent market expansion into gastroenterology includes a novel
immunodiagnostic method for serological detection of Helicobacter pylori, the
bacteria known to cause stomach ulcer and cancer. Genelabs also manufactures
Hepatitis B surface antigen and related raw materials used for the fabrication
of diagnostic kits.
The Company believes that the future growth of its diagnostics business
will be driven primarily by confirmatory and rapid test diagnostic products. The
Company's strategy is to market both directly in local markets as well through
distributors when required. The Company is also focused on rapid simple testing
devices for multiple analytes because it believes these tests can accelerate
growth in markets where diagnostic testing is likely to continue to be
decentralized in small clinical labs, physician offices or at the point of care
where the cost or convenience of automated equipment may not be appropriate.
Asian Biopharmaceutical Alliance
The Company believes that a presence in Asia is of strategic importance
because of the continued expansion of the Asian economies and the increasing per
capita expenditure on health care. These trends are expected to increase the
demand for high-quality and cost-effective health care products. Therefore, in
November 1995, Genelabs invested approximately $4.8 million and assigned the
Asian rights to several of its products in exchange for a 40% ownership interest
in Genelabs Biotechnology, Ltd., a company organized under the laws of Taiwan,
Republic of China. The government of Taiwan invested approximately $5.7 million
and Asian institutional investors invested approximately $4.1 million to obtain
35% and 25% ownership interests, respectively, in GBL. GBL's business strategy
is to focus on late-stage development, manufacture and commercialization of
newly developed or formulated pharmaceuticals, vaccines and other health care
products for the rapidly expanding Asian market. Through GBL, Genelabs intends
to substantially increase its presence in the Asian market.
In March 1997, GBL announced that it had entered into agreements with
Bristol Myers Squibb (Taiwan) Ltd. ("BMST"), under which GBL will acquire a BMST
pharmaceutical manufacturing plant. It is
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currently expected that the purchase of this plant will be completed by June
1997. In addition, GBL and BMST have agreed that GBL shall manufacture BMST's
Taiwan requirements for a number of pharmaceutical products for a minimum of
three years and also shall act as BMST's distributor for certain products in
selected territories in Taiwan.
MARKETING AND SALES
The Company's current marketing and sales activities relate primarily to
its diagnostics business, which is conducted through the Company's
Singapore-based subsidiary, GLD. GLD currently markets its confirmatory
diagnostic tests worldwide, but for research use only in the United States; its
rapid tests in markets outside the United States; its screening tests primarily
in Asia and its reagents to multinational diagnostic companies on a worldwide
basis. GLD sells its products directly through GLD's own sales offices in the
United States, Europe and Asia and through distributors.
The Company has only limited sales, marketing and distribution
capabilities. If the Company successfully develops any new products, including
pharmaceutical 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. Genelabs has established a number of strategic
alliances with selected market leaders such as Abbott, Boehringer Mannheim,
Chiron, DuPont Merck, Ortho Diagnostic Systems and SmithKline Beecham. In these
alliances, Genelabs generally receives a royalty or will receive royalties on
the sale of products by the licensor if a licensed product is ever successfully
introduced and also has retained certain rights to market the products on its
own. The Company has also licensed certain rights for selected products to GBL
for development and marketing in Asia as described in the previous section.
COMPETITION
Competition is intense in the human healthcare industry, particularly in
the application of biotechnology, and the level of competition is expected to
increase in the future. In seeking to develop proprietary pharmaceutical and
diagnostic products and technology, Genelabs faces competition from a number of
major pharmaceutical companies as well as emerging biotechnology companies. The
Company faces particularly significant competition from a number of large
pharmaceutical and diagnostic companies with respect to the Company's diagnostic
business. Many of these competitors have substantially greater financial and
other resources, larger research and development staffs and more extensive
manufacturing and marketing capabilities than the Company. In addition, many of
the Company's competitors have significantly greater experience than the Company
in preclinical testing and in conducting human clinical trials of potential
pharmaceutical products and in obtaining FDA and other regulatory approvals.
These factors may enable these competitors to develop products competitive with
or superior to those the Company plans to develop. Such competitive products
could enter the marketplace before the Company's products.
A significant amount of research in biotechnology is performed at
universities and nonprofit research organizations. These entities are becoming
more active in seeking patent protection and licensing revenues for their
discoveries. The competition among large pharmaceutical companies and smaller
biotechnology companies to acquire technologies from these entities also is
intensifying. While Genelabs has actively collaborated with such entities in
research and has and plans to continue to license their technologies for further
development, these institutions also compete with Genelabs to recruit scientific
personnel and to establish proprietary technology positions.
Genelabs believes that success in any of its product development efforts
will depend on its ability to enter the marketplace with superior,
cost-effective products in a timely manner, as well as on scientific and
technological superiority, managerial competence in identifying, pursuing and
securing opportunities, operational efficiency in developing, protecting,
producing and marketing products and the ability to obtain timely regulatory
agency approvals and adequate funds. Achieving success will also depend on the
Company's continued ability to attract and retain skilled and experienced
personnel and to develop and secure the rights to advanced proprietary
technologies and products.
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PATENTS AND LICENSES
The Company seeks patent protection for its proprietary technologies and
potential products in the United States and in foreign countries. The Company
holds several U.S. and foreign patents and is currently prosecuting a number of
patent applications in the United States and in various other countries relating
to the Company's proprietary technologies and products, including those relating
to the Merlin technology and the Company's HEV and HGV discoveries. It is not
known how many of these pending patent applications will be granted as patents.
The Company has exclusive licenses under a number of patents and patent
applications owned by third parties.
Patents and patent applications in the biotechnology field involve complex
legal and factual issues. Due to unresolved issues regarding the scope of
protection provided by such patents, as well as the possibility of patents being
granted to others, there can be no assurance that the patents owned or licensed
to the Company will provide substantial protection or commercial benefit. The
Company is unable to predict how the courts will resolve issues relating to the
validity and scope of such patents. The rapid rate of development and the
intense research efforts throughout the world in biotechnology, the significant
time lag between the filing of a patent application and its review by
appropriate authorities and the lack of significant legal precedent involving
biotechnology inventions make it difficult to predict accurately the breadth or
degree of protection that patents will afford the Company's biotechnology
products or their underlying technology.
GL701 is a pharmaceutical formulation designed for oral administration that
contains DHEA as the active ingredient. DHEA is a compound that has been in the
public domain for many years and the Company is thus unable to obtain patent
protection covering GL701's composition of matter. Genelabs does have an
exclusive license under a recently granted U.S. patent relating to the use of
DHEA for the treatment of lupus.
The Company is aware that others, including various competitors,
educational institutions and governmental organizations, have intellectual
property, particularly patents and pending patent applications, in the United
States and other countries potentially useful or necessary to the Company's
businesses. The Company is aware that others are pursuing and have obtained
patents covering peptide antigen inventions in the field of HTLV-I and HTLV-II
peptides. There can be no assurance that the Company will be able to manufacture
or sell its diagnostics products without obtaining licenses to such patents or
without modifying its diagnostic products to avoid the claims in such patents.
The Company also is aware that others have obtained U.S. patents covering
peptide antigens in the field of HIV-2 peptides, and have sought or obtained
patent protection in a number of European and other foreign countries. There can
be no assurance that the Company will be able to obtain licenses to such
patents, or that the Company will not have to limit the countries where its
diagnostic products for HIV-1/HIV-2 are made and sold to avoid such patents,
which could have a material adverse effect on the Company's revenues.
There may be similar third-party intellectual property important to the
business of the Company of which the Company is not currently aware. It is
likely that in the future others will obtain patents or develop proprietary
rights that might be necessary or useful for the manufacture, use or sale of
some products by the Company. Certain of these patents or rights may be
sufficiently broad to prevent or delay the Company from practicing necessary
technology, including the manufacture and/or marketing of products important to
the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which the Company may
wish or need to obtain licenses thereunder and the cost and availability of such
licenses cannot be accurately predicted. If the Company does not obtain such
licenses, or such licenses are terminated, products may be required to be
withdrawn from the market, or delays could be encountered in market introduction
while an attempt is made to design around such patents. The Company could incur
substantial costs in challenging the validity or scope of such patents. Such
others could bring legal actions against the Company or its licensees or
distributors claiming damages and seeking to enjoin them from manufacturing,
marketing and clinically testing the affected products. No assurance can be
given that the Company or its licensees or distributors would prevail in such
action or that any license required under any such patent would be made
available.
In addition to pursuing patent protection in appropriate cases, the Company
also relies on trade secret protection for its unpatented proprietary
technology. Although the Company seeks to protect trade secrets and
7
<PAGE> 10
confidential information they believe to be significant through a policy of
having its employees, consultants, and advisors execute proprietary information
and assignment of invention agreements, there can be no assurance that these
agreements will provide meaningful protection for the Company's trade secrets or
other proprietary information in the event of unauthorized use or disclosure of
such information. There also can be no assurance that others will not either
develop independently the same or similar trade secrets or confidential
information or obtain access to such trade secrets or confidential information.
Furthermore, there can be no assurance that others have not obtained or will not
obtain patent protection that will preclude the Company from using its trade
secrets or confidential information. See Risk Factor "Uncertainties Regarding
Patents and Trade Secrets".
GOVERNMENT REGULATION
The research and development, manufacture, distribution and marketing of
human pharmaceutical and diagnostic products are subject to regulation by the
FDA in the United States and by comparable authorities in other countries. These
national agencies and other federal, state and local entities regulate, among
other things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the products that the Company is developing. The process
required by the FDA before a new human drug, biological product or diagnostic
may be marketed in the United States includes (i) preclinical laboratory and
animal tests, (ii) an IND or, in some cases, an investigational device exemption
("IDE") application to conduct clinical investigations filed with the FDA, (iii)
the completion of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug or device for its recommended
conditions of use, (iv) FDA approval of a New Drug Application ("NDA") for a
drug product, or a Biologic License Application ("BLA") for a biological product
or a premarket approval application ("PMA") for a medical device, and (v)
preapproval inspections of manufacturing facilities. Preclinical tests include
laboratory evaluation of the product and animal studies to assess the potential
safety and efficacy of the product and its formulation. The results of the
preclinical tests are submitted to the FDA as part of an IND or IDE and, unless
the FDA objects, the IND or IDE becomes effective 30 days after receipt by the
FDA. FDA objection to the initiation of clinical trials is not uncommon, and may
involve a request for additional data, clarification or validation of data
submitted, or modification of the proposed clinical trial design.
Clinical trials are conducted in accordance with protocols that detail the
objectives and designs of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
Institutional Review Board ("IRB"). The IRB will consider, among other things,
ethical factors, the informed consent and the safety of human subjects and the
possible liability of the institution. Clinical trials are typically conducted
in three sequential phases, although the phases may overlap. In Phase I, the
initial introduction of the drug into human subjects, the product is tested for
safety, dosage tolerance, absorption, metabolism, distribution and excretion.
Phase II involves studies in a limited patient population to (i) determine the
efficacy of the product for specific, targeted indications, (ii) determine
dosage tolerance and optimal dosage and (iii) identify the common short-term
adverse effects and safety risks. When Phase II evaluations indicate that a
product is effective and has an acceptable safety profile, two Phase III trials
are normally required to further test for safety and efficacy within an expanded
patient population at multiple clinical sites. While the Company has been
granted Subpart E designation with respect to GL701, which provides for the
potential accelerated development of the drug, the FDA could also require that
the Company complete its second Phase III trial of GL701 and further demonstrate
satisfactory results of GL701 prior to filing of an NDA. In any event, no
assurance can be given that the results of the Company's first Phase III trial
will warrant proceeding with an NDA or continuing with the second Phase III
trial for GL701.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as an NDA, BLA or PMA for approval of the
marketing and commercial shipment of the new drug, biological product or medical
device. The FDA may deny approval if applicable regulatory criteria are not
satisfied or may require additional clinical or other testing. Even if
additional testing data are submitted, the FDA may ultimately decide that the
NDA, BLA or PMA does not satisfy the criteria for approval or it may limit the
8
<PAGE> 11
scope of any approval it does grant. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur or
are first discovered after the product reaches the market. The FDA may also
require post-approval testing and surveillance programs to monitor the effect of
products that have been commercialized, and has the power to prevent or limit
further marketing of the product based on the results of these post-marketing
programs.
Each manufacturing establishment must be determined to be adequate by the
FDA before approval of product manufacturing. Drug product manufacturing
establishments located in California also must be licensed by the State of
California. Manufacturing establishments are subject to inspections by the FDA
for compliance with current Good Manufacturing Practices and licensing
specifications before and after an NDA has been approved and foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities.
Sales of the Company's products outside the United States are subject to
regulatory requirements governing human clinical trials and marketing for drugs
and biological products. The requirements vary widely from country to country.
The process of obtaining FDA and other domestic and foreign government approval
for a new human drug, biological product or diagnostic is likely to take a
number of years and involve the expenditure of substantial resources. There can
be no assurance that any of the Company's products will be approved by the FDA
or foreign regulatory agencies on a timely basis or at all.
The Company's manufacturing, research and development programs involve the
use of hazardous, chemical, radiological and biological materials, such as
infectious disease agents. Accordingly, the Company's present and future
business is subject to regulations under state and federal laws regarding work
force safety, environmental protection and hazardous substance control and to
other present and possible future local, state and federal regulations. See Risk
Factor "No Assurance of Regulatory Approvals; Uncertainty of Government
Regulation".
MANUFACTURING
GLD manufactures all of its diagnostics products in its Singapore facility
or through OEM arrangements. In 1993, GLD's Singapore manufacturing facility was
jointly certified by the British Standards Institute and the Singapore Institute
of Standards and Industrial Research, now known as the Singapore Productivity
and Standards Board, as compliant with ISO 9002, a set of internationally
recognized guidelines on quality management systems. This certification is
generally required for pre-marketing approval in most countries outside the
United States. In 1996, GLD's Singapore manufacturing facility received EN46002
certification from TUV Product Services of Germany. This certification provides
evidence of conformance to specific requirements for suppliers of medical
devices that are more specific than the general requirements in ISO 9002. It
embraces the principles of current Good Manufacturing Practices used in the
manufacture of medical devices.
The Company currently has no manufacturing facilities for production of
clinical or commercial quantities of any compounds under development as
pharmaceutical products, including GL701. The Company is and will be relying
upon third parties to manufacture its products in quantities sufficient to meet
both clinical and commercial needs. The Company will be dependent upon these
manufacturers to comply with current Good Manufacturing Practices and to meet
its production requirements. There can be no assurance that these manufacturers
will timely deliver sufficient quantities of the Company's products or that the
Company would be able to find substitute manufacturers, if necessary. See Risk
Factor "Dependence on Third-Party Manufacturing and Sole-Source Suppliers;
Manufacturing Risks".
EMPLOYEES
As of February 28, 1997, the Company had 158 full time employees, including
84 employees for its subsidiary GLD. Of these employees, 59 were involved in
research and development, 53 were in manufacturing, and 46 were involved in
marketing, sales and administration. The Company's employees are not represented
by any collective bargaining agreements, and the Company has never experienced a
work stoppage.
9
<PAGE> 12
RISK FACTORS
IN THIS SECTION, THE COMPANY DESCRIBES CERTAIN RISKS THAT SHOULD BE
CONSIDERED BY SHAREHOLDERS AND PROSPECTIVE INVESTORS IN THE COMPANY. THESE RISKS
ARE DISCUSSED IN GREATER DETAIL BELOW, AND ARE DISCUSSED IN CONTEXT IN OTHER
SECTIONS OF THIS REPORT.
EARLY STAGE OF DEVELOPMENT
Genelabs' technology and product candidates are at an early stage of
development. The Company's technologies, including the DNA-binding technology,
are in many cases new and still under development. These approaches have not yet
been proven to have a therapeutic effect. There can be no assurance that these
technologies or any of the Company's product candidates resulting therefrom will
be successfully developed. 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. There can be no assurance that any of these
therapeutic products or others resulting from Genelabs' research programs will
be successfully developed, prove to be safe and efficacious at each stage of
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at reasonable costs or be successfully
marketed.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and initial
clinical trials of products under development by the Company may not be
predictive of results that will be obtained in large-scale testing, and there
can be no assurance that the Company's clinical trials will demonstrate the
safety and efficacy of any products or will result in marketable products. The
safety and efficacy of a therapeutic product under development by the Company,
such as GL701, must be supported by extensive data from clinical trials. Many
biopharmaceutical companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. The
Company currently intends to announce results from its initial Phase III
clinical trials during the second quarter of 1997. No assurance can be given as
to whether these results will demonstrate safety or efficacy of GL701 for the
reduction of prednisone in connection with the treatment of lupus. Even if the
results appear promising, no assurance can be given as to whether the results
will prove acceptable to the FDA to permit the filing of an NDA thereafter.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. The Company is dependent on
third parties including hospitals and physicians to conduct the clinical trials.
Delays in planned patient enrollment can result in increased costs and delays.
If the Company is unable to successfully complete its clinical trials, its
business, financial condition and results of operations could be materially
adversely affected.
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials and
approval by the FDA, by comparable agencies in other countries and by state
regulatory authorities prior to marketing. The process of conducting clinical
trials and obtaining regulatory approval for a product typically takes a number
of years and involves substantial expenditures. In addition, product approvals
may be withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company may
encounter significant delays or excessive costs in its efforts to secure and
maintain necessary approvals or licenses. Future federal, state, local or
foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance that
the Company will be able to obtain or maintain the necessary approvals for
manufacturing or marketing the Company's products for proposed indications or
that the data it obtains in clinical trials will be sufficient to establish the
safety and efficacy of its products. In
10
<PAGE> 13
particular, no assurance can be given that the results of the Company's first
Phase III trial of GL701 will warrant proceeding with an NDA or continuing with
the second Phase III trial for GL701.
Even if the Company obtains regulatory approval for any particular product,
there can be no assurance that it will be economically feasible for the Company
to commercialize its products. In addition, identification of certain side
effects after a drug is on the market or the occurrence of manufacturing
problems could cause subsequent withdrawal of approval, reformulation of the
drug, additional preclinical testing or clinical trials, and changes in labeling
of the product. Failure to obtain or maintain requisite governmental approvals,
failure to obtain approvals of the clinically intended uses or the
identification of side effects could delay or preclude the Company from further
developing particular products or from marketing its products, or could limit
the commercial use of its products, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has obtained orphan drug status for GL701 for the treatment of
lupus. Orphan drug status may, under present regulations, entitle the Company to
certain marketing exclusivity. While the marketing exclusivity of an orphan drug
would prevent other sponsors from obtaining approval of the same compound for
the same indication, it would not prevent the same compound from being approved
for a different use. There can be no assurance that the scope of protection or
the level of exclusivity that is currently afforded by orphan drug status will
remain in effect in the future.
In addition, 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. 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.
The Company is also subject to regulation under numerous federal, state and
local laws regarding, among other things, occupational safety, laboratory
practices, the use and handling of radioisotopes and hazardous chemicals,
prevention of illness and injury, environmental protection and hazardous
substance control. Failure to comply with such regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $111.0 million in net losses through December 31,
1996, including a net loss of $11.4 million in 1996. 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, 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
or bank financing. There can be no assurances 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.
UNCERTAINTIES REGARDING PATENTS AND TRADE SECRETS
There has been increasing litigation in the biotechnology, diagnostic and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic, diagnostic and vaccine products that are the subject of conflicting
patent rights. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and diagnostic companies, including Genelabs, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's existing patents will provide significant proprietary protection or
will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent
11
<PAGE> 14
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company may have to participate in interference
proceedings to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. Others, including competitors of Genelabs, may have filed
applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to products or technology competitive
with those of Genelabs. There can be no assurance that any patents owned or
controlled by the Company will protect Genelabs against infringement litigation
or afford commercially significant protection of the Company's technology. None
of the Company's patents has been tested in court to determine their validity
and scope. Moreover, the patent laws of foreign countries differ from those of
the United States and the degree of protection, if any, afforded by foreign
patents may therefore be different.
If another company were to successfully bring legal actions against the
Company claiming patent or other intellectual property right infringements, in
addition to any liability for damages, the Company could be enjoined by a court
from using or selling such products or technologies or might be required to
obtain a license to use, manufacture or sell the affected product or technology.
There can be no assurance that the Company would prevail in any such action or
that the Company could obtain any license required under any such patent on
acceptable terms, if at all. Any litigation, whether or not resolved in favor of
the Company, could be expensive and time-consuming, could consume substantial
management resources and could have a material adverse effect on the Company's
business, financial condition and results of operations.
GL701 is a pharmaceutical formulation designed for oral administration that
contains DHEA as the active ingredient. DHEA is a compound that has been in the
public domain for many years and the Company is thus unable to obtain patent
protection covering GL701's composition of matter. Genelabs does have an
exclusive license under a recently granted U.S. patent relating to the use of
DHEA for the treatment of lupus.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. Although
Genelabs has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by others.
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS; MANUFACTURING
RISKS
The Company has no internal manufacturing capabilities for pharmaceutical
products and is entirely dependent on contract manufacturers to manufacture
clinical and, if successfully developed, commercial-scale quantities of GL701
pursuant to supply agreements. There can be no assurance that these third party
manufacturers will continue to meet FDA or product specification standards or
that the Company's manufacturing requirements can be met in a consistent and
timely manner. The Company has in the past experienced batch failures in the
manufacturing process for GL701. In addition, the Company may be unable to
obtain sufficient contract manufacturing capacity due to competing demands on
the contract manufacturer's capacity or other reasons. In the event of any
interruption of supply from the contract manufacturer due to regulatory reasons,
significant batch failures, capacity constraints or other causes, there can be
no assurance that the Company could make alternative manufacturing arrangements
on a timely basis, if at all. Such an interruption would have a material adverse
effect on the Company's business, financial condition and results of operations.
Completion of the Company's clinical trials and any submission of an NDA will be
subject to the establishment of a commercial formulation and manufacturing
process. As manufacturing process development and formulation activities are
ongoing throughout the development process, the Company may encounter
difficulties at any time that could result in delays in clinical trials,
regulatory submissions and commercialization of its products, or cause potential
negative financial and competitive consequences.
The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, GL701 currently is
supplied to the Company by a single source, and the number of alternative
sources is limited. The disqualification or loss of a sole-source supplier could
have a material adverse effect on
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<PAGE> 15
the Company because of a delay or inability in obtaining and qualifying an
alternate supplier and the costs associated with such delay and in finding and
qualifying an alternate supplier. Regulatory requirements applicable to
pharmaceutical products tend to make the substitution of suppliers costly and
time consuming. The unavailability of adequate commercial quantities, the loss
of a supplier's regulatory approval, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of materials could impair the Company's ability to manufacture and market
its products which would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company's operating results may fluctuate significantly depending on a
variety of factors, including the scope of clinical trials for GL701; changes in
the Company's level of research and development; changes in manufacturing
capabilities; and variations in gross margins of the Company's diagnostic
products which may be caused by cost increases from third-party manufacturers,
availability and cost of raw materials, competitive pricing pressures and
currency fluctuations. The Company expects operating expenses to increase in
1997, and there can be no assurance that the Company will maintain or increase
revenues or ever achieve profitability.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, like the stock prices of
many publicly traded biopharmaceutical companies, has been and may continue to
be highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as problems with clinical
development of the Company's potential products; announcements of technological
innovations, regulatory developments or new commercial products by the Company
or its competitors; continued or expanded over-the-counter marketing of DHEA as
a dietary supplement; the level of sales of the Company's products; delays or
other developments relating to regulatory approvals; developments or disputes
relating to patent or proprietary rights; comments and reports by securities
analysts; product liability claims; as well as period-to-period fluctuations in
the Company's financial results, may each have a significant negative impact on
the market price of the Common Stock. Any large sale of securities of the
Company could have a significant adverse effect on the market price of the
Common Stock.
ITEM 2. PROPERTIES.
The table below sets forth certain information with respect to the
principal facilities of the Company.
<TABLE>
<CAPTION>
APPROX.
FLOOR AREA ANNUAL BASE
LOCATION PRINCIPAL OPERATIONS (SQ. FT.) RENT LEASE EXPIRATION DATE
- - -------------------- ------------------------- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Redwood City, CA.... Research and development 50,000 $ 659,000 November 1997
and office facilities
Morris Plains, NJ... Clinical research 2,300 $ 38,000 November 1997
Singapore........... Manufacturing, research 10,500 $ 303,000 April 1997
and
development and office
facilities
Singapore........... Manufacturing, research 10,500 $ 281,000 March 1999
and
development and office
facilities
</TABLE>
The Company has an option to extend the term of its lease for the Redwood
City facility for an additional five years, subject to an adjustment in the
annual base rent. The Company believes that the above-described facilities are
adequate for its current needs and that suitable additional or substitute space
will be available as needed to accommodate the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
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<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, who are chosen by and serve at the
discretion of the Board of Directors, at March 26, 1997, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ----------------------------- ---- ----------------------------------------------------------
<S> <C> <C>
Irene A. Chow, Ph.D.......... 57 Chief Executive Officer, President and Director
James A. D. Smith............ 38 Chief Operating Officer
Cynthia A. Edwards, Ph.D..... 43 Vice President, Research
Melinda Griffith............. 42 Vice President, General Counsel and Secretary
</TABLE>
Irene A. Chow has been Chief Executive Officer and President since July
1995. Before being appointed President and Chief Operating Officer of Genelabs
in May 1995, she served the Company as President of the Biopharmaceutical
Division beginning in August 1993. She has also been a director since August
1993. Dr. Chow also serves as Chairman of the Board of Directors of GBL. From
1975 to 1993, Dr. Chow held several positions at Ciba-Geigy Corporation, USA, a
pharmaceutical company, most recently as Senior Vice President of Drug
Development for the Ciba-Geigy pharmaceuticals division. In this capacity, she
directed all scientific, medical, technical and regulatory activities related to
the development of new drugs. During her last 8 years at Ciba-Geigy, Dr. Chow
was responsible for the approval of 10 NDA's and 26 IND's to the FDA. She holds
a B.A. degree in Literature from National Taiwan University, and both an M.A.
and a Ph.D. in Biostatistics from the University of California, Berkeley.
James A. D. Smith has been Chief Operating Officer since October 1996, and
was Vice President, Marketing and Business Development from June 1995 through
September 1996. From January 1994 through June 1995 he was Director of
Marketing. Prior to joining Genelabs in early 1994, Mr. Smith served for more
than ten years in various marketing and business development positions with ICN
Pharmaceuticals, most recently as Director of Worldwide Business Development.
Mr. Smith has a B.S. in Molecular and Cellular Biology from the University of
California at San Diego.
Cynthia A. Edwards has been Vice President, Research since July 1995. From
1994 to July 1995 Dr. Edwards served as Vice President, Pharmaceutical Research,
preceded by various Director and Scientist positions with Genelabs. Before
joining the Company in 1987, Dr. Edwards completed postdoctoral studies at the
National Institutes of Health. She has a Ph.D. in Biology from the University of
California, San Diego; an M.A. in Plant Physiology from Oregon State University
and a B.S. in Botany from Oregon State University.
Melinda Griffith has been Vice President, General Counsel and Secretary of
Genelabs since May 1996. From October 1995 through May 1996 she was Vice
President and Chief Legal Counsel for Genelabs. During 1995, she served as
Senior Counsel for Mitsubishi Electric America, Inc. From 1992 to 1995, she was
Director of Legal Affairs for Arris Pharmaceutical Corporation and from 1986
through 1992, she was Senior Counsel for Cetus Corporation. She received her
J.D. from Hastings College of the Law and has a B.S. in Business Administration
from the University of California, Berkeley.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock of the Company began trading publicly on the NASDAQ
National Market on June 13, 1991 under the symbol "GNLB." The following table
sets forth for the periods indicated the high and low sale prices reported by
the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -----
<S> <C> <C>
1995
1st Quarter.................................................. 2 1/4 1
2nd Quarter.................................................. 2 1 1/4
3rd Quarter.................................................. 5 3/8 1 9/
4th Quarter.................................................. 4 5/16 3 3/8
1996
1st Quarter.................................................. 8 1/8 4 1/2
2nd Quarter.................................................. 9 9/16 6
3rd Quarter.................................................. 6 5/8 3 3/4
4th Quarter.................................................. 6 7/16 3 3/8
</TABLE>
As of February 28, 1997, there were approximately 696 holders of record of
the Common Stock. In November 1996, the Company issued 700,000 shares of Common
Stock through a private offering pursuant to Section 4(2) of the Securities Act
of 1933 to Veron International Limited ("Veron"), receiving gross proceeds of
$2.8 million. In connection with this offering, the Company agreed to issue an
additional 1,900,000 shares of Common Stock to Veron for gross proceeds of $7.6
million, which the Company was required to hold in escrow until 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 for this investment were released to Genelabs
and the shares were issued to Veron. Also in connection with this offering, the
Company paid $950,000 to an affiliate of Veron in commissions and expenses,
which include Hart-Scott-Rodino filing and compliance and legal, accounting, tax
and other fees and expenses of Veron and its affiliates.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues............................ $ 13,330 $ 18,648 $ 16,064 $ 12,930 $ 4,855
Net loss.................................. (11,397) (10,511) (15,609) (22,013) (17,268)
Net loss per share........................ (0.32) (0.38) (0.68) (1.06) (0.96)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash, cash equivalents and short-term
investments............................ $ 30,465 $ 22,557 $ 4,584 $ 14,036 $ 17,057
Working capital........................... 30,224 18,776 5,346 13,689 19,957
Total assets.............................. 44,119 36,198 14,958 25,181 28,276
Long-term debt including current
portion................................ -- 3,324 3,535 3,614 2,925
</TABLE>
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<PAGE> 18
ITEM 7. 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 commencement and completion of
clinical trials and the announcement of trial data and results, the Company's
strategic plans, 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 U.S.
Food and Drug Administration and foreign regulatory authorities, product
development, manufacturing and market acceptance risks, 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 elsewhere in this Report.
Overview
Genelabs Technologies, Inc. (together with its subsidiaries, "Genelabs" or
the "Company") 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. 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"). This biopharmaceutical alliance is focused
on late-stage development, manufacture and commercialization of newly developed
or formulated pharmaceuticals, vaccines and other health care products for the
rapidly expanding Asian market.
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 products, 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.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenues
Revenues include both diagnostic product sales and contract and other
revenue. Total revenue was $13.3 million in 1996, $18.6 million in 1995, and
$16.1 million in 1994.
Diagnostic product sales were $11.3 million in 1996, $10.1 million in 1995,
and $11.6 million in 1994. The $1.2 million increase from 1995 to 1996 occurred
mainly in Europe, offsetting declines from the year before. The most notable
increases in diagnostic sales were for the Company's Western Blot products. The
$1.5 million sales decrease from 1994 to 1995 is attributed to lower sales in
Europe, combined with one-time purchases by a large Asian customer in 1994.
Contract and other revenues were $2.0 million in 1996, $8.5 million in
1995, and $4.5 million in 1994. Contract and other revenues include royalties,
licensing, milestone and research and development payments. In 1995, the Company
recognized revenue of $6.0 million from an upfront payment made under a
collaboration with Chiron Corporation ("Chiron") and Ortho Diagnostic Systems,
Inc. ("Ortho") for
16
<PAGE> 19
development of diagnostic products for the hepatitis G virus ("HGV"). Because
this revenue represented up-front license payments, there was no comparable
revenue in 1996 or 1994. Exclusive of this $6.0 million, contract and other
revenues decreased $0.5 million from 1995 to 1996, partially due to a reduction
in government grant funding of the Company's research programs. The Company
recognized $1.0 million in 1996 related to its HGV program and $0.9 million in
1995 related to its hepatitis E virus vaccine program. Excluding the above noted
Chiron and Ortho revenue, the decrease in contract and other revenue from 1994
to 1995 is due to milestone payments received for research progress and
reductions in government grant funding based on the Company's strategic decision
to de-emphasize government funding as a source of revenue. Contract and other
revenues recognized in the future will be dependent in part upon the Company's
achieving milestones under current agreements, and entering into new research
and development and licensing agreements with corporate collaborators.
Cost of Product Sales
Cost of diagnostic product sales were $6.2 million in 1996, $6.1 million in
1995, and $5.7 million in 1994. Despite a $1.2 million increase in diagnostic
product sales in 1996 from 1995, cost of sales only increased $0.1 million as
gross margins improved to 45% in 1996 from 40% in 1995. This improvement in
gross margins was due to efficiencies resulting from a relocation of the
Company's production facilities, better production yields, and differences in
the mix of products sold. In 1994, gross margins were 51%. The decrease in
margins from 1994 to 1995 was due to write-offs of obsolete inventory, certain
relocation costs of the Company's production facilities and lower selling prices
for certain products.
Research and Development Expenses
The Company's research and development expenses were $10.1 million in 1996,
$12.6 million in 1995 and $15.0 million in 1994. The Company's principal ongoing
research and development expenses are directed toward its priority projects
which are DNA-binding, gene-regulating drug discovery and GL701 for lupus. The
decreases from 1995 to 1996, as well as from 1994 to 1995, are the result of the
Company focusing on these priority projects, while reducing or eliminating
expenditures on other projects. In 1996 and 1995, costs related to contract
revenues were not significant; in 1994 these costs were $4.2 million and were
included in research and development expenses. In the future, the Company
expects its annual research and development expenses to increase and to exceed
the contract revenues associated with these programs.
In 1995, the Company recorded a non-cash charge of $0.9 million for
purchased in-process research and development related to the acquisition of GLD
in 1993. In 1995 the Company was obligated to issue an additional 497,000 shares
of its Common Stock to original GLD shareholders who retained their shares for a
certain holding period, and this resulted in the 1995 charge.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $9.3 million in
1996, $10.0 million in 1995 and $11.1 million in 1994. The decreases in SG&A
expenses in both 1996 and 1995 reflect the Company's reduced headcount and
ongoing efforts to contain operating expenses. The Company presently anticipates
that further decreases in 1997 are not likely.
Net Interest Income
The Company recognized net interest income of $1.2 million in 1996, $0.5
million in 1995 and $0.2 million in 1994. The increase in 1996 represents higher
average cash and short-term investment balances compared to the previous year as
well as lower interest expense after the Company repaid the convertible
subordinated debentures early in the year. The increase in 1995 represents a
higher average cash balance compared to 1994.
17
<PAGE> 20
Equity in Loss of Genelabs Biotechnology, Ltd.
In November 1995, the Company invested $4.8 million and certain technology
rights for a 40% interest in GBL, a company organized under the laws of Taiwan,
Republic of China. GBL plans to focus on the late-stage development, manufacture
and commercialization of newly developed or formulated pharmaceuticals, vaccines
and other health care products for the Asian market. The Company accounts for
its investment in GBL under the equity method. In 1995, only two months of
operations were included in Genelabs' financial statements, therefore, the
higher loss in 1996 was due to increased operating activity for a full year of
operations. In 1997, the loss on this investment is expected to increase as GBL
expands its activities with the acquisition of a pharmaceutical manufacturing
plant.
Net Losses
The Company has operated at a loss since its inception and had an
accumulated deficit of $111.0 million as of December 31, 1996. The net loss was
$11.4 million in 1996, $10.5 million in 1995 and $15.6 million in 1994. The 1996
net loss is greater than that of 1995 because of the $6.0 million received in
1995 as up-front license payments from Chiron and Ortho. Excluding this contract
revenue, the 1996 net loss improved by $5.1 million mainly due to lower
recurring operating expenses, higher gross margins and the 1995 non-cash charge
for in-process research and development. The 1995 net loss is below that of 1994
primarily as a result of the above noted additional contract revenue and reduced
operating expenditures, somewhat offset by lower gross margins on product sales
and the non-cash charge for in-process research and development.
Foreign Currency Translation
The functional currency of GLD is the Singapore dollar, and the functional
currency of GBL is the New Taiwan Dollar. In addition, the Company receives
revenues from other countries throughout the world. As a result, risks exist
that revenues and/or asset values may be impacted by changes in global currency
exchange rates, particularly those impacting the U.S. dollar. The Company has
not experienced any significant losses as a result of changes in exchange rates.
Income Taxes
Because Genelabs has generated net losses since its inception, income taxes
have not been a significant expense. At December 31, 1996, the Company had net
operating loss carryforwards for federal and California income tax purposes of
approximately $81 million and $12 million, respectively. In addition, the
Company had federal research and development tax credit carryforwards of
approximately $1.4 million. The federal net operating loss and tax credit
carryforwards expire in various amounts from years 2000 through 2011. The
California net operating loss carryforwards expire in various amounts from years
1997 through 2001. Under provisions of the Internal Revenue Code, the
availability of the Company's net operating loss and tax credit carryforwards
may be subject to an annual limitation because of changes in ownership resulting
from transactions the Company entered into in the current and prior fiscal
years. To date, no substantial restriction in the ability to utilize the
Company's carryforwards is anticipated. However, future equity transactions
which the Company may enter into could cause additional ownership changes which
may result in substantial limitations or an inability to use these
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $30.5 million at December 31, 1996, compared to $22.6 million at
December 31, 1995. The $7.9 million increase in cash, cash equivalents and
short-term investments was largely attributable to $21.5 million received from
the issuance of Common Stock, inclusive of the cash held in escrow, partially
offset by $10.6 million used in operations and $2.8 million paid upon maturity
of the convertible subordinated debentures.
The Company has funded its operations since inception primarily through
public and private offerings of its Common Stock, private offerings of its
preferred stock, contract revenues and product sales. The Company has no bank
debt or open credit lines. Genelabs' expects to incur substantial additional
costs, including costs
18
<PAGE> 21
for clinical trials for products currently under development and costs for
further research on DNA-binding and 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 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 or
bank financing. 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements are set forth in the
"Genelabs Technologies, Inc. Consolidated Financial Statements and Annual Report
on Form 10-K Index" on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information concerning the Company's directors required by Item 10 is
incorporated herein by reference to the section entitled "Proposal No.
1 -- Election of Directors" of the definitive Proxy Statement for the Company's
1997 Annual Meeting of Shareholders to be held on May 22, 1997 (the "Proxy
Statement"), and the information concerning the Company's executive officers
required by Item 10 is incorporated herein by reference to Item 4A of this
Annual Report on Form 10-K. The information concerning compliance with Section
16 of the Securities Exchange Act of 1934 required by Item 10 is incorporated
herein by reference to the section entitled "Compliance Under Section 16(a) of
the Securities Exchange Act of 1934" of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation" and "Compensation of Directors"
of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Transactions" of the Proxy Statement.
19
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1), (a)(2) and (d) Financial Statements and Schedules.
Reference is made to "Genelabs Technologies, Inc. Consolidated Financial
Statements Annual Report on Form 10-K Index" on page F-1 of this Annual Report
on Form 10-K.
(a)(3) and (c) Index to Exhibits.
The following documents are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
- - -------- ----------------------------------------------------------------------------------
<C> <S>
2.01 Exchange Agreement, dated as of March 8, 1993, by and among Registrant and certain
principal shareholders of Diagnostic Biotechnology (Pte.) Ltd., including, as
Exhibit B thereto, the form of Exchange Agreement between Registrant and certain
non-principal shareholders of Diagnostic Biotechnology (Pte.) Ltd. (incorporated
herein by reference to Exhibit 2.01 to the Company's Current Report on Form 8-K
filed with the Commission on March 26, 1993, as amended by the Form 8-K/A filed
with the Commission on May 14, 1993).
3.01 Registrant's Amended and Restated Articles of Incorporation (incorporated herein
by reference to Exhibit 3.01 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (the "1991 Form 10-K")).
3.02 Registrant's Bylaws, as amended to date (incorporated herein by reference to
Exhibit 3.02 to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 Form 10-K")).
4.01 Specimen Certificate for Registrant's Common Stock (incorporated herein by
reference to Exhibit 4.01 to Registrant's Registration Statement on Form S-1 filed
with the Commission on April 29, 1991 (File No. 33-40120) (the "Form S-1")).
4.02 Certificate of Determination of Preferences of Series A Convertible Preferred
Stock of Genelabs Technologies, Inc. (incorporated herein by reference to Exhibit
10.37 to Registrant's Form 10-Q for the Quarter ended June 30, 1995).
4.03 Form of Unit Purchase Agreement entered into between Registrant and each Selling
Shareholder (incorporated herein by reference to Exhibit 4.04 to Registrant's Form
S-3 filed with the Commission on September 26, 1995 (File No. 33-97336)).
10.01 Registrant's 1985 Employee Stock Option Plan and related documents, as amended to
date (incorporated herein by reference to Exhibit 4.03 to the Registrant's
Registration Statement on Form S-8 (File No. 33- 81894) filed on July 25, 1994
(the "July 1994 Form S-8").
10.02 Registrant's 1987 Directors Stock Option Plan and related documents, as amended to
date (incorporated herein by reference to Exhibit 10.02 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K")).
10.03 Registrant's 1991 Employee Stock Purchase Plan, as amended to date.
10.04 Registrant's 1994 Annual and Long-Term Incentive Based Compensation Program
(incorporated herein by reference to Exhibit 4.03 to Registrant's Registration
Statement on Form S-8 (File No. 33-85914) filed on November 3, 1994).
10.05 Registrant's 1992 Restricted Stock Award Plan, as amended to date (incorporated
herein by reference to Exhibit 4.06 to the Registrant's Registration Statement on
Form S-8 (File No. 333-4806) filed on May 7, 1996).
10.06 Registrant's 1995 Employee Stock Option Plan, as amended to date (incorporated
herein by reference to Exhibit 4.04 to the Registrant's Registration Statement on
Form S-8 (File No. 333-5769) filed on June 12, 1996).
10.07 Form of Registrant's Indemnity Agreement entered into by Registrant with certain
officers and directors (incorporated herein by reference to Exhibit 10.04 to the
Form S-1).
10.08 Industrial Net Lease Agreement by and between Registrant and Lincoln Property
Company N.C., Inc. dated July 29, 1986, as amended to date (incorporated herein by
reference to Exhibit 10.06 to the Form S-1).
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
- - -------- ----------------------------------------------------------------------------------
<C> <S>
10.09 Amendment to Industrial Net Lease Agreement by and between Registrant and Lincoln
Property Company N.C., Inc. dated June 19, 1992 (incorporated herein by reference
to Exhibit 10.18 to Registrant's Form 10-Q for the quarter ended June 30, 1992).
10.10 Tenancy Agreement for Research Unit(s) at Singapore Science Park, by and between
Technology Parks Private Limited and Genelabs Diagnostics (Pte.) Ltd. dated April
27, 1994 (incorporated herein by reference to Exhibit 10.12 to the 1995 Form
10-K).
10.11 Tenancy Agreement for Research Unit(s) at Singapore Science Park, by and between
Technology Parks Private Limited and Genelabs Diagnostics (Pte.) Ltd. dated
February 22, 1996 (incorporated herein by reference to Exhibit 10.13 to the 1995
Form 10-K).
10.12 License Agreement dated October 2, 1991 by and between Registrant, the University
of North Carolina at Chapel Hill and Yale University (incorporated herein by
reference to Exhibit 10.16 to the 1991 Form 10-K).*
10.13 Heads of Agreement dated August 27, 1992 by and between Registrant and SmithKline
Beecham p.l.c. (incorporated herein by reference to Exhibit 10.19 to the
Registrant's Form 10-Q for the quarter ended September 30, 1992).*
10.14 License Agreement dated May 26, 1993 by and between the Registrant and Boehringer
Mannheim America Ltd. (incorporated herein by reference to Exhibit 10.22 to the
Registrant's Form 10-Q for the quarter ended June 30, 1993).*
10.15 Agreement dated as of January 26, 1996 by and between Registrant and Dr. Edgar G.
Engleman.**
10.16 License Agreement dated as of October 1, 1993 by and between Registrant and
Stanford University.**
10.17 Common Stock Purchase Agreement dated May 5, 1989 and Addendum dated August 31,
1989 (incorporated herein by reference to Exhibit 4.04 to the Form S-1).
10.18 Common Stock Purchase Agreement dated September 24, 1992 between Registrant and
SmithKline Beecham p.l.c. (incorporated herein by reference to Exhibit 4.07 to
Registrant's Form 10-Q for the quarter ended September 30, 1992).
10.19 Common Stock and Warrant Purchase Agreement dated as of December 31, 1992 by and
between Registrant and Abbott Laboratories (incorporated herein by reference to
Exhibit 10.19 to Registrant's Annual Report on the 1992 Form 10-K).*
10.20 Common Stock Purchase Agreement dated May 26, 1993 by and between Registrant and
Boehringer Mannheim America Ltd. (incorporated herein by reference to Exhibit
10.32 to the 1993 Form 10-K).
10.21 Stock Purchase Agreement, dated as of May 15, 1995, by and among Registrant,
Genelabs Diagnostic, Inc., a wholly owned subsidiary of the Registrant, Johnson &
Johnson Development Corporation, and Chiron Corporation (incorporated herein by
reference to Exhibit 10.34 to Registrant's Form 10-Q for the quarter ended March
31, 1995 (the "1st Quarter 1995 Form 10-Q")).*
10.22 License and Supply Agreement, dated as of May 15, 1995, by and among Registrant,
Genelabs Diagnostic, Inc., Chiron Corporation, and Ortho Diagnostic Systems, Inc.
(incorporated herein by reference to Exhibit 10.35 to the 1st Quarter 1995 Form
10-Q).*
10.23 Asset Purchase Agreement, dated as of May 15, 1995, by and between Registrant and
Genelabs Diagnostic, Inc. (incorporated herein by reference to Exhibit 10.36 to
the 1st Quarter 1995 Form 10-Q).*
10.24 Joint Investment Agreement for formation of Genelabs Biotechnology Ltd., a company
organized under the laws of Taiwan, Republic of China (incorporated herein by
reference to Exhibit 10.28 to the 1995 Form 10-K).*
10.25 Technology Transfer Agreement, dated as of November 21, 1995, by and between
Registrant and Genelabs Biotechnology Ltd. (incorporated herein by reference to
Exhibit 10.29 to the 1995 Form 10-K).*
10.26 Common Stock Purchase Agreement, dated as of November 15, 1996, by and between
Registrant and Veron International Limited (incorporated herein by reference to
Exhibit 10.30 to Registrant's Current Report on Form 8-K filed on November 22,
1996).
10.27 Collaborative Research and License Agreement, dated as of December 13, 1996, by
and between Registrant and The DuPont Merck Pharmaceutical Company.**
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
- - -------- ----------------------------------------------------------------------------------
<C> <S>
21.01 List of Significant Subsidiaries.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit only in the
electronic format of this Annual Report on Form 10-K submitted to the Securities
and Exchange Commission).
</TABLE>
- - ---------------
* Confidential treatment has been granted with respect to certain portions of
this document.
** Confidential treatment has been requested with respect to certain portions of
this document.
(b) Reports on Form 8-K.
During the fourth quarter 1996, the Company filed two reports on Form 8-K.
A current report on Form 8-K was filed on November 22, 1996. This report
announced the Common Stock Purchase Agreement dated as of November 15, 1996
between the Company and Veron International Limited, which provided for the
issuance of 2.6 million shares of Genelabs' Common Stock.
A current report on Form 8-K was filed on December 23, 1996. This report
announced the Collaborative Research and License Agreement with The DuPont Merck
Pharmaceutical Company dated as of December 13, 1996.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 26, 1997 By: /s/ IRENE A. CHOW
------------------------------------
Irene A. Chow
Chief Executive Officer, President
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Irene A. Chow and Melinda Griffith, and
each of them, his or her true and lawful attorneys-in-fact and agents with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto and all documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or his, her or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
<TABLE>
<S> <C> <C>
/s/ IRENE A. CHOW Chief Executive Officer, President March 26, 1997
- - ---------------------------------------- and Director
Irene A. Chow
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES A.D. SMITH Chief Operating Officer March 26, 1997
- - ----------------------------------------
James A.D. Smith
PRINCIPAL ACCOUNTING OFFICER:
/s/ MATTHEW M. LOAR Director of Finance and Controller March 26, 1997
- - ----------------------------------------
Matthew M. Loar
CHAIRMAN OF THE BOARD OF DIRECTORS:
/s/ MAX WILHELM March 26, 1997
- - ----------------------------------------
Max Wilhelm
ADDITIONAL DIRECTORS:
/s/ EDGAR G. ENGLEMAN March 26, 1997
- - ----------------------------------------
Edgar G. Engleman
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C> <C>
/s/ ARTHUR GRAY, JR. March 26, 1997
- - ----------------------------------------
Arthur Gray, Jr.
/s/ H. H. HAIGHT March 26, 1997
- - ----------------------------------------
H. H. Haight
/s/ FRANK F.C. KUNG March 26, 1997
- - ----------------------------------------
Frank F.C. Kung
/s/ DAMARIS SKOURAS March 26, 1997
- - ----------------------------------------
Damaris Skouras
/s/ NINA K. WANG March 26, 1997
- - ----------------------------------------
Nina K. Wang
</TABLE>
24
<PAGE> 27
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
ANNUAL REPORT ON FORM 10-K
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995.................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994.............................................................. F-4
Consolidated Statement of Shareholders' Equity for the Years Ended December
31, 1996, 1995 and 1994.................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994.............................................................. F-6
Notes to Consolidated Financial Statements.................................... F-7-F-17
</TABLE>
All schedules are omitted because they are not required or the required
information is included in the consolidated financial statements or notes
thereto.
F-1
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Genelabs Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Genelabs
Technologies, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Genelabs Technologies, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 12, 1997
F-2
<PAGE> 29
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 4,377 $ 22,557
Cash held in escrow................................................. 6,953 --
Short-term investments.............................................. 19,135 --
------- -------
Cash, cash equivalents and short-term investments................... 30,465 22,557
Receivables, net of allowance for doubtful accounts of $343 and $271
at December 31, 1996 and 1995, respectively...................... 3,170 2,489
Inventories......................................................... 3,535 3,336
Other current assets................................................ 726 716
------- -------
Total current assets.................................................. 37,896 29,098
Property and equipment, net........................................... 1,463 1,945
Investment in Genelabs Biotechnology Ltd.............................. 4,628 4,828
Other assets.......................................................... 132 327
------- -------
$ 44,119 $ 36,198
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of convertible subordinated notes payable........... $ -- $ 2,828
Accounts payable and other accrued liabilities...................... 4,778 5,374
Accrued compensation and related expenses........................... 1,694 2,120
Unearned contract revenue........................................... 1,200 --
------- -------
Total current liabilities............................................. 7,672 10,322
Long-term obligations................................................. 523 124
------- -------
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized, 10 shares
convertible Series A issued and outstanding, with liquidation
preference of $10,000............................................ 9,682 9,682
Common stock, no par value, 75,000 shares authorized, 37,197 and
32,528 shares issued and outstanding at December 31, 1996 and
1995, respectively............................................... 129,591 115,002
Common stock to be issued........................................... 6,953 --
Accumulated deficit................................................. (110,995) (99,598)
Cumulative foreign currency translation adjustment.................. 693 666
------- -------
Total shareholders' equity............................................ 35,924 25,752
------- -------
$ 44,119 $ 36,198
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 30
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales............................................ $ 11,324 $ 10,149 $ 11,590
Contract and other....................................... 2,006 8,499 4,474
-------- -------- --------
Total revenues............................................. 13,330 18,648 16,064
-------- -------- --------
Operating costs and expenses:
Cost of product sales.................................... 6,177 6,090 5,725
Research and development................................. 10,133 12,551 15,025
Selling, general and administrative...................... 9,333 9,994 11,090
Purchased in-process research and development............ -- 949 --
-------- -------- --------
Total operating costs and expenses......................... 25,643 29,584 31,840
-------- -------- --------
Operating loss............................................. (12,313) (10,936) (15,776)
Interest income, net....................................... 1,181 478 167
Equity in loss of Genelabs Biotechnology, Ltd.............. (265) (53) --
-------- -------- --------
Net loss................................................... $(11,397) $(10,511) $(15,609)
======== ======== ========
Net loss per share......................................... $ (0.32) $ (0.38) $ (0.68)
======== ======== ========
Weighted average shares outstanding........................ 35,746 27,497 23,008
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
SERIES A FOREIGN
CONVERTIBLE COMMON CURRENCY TOTAL
PREFERRED COMMON STOCK TO ACCUMULATED TRANSLATION SHAREHOLDERS'
STOCK STOCK BE ISSUED DEFICIT ADJUSTMENT EQUITY
----------- -------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993................ $ -- $87,156 $ 2,000 $ (73,478) $ 91 $ 15,769
78 shares issued under the employee
stock purchase plan................... -- 112 -- -- -- 112
53 shares issued under stock options.... -- 82 -- -- -- 82
2,553 shares issued in a public
offering, net......................... -- 4,889 -- -- -- 4,889
Foreign currency translation
adjustment............................ -- -- -- -- 507 507
Cumulative unrealized securities loss... -- -- -- (9) -- (9)
Net loss................................ -- -- -- (15,609) -- (15,609)
------ -------- ------ --------- ---- --------
Balance, December 31, 1994................ -- 92,239 2,000 (89,096) 598 5,741
81 shares issued under the employee
stock purchase plan................... -- 82 -- -- -- 82
298 shares issued under stock options... -- 673 -- -- -- 673
843 shares issued to SmithKline Beecham
PLC................................... -- 2,000 (2,000) -- -- --
497 shares issued to former DBL
shareholders.......................... -- 949 -- -- -- 949
6,500 shares issued in a private
placement, net........................ -- 19,059 -- -- -- 19,059
10 shares preferred stock issued to
Chiron and J&J, net................... 9,682 -- -- -- -- 9,682
Foreign currency translation
adjustment............................ -- -- -- -- 68 68
Change in unrealized securities loss.... -- -- -- 9 -- 9
Net loss................................ -- -- -- (10,511) -- (10,511)
------ -------- ------ --------- ---- --------
Balance, December 31, 1995................ 9,682 115,002 -- (99,598) 666 25,752
89 shares issued under the employee
stock purchase plan................... -- 223 -- -- -- 223
711 shares issued under stock options... -- 1,526 -- -- -- 1,526
3,169 shares issued upon exercise of
warrants, net......................... -- 10,313 -- -- -- 10,313
700 shares issued and 1,900 shares to be
issued in a private placement, net.... -- 2,527 6,953 -- -- 9,480
Foreign currency translation
adjustment............................ -- -- -- -- 27 27
Net loss................................ -- -- -- (11,397) -- (11,397)
------ -------- ------ --------- ---- --------
Balance, December 31, 1996................ $ 9,682 $129,591 $ 6,953 $(110,995) $ 693 $ 35,924
====== ======== ====== ========= ==== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 32
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(11,397) $(10,511) $(15,609)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense................. 863 958 2,227
Amortization of unearned contract revenue............. -- (889) (1,333)
Purchased in-process research and development......... -- 949 --
Equity in loss of Genelabs Biotechnology, Ltd......... 265 53 --
Changes in assets and liabilities:
Receivables........................................... (681) 423 1,046
Inventories........................................... (199) (50) (1,360)
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations.............. (633) 2,368 162
Additions to unearned contract revenue................ 1,200 -- 1,000
-------- -------- --------
Net cash used in operating activities.................... (10,582) (6,699) (13,867)
-------- -------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale............... (43,488) -- --
Proceeds from sale and maturities of securities
available-for-sale.................................... 24,353 1,031 8,123
Capital expenditures..................................... (329) (240) (544)
Investment in Genelabs Biotechnology Ltd................. -- (4,817) -
Other.................................................... 98 565 (25)
-------- -------- --------
Net cash (used in)/provided by investing activities...... (19,366) (3,461) 7,554
-------- -------- --------
Cash flows from financing activities:
Payments on long-term obligations........................ (2,828) (387) (185)
Proceeds from issuance of convertible preferred stock,
net................................................... -- 9,682 --
Proceeds from issuance of common stock and warrants,
net................................................... 14,589 19,814 5,083
-------- -------- --------
Net cash provided by financing activities................ 11,761 29,109 4,898
-------- -------- --------
Effect of exchange rate change on cash................... 7 46 95
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents..... (18,180) 18,995 (1,320)
Cash and cash equivalents, beginning of the period....... 22,557 3,562 4,882
-------- -------- --------
Cash and cash equivalents, end of the period............. 4,377 22,557 3,562
Cash held in escrow, end of the period................... 6,953 -- --
Short-term investments, end of the period................ 19,135 -- 1,022
-------- -------- --------
Cash, cash equivalents and short-term investments, end of
the period............................................ $ 30,465 $ 22,557 $ 4,584
======== ======== ========
Supplemental Cash Flow Information:
Interest paid............................................ $ 170 $ 320 $ 347
Property and Equipment acquired under capital lease
obligations........................................... -- $ 176 $ 223
</TABLE>
See accompanying notes.
F-6
<PAGE> 33
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Genelabs Technologies, Inc. ("Genelabs" or the "Company") 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 consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. Investments in which Genelabs holds a 20%-50% ownership
interest are accounted for on the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. It is possible that actual amounts will differ from those
estimates.
Certain items from prior years have been reclassified to conform to the
current year's presentation.
Foreign Currency Translation
The functional currency of the Company's wholly-owned subsidiary, Genelabs
Diagnostics (Pte.) Ltd. ("GLD"), is the Singapore dollar. The functional
currency of the Company's equity investment, Genelabs Biotechnology Ltd.
("GBL"), is the New Taiwan dollar. GLD's assets and liabilities and Genelabs'
investment in GBL are translated at the exchange rate in effect at year end.
GLD's revenue and expenses and the Company's 40% share of GBL's net income or
loss are translated at the average exchange rate for the period. Adjustments
resulting from the translation of financial statements denominated in foreign
currency are reflected as a separate component of shareholders' equity.
Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are held primarily in
demand deposit, money market and custodial accounts with United States and
Singapore banks. Cash equivalents consist of financial investments with
maturities of 90 days or less at time of acquisition that are readily
convertible into cash and have insignificant interest rate risk.
Management determines the appropriate classification of marketable equity
and debt securities at the time of purchase and reevaluates such designation as
of each balance sheet date. As of December 31, 1996 and 1995, all marketable
securities are classified as available-for-sale. These securities are stated at
estimated fair value based upon market quotes. Unrealized gains and losses, when
material, are included in retained earnings. Amortization of premiums and
discounts and realized gains and losses are included in interest income. The
cost of securities sold is based on the specific identification method.
Concentration of Credit Risk
The Company invests funds which are not required for immediate operating
needs principally in a diversified portfolio of debt instruments. The Company
has not experienced any significant losses on its investments.
The Company sells its products primarily to pharmaceutical companies,
clinical laboratories and distributors located in the United States, Europe and
Asia. The Company performs ongoing credit evaluations of its customers, does not
require collateral and provides for potential credit losses at the time of
shipment.
F-7
<PAGE> 34
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
No single customer accounted for 10% or more of total product sales for the
year ended December 31, 1996. For each of the years ended December 31, 1995 and
1994, product sales to one customer represented 10% of total product sales.
Property and Equipment
Property and equipment are stated at cost. Depreciation on equipment,
including equipment under capital leases, is calculated on a straight-line basis
over the estimated useful lives of the assets, generally five years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful lives of the improvements.
Product Sales
Revenue on product sales is recognized upon shipment.
Contract Revenue and Unearned Contract Revenue
Contract revenue consists of revenue from contracts and grants awarded to
the Company by corporations and government agencies which is recognized in
accordance with the terms of the contracts and grants. Advance payments received
upon the signing of certain corporate contracts are recorded as unearned
contract revenue and the related revenue is recognized as earned over the
initial terms of the agreements. Costs related to contract revenue were not
significant in 1996 and 1995. In 1994, costs related to contract revenues were
approximately $4,216,000 and were included in research and development expenses.
Stock Based Compensation
The Company grants stock options at an exercise price equal to the fair
market value of the shares at the date of grant. The Company accounts for
stock-based compensation using the intrinsic value method and, accordingly,
recognizes no compensation expense for stock options granted to employees. In
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), Genelabs has disclosed the
estimated fair value of stock options in Note 10.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
2. INVESTMENT IN GENELABS BIOTECHNOLOGY, LTD.
In November 1995, the Company acquired a 40% ownership interest in a newly
formed company, Genelabs Biotechnology, Ltd., located in Taiwan, Republic of
China. The other investors are the Ministry of Finance of the government of
Taiwan, Republic of China, which has a 35% ownership interest, and private
investors who collectively have a 25% ownership interest. GBL focuses on the
late-stage development, manufacture and commercialization of newly developed or
formulated pharmaceuticals, vaccines and other health care products for the
Asian market.
The total initial capitalization of GBL was $14.6 million in cash, of which
the Company provided $4.8 million. In addition, Genelabs licensed certain
technology to GBL. Both the General Manager and Chairman of the Board of GBL are
employees of the Company. The Company's investment in GBL is accounted for under
the equity method.
F-8
<PAGE> 35
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Summarized financial information for GBL in conformity with U.S. generally
accepted accounting principles, which excludes the value GBL assigned to
technology contributed by Genelabs, is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash and equivalents..................................... $14,000 $14,100
Other assets............................................. 900 400
------- -------
Total assets............................................. $14,900 $14,500
======= =======
Liabilities.............................................. $ 1,000 $ 100
Shareholders' equity..................................... 13,900 14,400
------- -------
Total liabilities and shareholders' equity............... $14,900 $14,500
======= =======
Net (loss)............................................... $ (500) $ (100)
======= =======
</TABLE>
3. AVAILABLE-FOR-SALE SECURITIES
The following table represents the estimated fair value of investment by
category at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
U.S. Treasury securities and obligations of U.S.
government agencies.................................... $13,181 $ --
Corporate debt securities................................ 4,037 --
Asset-backed securities.................................. 3,412 --
Money-market mutual funds................................ 206 21,477
------- -------
$20,836 $21,477
======= =======
Included in cash and cash-equivalents.................... $ 1,701 $21,477
Included in short-term investments....................... 19,135 --
------- -------
$20,836 $21,477
======= =======
</TABLE>
Maturities of securities available-for-sale were as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Due within one year...................................... $10,202 $21,477
Due after one year through two years..................... 10,634 --
------- -------
$20,836 $21,477
======= =======
</TABLE>
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts at December 31, 1996, 1995 and 1994 was
$343,000, $271,000 and $306,000, respectively. In 1996 and 1995, there were
write-offs of $17,000 and $149,000, respectively, and no recoveries. In 1994,
there were write-offs of $316,000 and recoveries of $13,000.
F-9
<PAGE> 36
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. INVENTORIES
Inventories are stated at the lower of cost, as determined on the first-in,
first-out method, or market.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Raw materials.............................................. $2,126 $1,909
Work-in process............................................ 389 167
Finished Goods............................................. 1,020 1,260
------ ------
$3,535 $3,336
====== ======
</TABLE>
6. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Laboratory equipment.................................... $ 4,670 $ 4,984
Leasehold improvements.................................. 4,674 4,496
Office and other equipment.............................. 2,311 2,235
-------- -------
11,655 11,715
Less accumulated depreciation and amortization.......... (10,192) (9,770)
-------- -------
$ 1,463 $ 1,945
======== =======
</TABLE>
7. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In accordance with the terms of its five-year, 10% subordinated convertible
notes payable sold to a group of investors in 1991, the Company paid $2,828,000
upon their maturity in March 1996.
8. LEASE OBLIGATIONS
Operating Lease Obligations
The Company leases its primary office and laboratory facilities under a
noncancelable operating lease, which as amended has a term of five years
expiring November 1997 with a five-year renewal option. The Company is required
to pay certain maintenance expenses in addition to monthly rent. The Company
also leases certain laboratory equipment under other noncancelable operating
leases. GLD leases its office and production facilities under two noncancelable
operating leases, one of which has a three-year term expiring April 1997, the
other has a four-year term expiring March 1999.
At December 31, 1996, future minimum lease payments under all operating
leases with original terms of greater than one year are $1,372,000, $397,000 and
$132,000 in 1997, 1998 and 1999, respectively, for a total of $1,901,000.
Total lease expense was $1,693,000, $1,565,000 and $1,664,000 for 1996,
1995 and 1994, respectively.
Capital Lease Obligations
Laboratory equipment at December 31, 1996 and 1995 includes assets under
capitalized leases of $441,000 and $1,221,000, respectively, with related
accumulated amortization of $397,000 and $475,000, respectively. Future minimum
payments are $178,000, all due in 1997.
F-10
<PAGE> 37
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
In May 1995, the Company authorized and then issued 10,000 shares of Series
A Convertible Preferred Stock to Chiron Corporation ("Chiron") and Johnson &
Johnson ("J&J") for $10.0 million. In May 2000, Chiron and J&J can convert their
convertible preferred stock into Genelabs common stock at the lesser of the fair
market value at the time of conversion or $3.00 per share, but in no event for
more than 49.99% of Genelabs common stock after conversion of the Convertible
Preferred Stock. Alternatively, Chiron and J&J can apply their investment
towards the purchase of up to 49.99% of Genelabs' subsidiary which operates its
diagnostic business and Chiron and J&J will have the option of acquiring the
remainder of this business at fair market value at the time of purchase, subject
to shareholder approval, if required. The convertible preferred stock was issued
in connection with a diagnostics alliance also entered into in May 1995 (see
Note 11). The Series A Convertible Preferred stockholders are entitled to
noncumulative dividends in preference to common stock dividends at the annual
rate of $40 per share, payable quarterly, if declared by the Company's Board of
Directors. No dividends have been declared or paid by the Company. Preferred
stockholders are entitled to one vote for each share of common stock into which
their preferred stock could be converted at the time of voting.
Common Stock
In November 1996, the Company issued 700,000 shares of Common Stock through
a private offering to Veron International Limited ("Veron"), receiving gross
proceeds of $2.8 million. In connection with this offering, the Company agreed
to issue an additional 1,900,000 shares of Common Stock to Veron for gross
proceeds of $7.6 million, which the Company was required to hold in escrow until
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 for this investment
were released to Genelabs and the shares were issued to Veron. Also in
connection with this offering, the Company paid $950,000 to an affiliate of
Veron in commisions and expenses, which include Hart-Scott-Rodino filing and
compliance and legal, accounting, tax and other fees and expenses of Veron and
its affiliates. There were no additional brokerage commisions or fees associated
with this transaction. In February 1997, Ms. Nina K. Wang, the controlling
shareholder of Veron, was elected to the Company's Board of Directors, replacing
Ms. Wang's sister, Dr. Zhongxin M. Gong.
In August 1995, the Company issued 6,500,000 shares of Common Stock through
a private offering to investors in the United States, Europe and Asia for net
proceeds of $19.1 million. Each purchaser of these shares was also eligible to
receive a callable warrant to purchase one-half share of Common Stock for each
share purchased in the offering and held until a specified date. In February
1996, conditions were met allowing the Company to call the warrants, and an
additional 3,168,000 shares of the Company's common stock were issued for net
proceeds of $10.3 million.
Also in August 1995, the Company issued 843,000 shares of Common Stock to
SmithKline Beecham p.1.c. ("SKB") in connection with a research & development
agreement entered into during 1992.
In April 1995, the Company issued 497,000 shares of its Common Stock to the
former shareholders of Diagnostic Biotechnology (Pte.) Ltd. ("DBL"), which was
acquired by Genelabs in 1993. The fair market value of these shares at the time
of their issuance resulted in a charge of $949,000 to in-process research and
development in 1995.
At December 31, 1996 the Company had 36,245,000 shares reserved for future
issues and conversions.
F-11
<PAGE> 38
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK OPTION PLANS
The 1995 Employee Stock Option Plan (the "1995 Plan") provides for the
issuance of incentive stock options and nonqualified stock options to officers,
employees, consultants and independent contractors in amounts determinable by
the Board of Directors. The 1995 Plan replaced the Company's 1985 Employee Stock
Option Plan (the "1985 Plan") which was terminated in 1995. Options granted
under the 1985 Plan before its termination remain outstanding in accordance with
their terms, and no further options were granted under the 1985 Plan after June
1995. Shares of Common Stock remaining available for future grants of stock
options under the 1985 Plan and shares of Common Stock issuable upon exercise or
outstanding pursuant to the 1985 Plan that expire or become unexerciseable for
any reason without having been exercised in full, are available for issuance
under the 1995 Plan. At December 31, 1996, 1,349,000 shares were available for
future grants under the 1995 Plan.
In July 1994 for certain options, and in January 1995 for the remainder,
the Board of Directors adopted resolutions to exchange higher-priced options to
purchase approximately 2,059,000 shares of Common Stock for new options having
an exercise price of $2.625 per share, the fair market value of the Company's
Common Stock on the date of the Board's action in July 1994. The July 1994 and
January 1995 options are included in the granted amount and the old options are
included in the canceled amount in the following table. An extended vesting
schedule was established for the reissued options.
Stock option transactions for the aggregate of the 1995 and 1985 Plans for
the period 1994 through 1996 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED RANGE OF
NUMBER OF AVERAGE EXERCISE
SHARES EXERCISE PRICE PRICES
---------- -------------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1993.................... 2,414,000 $ 5.05 $0.07-$9.00
Granted........................................... 3,006,000 $ 2.83 $2.00-$4.00
Exercised......................................... (21,000) $ 0.49 $0.07-$2.50
Canceled.......................................... (2,530,000) $ 4.84 $0.14-$9.00
--------- ----- -----------
Outstanding at December 31, 1994.................... 2,869,000 $ 2.94 $0.07-$7.06
Granted........................................... 990,000 $ 2.37 $1.41-$4.59
Exercised......................................... (224,000) $ 2.37 $1.25-$2.63
Canceled.......................................... (985,000) $ 3.09 $0.07-$7.06
--------- ----- -----------
Outstanding at December 31, 1995.................... 2,650,000 $ 2.73 $1.25-$7.06
Granted........................................... 951,000 $ 5.95 $3.56-$9.16
Exercised......................................... (716,000) $ 2.36 $1.25-$5.00
Canceled.......................................... (215,000) $ 4.31 $1.25-$7.62
--------- ----- -----------
Outstanding at December 31, 1996.................... 2,670,000 $ 3.85 $1.41-$9.16
========= ===== ===========
</TABLE>
The Directors Stock Option Plan (the "Directors Plan") provides for the
issuance of nonqualified stock options to nonemployee members of the Company's
Board of Directors. As amended, an aggregate of 300,000 shares of the Company's
authorized but unissued Common Stock has been reserved for issuance upon the
exercise of options granted under the Directors Plan. Through December 31, 1996
and 1995, options for 355,000 and 285,000 shares, respectively, had been granted
under the Directors Plan at prices ranging from $1.41 to $9.00 per share.
Through both December 31, 1996 and 1995, options for 20,000 shares granted under
the Directors Plan have been exercised. Through December 31, 1996, options for
140,000 shares were canceled. At December 31, 1996, 85,000 shares were available
for future grants under the Directors Plan.
F-12
<PAGE> 39
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Under the 1995 Plan and the Directors Plan, stock options may not be
granted at prices lower than fair market value at the date of grant. Stock
options issued to date generally vest over periods ranging from two to four
years and expire no later than ten years from the date of grant.
In 1993, the Company granted, outside the above plans, nonqualified stock
options to a director/officer of the Company to purchase 20,000 shares of the
Company's Common Stock. The options have an exercise price of $2.41 per share
and were not exercisable at December 31, 1996.
In 1991, the Company granted, outside of the above plans, nonqualified
stock options to certain directors and officers of the Company to purchase
98,300 shares of Common Stock. These options were issued to replace previously
granted options, were granted with the same exercise prices as the original
options and, inclusive of options already exercised, have a weighted average
exercise price of $2.28 per share. Through December 31, 1996 and 1995, options
for 73,300 and 31,500 shares, respectively, have been exercised. The outstanding
25,000 options were fully exercisable at December 31, 1996.
There were options for 1,317,000 and 915,000 shares excercisable under all
of the Company's stock option plans at December 31, 1995 and 1994, respectively.
Options outstanding and excercisable for 1996 have been segregated into four
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------
OPTIONS WEIGHTED AVERAGE OPTIONS
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- - ----------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1.41 - $2.59 603,000 6.24 $ 1.97 349,000 $ 1.82
$2.63 930,000 7.56 $ 2.63 683,000 $ 2.63
$2.75 - $6.00 706,000 7.39 $ 4.33 269,000 $ 4.16
$6.06 - $9.16 671,000 8.44 $ 6.66 72,000 $ 6.45
----- ---- ----- ---- ----- ------ ---
$1.41 - $9.16 2,910,000 7.45 $ 3.83 1,373,000 $ 2.92
===== ========= ==== ===== =========
</TABLE>
Employee Stock Purchase Plan ("Stock Purchase Plan"):
Employees who meet certain minimum requirements are eligible to participate
in the Company's Stock Purchase Plan, for which there are 500,000 shares of
Common Stock reserved for issuance. Eligible employees may purchase stock at 85%
of the lower of the closing price at the beginning or end of the Stock Purchase
Plan purchase period (six-month periods beginning in January and July). Stock
may be purchased at that same price for up to the 24-month duration of the Stock
Purchase Plan offering period. Annual purchases are limited to the lesser of
$25,000 or 10% of an employee's compensation. Through December 31, 1996 and
1995, 341,000 and 251,000 shares, respectively, had been issued under the Stock
Purchase Plan. In 1996, the Company established the Genelabs Biotechnology, Ltd.
Employee Stock Purchase Plan ("GBL Plan") for eligible employees of the
Company's 40%-owned affiliate, Genelabs Biotechnology, Ltd. The GBL Plan
contains essentially the same terms as the Company's Stock Purchase Plan. There
are 100,000 shares of Common Stock reserved for issuance under the GBL Plan with
no shares issued as of December 31, 1996.
Restricted Stock Award Plan ("Restricted Plan"):
The Company's Restricted Plan provides for the issuance of shares of Common
Stock to employees and consultants who are not officers or directors. As
amended, an aggregate of 300,000 shares of Common Stock are reserved for
issuance under the Restricted Plan. Through December 31, 1996 and 1995, 106,000
and 96,000 shares, respectively, had been issued under the Restricted Plan.
F-13
<PAGE> 40
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
PRO-FORMA DISCLOSURE UNDER SFAS NO. 123. Generally Accepted Accounting
Principles require disclosure of pro forma information regarding net loss and
net loss per share as if the Company had accounted for its stock-based
compensation plans under the fair value method of SFAS No. 123. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and 1995,
respectively: dividend yields of zero; risk-free interest rates of 5.8% and
6.3%; volatility factors of the expected market price of the Company's common
stock of .81; and an expected life of the options of one year subsequent to
vesting.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is the Company's
belief that the existing models do not necessarily provide a reliable single
measure of the fair value of the options granted under the Company's stock-based
compensation plans.
The weighted-average fair value of options granted during 1996 and 1995
were $3.48 and $1.25, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is expensed ratably over the options'
vesting period. Pro forma information for the combined stock-based compensation
plans using the Black-Scholes valuation model is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Pro forma net loss (in thousands)...... $(13,072) $(11,048)
Pro forma net loss per share........... $ (0.37) $ (0.40)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to 1994,
its pro forma effect will not be fully reflected until 1998 since the options
granted by Genelabs generally vest over four years.
Incentive Based Compensation Program
In 1994, the Board of Directors adopted its 1994 Annual & Long-Term
Incentive Based Compensation Program that provides for the issuance of awards to
employees which are paid in a combination of cash and shares of the Common Stock
of the Company. Employees who are directors or officers are not eligible to
receive shares of the Common Stock of the Company. There are 400,000 shares of
Common Stock reserved for issuance under this program and through December 31,
1996, no shares had been issued.
11. COLLABORATIVE AGREEMENTS
To facilitate the development and commercialization of Genelabs' products,
the Company has established a number of strategic alliances with selected market
leaders, universities and research centers. Genelabs' strategy has been to
retain Asian Pacific Rim and certain North American development and marketing
rights to the extent feasible and to license marketing rights in other regions
of the world.
The DuPont Merck Pharmaceutical Company -- Gene-Regulating Drugs. In
December 1996, the Company signed a collaborative research and license agreement
with The DuPont Merck Pharmaceutical Company ("DuPont Merck") to jointly develop
small molecule gene-regulating drugs. The Company and DuPont Merck will jointly
conduct a drug discovery program directed towards a number of target genes. Each
company will have the right to develop or out-license products resulting from a
shared database of compounds and chemistries developed by the collaboration,
although DuPont Merck will have certain exclusive rights to pharmaceutical
products resulting from the collaboration. Under the terms of the agreement, the
Company received an upfront payment and will receive research funding for at
least two years. The Company will also
F-14
<PAGE> 41
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
receive payments for milestones reached for each gene target as well as royalty
payments for each successful product resulting from this collaboration. No
revenue was recognized under this agreement in 1996.
Chiron Corporation and Ortho Diagnostic Systems, Inc. -- HGV. In May 1995,
the Company completed agreements for a worldwide diagnostics alliance with
Chiron and Ortho Diagnostic Systems, Inc. ("Ortho"). Under the terms of the
agreements, the Company has granted Chiron and its partner, Ortho, worldwide,
limited co-exclusive rights to develop and commercialize diagnostic products for
the hepatitis G virus ("HGV"), subject to rights already granted to Boehringer
Mannheim, and certain retained rights of Genelabs in Asia. The agreements
provide for certain revenue payments, including payments for reaching research
and development goals and royalties on sales of licensed HGV products. Genelabs
has also granted to Chiron and Ortho worldwide, non-exclusive, royalty-bearing
rights to commercialize diagnostic products for human T-cell leukemia virus
I/II. Chiron and Ortho have in turn licensed to Genelabs non-exclusive, royalty-
bearing rights in Asia to commercialize certain diagnostic products for the
hepatitis C virus ("HCV"). There was no revenue recognized under these
agreements in 1996 and $6,000,000 was recognized in 1995.
Boehringer Mannheim America Ltd. -- HXV Diagnostics. In May 1993, the
Company entered into a worldwide, limited co-exclusive licensing agreement with
Boehringer Mannheim for hepatitis X virus ("HXV"), including the Company's
discovery of HGV. This agreement provides for the development and
commercialization of diagnostic products except confirmatory tests. This
agreement provides for certain revenue payments, including payments for reaching
certain research and development goals and royalties on sales of licensed HXV
products. Revenue recognized under this agreement was $1,033,000, $0 and
$1,000,000 for 1996, 1995 and 1994, respectively.
SmithKline Beecham p.1.c. -- HEV Vaccine. In August 1992, the Company
entered into a research and development agreement with SKB to develop an HEV
vaccine. The agreement provides for certain revenue payments, including research
and development payments and payments for reaching certain research and
development goals. SKB has exclusive manufacturing and marketing rights
worldwide, except for certain Asian Pacific Rim countries where Genelabs has
retained co-exclusive rights. Should development efforts result in a marketable
product, Genelabs will also receive royalty payments based on SKB's sales of HEV
vaccine products. Revenue recognized under this agreement was $190,000, $889,000
and $1,333,000 in 1996, 1995 and 1994, respectively.
Stanford University -- Lupus. In November 1993, the Company entered into an
exclusive licensing agreement with Stanford University for worldwide rights to
the development, manufacture and sale of dehydroepiandrosterone ("DHEA") for the
treatment of systemic lupus erythematosus ("lupus"). Under this agreement,
Stanford receives milestone payments based on clinical development goals and
will receive royalty payments on sales. A director of Genelabs will also receive
royalties based on sales of DHEA for lupus. In November 1996, Genelabs completed
the clinical portion of a pivotal randomized, double-blind, placebo controlled,
multicenter Phase III human clinical trial of this agent, designated GL701, as a
therapy for lupus. The Company initiated a second pivotal Phase III trial of the
compound in March 1996. The Taiwan, Republic of China, Department of Health has
approved a third pivotal Phase III trial, which GBL commenced in February 1997.
Sanofi Diagnostics Pasteur -- HCV Diagnostic. In February 1990, the Company
entered into a research and development agreement with Sanofi Diagnostics
Pasteur ("SDP") to develop diagnostic tests for HCV. The agreement provides for
certain revenue payments, including payments for certain research and
development costs and for reaching certain research and development goals.
Additionally, the Company granted to SDP a co-exclusive license with the Company
to sell the product in certain countries and an exclusive license to sell the
product in all other countries in consideration for certain royalty payments.
Total revenue recognized under the agreement for the years ended December 31,
1996, 1995 and 1994 was $411,000, $389,000 and $338,000, respectively.
F-15
<PAGE> 42
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $81,000,000 and
$12,000,000, respectively. In addition, the Company has federal and California
research and development tax credit carryforwards of approximately $1,400,000
and $200,000, respectively. The federal net operating loss and federal and
California credit carryforwards expire in various amounts between the years 2000
and 2011. The California net operating loss carryforwards expire in various
amounts between the years 1997 and 2001. Under provisions of the Internal
Revenue Code, as amended in 1986, the availability of the Company's net
operating loss and tax credit carryforwards will be subject to an annual
limitation because of changes in ownership resulting from transactions the
Company entered into in the current and prior fiscal years. To date, no
substantial restriction in the ability to utilize the Company's carryforwards is
anticipated. However, future equity transactions which the Company may enter
into could cause additional ownership changes which may result in substantial
limitation, or expiration, of loss and tax credit carryforwards.
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities for federal and state income taxes as of
December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 27,800 $ 23,400
Research credits..................................... 1,700 1,600
Capitalized research expenditures.................... 1,700 2,000
Other individually immaterial items.................. 2,600 2,500
-------- --------
Total deferred tax assets............................ 33,800 29,500
Valuation allowance for deferred tax assets............ (33,600) (29,400)
-------- --------
Net deferred tax assets.............................. 200 100
Deferred tax liabilities:
Other individually immaterial items.................. (200) (100)
-------- --------
Total net deferred tax assets........................ $ -- $ --
======== ========
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, the valuation
allowance increased by $4,200,000, $1,800,000, and $4,000,000, respectively.
Approximately $1,300,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
F-16
<PAGE> 43
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
13. GEOGRAPHIC OPERATIONS
Information regarding geographic operations for the years ended December
31, 1996, 1995 and 1994 are presented in the table below. Operating loss by
geographic area does not include an allocation of general corporate expenses.
Identifiable assets are those assets that can be directly associated with a
particular geographic location. Asia primarily consists of Singapore, Taiwan,
China, Korea, Thailand and Australia. Europe primarily consists of Switzerland,
Belgium and the Netherlands.
Year ended December 31, 1996:
<TABLE>
<CAPTION>
UNITED STATES ASIA EUROPE ELIMINATIONS TOTAL
------------- ------- ------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues to unaffiliated customers.... $ 3,067 $ 5,069 $5,194 $ -- $ 13,330
Intercompany transfers...................... 655 42 2,498 (3,195) --
Operating income (loss)..................... (12,843) 307 223 -- (12,313)
Identifiable assets......................... 32,260 10,056 1,803 -- 44,119
</TABLE>
Year ended December 31, 1995:
<TABLE>
<CAPTION>
UNITED STATES ASIA EUROPE ELIMINATIONS TOTAL
------------- ------- ------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues to unaffiliated customers.... $ 8,876 $ 3,989 $5,783 $ -- $ 18,648
Intercompany transfers...................... 573 676 3,066 (4,315) --
Operating loss.............................. (9,332) (972) (632) -- (10,936)
Identifiable assets......................... 23,621 10,208 2,369 -- 36,198
</TABLE>
Year ended December 31, 1994:
<TABLE>
<CAPTION>
UNITED STATES ASIA EUROPE ELIMINATIONS TOTAL
------------- ------- ------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues to unaffiliated customers.... $ 6,337 $ 4,105 $5,622 $ -- $ 16,064
Intercompany transfers...................... 2,839 1,853 2,453 (7,145) --
Operating loss.............................. (15,221) (543) (12) -- (15,776)
Identifiable assets......................... 6,056 6,525 2,377 -- 14,958
</TABLE>
Export sales were not material during 1996, 1995 or 1994.
F-17
<PAGE> 1
EXHIBIT 10.03
GENELABS TECHNOLOGIES, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Adopted by the Board of Directors on April 24, 1991) As Amended
February 11, 1994, September 20, 1995
and January 26, 1996
1. ESTABLISHMENT OF PLAN
Genelabs Technologies, Inc. (the "Company") proposes to grant options for
purchase of the Company's Common Stock (an "Offering") to eligible employees of
the Company and its Subsidiaries (as hereinafter defined) pursuant to this
Employee Stock Purchase Plan (this "Plan"). For purposes of this Plan, "Parent
Corporation" and "Subsidiary" (collectively, "Subsidiaries") shall have the same
meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e)
and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code"). The Company intends the Plan to qualify as an "employee stock purchase
plan" under Section 423 of the Code (including any amendments to or replacements
of such Section), and the Plan shall be so construed. Any term not expressly
defined in the Plan but defined for purposes of Section 423 of the Code shall
have the same definition herein. A total of 500,000 shares of the Company's
Common Stock are reserved for issuance under the Plan. Such number shall be
subject to adjustments effected in accordance with Section 14 of the Plan.
2. PURPOSE
The purpose of the Plan is to provide employees of the Company and
Subsidiaries designated by the Board of Directors of the Company (the "Board")
as eligible to participate in the Plan with a convenient means of acquiring an
equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Subsidiaries, and to provide an incentive for continued employment.
3. ADMINISTRATION
This plan may be administered by the Board or a committee appointed by the
Board (the "Committee"). If, at the time the Company registers under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), a majority of
the Board is not comprised of Disinterested Persons as defined in Rule 16b-3(d)
promulgated under the Exchange Act, the Board shall appoint a committee
consisting of not less than three (3) persons (who need not be members of the
Board), each of whom is a Disinterested Person. As used in this Plan, references
to the "Committee" shall mean either such committee or the Board if no committee
has been established. After registration of the Company under the Exchange Act,
Board members who are not Disinterested Persons may not vote on any matters
affecting the administration of this Plan, but any such member may be counted
for determining the existence of a quorum at any meeting of the Board. Subject
to the provisions of the Plan and
- 1 -
<PAGE> 2
the limitations of Section 423 of the Code or any successor provision in the
Code, all questions of interpretation or application of the Plan shall be
determined by the Board and its decisions shall be final and binding upon all
participants. Members of the Board shall receive no compensation for their
services in connection with the administration of the Plan, other than standard
fees as established from time to time by the Board for services rendered by
Board members serving on Board committees. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
4. ELIGIBILITY
Any employee of the Company or the Subsidiaries is eligible to participate
in an Offering Period (as hereinafter defined) under the Plan except the
following:
(a) employees who are not employed by the Company or Subsidiaries
on the fifteenth (15th) day of the month before the beginning of such
Offering Period;
(b) employees who are customarily employed for less than 20 hours
per week;
(c) employees who are customarily employed for less than 5 months
in a calendar year;
(d) employees who, together with any other person whose stock would be
attributed to such employee pursuant to Section 424(d) of the Code, own stock or
hold options to purchase stock or who, as a result of being granted an option
under the Plan with respect to such Offering Period, would own stock or hold
options to purchase stock possessing 5 percent or more of the total combined
voting power or value of all classes of stock of the Company or any of its
Subsidiaries.
5. OFFERING DATES
The Offering Periods of the Plan (the "Offering Period") shall be of
twenty-four (24) months duration commencing on January 2 and July 2 of each year
and ending on July 1 and January 1 of each year. Each Offering Period shall
consist of four (4) six-month purchase periods (individually, a "Purchase
Period") during which payroll deductions of the participants are accumulated
under the Plan. The first business day of each Offering Period is referred to as
the "Offering Date". The last business day of each Offering Period is referred
to as the "Purchase Date". Notwithstanding the foregoing, if the fair market
value of the Company's Common Stock on any Purchase Date is less than it was on
an Offering Date, then the Offering Period (s) for such Offering Date(s) shall
immediately terminate and a new Offering Period shall commence for those
employees participating in such terminated Offerings (See also Section 11(c)
below). The Board shall have the power to change the duration of Offering
Periods or Purchase Periods with respect to offerings without shareholder
approval if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Offering Period or Purchase Period to be
affected.
- 2 -
<PAGE> 3
6. PARTICIPATION IN THE PLAN
Eligible employees may become participants in an Offering Period under the
Plan upon the commencement of the next Purchase Period after satisfying the
eligibility requirements by delivering a subscription agreement to the Company's
or Subsidiary's (whichever employs such employee) Treasury Department (the
"Treasury Department") not later than the 15th day of the month before such
Purchase Period begins unless a later time for filing the subscription agreement
authorizing payroll deductions is set by the Board for all eligible employees
with respect to a given Purchase Period. An eligible employee who does not
deliver a subscription agreement to the Treasury Department by such date after
becoming eligible to participate in such Purchase Period shall not participate
in that Purchase Period or any subsequent Purchase Period unless such employee
enrolls in the Plan by filing a subscription agreement with the Treasury
Department not later than the 15th day of the month preceding the beginning of a
subsequent Purchase Period. Once an employee becomes a participant in a Purchase
Period, such employee will automatically participate in the next Purchase Period
unless the employee withdraws from the Plan or terminates further participation
in the Purchase Period as set forth in Section 11 below. Such participant is not
required to file any additional subscription agreement in order to continue
participation in the Plan.
7. GRANT OF OPTION ON ENROLLMENT
Enrollment by an eligible employee in the Plan with respect to an Offering
Period will constitute the grant (as of the Offering Date) by the Company to
such employee of an option to purchase on the Purchase Date up to that number of
shares of Common Stock of the Company determined by dividing the amount
accumulated in such employee's payroll deduction account during such Purchase
Period by the lower of (i) eighty-five percent (85%) of the fair market value of
a share of the Company's Common Stock on the Offering Date (the "Entry Price")
or (ii) eighty-five percent (85%) of the fair market value of a share of the
Company's Common Stock on the Purchase Date; provided, however, that the number
of shares of the Company's Common Stock subject to any option granted pursuant
to this Plan shall not exceed the lesser of (a) the maximum number of shares set
by the Board pursuant to Section 10(c) below with respect to the applicable
Purchase Period, or (b) the maximum number of shares which may be purchased
pursuant to Section 10(b) below with respect to the applicable Purchase Period.
Fair market value of a share of the Company's Common Stock shall be determined
as provided in Section 8 hereof.
8. PURCHASE PRICE
The purchase price per share at which a share of Common Stock will be sold
during any Offering Period shall be 85 percent of the lesser of:
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date.
- 3 -
<PAGE> 4
For purposes of the Plan, the term "fair market value" on a given date
shall mean the closing price from the previous day's trading of a share of the
Company's Common Stock as reported on The Nasdaq National Market.
9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF
SHARES
(a) The purchase price of the shares is accumulated by regular payroll
deductions made during each Purchase Period. The deductions are made as a
percentage of the participant's compensation in one percent increments not less
than 2 percent nor greater than 10 percent, not to exceed $25,000 per year or
such other limit set by the Committee. Compensation shall mean all W-2
compensation, including, but not limited to base salary, wages, commissions,
overtime, shift premiums and bonuses, plus draws against commissions; provided,
however, that for purposes of determining a participant's compensation, any
election by such participant to reduce his or her regular cash remuneration
under Sections 125 or 401(k) of the Code shall be treated as if the participant
did not make such election. Payroll deductions shall commence on the first
payday following the Offering Date and shall continue to the end of the Purchase
Period unless sooner altered or terminated as provided in the Plan.
(b) A participant may lower (but not increase) the rate of payroll
deductions during a Purchase Period by filing with the Treasury Department a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing more than 15 days after the
Treasury Department's receipt of the authorization and shall continue for the
remainder of the Purchase Period unless changed as described below. Such change
in the rate of payroll deductions may be made at any time during a Purchase
Period, but not more than one change may be made effective during any Purchase
Period. A participant may increase or decrease the rate of payroll deductions
for any subsequent Purchase Period by filing with the Treasury Department a new
authorization for payroll deductions not later than the 15th day of the month
before the beginning of such Purchase Period. An increase or decrease in your
payroll deduction does not start a new Offering Period.
(c) All payroll deductions made for a participant are credited to his or
her account under the Plan and are deposited with the general funds of the
Company. No interest accrues on the payroll deductions. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purposes, and the Company shall not be obligated to segregate such payroll
deductions.
(d) On each Purchase Date, so long as the Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the participant
wishes to withdraw from that Purchase Period under the Plan and have all payroll
deductions accumulated in the account maintained on behalf of the participant as
of that date returned to the participant, the Company shall apply the funds then
in the participant's account to the purchase of whole shares of Common
- 4 -
<PAGE> 5
Stock reserved under the option granted to such participant with respect to the
Purchase Period to the extent that such option is exercisable on the Purchase
Date. The purchase price per share shall be as specified in Section 8 of the
Plan. Any cash remaining in a participant's account after such purchase of
shares shall be refunded to such participant in cash, without interest;
provided, however, that any amount remaining in such participant's account on a
Purchase Date which is less than the amount necessary to purchase a full share
of Common Stock of the Company shall be carried forward, without interest, into
the next Purchase Period. In the event that the Plan has been oversubscribed,
all funds not used to purchase shares on the Purchase Date shall be returned to
the participant, without interest. No Common Stock shall be purchased on a
Purchase Date on behalf of any employee whose participation in the Plan has
terminated prior to such Purchase Date.
(e) As promptly as practicable after the Purchase Date, the Company shall
arrange the delivery to each participant of a certificate representing the
shares purchased upon exercise of his option; provided that the Board may
deliver certificates to a broker or brokers that hold such certificate in a
street name for the benefit of each such participant.
(f) During a participant's lifetime, such participant's option to purchase
shares hereunder is exercisable only by him or her. The participant will have no
interest or voting right in shares covered by his or her option until such
option has been exercised. Shares to be delivered to a participant under the
Plan will be registered in the name of the participant or in the name of the
participant and his or her spouse.
10. LIMITATIONS ON SHARES TO BE PURCHASED
(a) No employee shall be entitled to purchase stock under the Plan at a
rate which, when aggregated with his or her rights to purchase stock under all
other employee stock purchase plans of the Company or any Subsidiary, exceeds
$25,000 in fair market value, determined as of the Offering Date (or such other
limit as may be imposed by the Code) for each calendar year in which the
employee participates in the Plan.
(b) No more than 200% of the number of shares determined by using 85% of
the fair market value of a share of the Company's Common Stock on the Offering
Date as the denominator may be purchased by a participant on any single Purchase
Date.
(c) No employee shall be entitled to purchase more than the Maximum Share
Amount (as defined below) on any single Purchase Date. Not less than thirty days
prior to the commencement of any Purchase Period, the Board may, in its sole
discretion, set a maximum number of shares which may be purchased by any
employee at any single Purchase Date (hereinafter the "Maximum Share Amount").
In no event shall the Maximum Share Amount exceed the amounts permitted under
Section 10(b) above. If a new Maximum Share Amount is set, then all participants
must be notified of such Maximum Share Amount not less than fifteen days prior
to the commencement of the next Purchase Period. Once the Maximum Share Amount
is set, it shall continue to apply with respect to all succeeding Purchase Dates
and Purchase Periods unless revised by the Board as set forth above.
- 5 -
<PAGE> 6
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in the Plan exceeds the number of shares then available
for issuance under the Plan, the Company will make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the Board
shall determine to be equitable. In such event, the Company shall give written
notice of such reduction of the number of shares to be purchased under a
participant's option to each participant affected thereby.
(e) Any payroll deductions accumulated in a participant's account which
are not used to purchase stock due to the limitations in this Section 10 shall
be returned to the participant as soon as practicable after the end of the
Purchase Period, without interest.
11. WITHDRAWAL
(a) Each participant may withdraw from a Purchase Period under the Plan by
signing and delivering to the Treasury Department notice on a form provided for
such purpose. Such withdrawal may be elected at any time at least 15 days prior
to the end of a Purchase Period.
(b) Upon withdrawal from the Plan, the accumulated payroll deductions
shall be returned to the withdrawn participant, without interest, and his or her
interest in the Plan shall terminate. In the event a participant voluntarily
elects to withdraw from the Plan, he or she may not resume his or her
participation in the Plan during the same Purchase Period, but he or she may
participate in any Purchase Period under the Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth above for initial participation in
the Plan.
(c) For an Offering Period in which a participant is enrolled, if the fair
market value of the Company's Common Stock on the Purchase Date is less than it
was on the Offering Date, the Company will automatically enroll such participant
in the subsequent Offering Period. A participant does not need to file any forms
with the Company to automatically be enrolled in the subsequent Offering Period.
12. TERMINATION OF EMPLOYMENT
Termination of a participant's employment for any reason, including
retirement, death or the failure of a participant to remain an eligible
employee, immediately terminates his or her participation in the Plan. In such
event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company in the case of sick leave, military leave, or
any other leave of absence approved by the Board; provided that such leave is
for a period of not more than ninety (90) days or reemployment upon the
expiration of such leave is guaranteed by contract or statute.
- 6 -
<PAGE> 7
13. RETURN OF PAYROLL DEDUCTIONS
In the event a participant's interest in the Plan is terminated by
withdrawal, termination of employment or otherwise, or in the event the Plan is
terminated by the Board, the Company shall promptly deliver to the participant
all payroll deductions credited to his account. No interest shall accrue on the
payroll deductions of a participant in the Plan.
14. CAPITAL CHANGES
Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each option under the Plan which has
not yet been exercised and the number of shares of Common Stock which have been
authorized for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split or the payment of a stock
dividend (but only on the Common Stock) or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company,
the Purchase Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that the options
under the Plan shall terminate as of a date fixed by the Board and give each
participant the right to exercise his or her option as to all of the optioned
stock, including shares which would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, each option under
the Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the participant shall have the right to
exercise the option as to all of the optioned stock. If the Board makes an
option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the participant that the option
shall be fully exercisable for a period of twenty (20) days from the date of
such notice, and the option will terminate upon the expiration of such period.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered
- 7 -
<PAGE> 8
by each outstanding option, in the event that the Company effects one or more
reorganizations, recapitalizations, rights offerings or other increases or
reductions of shares of its outstanding Common Stock, or in the event of the
Company being consolidated with or merged into any other corporation.
15. NONASSIGNABILITY
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an option or to receive shares under the
Plan may be assigned, transferred, pledged or otherwise disposed of in any way
(other than by will, the laws of descent and distribution or as provided in
Section 22 hereof) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect.
16. REPORTS
Individual accounts will be maintained for each participant in the Plan.
Each participant shall receive promptly after the end of each Purchase Period a
report of his account setting forth the total payroll deductions accumulated,
the number of shares purchased, the per share price thereof and the remaining
cash balance, if any, carried forward to the next Purchase Period.
17. NOTICE OF DISPOSITION
Each participant shall notify the Company if the participant disposes of
any of the shares purchased in any Purchase Period pursuant to this Plan if such
disposition occurs within two years from the Offering Date or within one year
from the Purchase Date on which such shares were purchased (the "Notice
Period"). Unless such participant is disposing of any of such shares during the
Notice Period, such participant shall keep the certificates representing such
shares in his or her name (and not in the name of a nominee) during the Notice
Period. The Company may, at any time during the Notice Period, place a legend or
legends on any certificate representing shares acquired pursuant to the Plan
requesting the Company's transfer agent to notify the Company of any transfer of
the shares. The obligation of the participant to provide such notice shall
continue notwithstanding the placement of any such legend on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT
Neither this Plan nor the grant of any option hereunder shall confer any
right on any employee to remain in the employ of the Company or any Subsidiary,
or restrict the right of the Company or any Subsidiary to terminate such
employee's employment.
19. EQUAL RIGHTS AND PRIVILEGES
All eligible employees shall have equal rights and privileges with respect
to the Plan so that the Plan qualifies as an "employee stock purchase plan"
within the meaning of Section 423 or any successor provision of the Code and the
related regulations. Any provision of the
- 8 -
<PAGE> 9
Plan which is inconsistent with Section 423 or any successor provision of the
Code shall, without further act or amendment by the Company or the Board, be
reformed to comply with the requirements of Section 423. This Section 19 shall
take precedence over all other provisions in the Plan.
20. NOTICES
All notices or other communications by a participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
21. SHAREHOLDER APPROVAL OF AMENDMENTS
Any required approval by the shareholders of the Company shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act,
and the rules and regulations promulgated thereunder. Such approval of an
amendment shall be solicited at or prior to the first annual meeting of
shareholders held subsequent to the grant of an option under the Plan to an
employee of the Company. If such shareholder approval is obtained at a duly held
shareholders' meeting, it must be obtained by a majority of all of the
outstanding shares of the Company, or if such shareholder approval is obtained
by written consent, it must be obtained by a majority of all shareholders of the
Company; provided, however, that approval at a meeting or by written consent may
be obtained by a lesser degree of shareholder approval if the Board determines,
in its discretion after consultation with the Company's legal counsel, that such
lesser degree of shareholder approval will comply with all applicable laws and
will not adversely affect the qualification of the Plan under Section 423 of the
Code or Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3").
22. DESIGNATION OF BENEFICIARY
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares or
cash to the executor or administrator of the estate of the participant, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
- 9 -
<PAGE> 10
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES
Shares shall not be issued with respect to an option unless the exercise
of such option and the issuance and delivery of such shares pursuant thereto
shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
24. APPLICABLE LAW
The Plan shall be governed by the substantive laws (excluding the conflict
of laws rules) of the State of California.
25. AMENDMENT OR TERMINATION OF THE PLAN
This Plan shall be effective July 1, 1991, subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted by the Board and the Plan shall continue until the earlier to occur of
termination by the Board, issuance of all of the shares of Common Stock reserved
for issuance under the Plan, or ten (10) years from the adoption of the Plan by
the Board. No purchase of shares pursuant to the Plan shall occur prior to such
shareholder approval. The Board may at any time amend or terminate the Plan,
except that any such termination cannot affect options previously granted under
the Plan, nor may any amendment make any change in an option previously granted
which would adversely affect the right of any participant, nor may any amendment
be made without approval of the shareholders of the Company obtained in
accordance with Section 21 hereof within 12 months of the adoption of such
amendment (or earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under the
Plan;
(b) change the designation of the employees (or class of
employees) eligible for participation in the Plan; or
(c) constitute an amendment for which shareholder approval is required in
order to comply with Rule 16b-3 (or any successor rule) of the Exchange Act.
- 10 -
<PAGE> 1
EXHIBIT 10.15
AGREEMENT
This Agreement is made as of the 26th day of January, 1996 between Genelabs
technologies, Inc., a California corporation with its principal place of
business at 505 Penobscot Drive, Redwood City, California 94063 ("Genelabs") and
Dr. Edgar G. Engleman, an individual, whose residence is 60 Lane Place,
Atherton, California 94025 ("Engleman").
RECITALS
A. Engleman is a member of the Board of Directors of Genelabs,
Chairman of the Scientific Advisory Board of Genelabs and a
consultant to Genelabs.
B. In his capacity as a consultant to Genelabs, Engleman has
identified as a potential commercial opportunity for Genelabs the
use of a compound known as dehydroepiandrosterone ("DHEA") in the
treatment of systemic lupus erythematosus ("SLE"), a disease that
can inflame and damage the connective tissue in various parts of
the human body.
C. Engleman has assisted Genelabs in obtaining from Stanford
University a license to certain rights and clinical data relating
to the use of DHEA in the treatment of SLE.
D. Genelabs is in the process of clinical testing and development for
DHEA for the treatment of SLE, and intends to commercialize a
therapeutic product using DHEA for the treatment of SLE.
E. With the approval of a majority of its Board of Directors other
than Engleman (who abstained with respect of this matter), Genelabs
has agreed to compensate Engleman for his identification of the
application of DHEA to SLE and for his assistance in obtaining the
rights referred to above, as set forth in this Agreement.
NOW, THEREFORE, Genelabs and Engleman agree as follows:
1. Fees. In the event that Genelabs or any licensee of Genelabs sells
any product that incorporates DHEA for the treatment of SLE (a
"Product"), Genelabs will pay fees to Engleman, subject to the
terms of this Agreement, as follows:
(a) a fee equal to [ * ] of the Net Sales of Products by
Genelabs or any affiliate of Genelabs during the term of
this Agreement; and
(b) a fee equal to the lesser of (i) [ * ] of the Net Sales of
Products by any licensee that is not an affiliate of
Genelabs or (ii) [ * ] of the amounts actually received by
Genelabs with respect to the Net Sales of Products by such
licensee, during the term of this Agreement.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
1
<PAGE> 2
The term of this Agreement shall expire upon the seventeenth (17th) annual
anniversary of the first commercial sale of a Product made by Genelabs or a
licensee, after which Genelabs will have no further obligations to Engleman
under this Agreement except for payment of any amounts then due hereunder.
For purposes of this Section, an "affiliate" means any corporation or other
business entity that is controlled by Genelabs, where "control" means ownership
of a majority of the equity interests or the power to elect a majority of the
directors or other members of the governing body of the entity.
2. Determination of Net Sales.
(a) Net Sales. As used in this agreement, "Net Sales" or any
Product will mean the aggregate worldwide gross revenues
that are recognized and actually received by Genelabs, its
affiliates or its licensees from or on account of the sale
of Products to independent third parties, less (i)
reasonable credits or allowances, if any, actually granted
on account of, and reasonably allocable to, Products,
based on price adjustments, discounts or rebates to such
independent third parties, (ii) reasonable credits or
allowances, if any, actually granted on account of
recalls, rejection or return of Products previously sold,
(iii) excises, sales taxes, consumption taxes, duties or
other taxes imposed upon and paid with respect to such
sales (excluding income or franchise taxes of any kind)
and (iv) separately itemized transportation and insurance
costs incurred in shipping Products to such independent
third parties.
(b) Exclusions. Net Sales will not include any revenues
received by any licensee of Genelabs with respect to
Products manufactured by such licensee and transferred to
Genelabs for resale of Genelabs but will include revenues
from resale by Genelabs. No transfer of Products solely
for experimental purposes or as samples will be considered
a sale for purposes of determining Net Sales.
(c) Products Sold in Combination. If Genelabs or any of its
affiliates or licensees sells Products together with other
products to independent third parties at a combined price,
then the Net Sales for the Product will be to the average
price for "arms length" sales of Products sold separately
during the fee reporting period in which such sales occur.
3. Reports and Payments. Genelabs will deliver to Engleman within 45
days after the end of each calendar quarter a written report
showing its computation of fees due under this Agreement and with
respect to (a) Net Sales made by Genelabs or its affiliates during
such calendar quarter and (b) payments received by Genelabs or its
affiliates from licensees that are not affiliates of Genelabs
during such quarter with respect to Net Sales by such licensees.
4. Inspection of Records. Genelabs will keep, and will require its
affiliates and licensees to keep, complete and accurate books and
records necessary to verify the Net Sales of Products and the
payment of fees hereunder. During the term that fees are payable
under this Agreement and for one year after the date of the last
fee payment, Engleman will have the right at his expense to have an
independent auditor inspect such books
2
<PAGE> 3
and records at reasonable times and upon reasonable notice, but not
more often than once each calendar year. If such inspection reveals
an underpayment by Genelabs of more than 5% of the fees determined
by such inspection to be due for the period inspected, Genelabs
will pay the reasonable fees and expenses for such auditor for such
inspection. Neither Engleman nor the auditor will disclose the Net
Sales of Products to any third party except as may be necessary to
enforce Engleman's rights to receive fees under this Agreement.
5. General.
(a) Governing Law. This Agreement will be governed by and
enforced in accordance with the laws of the State of
California.
(b) Notices. Any notice or report required or permitted to be
given hereunder shall be given in writing and deemed
sufficient if sent by first class mail or hand delivered
to the respective party at the address set forth on the
first page of this Agreement, or any subsequent address
provided by notice hereunder. Any such notice or report
given by mail shall be deemed to have been given when
mailed.
(c) Assignment. This Agreement shall be assignable by Genelabs
to any third party to which Genelabs assigns substantially
all of its rights to make, use and sell Products in the
treatment of SLE, provided that the third party expressly
assumes all of Genelabs' obligations hereunder and
Genelabs remains responsible for all obligations of the
third party hereunder. Genelabs may license any affiliate
or third party to make, use or sell Products, subject to
the payment of fees under this Agreement. The rights to
receive payment hereunder may be assignable by Engleman to
the Engleman Family Trust.
(d) Arbitration. Any dispute, controversy or claim arising out
of or relating to this Agreement, or the breach thereof,
shall be settled by arbitration in San Mateo County,
California, in accordance with the rules of the American
Arbitration Association then in effect, and the prevailing
party shall be awarded such party's costs and expenses,
including reasonable attorneys' fees. Judgment upon the
award of the arbitrator(s) may be entered in any court
having jurisdiction thereof.
(e) Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the
subject matter hereof and supersedes all previous
negotiations, representations and understandings between
the parties with respect thereto. No waiver or amendment
of any of the provisions hereof shall be effective unless
made in writing and signed by both parties.
(f) Waiver. The waiver by either party of a breach of any
provision of this Agreement by the other party will not be
construed as a waiver of any succeeding breach of the same
or any other provision.
3
<PAGE> 4
(g) Severability. Should any part of this Agreement be held
unenforceable, the unenforceable part of this Agreement
shall be replaced with a provision that accomplishes, to
the extent possible, the original purpose of the
unenforceable provision, and the remainder of the
Agreement will remain in effect.
GENELABS: ENGLEMAN:
GENELABS TECHNOLOGIES, INC.
By: /s/ Irene Chow By: /s/ Edgar G. Engleman
-------------- ---------------------
Irene Chow, Ph.D. Edgar G. Engleman, M.D.
President & CEO
4
<PAGE> 1
EXHIBIT 10.16
AGREEMENT
Effective as of October 1, 1993 ("Effective Date"), THE BOARD OF TRUSTEES OF THE
LELAND STANFORD JUNIOR UNIVERSITY, a body having corporate powers under the laws
of the State of California ("STANFORD"), and Genelabs Technologies, Inc. and its
Affiliates, a California corporation having a principal place of business at 505
Penobscot Drive, Redwood City, California 94063 ("LICENSEE"), agree as follows:
1. BACKGROUND
1.1 STANFORD has an assignment of "Use of Dehydroepiandrosterone (DHEA) in
the Medical Treatment of Systemic Lupus Erythematosus (SLE)" from the
laboratory of Dr. James L. McGuire ("Invention[s]"), as described in
Stanford Docket S92-148, and any Licensed Patent(s), as hereinafter
defined, which may issue to such Invention(s).
1.2 STANFORD has certain technical data and information as herein defined
("Technology") pertaining to Invention(s).
1.3 STANFORD desires to have the Technology and Invention(s) perfected and
marketed at the earliest possible time in order that products resulting
therefrom may be available for public use and benefit.
1.4 LICENSEE desires a license under said Technology, Invention(s), and
Licensed Patent(s) to develop, manufacture, use, and sell Licensed
Product(s) in the field of use of treatment of SLE in humans.
2. DEFINITIONS
2.1 "Licensed Patent(s)" means any Letters Patent issued upon STANFORD's
U.S. Patent Application, Serial Number 07/958,911 filed October 9,
1992, and/or any divisions, continuations, continuations-in-part or
reissues thereof, and/or any foreign patents corresponding thereto.
2.2 "Technology" means (a) existing technical data and information,
including but not limited to the information contained in the Patent
Application, pertaining to the Invention(s) and provided to the
LICENSEE whether or not it is of a confidential nature, and (b)
existing preclinical and clinical data relating to the Invention(s),
and provided to the LICENSEE.
2.3 "Licensed Product(s)" means any product or part thereof in the Licensed
Field of Use, the manufacture, use, or sale of which:
(a) Is covered by a valid claim of an issued, unexpired Licensed
Patent(s) directed to the Invention(s). A claim of an issued,
unexpired Licensed Patent(s) shall be presumed to be valid
unless and until it has been held to be invalid by a final
judgment of a court of competent jurisdiction from which no
appeal can be or is taken;
<PAGE> 2
(b) Is covered by any claim being prosecuted in a pending
application directed to the Invention(s); or
(c) Incorporates any of the Technology.
2.4 "Net Sales" means the gross revenue derived by LICENSEE and/or
sublicensee(s) from Licensed Product(s), less the following items but
only insofar as they actually pertain to the disposition of such
Licensed Product(s) by LICENSEE or sublicensee(s), are included in such
gross revenue, and are actually credited or granted to customers:
(a) Import, export, excise and sales taxes, and custom duties;
(b) Credit for returns, allowances, or trades, and
(c) Discounts and rebates
2.5 "Licensed Field of Use" means therapeutic use for treatment of Systemic
Lupus Erythematosus.
2.6 "Licensed Territory" means the entire world.
2.7 "Exclusive" means that, subject to Article 4, STANFORD shall not grant
further licenses in the Licensed Territory in the Licensed Field of
Use.
2.8 "Date of FDA Approval" means the date of final written notification by
the U.S. Food and Drug Administration ("FDA") of its approval of the
Licensed Product(s) (including the labeling therefor) that authorizes
marketing thereof for the treatment of SLE.
2.9 "Affiliates" means any corporation, firm, partnership or other entity,
whether de jure or de facto, which directly or indirectly owns, is
owned by or is under common ownership with a party to this Agreement to
the extent of at least fifty percent (50%) of the equity (or such
lesser percentage which is the maximum allowed to be owned by a foreign
corporation in a particular jurisdiction) having the power to vote on
or direct the affairs of the entity and any person, firm partnership,
corporation or other entity actually controlled by, controlling or
under common control with a party to this Agreement.
3. GRANT
3.1 STANFORD hereby grants and LICENSEE hereby accepts a license in the
Licensed Field of Use to make, use, and sell Licensed Product(s) in the
Licensed Territory.
3.2 Said license is Exclusive, including the right to sublicense pursuant
to Article 13, in the Licensed Field of Use for a term commencing as of
Effective Date and ending, in each country, 7 years from the date of
first commercial sale of a Licensed Product(s) by LICENSEE or
sublicensee(s) in such country; LICENSEE agrees to promptly inform
STANFORD in writing of the date of first commercial sale. Thereafter,
said license shall be nonexclusive until
2
<PAGE> 3
expiration of the last to expire of Licensed Patent(s). Within one year
prior to the end of the Exclusive period STANFORD agrees to consider
extending the Exclusive term herein defined upon request by LICENSEE,
and if such extension is not in conflict with STANFORD policy or
regulations.
4. GOVERNMENT RIGHTS
This Agreement may be subject to all of the terms and conditions of Title 35
United States Code Sections 200 through 204, including an obligation that
Licensed Product(s) sold or produced in the United States be "manufactured
substantially in the United States," and LICENSEE agrees to take all reasonable
action necessary on its part as licensee to enable STANFORD to satisfy its
obligation thereunder, if any, relating to Invention(s).
5. DILIGENCE
5.1 As an inducement to STANFORD to enter into this Agreement, LICENSEE
agrees to use all reasonable efforts and diligence to proceed with the
development, manufacture, and sale or lease of Licensed Product(s) and
to diligently develop markets for the Licensed Product(s). Unless
LICENSEE has initiated Phase II clinical trials by January 1, 1996,
STANFORD may terminate this Agreement if LICENSEE or a sublicensee has
not sold Licensed Product(s) for a period of one (1) year commencing as
of the Date of FDA Approval of a Licensed Product.
5.2 Progress Report -- Commencing September 1, 1994, on or before September
1 of each year until LICENSEE markets a Licensed Product(s), LICENSEE
shall make a written annual report to STANFORD covering the preceding
year ending June 30, regarding the progress of LICENSEE toward
commercial use of Licensed Product(s). Such report shall include, as a
minimum, information sufficient to enable STANFORD to satisfy any
reporting requirements of the U.S. Government and for STANFORD to
ascertain progress by LICENSEE toward meeting the diligence
requirements of this Article 5.
6. ROYALTIES
6.1 LICENSEE agrees to pay to STANFORD a noncreditable, nonrefundable
license issue royalty of Twenty Thousand Dollars ($ 20,000) upon
signing this Agreement.
6.2 Beginning September 1, 1994 and each September 1 thereafter, LICENSEE
also shall pay to STANFORD a yearly royalty of Five Thousand Dollars
($5,000). Said yearly royalty payments are nonrefundable but they are
creditable against earned royalties to the extent provided in Paragraph
6.5.
6.3 (A) LICENSEE shall pay STANFORD earned royalties of [ * ] on Net Sales
in countries where a Licensed Patent(s) has issued and LICENSEE (or a
sublicensee), by its activities would, but for the license granted
herein, infringe a valid claim of an unexpired Licensed Patent(s) of
STANFORD covering said activity.
(B) LICENSEE shall pay STANFORD earned royalties of [ * ] on Net Sales
in countries where a Licensed Patent(s) has not issued and its
activities (or those of any sublicensees) do not infringe a valid claim
of an unexpired Licensed Patent(s), provided,
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
3
<PAGE> 4
however, that such royalties shall be reduced to [ * ] with
respect to Net Sales in any country where a third party (other than a
sublicensee) is selling a DHEA-containing product and the product is
being used for the treatment of SLE.
6.4 LICENSEE shall pay STANFORD milestone payments according to the
following schedule:
<TABLE>
<S> <C>
Issuance of Licensed Patent $ 20,000
Initiation of Phase III clinical trials $ 50,000
or January 1, 1998, whichever occurs first
Date of FDA Approval $100,000
</TABLE>
6.5 Creditable payments under this Agreement shall be an offset to LICENSEE
against up to fifty percent (50%) of each earned royalty payment which
LICENSEE would be required to pay pursuant to Paragraph 6.3 until the
entire credit is exhausted.
6.6 (A) If this Agreement is not terminated in accordance with other
provisions hereof, LICENSEE's obligation to pay royalties under
Subsection 6.3 (A) in a country of the Licensed Territory shall
continue for so long as LICENSEE, by its activities in such country
would, but for the license granted herein, infringe a valid claim of an
unexpired Licensed Patent(s) of STANFORD covering said activity.
(B) If this Agreement is not terminated in accordance with other
provisions hereof, LICENSEE's obligation to pay royalties under
Subsection 6.3 (B) shall continue during the Exclusive period set
forth in Section 3.2.
6.7 The royalty on sales in currencies other than U.S. Dollars shall be
calculated using the appropriate foreign exchange rate for such
currency quoted by the Bank of America (San Francisco) foreign exchange
desk, on the close of business on the last banking day of each calendar
quarter. Royalty payments to STANFORD shall be in U.S. Dollars. All
non-U.S. taxes related to royalty payments shall be paid by LICENSEE
and are not deductible from the payments due STANFORD.
6.8 Within thirty (30) days after receipt of a statement from STANFORD,
LICENSEE shall reimburse STANFORD for all costs incurred by STANFORD
during the Exclusive period and including those costs incurred prior to
the Effective Date, in connection with the preparation, filing and
prosecution of all patent applications and maintenance of patents
corresponding to the Invention(s).
6.9 If LICENSEE makes payment to one or more third parties under
patent(s)/patent applications and/or know-how which LICENSEE reasonably
believes cover a particular Licensed Product as defined in Paragraph
2.3 hereunder (and which do not cover apparatus used to manufacture the
Licensed Product), the royalty rate specified in Paragraph 6.3 above
shall be subject to reduction. [ * ]. [ * ] [ * ] . The obligations of
STANFORD to reduce its royalties under this paragraph shall be subject
to receipt by STANFORD from LICENSEE of adequate evidence of the
payment obligation of such royalties by LICENSEE to such unaffiliated
third parties, including the identity of such parties.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
4
<PAGE> 5
7. ROYALTY REPORTS, PAYMENTS, AND ACCOUNTING
7.1 Quarterly Earned Royalty Payment and Report -- Beginning with the first
sale of a Licensed Product, LICENSEE shall make written reports (even
if there are no sales) and earned royalty payments to STANFORD within
thirty (30) days after the end of each calendar quarter. This report
shall state the number, description, and aggregate Net Sales of
Licensed Product(s) during such completed calendar quarter, and
resulting calculation pursuant to Paragraph 6.3 of earned royalty
payment due STANFORD for such completed calendar quarter. Concurrent
with the making of each such report, LICENSEE shall include payment due
STANFORD of royalties for the calendar quarter covered by such report.
7.2 Accounting -- LICENSEE agrees to keep and maintain records for a period
of three (3) years showing the manufacture, sale, use, and other
disposition of products sold or otherwise disposed of under the license
herein granted. Such records will include general ledger records
showing cash receipts and expenses, and records which include
production records, customers, serial numbers and related information
in sufficient detail to enable the royalties payable hereunder by
LICENSEE to be determined. LICENSEE further agrees to permit its books
and records to be examined by STANFORD from time to time to the extent
necessary to verify reports provided for in Paragraph 7.1. Such
examination is to be made by STANFORD or its designee (acceptable to
LICENSEE), at the expense of STANFORD, except in the event that the
results of the audit reveal an underreporting of royalties due STANFORD
of five percent (5%) or more, then the audit costs shall be paid by
LICENSEE.
8. NEGATION OF WARRANTIES
8.1 Nothing in this Agreement is or shall be construed as:
(a) A warranty or representation by STANFORD as to the validity or
scope of any Licensed Patent(s);
(b) A warranty or representation that anything made, used, sold,
or otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents,
copyrights, and other rights of third parties;
(c) An obligation to bring or prosecute actions or suits against
third parties for infringement, except to the extent and in
the circumstances described in Article 12;
(d) Granting by implication, estoppel, or otherwise any licenses
or rights under patents or other rights of STANFORD or other
persons other than Licensed Patent(s), regardless of whether
such patents or other rights are dominant or subordinate to
any Licensed Patent(s); or
(e) An obligation to furnish any technology or technological
information other than the Technology.
8.2 Except as expressly set forth in this Agreement, STANFORD MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS
OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE
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USE OF THE LICENSED PRODUCT(S) WILL NOT INFRINGE ANY PATENT,
COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED
WARRANTIES.
8.3 LICENSEE agrees that nothing in this Agreement grants LICENSEE any
express or implied license or right under or to:
(a) U.S. Patent No. 4,237,224, "Process for Producing Biologically
Functional Molecular Chimeras," U.S. Patent No. 4,468,464 and
U.S. Patent No. 4,740,470, both entitled, "Biologically
Functional Molecular Chimeras" (collectively known as the
Cohen/Boyer patents) or reissues thereof; or
(b) U.S. Patent 4,656,134 "Amplification of Eucaryotic Genes" or
any patent application corresponding thereto.
9. INDEMNITY
9.1 LICENSEE agrees to indemnify, hold harmless, and defend STANFORD and
Stanford University Hospital and their respective trustees, officers,
employees, students, and agents against any and all claims for death,
illness, personal injury, property damage, and improper business
practices arising out of the manufacture, use, sale, or other
disposition of Invention(s), Licensed Patent(s), Licensed Product(s),
or Technology by LICENSEE or sublicensee(s), or their customers.
9.2 STANFORD shall not be liable for any indirect, special, consequential,
or other damages whatsoever, whether grounded in tort (including
negligence), strict liability, contract or otherwise. STANFORD shall
not have any responsibilities or liabilities whatsoever with respect to
Licensed Products(s).
9.3 LICENSEE shall at all times comply, through insurance or
self-insurance, with all statutory workers' compensation and employers'
liability requirements covering any and all employees with respect to
activities performed under this Agreement.
9.4 In addition to the foregoing, LICENSEE shall maintain, during the term
of this Agreement, Comprehensive General Liability Insurance, including
Products Liability Insurance, with reputable and financially secure
insurance carrier(s) to cover the activities of LICENSEE and its
sublicensee(s). During Phase I through Phase III clinical trials such
insurance shall provide minimum limits of liability of Two Million
Dollars ($2,000,000), and during marketing of Licensed Product(s) to
the public such insurance shall provide minimum limits of liability of
Five Million Dollars ($5,000,000) and shall include STANFORD, Stanford
University Hospital, their trustees, directors, officers, employees,
students, and agents as additional insureds. Such insurance shall be
written to cover claims incurred, discovered, manifested, or made
during or after the expiration of this Agreement. At STANFORD's
request, LICENSEE shall furnish a Certificate of Insurance evidencing
primary coverage and requiring thirty (30) days prior written notice of
cancellation or material change to STANFORD. LICENSEE shall advise
STANFORD, in writing, that it maintains excess liability coverage
(following form) over primary insurance for at least the minimum limits
set forth above. All such insurance of LICENSEE shall be primary
coverage; insurance of STANFORD or Stanford University Hospital shall
be excess and noncontributory.
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10. MARKING
Prior to the issuance of patents on the Invention(s), LICENSEE agrees to mark
Licensed Product(s) (or their containers or labels) made, sold, or otherwise
disposed of by it under the license granted in this Agreement with the words
"Patent Pending," and following the issuance of one or more patents, with the
numbers of the Licensed Patent(s).
11. STANFORD NAMES AND MARKS
LICENSEE agrees not to identify STANFORD in any promotional advertising or other
promotional materials to be disseminated to the public or any portion thereof or
to use the name of any STANFORD faculty member, employee, or student or any
trademark, service mark, trade name, or symbol of STANFORD or the Stanford
University Hospital, or that is associated with either of them, without
STANFORD's prior written consent.
12. INFRINGEMENT BY OTHERS: PROTECTION OF PATENTS
12.1 LICENSEE shall promptly notify STANFORD ("Notice of Infringement") of
any suspected infringement of any Licensed Patent(s) by a third party.
During the Exclusive period of this Agreement, STANFORD and LICENSEE
each shall have the right to institute an action for infringement of
the Licensed Patent(s) against such third party in accordance with the
following:
(a) If STANFORD and LICENSEE agree to institute suit jointly, the
suit shall be brought in both their names, the out-of-pocket
costs thereof shall be borne equally, and any recovery or
settlement shall be shared equally. LICENSEE and STANFORD
shall agree to the manner in which they shall exercise control
over such action. STANFORD may, if it so desires, also be
represented by separate counsel of its own selection, the fees
for which counsel shall be paid by STANFORD;
(b) In the absence of agreement to institute a suit jointly,
STANFORD may institute suit, and, at its option, join LICENSEE
as a plaintiff. If STANFORD decides to institute suit, then it
shall notify LICENSEE in writing. LICENSEE's failure to notify
STANFORD in writing, within thirty (30) days after the date of
the notice, that it will join in enforcing the patent pursuant
to the provisions hereof, shall be deemed conclusively to be
LICENSEE's assignment to STANFORD of all rights, causes of
action, and damages resulting from any such alleged
infringement. STANFORD shall bear the entire cost of such
litigation and shall be entitled to retain the entire amount
of any recovery or settlement;
(c) In the absence of agreement to institute a suit jointly and if
STANFORD notifies LICENSEE that it has decided not to join in
or institute a suit, as provided in (a) or (b) above, STANFORD
shall notify LICENSEE of such decision no later than sixty
(60) days after LICENSEE's Notice of Infringement and LICENSEE
may institute suit and, at its option, join STANFORD as a
plaintiff. If LICENSEE decides to institute suit, then it
shall notify STANFORD in writing. LICENSEE shall bear the
entire cost of such litigation and shall be entitled to retain
the entire amount of any recovery or settlement, provided,
however, that one-half (1/2) of any recovery in excess of
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<PAGE> 8
litigation costs (including, without limitation, attorneys'
fees and court costs) shall be deemed to be Net Sales, and
LICENSEE shall pay STANFORD royalties thereon at the rates
specified herein.
12.2 Should either STANFORD or LICENSEE commence a suit under the provisions
of Paragraph 12.1 and thereafter elect to abandon the same, it shall
give timely notice to the other party who may, if it so desires,
continue prosecution of such suit, provided, however, that the sharing
of expenses and any recovery in such suit shall be as agreed upon
between STANFORD and LICENSEE.
13. SUBLICENSE(S)
13.1 LICENSEE may grant sublicense(s) during the Exclusive period.
13.2 If LICENSEE is unable or unwilling to serve or develop a potential
market or market territory for which there is a willing sublicensee(s),
LICENSEE will, at STANFORD's request, negotiate in good faith a
sublicense(s) hereunder.
13.3 Any sublicense(s) granted by LICENSEE under this Agreement shall be
subject and subordinate to terms and conditions of this Agreement,
except:
(a) Sublicense terms and conditions shall reflect that any
sublicensee(s) shall not further sublicense; and
(b) The earned royalty rate specified in the sublicense(s) may be
at higher rates than the rates in this Agreement. Any such
sublicense(s) also shall expressly include the provisions of
Articles 7, 8, and 9 for the benefit of STANFORD and provide
for the transfer of all obligations, including the payment of
royalties specified in such sublicense(s), to STANFORD or its
designee, in the event that this Agreement is terminated.
13.4 LICENSEE agrees to provide STANFORD a copy of any sublicense(s) granted
pursuant to this Article 13.
13.5 LICENSEE shall pay STANFORD [ * ] of all non-equity
license issue and milestone payments received by LICENSEE from its
sublicensee(s). In addition, LICENSEE shall pay to STANFORD earned
royalties on the Net Sales of its sublicensees in accordance with the
terms set forth in Article 6.
14. TERMINATION
14.1 LICENSEE may terminate this Agreement by giving STANFORD notice in
writing at least thirty (30) days in advance of the effective date of
termination selected by LICENSEE.
14.2 STANFORD may terminate this Agreement if LICENSEE:
(a) Is in default in payment of royalty or providing of reports;
(b) Is in breach of any provision hereof; or
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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(c) Provides any false report;
and LICENSEE fails to remedy any such default, breach, or false report
within sixty (60) days after written notice thereof by STANFORD.
14.3 Surviving any termination are:
(a) LICENSEE's obligation to pay royalties accrued or accruable;
(b) Any cause of action or claim of LICENSEE or STANFORD, accrued
or to accrue, because of any breach or default by the other
party; and
(c) The provisions of Articles 7, 8, and 9.
15. ASSIGNMENT
This Agreement may not be assigned, except that in the event of a sale,
consolidation, reorganization, merger or other transfer involving all or
substantially all of LICENSEE's business or assets, this Agreement and the
rights granted herein shall inure to the benefit of the successor of LICENSEE.
16. ARBITRATION
16.1 Any controversy arising under or related to this Agreement, and any
disputed claim by either party against the other under this Agreement
excluding any dispute relating to patent validity or infringement
arising under this Agreement, shall be settled by arbitration in
accordance with the Licensing Agreement Arbitration Rules of the
American Arbitration Association.
16.2 Upon request by either party, arbitration will be by a third party
arbitrator mutually agreed upon in writing by LICENSEE and STANFORD
within thirty (30) days of such arbitration request. Judgment upon the
award rendered by the arbitrator shall be final and nonappealable and
may be entered in any court having jurisdiction thereof.
16.3 The parties shall be entitled to discovery in like manner as if the
arbitration were a civil suit in the California Superior Court. The
Arbitrator may limit the scope, time and/or issues involved in
discovery.
16.4 Any arbitration shall be held at Stanford, California, unless the
parties hereto mutually agree in writing to another place.
17. NOTICES
All notices under this Agreement shall be deemed to have been fully given when
done in writing and deposited in the United States mail, registered or
certified, and addressed as follows:
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To STANFORD: Office of Technology Licensing
Stanford University
900 Welch Road, Suite 350
Palo Alto, CA 94304-1850
Attention: Director
To LICENSEE: Genelabs Technologies, Inc.
505 Penobscot Drive
Redwood City, CA 94063
Attention: Senior Vice President
Corporate Development
Either party may change its address upon written notice to the other party.
18. WAIVER
None of the terms of this Agreement can be waived except by the written consent
of the party waiving compliance.
19. APPLICABLE LAW
This Agreement shall be governed by the laws of the State of California
applicable to agreements negotiated, executed and performed wholly within
California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate
originals by their duly authorized officers or representatives.
THE BOARD OF TRUSTEES OF THE GENELABS TECHNOLOGIES, INC.
LELAND STANFORD JUNIOR UNIVERSITY
<TABLE>
<S> <C>
Signature: /s/ Katharine Ku Signature: /s/ John S. Hegedus
----------------- --------------------
Name: Katharine Ku Name: John S. Hegedus
Title: Director, Technology Licensing Title: Sr. VP, Corporate Development
Date: September 28, 1993 Date: October 8, 1993
</TABLE>
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<PAGE> 1
EXHIBIT 10.27
COLLABORATIVE RESEARCH
AND
LICENSE AGREEMENT
DECEMBER 13, 1996
BETWEEN
THE DUPONT MERCK PHARMACEUTICAL COMPANY
AND
GENELABS TECHNOLOGIES, INC.
<PAGE> 2
COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
OVERVIEW AND INTENT...........................................................1
ARTICLE I CERTAIN DEFINITIONS.......................................2
"Affiliate"..........................................................2
"Agency".............................................................2
"Calendar Quarter"...................................................3
"Calendar Year"......................................................3
"Collaboration"......................................................3
"Collaboration Lead Compound"........................................3
"Collaboration Patent Rights"........................................3
"Collaboration Target Gene"..........................................3
"Collaboration Technology"...........................................3
"Confidential Information"...........................................4
"Discovered" or "Discovery"..........................................4
"Effective Date".....................................................4
"Field of Use".......................................................4
"First Commercial Sale"..............................................4
"FTE"................................................................5
"FTE Rate"...........................................................5
"Genelabs Lead Compounds"............................................5
"Genelabs Lead Compound Program".....................................5
"Genelabs Patent Rights".............................................5
"Genelabs Screening Collaboration"...................................6
"Genelabs Target Gene"...............................................6
"Genelabs Technology"................................................6
"Initial Research Term"..............................................6
"Lead Compound"......................................................6
"Licensed Products"..................................................6
"Merlin Assay".......................................................6
"Monomer"............................................................7
"Monomer Database"...................................................7
"Net Proceeds".......................................................7
"Net Sales"..........................................................8
"Patent Rights"......................................................8
"Research Program"...................................................8
"Research Plan"......................................................8
"RSC"................................................................9
"Sublicensee"........................................................9
"Target Gene"........................................................9
"Technology".........................................................9
"Third Party Lead Compound Program"..................................9
ARTICLE II RESEARCH COLLABORATION....................................9
<PAGE> 3
2.1 Conduct of the Research Program.............................9
2.2 Scope of Collaboration......................................10
2.3 Term of Research Program....................................10
2.4 Research Term Extension.....................................11
2.5 Direction of Research Program...............................12
2.6 Assistance..................................................13
ARTICLE III TARGET GENES..............................................13
3.1 Collaboration Target Genes..................................13
3.2 Genelabs Lead Compound Programs.............................14
3.3 Outlicensing by Genelabs....................................17
3.4 Genelabs Screening Collaboration............................18
ARTICLE IV GRANT OF RIGHTS...........................................19
4.1 Monomer Database............................................19
4.2 License to DuPont Merck.....................................19
4.3 Collaboration Technology....................................21
ARTICLE V PAYMENTS..................................................21
5.1 Payments by DuPont Merck....................................21
(a) Up-Front Payment...................................21
(b) Milestones.........................................21
(c) Royalties..........................................24
5.2 Payments by Genelabs........................................24
(a) Outlicensing Revenues if Lead Compound Discovered..24
(b) Licensing Revenues If Lead Compound Not Discovered.26
(c) Revenues from Genelabs Commercialization...........27
(d) Revenues from Genelabs Screening Collaborations....28
5.3 Accounting..................................................29
5.4 Certain Conditions..........................................30
5.5 Paid-up License.............................................31
5.6 Sublicense Provision........................................31
5.7 Confidentiality of Financial Information....................31
5.8 Interest on Late Payments...................................32
ARTICLE VI CONFIDENTIALITY AND PUBLICATION...........................32
6.1 Restrictions on Disclosure..................................32
6.2 Access to Information.......................................33
6.3 Protection of Information...................................34
6.4 Ownership of Information....................................34
6.5 Return of Information.......................................34
6.6 Injunctive Relief...........................................35
6.7 Use of Confidential Information.............................35
6.8 Scientific Publication......................................35
<PAGE> 4
ARTICLE VII INVENTIONS, PATENTS.......................................36
7.1 Collaboration Patent Rights.................................36
7.2 Filing, Prosecution and Maintenance of Patents..............36
7.3 Patent Term Restoration.....................................37
7.4 Infringement................................................37
ARTICLE VIII TERM AND TERMINATION......................................39
8.1 Term and Expiration.........................................39
8.2 Termination for Cause.......................................39
8.3 Effect of Termination.......................................40
8.4 Continuation of Agreement...................................40
ARTICLE IX LIABILITY.................................................40
9.1 Indemnification.............................................40
(a) By DuPont Merck....................................40
(b) By Genelabs........................................41
9.2 Insurance...................................................42
9.3 No Implied Warranties.......................................42
ARTICLE X MISCELLANEOUS.............................................43
10.1 Force Majeure...............................................43
10.2 Assignment..................................................43
10.3 Severability................................................44
10.4 Notices.....................................................44
10.5 Applicable Law/Jurisdiction.................................45
10.6 Dispute Resolution..........................................46
10.7 Entire Agreement............................................46
10.8 Headings....................................................46
10.9 Independent Contractors.....................................46
10.10 Waiver......................................................47
10.11 Counterparts................................................47
10.12 Representations and Warranties..............................47
10.13 Publicity...................................................48
10.14 Use of Names................................................48
EXHIBIT A GENELABS PATENT RIGHTS....................................49
EXHIBIT B RESEARCH PLAN.............................................50
<PAGE> 5
COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
THIS AGREEMENT, dated as of December 13, 1996 (the "Effective Date"),
is between Genelabs Technologies, Inc., a corporation organized and existing
under the laws of California and having its principal office at 505 Penobscot
Drive, Redwood City, California 94063 ("Genelabs") and The DuPont Merck
Pharmaceutical Company, a general partnership organized and existing under the
laws of Delaware and having its principal office at DuPont Merck Plaza, Walnut
Run, 974 Centre Road, Wilmington, Delaware 19807 ("DuPont Merck").
OVERVIEW AND INTENT
The parties intend to establish a research collaboration using certain
Genelabs technology directed towards the discovery of gene regulating
DNA-binding drugs for human therapeutic applications. Each party will contribute
compounds and chemistries which it currently has or develops during the course
of the research collaboration, and in the case of DuPont Merck for [ * ] years
after the collaboration, into a monomer database. Each party may use the monomer
data base independently for the discovery of lead compounds for pharmaceutical
products. The primary goals of the collaboration are to create the monomer
database, to use the monomer database to create lead compounds, and to create
small molecule gene regulating DNA-binding pharmaceuticals from such lead
compounds. Each party can develop and commercialize pharmaceutical products or
sublicense lead compounds to other parties. DuPont Merck will have certain
exclusive rights to pharmaceutical products resulting from the collaboration.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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The parties agree as follows.
ARTICLE I CERTAIN DEFINITIONS
The terms in this Agreement with initial letters capitalized, whether
used in the singular or plural, shall have the meaning designated below or, if
not designated below, the meaning as designated in places throughout this
Agreement.
"Affiliate" means any corporation or other entity which controls, is
controlled by, or is under common control with a party to this Agreement. A
corporation or other entity shall be regarded as in control of another
corporation or entity if it owns or directly or indirectly controls more than
fifty percent (50%) of the voting stock or other ownership interest of the other
corporation or entity, or if it possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of the corporation
or other entity or the power to elect or appoint more than fifty percent (50%)
of the members of the governing body of the corporation or other entity. For
purposes of this Agreement, [ * ].
"Agency" means any governmental regulatory authority responsible for
granting health or pricing approvals, registrations, import permits, and other
approvals required before Licensed Product may be tested or marketed in any
country.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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"Calendar Quarter" means the respective periods of three (3)
consecutive calendar months ending on March 31, June 30, September 30 and
December 31.
"Calendar Year" means each successive period of twelve (12) months
commencing on January 1 and ending on December 31.
"Collaboration" means the collaborative research program established by
this Agreement, also sometimes referred to herein as the "Research Program" or
"Research Collaboration".
"Collaboration Lead Compound" means a Lead Compound Discovered as part
of the Collaboration.
"Collaboration Patent Rights" means all patents and applications
worldwide on patentable inventions and discoveries included in the Collaboration
Technology, any divisions, continuations, or continuations-in-part of the patent
applications, all patents which issue on such applications, including all
reissues, reexaminations or extensions of the patents, any extended or restored
term, and any confirmation patent, registration patent, patent of addition, or
the like.
"Collaboration Target Gene" has the meaning set forth in Section 3.1.
"Collaboration Technology" means any information, and data concerning
[*], and all related intellectual
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 8
property, including information, data, trade secrets, know-how, inventions,
discoveries and Collaboration Patent Rights, owned or licensable by one party to
the other, excluding clinical information and data, and excluding that portion
of such information, data, trade secrets, know-how, inventions, discoveries and
[ * ].
"Confidential Information" means information and data which relates to
the Genelabs Technology or the Collaboration Technology, which is owned by one
party and is disclosed to the other party in connection with this Agreement, and
which is designated confidential by the disclosing party.
"Discovered" or "Discovery", as applied to [ * ].
"Effective Date" means January 1, 1997, the date of commencement of the
Research Program.
"Field of Use" means [ * ].
"First Commercial Sale" means, with respect to a Licensed Product, the
first sale for use or consumption by the public of such Licensed Product in a
country after all required approvals, including marketing and pricing approvals,
have been granted by such country.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
4
<PAGE> 9
"FTE" means one or more researchers employed by Genelabs or DuPont
Merck and assigned to work on the Research Collaboration with such time and
effort to constitute the equivalent of one scientist working on a full time
basis consistent with normal business and scientific practice (e.g. at least 40
hours per week of dedicated effort for at least 48 weeks per year).
"FTE Rate" shall have the meaning set forth in Section 2.3.
"Genelabs Lead Compounds" means Lead Compounds [ * ].
"Genelabs Lead Compound Program" means a program which [ * ].
"Genelabs Patent Rights" means all currently existing patents and
patent applications worldwide which relate to [ * ] and which are owned or
licensable by Genelabs, including those set forth in Exhibit A hereto, any
divisions, continuations, or continuations-in-part of the patent applications,
all patents which issue on such applications, including all reissues,
reexaminations or extensions of the patents, any extended or restored term, and
any confirmation patent, registration patent, patent of addition, or the like.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
5
<PAGE> 10
"Genelabs Screening Collaboration" means a collaboration in which
[ * ].
"Genelabs Target Gene" means a Target Gene which is [ * ].
"Genelabs Technology" means the Merlin assay and all related
intellectual property existing as of the Effective Date, including information,
data, trade secrets, know-how, inventions, discoveries and Genelabs Patent
Rights owned or licensable by Genelabs and directed toward [ * ].
"Initial Research Term" shall have the meaning set forth in Section
2.3.
"Lead Compound" means a molecule which demonstrates [ * ].
"Licensed Products" means pharmaceutical products in the Field of Use
derived directly or indirectly from a Lead Compound and/or employing the
Technology.
"Merlin Assay" means the assay described and claimed [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
6
<PAGE> 11
[ * ].
"Monomer" means a [ * ].
"Monomer Database" means a [ * ].
"Net Proceeds" means the gross amount of revenues received by Genelabs
from outlicensing or sublicensing a Lead Compound to third parties, including
[ * ]. Net Proceeds shall include the financial value of any non-
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
7
<PAGE> 12
financial compensation paid or exchanged with Genelabs, to be determined by
valuation methods (and a payment schedule) to be agreed upon by the parties.
"Net Sales" means the gross invoice price of Licensed Product to third
parties, including without limitation distributors, less (i) trade and quantity
discounts actually allowed; (ii) returns and allowances; (iii) rebates,
chargebacks and other amounts paid, credited or accrued, (iv) retroactive price
reductions; (v) sales commissions to distributors and independent agents, (vi)
the costs of devices for dispensing or administering the Licensed Product (for
which the customer is not charged) which accompany the Licensed Product as it is
sold, (vii) a fixed amount equal to [ * ] for sales outside the U.S., of the
amount invoiced to cover bad debts, custom duties, surcharges, sales or excise
taxes, cash discounts, transportation and insurance charges; and (viii) as
agreed by the parties, any other specifically identifiable amounts included in
gross sales that were or ultimately will be credited and that are substantially
similar to those listed above.
"Patent Rights" means Genelab Patent Rights and Collaboration Patent
Rights.
"Research Program" or "Research Collaboration" means the collaborative
research program established by this Agreement, also sometimes referred to
herein as the "Collaboration".
"Research Plan" is the research plan for the Collaboration, as
described in Section 2.1, and as revised from time to time by the Research
Steering Committee.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
8
<PAGE> 13
"RSC" or "Research Steering Committee" has the meaning set forth in
Section 2.5.
"Sublicensee" means a business entity which is sublicensed by DuPont
Merck or Genelabs under this Agreement.
"Target Gene" means [ * ].
"Technology" means Genelabs Technology and Collaboration Technology.
"Third Party Lead Compound Program" means a [ * ].
ARTICLE II RESEARCH COLLABORATION
2.1 Conduct of the Research Program. The parties shall engage in a
collaborative research program (the "Research Program" or "Research
Collaboration") directed towards the discovery of gene regulating DNA-binding
pharmaceutical products. The Research Program will be conducted in good
scientific manner, and in accordance with all applicable good laboratory
practices and legal requirements. The objectives, workplan, timeline and
assignment of the initial activities of the Research
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
9
<PAGE> 14
Program are set forth in the Research Plan annexed hereto as Exhibit B (the
"Research Plan"). Within four months of the Effective Date, the scientists
assigned to work on the Research Collaboration will have assessed [ * ], and
will at that time present a more detailed set of objectives and research plans
to the Research Steering Committee, which will issue a revised Research Plan.
2.2 Scope of Collaboration. Notwithstanding anything else in this
Agreement, the parties recognize that in conducting the Research Program
compounds and components of compounds may be identified that could have
applications outside the Field of Use. [ * ].
2.3 Term of Research Program. The initial term for the Research Program
shall commence on January 1, 1997 and continue through [ * ] (the "Initial
Research Term"), and may be extended, as provided below, for [ * ]. During each
year of the Initial Research Term, DuPont Merck shall fund a [ * ]. Payment to
Genelabs of such research funding shall be made
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
10
<PAGE> 15
in equal quarterly installments payable within 15 days of the beginning of each
Calendar Quarter commencing on the Effective Date. Payment shall be made by
immediately available funds. Such funding by DuPont Merck of FTE's at Genelabs
shall be contingent upon Genelabs providing and retaining the indicated number
of qualified FTE's and upon Genelabs making a good faith effort in accordance
with industry standards to achieve the goals of the Research Collaboration as
set forth in the Research Plan. Without limiting DuPont Merck's rights or
remedies, DuPont Merck shall have the right to reduce the level of funding
described above to reflect the failure by Genelabs to provide or retain the
required number of qualified FTE's or to make the required effort to achieve the
goals of the Research Collaboration. The names, curriculum vitae and percentage
of time devoted to the Research Program for each scientist comprising the
required number of FTE's will be provided to DuPont Merck within 30 days of the
Effective Date and not later than 60 days prior to the start of each subsequent
Calendar Year of the Research Collaboration. The mixture of skills and levels of
expertise of such scientists shall be appropriate to the objectives of the
Research Program. The selection of such scientists shall be subject to the
approval of DuPont Merck, such approval not to be unreasonably withheld.
2.4 Research Term Extension. DuPont Merck shall provide Genelabs with
written notice no later than [ * ],
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ]. Upon any extension of the Initial Research Term, the RSC shall revise the
Research Plan and assign responsibilities and determine manpower requirements of
the parties for such extended term.
2.5 Direction of Research Program
(a) The Research Program will be directed by a [ * ] member
Research Steering Committee ("RSC"), comprised of [ * ]. The first meeting of
the RSC will take place within thirty (30) days after January 1, 1997 for the
purpose of making any modifications to the Research Plan, including
modifications to the timeline or assignment of responsibilities to achieve the
objectives of the Research Program. Thereafter, the RSC will meet on a regular
basis, no less frequently than quarterly (via teleconference, video conference,
or face to face) to review the progress of the Research Program and make any
changes in the Research Plan necessary to achieve the objectives of the Research
Program. Additional meetings may be scheduled by mutual consent.
(b) Genelabs and DuPont Merck will exchange written reports
quarterly outlining the progress of the Research Program for the prior quarter,
and, in particular, reporting on the progress of those aspects of the Research
Program for which the party is primarily or entirely
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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responsible. Each party shall select a coordinator for the Research Program to
whom such communications and all reports shall be submitted and who shall
mutually determine the agenda for each of the meetings between the parties. The
authority and responsibility of the RSC shall be limited to scientific matters
relating to the Research Plan being undertaken during the Research
Collaboration; the RSC shall have no authority regarding any business matter,
for example, to amend this Agreement or in any way elaborate, change or expand
upon any of its terms. In the event of any impasse which cannot be resolved by
the RSC, [ * ] shall have tie-breaking authority.
2.6 Assistance. If either party requests, the other party will provide
to it technical assistance within its area of expertise and supply any technical
information and know-how which the requesting party may require in connection
with the Research Program. Provision of such technical assistance shall include
but not be limited to visits by Genelabs and/or DuPont Merck personnel to each
other at the requesting party's expense, at times and for periods of time upon
which the parties shall reasonably agree.
ARTICLE III TARGET GENES
3.1 Collaboration Target Genes. Within the initial four months of the
Research Collaboration, the RSC shall designate [ * ] (the "Collaboration Target
Genes"), and shall designate [ * ] Collaboration Target Genes as the initial
focus of the Research Collaboration. [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ].
3.2 Genelabs Lead Compound Programs.
(a) Genelabs may initiate [ * ], a Genelabs Lead Compound Program;
provided, however, that in no event may [ * ]. Genelabs may initiate [ * ]
Genelabs Lead Compound Programs during any year of the Research Collaboration;
however, if in any year, Genelabs ceases work on a [ * ].
(b) [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[*].
(c) Lead Compound Programs can be [ * ], subject to the following
provisions:
(i) [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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Programs [ * ] that Genelabs is able to establish during the term of the
Research Collaboration, provided that Genelabs may initiate [ * ] Third Party
Lead Compound Program which program is described in [ * ] during the [ * ] of
[ * ].
(ii) [ * ] resulting from [ * ] will be subject to the same
[ * ] to be made by Genelabs to DuPont Merck for [ * ].
(iii) If the [ * ], Genelabs will [ * ].
(iv) If the [ * ].
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ].
(v) If the [ * ].
(vi) Following the term of the Research Collaboration, [ * ].
(d) Genelabs will provide to DuPont Merck a quarterly progress
report on all Genelabs Lead Compound Programs.
3.3 Outlicensing by Genelabs. Genelabs may develop and commercialize
Genelabs Lead Compounds or may choose at any time to out-license a Genelabs Lead
Compound to a third party according to the following procedure:
i) Genelabs shall [ * ];
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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ii) [ * ];
iii) [ * ];
iv) [ * ].
Genelabs' obligations under this Section 3.3 shall terminate upon the [ * ]
anniversary of the termination of the Research Program.
3.4 Genelabs Screening Collaboration. During the term of the Research
Collaboration, Genelabs may, at its sole discretion, enter into Genelabs
Screening Collaborations on a blinded basis with third parties. As part of
Genelabs Screening Collaborations, Genelabs shall [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ].
ARTICLE IV GRANT OF RIGHTS
4.1 Monomer Database. Following the execution of this Agreement, each
party will [ * ].
4.2 License to DuPont Merck. Genelabs grants to DuPont Merck:
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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(i) [ * ] license, with no right to sublicense, to use the
Technology and Patent Rights during the term of the Research Collaboration to
Discover Collaboration Lead Compounds directed against Collaboration Target
Genes, which shall [ * ],
and
(ii) [ * ] license to the Technology and Patent Rights to
discover, make, use and sell Lead Compounds and Licensed Products directed
against Target Genes other than Collaboration Target Genes in the Field of Use,
with the right to grant sublicenses to, make, use and sell Lead Compounds and
Licensed Products directed against Target Genes other than Collaboration Target
Genes in the Field of Use, and
(iii) [ * ] license to the Technology and Patent Rights to
discover, make, use and sell Lead Compounds and Licensed Products directed
against Collaboration Target Genes in the Field of Use, with the right to grant
sublicenses to make, use and sell Lead Compounds and Licensed Products directed
against Collaboration Target Genes in the Field of Use. This license shall be
(i) [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ].
For the purpose of clarity, it is understood that (a) [ * ].
4.3 Collaboration Technology. Each party grants to the other a
non-exclusive worldwide license in the Field of Use to any Collaboration
Technology and Collaboration Patent Rights, except for the [ * ].
ARTICLE V PAYMENTS
5.1 Payments by DuPont Merck. In consideration for the licenses
provided for in Section 4.2 hereof and the research to be conducted by Genelabs
pursuant to the Research Plan, DuPont Merck shall make the following payments to
Genelabs:
(a) Up-Front Payment. Within 3 business days following the
execution of this Agreement, DuPont Merck shall pay to Genelabs [ * ].
(b) Milestones. DuPont Merck shall also make the following payments
(which may be used for any purpose by Genelabs) to Genelabs within thirty (30)
days of the
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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achievement of the following milestones related to commercial Licensed Products
which are derived directly or indirectly through utilization of the Genelabs
Technology or Collaboration Technology, regardless of whether the milestone is
achieved during or after termination of the Research Collaboration, and
regardless of whether the entity achieving the milestone is DuPont Merck itself
or one of its Sublicensees or Affiliates:
(i) [ * ];
(ii) [ * ];
(iii) [ * ];
(iv) [ * ];
(v) [ * ];
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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(vi) [ * ];
(vii) [ * ].
To clarify the foregoing, in no event is DuPont Merck required to pay
Genelabs more than one time for the accomplishment of the [ * ]. For example, if
[ * ].
In the first instance that either Milestone (ii) above is achieved or
Milestone (i) above is achieved with respect to [ * ], and for each
subsequent instance occurring within 90 days of the first instance, DuPont Merck
will have a 90 day period from the date of the first such achievement to select
between the options of either [ * ]. If DuPont Merck elects the latter option
with respect to a given Collaboration Lead Compound,
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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DuPont Merck will have [ * ].
(c) Royalties. [ * ]. Notwithstanding the foregoing, if no patent
is obtained for the Licensed Product, or if DuPont Merck is required to pay
royalties in order to obtain an unblocking license, with respect to the
manufacture, use or sale of such Licensed Product, then the royalty rate to be
paid to Genelabs by DuPont Merck shall be reduced by a total of one-third of the
royalty rate to be paid by DuPont Merck for the unblocking license; provided
that the maximum reduction of the royalty payable to Genelabs by DuPont Merck
shall be an amount equal to one-third of the amount of the royalty which would
have otherwise been payable by DuPont Merck to Genelabs, without taking into
consideration such reduction.
5.2 Payments by Genelabs.
(a) Outlicensing Revenues if [ * ]. In the event [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ], Genelabs will pay to DuPont Merck a fee equal to a percentage of the Net
Proceeds received by Genelabs from outlicensing or sublicensing any Genelabs
Lead Compounds. For a given Genelabs Lead Compound outlicensed or sublicensed by
Genelabs, the applicable percentage of Net Proceeds to be paid to DuPont Merck
will [ * ]. The following chart illustrates the applicable percentage which
DuPont Merck will be entitled to:
Applicable Percentage of Net Proceeds
----------------------------------------------------------
[
- - --------------------------------------------------------------------------------
* ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ]
As an example of the foregoing, assume (i) [ * ].
As another example, assume [ * ].
For the purposes of determining the [ * ].
(b) Licensing Revenues If [ * ]. If [ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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[ * ], Genelabs will pay to DuPont Merck a fee equal to a
percentage of the Net Proceeds received by Genelabs from outlicensing or
sublicensing such Genelabs Lead Compounds. For a given Genelabs Lead Compound
outlicensed or sublicensed by Genelabs, the applicable percentage of Net
Proceeds to be paid to DuPont Merck will [ * ]. Genelabs will have no obligation
to DuPont Merck with respect to [ * ]. The following chart illustrates the
applicable percentage which DuPont Merck will be entitled to:
Applicable Percentage of Net Proceeds
-----------------------------------------------------------
[
- - --------------------------------------------------------------------------------
* ]
(c) Revenues from Genelabs Commercialization. Genelabs will pay to
DuPont Merck [ * ] by Genelabs and its Affiliates of Licensed Products in the
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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Field of Use derived from Genelabs Lead Compounds Discovered during the
Collaboration or for the applicable period of time thereafter determined
pursuant to Subsections (a) and (b), above. The amount of the royalty will be
determined [ * ]. Notwithstanding the foregoing, if no patent is obtained for
the Licensed Product, or if Genelabs is required to pay royalties in order to
obtain an unblocking license, with respect to the manufacture, use or sale of
such product then the royalty rate to be paid to DuPont Merck by Genelabs shall
be reduced by a total of one-third of the royalty rate to be paid by Genelabs
for the unblocking license; provided that the maximum reduction of the royalty
payable to DuPont Merck by Genelabs shall be an amount equal to one-third of the
amount of the royalty which would have otherwise been payable by Genelabs to
DuPont Merck, without taking into consideration such reduction.
(d) Revenues from Genelabs Screening Collaborations. In no event
will any payments be owed by Genelabs to DuPont Merck for revenue derived from
Genelabs
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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Screening Collaborations performed by Genelabs for third parties.
5.3 Accounting
(a) DuPont Merck and Genelabs shall deliver to each other within
sixty (60) days after the end of each Calendar Quarter a written accounting,
including quantities and monetary amounts of Net Sales and Net Proceeds subject
to fee or royalty payments and the amount of the fee or royalty payment due to
the other party for such Calendar Quarter.
(b) When each party delivers its accounting to the other, the
reporting party shall also deliver all fee or royalty payments due to the other
party for the Calendar Quarter.
(c) Each party shall keep accurate records in sufficient detail to
enable the amounts due to the other party to be determined. Upon the request of
either party, the other party shall permit an independent, certified public
accountant selected by the requesting party, except one to whom the disclosing
party has reasonable objections, to have access during ordinary business hours
to records necessary to determine the correctness of any quarterly report and
obtain information as to the amount payable to the requesting party for any such
period in case of the disclosing party's failure to report or make payment. Such
examination shall be at the requesting party's expense and shall not take place
more than once each year for each party. These rights with respect to any year
shall terminate three (3) years after the end of any such year. Information
supplied to the requesting party by such
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independent certified public accountants shall not include any proprietary
information not required to be disclosed under other sections of this Agreement.
(d) All payments to be made by either party under this Agreement
shall be made in United States dollars. In the case of sales outside the United
States, the rate of exchange to be used in computing the amount of currency
equivalent in United States dollars due to a party shall be the month-end
exchange rate applicable for the month in which the sales are recorded. Such
month-end exchange rate is the exchange rate utilized by the paying party in its
worldwide accounting system and reflects the average exchange rate for the
month.
(e) All payments due hereunder from either party shall be paid in
immediate available funds.
5.4 Certain Conditions. Payments for sale of Licensed Products by
either party shall be subject to the following conditions:
(a) no fees or royalties shall be due upon the sale or other
transfer between DuPont Merck and its Affiliates or Genelabs and its Affiliates,
provided that royalties will be paid on sales by such Affiliates to independent
third parties;
(b) no fees or royalties shall accrue on the disposition of
Licensed Product in reasonable quantities by DuPont Merck, Genelabs, or their
respective Affiliates or Sublicensees as bona fide samples or as donations to
non-profit institutions or government agencies for non-
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commercial purposes or to support physician initiated research; and
(c) notwithstanding the above fee and royalty rates, upon either
party's request, the parties will discuss in good faith a reduction of the
applicable fee or royalty rate in any given country in the event the level of
development, patent protection or general commercial environment affects the
commercial viability of the Licensed Products under such fee or royalty rate.
5.5 Paid-up License. For each country, upon expiration of DuPont
Merck's obligation to pay royalties pursuant to Section 5.1, DuPont Merck shall
have a fully paid-up, non-exclusive license under the Genelabs Technology, to
make, have made, use and sell Licensed Product in that country. For each
country, upon expiration of a party's obligation to make payments hereunder, the
party shall have a fully paid-up, non-exclusive license under the Collaboration
Technology owned by the other party to make, have made, use and sell Licensed
Product in that country.
5.6 Sublicense Provision. Each party shall include in each sublicense
granted by it pursuant to this Agreement a provision requiring the Sublicensee
to make reports to the other party, to keep and maintain records of sales made
pursuant to such sublicense and to grant access to such records by independent
accountant.
5.7. Confidentiality of Financial Information. Each party shall treat
all financial information subject to review under Section 5.3(c) or under any
sublicense agreement in accordance with the confidentiality provisions
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of this Agreement, and shall cause its accounting firm to enter into a
confidentiality agreement with the other party obligating it to retain all such
financial information in confidence pursuant to such confidentiality agreement.
5.8 Interest on Late Payments. Each party will pay interest on any
overdue amounts at the rate of one-half percent (0.5%) per month calculated from
the date any payment was due and payable.
ARTICLE VI CONFIDENTIALITY AND PUBLICATION
6.1 Restrictions on Disclosure. The parties will not disclose or use
Confidential Information disclosed by one party to the other under the terms of
this Agreement without the express, written consent of the disclosing party,
with the exception of the following:
a. information which, at the time of disclosure, is available to the
public;
b. information which, after disclosure, becomes available to the
public by publication or otherwise, other than by breach of this
Agreement by the receiving party;
c. information that the receiving party can establish by prior written
record was already known to it or was in its possession or in the
possession of an Affiliate at the time of disclosure and was not
acquired, directly or indirectly, from the disclosing party;
d. information that the receiving party obtains from a third party;
provided however, that such information was not obtained by said
third party, directly or indirectly, from the
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disclosing party under an obligation of confidentiality toward the
disclosing party;
e. information that the receiving party can establish by written
evidence satisfactory to the disclosing party was independently
developed by persons in its employ or otherwise who had no contact
with and were not aware of the content of the Confidential
Information; and
f. information that the receiving party is compelled to disclose by a
court or other tribunal of competent jurisdiction, provided
however, that in such case the receiving party shall immediately
give notice to the providing party so that the providing party may
seek a protective order or other remedy from said court or tribunal
and will cooperate with the disclosing party. In any event, the
receiving party shall disclose only that portion of the
Confidential Information that, in the opinion of its legal counsel,
is legally required to be disclosed and will exercise reasonable
efforts to ensure that any such information so disclosed will be
accorded confidential treatment by said court or tribunal.
6.2 Access to Information. The receiving party will not disclose any
such Confidential Information to any person other than to its directors,
officers or employees, or to directors, officers or employees of an Affiliate
and sublicencees, or to contractors under confidentiality obligations having
substantially the same terms expressed herein, and only then to the foregoing
individuals if they have a clear need to know such Confidential Information in
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connection with the performance of their professional responsibilities.
6.3 Protection of Information. The receiving party shall take all
reasonable steps, including, but not limited to, those steps taken to protect
its own information, data or other tangible or intangible property that it
regards as proprietary or confidential, to insure that the Confidential
Information is not disclosed or duplicated for the use of any third party, and
shall take all reasonable steps to prevent its officers and employees, or any
others having access to the Confidential Information, from disclosing or making
unauthorized use of any Confidential Information, or from committing any acts or
omissions that may result in a violation of this Agreement.
6.4 Ownership of Information. Title to, and all rights emanating from
the ownership of, all Confidential Information disclosed under this Agreement
shall remain vested in the disclosing party. Nothing herein shall be construed
as granting any license or other right to use the Confidential Information other
than as specifically agreed upon by the parties.
6.5 Return of Information. Upon expiration or termination of this
Agreement and upon the written request of the disclosing party, the receiving
party shall return promptly to the disclosing party all written materials and
documents, as well as any computer software or other media, made available or
supplied by the disclosing party to the receiving party that contains
Confidential Information, together with any copies thereof, except that the
receiving party may retain one copy of each such document or other media under
seal for archival purposes, subject to
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protection and non-disclosure in accordance with the terms of this Agreement.
6.6 Injunctive Relief. The receiving party acknowledges that the
disclosure of Confidential Information without the express written consent of
the disclosing party will cause irreparable harm to the disclosing party, and
that any breach or threatened breach of this Agreement by the receiving party
will entitle the disclosing party to injunctive relief, in addition to any other
legal remedies available to it, in any court of competent jurisdiction, and that
the receiving party will not claim as a defense that the disclosing party has an
adequate remedy at law.
6.7 Use of Confidential Information. Confidential Information shall
only be used in connection with the parties' respective rights and obligations
under this Agreement.
6.8 Scientific Publication Either party wishing to make a scientific
publication of the research emanating from the Research Program shall deliver to
the other party a copy of the proposed written publication or an outline of an
oral disclosure at least sixty (60) days prior to submission for publication or
presentation. The reviewing party shall have the right (i) to propose
modifications to the publication for patent reasons, trade secret reasons or
business reasons and (ii) to request removal of its Confidential Information
from such publication or presentation. If the reviewing party requests
modifications to the publication, the publishing party shall edit such
publication to prevent disclosure of trade secret or proprietary business
information prior to
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submission of the publication or presentation. In event the parties agree to
publish the proposed submission, then the contributions of the parties to the
research shall be expressly noted in such publications or other public
disclosures by acknowledgment or co-authorship, whichever is appropriate.
ARTICLE VII INVENTIONS, PATENTS
7.1 Collaboration Patent Rights. If either party makes an invention in
the course of the Research Program, that party shall own the invention and is
responsible for the preparation, filing, prosecution and maintenance of all
patent applications and patents covering such invention. If any joint invention
is made under the Research Program, then such invention shall be owned by both
parties, and Genelabs shall be responsible for the preparation, filing,
prosecution and maintenance of all patent applications and patents covering such
invention. Each party's Collaboration Patent Rights shall be subject to the
license grants described in Section 4.2.
7.2 Filing, Prosecution and Maintenance of Patents. Each party shall
diligently take all commercially reasonable steps required to maintain the
Collaboration Patent Rights it owns in full force and effect and shall be
responsible for the day-to-day activities associated with filing, prosecuting
and maintaining such Collaboration Patent Rights. Each party will consult with
and cooperate with the other party to promptly file, prosecute and maintain such
party's Collaboration Patent Rights. Each party shall at all times during the
term of this Agreement keep the other party advised of the status of its patent
filings related to the Collaboration Patent Rights, and
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upon request of the other party, shall provide copies of any papers relating to
the filing, prosecution or maintenance of such Collaboration Patent Rights,
subject to Article VI hereof. During the term of this Agreement the parties
shall cooperate in providing information to assist counsel with the patent
prosecution of such Collaboration Patent Rights.
7.3 Patent Term Restoration. The parties hereto shall cooperate with
each other in obtaining patent term restoration or supplemental protection
certificates or their equivalents in any country in the Territory where
applicable to Patent Rights. In the event that elections with respect to
obtaining such patent term restoration, supplemental protection certificates or
their equivalents are to be made, the party owning such patent rights shall have
the right to make the election and the other party will abide by such election.
7.4 Infringement.
(a) Genelabs and DuPont Merck each shall immediately give notice to
the other of any potential or actual infringement by a third party of any Patent
Rights of which they become aware or of any certification of which they become
aware filed under the United States "Drug Price Competition and Patent Term
Restoration Act of 1984" claiming that Patent Rights are invalid or
unenforceable or that infringement will not arise from the manufacture, use or
sale of a product by a third party.
(b) The owner of the Patent Rights will have the right to settle
with the infringer or to bring suit or other proceeding at its expense against
the infringer in
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its own name or in the name of the other party where necessary, after
consultation with the other party; provided, however, that no settlement will be
entered into which increases the payment obligations of the other party without
the prior written consent of the other party. A party shall keep the other party
advised at all times of such suit or proceedings brought. A party may, in its
discretion and at its expense, join the other party as a party to the suit or
other proceeding, provided that the party bringing the action shall retain
control of the prosecution of such suit or proceedings in such event. Each party
will cooperate with the other party in any efforts to protect Patent Rights,
including joining as a party where necessary.
(c) If the party owning the Patent Rights does not settle with the
infringer or bring suit or other proceeding against the infringer, the other
party may in its discretion, bring suit or other proceeding at its expense
against the infringer, provided however, that the other party shall first
consult with the party owning such Patent Rights as to whether such act(s) by a
third party reasonably constitute infringement and whether it is commercially
advisable to bring such suit or proceeding, as reasonably determined by the
owner of such patent rights. Such owning party shall be kept advised at all
times of all developments in such suit or proceedings brought by the other
party.
(d) Each party will bear its own expenses with respect to any suit
or other proceeding against an infringer. Any recovery in connection with such
suit or proceeding will first be applied to reimburse each party for its
out-of-pocket expenses, including attorneys' fees.
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The party controlling the suit will retain the balance of any recovery.
ARTICLE VIII TERM AND TERMINATION
8.1 Term and Expiration. This Agreement shall be effective as of the
Effective Date and unless terminated earlier pursuant to Section 8.2 below, the
terms of this Agreement shall continue in effect on a country-by-country basis
until expiration date of the last obligation of a party to pay fees or royalties
to the other party for the sale of a Licensed Product in that country. Upon
expiration of this Agreement as to any country due to the expiration of the
obligation of a party to pay royalty to the other party for the sale of a
Licensed Product in that country, the licenses hereunder with respect to
Licensed Product shall become fully paid-up, perpetual licenses.
8.2 Termination for Cause. This Agreement may be terminated by notice
by either party at any time during the term of this Agreement:
(a) if it is shown by credible evidence that the other party is in
breach of its material obligations hereunder by causes and reasons within its
control and has not cured such breach within ninety (90) days after written
notice requesting cure of the breach; or
(b) upon the filing or institution of bankruptcy, reorganization,
liquidation or receivership proceedings, or upon an assignment of a substantial
portion of the assets for the benefit of creditors by the other party; provided,
however, in the case of any involuntary bankruptcy proceeding such right to
terminate shall only become effective if the party consents to the involuntary
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bankruptcy or such proceeding is not dismissed within ninety (90) days after the
filing thereof.
8.3 Effect of Termination. Expiration or termination of the Agreement
shall not relieve the parties of any obligation accruing prior to such
expiration or termination. Any expiration or early termination of this Agreement
shall be without prejudice to the rights of either party against the other
accrued or accruing under this Agreement prior to termination, including the
obligation to pay milestones, royalties or fees for Licensed Product sold prior
to such termination.
8.4 Continuation of Agreement. In the event of a breach described in
Section 8.2, as an alternative to terminating the Agreement, the non-breaching
party may in its discretion continue the Agreement, but reduce its payment
obligations to the breaching party [ * ]. All rights and obligations of the
breaching party continue, including licenses under Article IV hereof and payment
obligations to the non-breaching party.
ARTICLE IX LIABILITY
9.1 Indemnification.
(a) By DuPont Merck. DuPont Merck shall at all times during the
term of this Agreement and thereafter, indemnify, defend and hold harmless
Genelabs, its
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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directors, officers, employees and Affiliates, from and against any and all
claim, loss, damage, liability, injury, cost or expense, including without
limitation expenses of litigation and reasonable attorneys' fees, in connection
with any claims made or suits brought against Genelabs by a third party relating
to this Agreement and (i) arising from the negligence, willful misconduct, or
material breach of this Agreement by DuPont Merck, its Affiliates,
subcontractors or agents or (ii) arising out of the death of or injury to any
person or persons or out of any damage to property and resulting from the
production, manufacture, sale, use, lease, consumption or advertisement of
Licensed Product by DuPont Merck, its Affiliates or Sublicensees; provided
however that DuPont Merck's obligation to provide indemnification hereunder
shall be limited to the extent by which any such claim, loss, damage, liability,
injury, cost or expense results from the negligence, willful misconduct, or
material breach of this Agreement by Genelabs.
(b) By Genelabs. Genelabs shall at all times during the term of
this Agreement and thereafter, indemnify, defend and hold harmless DuPont Merck
and its owners and Affiliates, and their respective directors, officers, and
employees, from and against any and all claim, loss, damage, liability, injury,
cost or expense, including without limitation expenses of litigation and
reasonable attorneys' fees, in connection with any claims made or suits brought
against DuPont Merck by a third party relating to this Agreement and (i) arising
from the negligence, willful misconduct, or material breach of this Agreement by
Genelabs, its Affiliates, subcontractors or agents or (ii) arising out of the
death of or injury to any person or persons or out of any damage to property and
resulting from the production, manufacture, sale, use,
41
<PAGE> 46
lease, consumption or advertisement of Licensed Product by Genelabs, its
Affiliates or Sublicensees; provided however that Genelabs' obligation to
provide indemnification hereunder shall be limited to the extent by which any
such claim, loss, damage, liability, injury, cost or expense results from the
negligence, willful misconduct, or material breach of this Agreement by DuPont
Merck.
9.2 Insurance.
(a) DuPont Merck represents and warrants that DuPont Merck is
self-insured, and shall provide liability protection to Genelabs in regard to
events covered by Section 9.1(a). DuPont Merck further represents and warrants
that it has sufficient financial resources enabling it to provide liability
protection, the nature and extent of which is commensurate with usual and
customary industry practices, as determined by DuPont Merck's good faith
assessment.
(b) Genelabs represents and warrants that it possesses sufficient
insurance to meet its obligations hereunder, and shall provide liability
protection to DuPont Merck in regard to events covered by Section 9.1(b).
Genelabs further represents and warrants that it has sufficient financial
resources enabling it to provide liability protection, the nature and extent of
which is commensurate with usual and customary industry practices, as determined
by Genelabs' good faith assessment.
9.3 No Implied Warranties. Except as otherwise expressly set forth in
this Agreement, DuPont Merck and Genelabs MAKE NO REPRESENTATIONS AND EXTENDS NO
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT
42
<PAGE> 47
LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
NON-INFRINGEMENT OF THIRD PARTY RIGHTS, AND VALIDITY OF PATENT RIGHTS CLAIMS,
ISSUED OR PENDING.
ARTICLE X MISCELLANEOUS
10.1 Force Majeure. Except with respect to any payment obligation,
neither party shall be held liable or responsible to the other party nor be
deemed to have defaulted under or breached the Agreement for failure or delay in
fulfilling or performing any term of the Agreement when such failure or delay is
caused by or results from causes beyond the reasonable control of the affected
party including, but not limited to, fire, floods, embargoes, war, acts of war
(whether war be declared or not), insurrections, riots, civil commotions,
strikes, lockouts or other labor disturbances, acts of God or acts, omissions or
delays in acting by any governmental authority or the other party.
10.2 Assignment. This Agreement may not be assigned or otherwise
transferred by either party without the consent of the other party; provided,
however, that the parties may, without such consent, assign this Agreement and
its rights and obligations hereunder to its Affiliates or in connection with the
transfer or sale of all or substantially all of its business to which the
Agreement relates, or in the event of its merger or consolidation or similar
transaction. Any purported assignment in violation of the preceding sentences
shall be void. Any permitted assignee shall assume all obligations of its
assignor under this Agreement.
43
<PAGE> 48
10.3 Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby, unless the absence of the invalidated provision(s) adversely affect the
substantive rights of the parties. The parties shall in such an instance use
their best efforts to replace the invalid, illegal or unenforceable provision(s)
with valid, legal and enforceable provision(s) which, insofar as practical,
implement the purposes of this Agreement.
10.4 Notices;. Any payment, notice or other communication pursuant to
this Agreement shall be sufficiently made or given on the date of mailing if
sent to such party by facsimile on such date, with paper copy being sent by
certified first class mail, postage prepaid, or by next day express delivery
service, addressed to it at its address below (or such address as it shall
designate by written notice given to the other party).
In the case of DUPONT MERCK:
Attention:
President, DuPont Merck Research Laboratories
Research and Development Division
The DuPont Merck Pharmaceutical Company
974 Centre Road, DuPont Merck Plaza
Wilmington, Delaware 19807-2802
Phone (302) 695-7008)
with copy to:
General Counsel
44
<PAGE> 49
Legal Division
The DuPont Merck Pharmaceutical Company
974 Centre Road, DuPont Merck Plaza
Wilmington, Delaware 19807-2802
Fax (302) 892-8536)
In the case of Genelabs:
Attention: Chief Executive Officer
Genelabs Technologies, Inc.
505 Penobscot Drive
Redwood City, California 94603
Phone: (415) 369-9500
Fax: (415) 368-0709
with copy to:
General Counsel
Genelabs Technologies, Inc.
505 Penobscot Drive
Redwood City, CA 94603
Fax: (415) 368-0709
10.5 Applicable Law/Jurisdiction. This Agreement is acknowledged to
have been made in and shall be construed, governed, interpreted and applied in
accordance with the laws of Delaware, without giving effect to its conflict of
laws provisions. Any litigation instituted by DuPont Merck shall be brought in a
state or federal court located in San Francisco, California, and any litigation
instituted by Genelabs shall be brought in a state or federal court located in
Wilmington, Delaware. Each party
45
<PAGE> 50
hereby irrevocably consents to the personal and exclusive jurisdiction and
venue of such courts.
10.6 Dispute Resolution. In the event that any controversy or claim
shall arise under, out of, in connection with, or relating to this Agreement or
the breach thereof, the party initiating such controversy or making such claim
shall provide to the other party a brief and concise statement of the initiating
party's claims, together with relevant facts supporting them. During a period of
sixty (60) days, or such longer period as may be mutually agreed upon in writing
by the parties, following the date of said notice, the parties shall make good
faith efforts to settle the dispute. Such efforts will include, but shall not be
limited to, full presentation of both parties' claims and responses, with or
without assistance of counsel, before the President of Genelabs and the
President of DuPont Merck, or an equivalent if such positions do not exist in
the respective companies.
10.7 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties as to the subject matter hereof. This Agreement
may be amended only by a written instrument duly executed by both parties
hereto.
10.8 Headings. The captions to the Articles and Sections hereof are not
a part of the Agreement, but are merely guides or labels to assist in locating
and reading the Articles and Sections hereof.
10.9 Independent Contractors. Genelabs and DuPont Merck are independent
contractors with respect to this Agreement. The relationship between the two
parties
46
<PAGE> 51
created by this Agreement shall not constitute a partnership, joint venture or
agency. Neither Genelabs nor DuPont Merck shall have the authority to make any
statements, representations or commitments of any kind, or to take any action,
which shall be binding on the other.
10.10 Waiver. The waiver by either party hereto of any right hereunder
or the failure to perform or of a breach by the other party shall not be deemed
a waiver of any other right hereunder or of any other breach or failure by said
other party whether of a similar nature or otherwise.
10.11 Counterparts. The Agreement may be executed with original or
facsimile signatures in two or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument.
10.12 Representations and Warranties. Genelabs hereby represents and
warrants that: (1) it owns the Genelabs Patent Rights and Genelabs Technology
licensed hereunder; (2) no other person or organization presently has any
effective option or license to the Genelabs Patent Rights; (3) Genelabs is not
aware of any existing patent or published application of a third party which
would be infringed by use of the Genelabs Technology as part of the Research
Collaboration; and (4) Genelabs is not aware of any prior art or other reason to
believe that the Genelabs Patent Rights licensed hereunder are invalid or
unenforceable. Each party warrants and represents to the other that it has the
full right and authority to enter into this Agreement, and that it is not aware
of any
47
<PAGE> 52
impediment which would inhibit its ability to perform the terms and conditions
imposed on it by such Agreement.
10.13 Publicity. Neither party will issue any press release or other
public statement, whether oral or written, disclosing any information relating
to this Agreement that has not previously been approved without the prior
written consent of the other party, provided however, that neither party will be
prevented from complying with any duty of disclosure it may have pursuant to law
or governmental regulation.
10.14 Use of Names. Neither party will, without prior written consent
of the other party, use the name or any trademark or tradename owned by the
other party, or owned by an Affiliate or parent corporation of the other party,
in any publication, publicity, advertising, or otherwise.
GENELABS TECHNOLOGIES, INC.
By:_______________________________
Title:____________________________
Date:_____________________________
THE DUPONT MERCK PHARMACEUTICAL COMPANY
By:_______________________________
Title:____________________________
Date:_____________________________
48
<PAGE> 53
EXHIBIT A
GENELABS PATENT RIGHTS
COUNTRY PATENT/SERIAL NO. TITLE
[ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
49
<PAGE> 54
EXHIBIT B
RESEARCH PLAN
COLLABORATIVE DNA-BINDING DISCOVERY PROGRAM
BETWEEN
DUPONT MERCK AND GENELABS TECHNOLOGIES, INC.
[ * ]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
50
<PAGE> 55
Exhibit B (page 2 of 3)
[*]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
51
<PAGE> 56
Exhibit B (page 3 of 3)
TIMELINES
[*]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
52
<PAGE> 1
EXHIBIT 21.01
GENELABS TECHNOLOGIES, INC.
LIST OF REGISTRANT'S SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENT OWNED
STATE OR COUNTRY BY GENELABS
NAME OF ORGANIZATION TECHNOLOGIES, INC.
- - ------------------------------------------------------------ ---------------- ------------------
<S> <C> <C>
Accelerated Clinical Research Organization, Inc............. Delaware 100%
Genelabs Asia (Pte.) Ltd.................................... Singapore 100%*
Genelabs Biotechnology Ltd.................................. Taiwan 40%
Genelabs Diagnostic, Inc.................................... Delaware 100%
Genelabs Diagnostics (Pte.) Ltd............................. Singapore 100%**
</TABLE>
- - ---------------
* Wholly-owned by Genelabs Diagnostic, Inc.
** Wholly-owned by Genelabs Asia (Pte.) Ltd.
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-97336 and Form S-8 No.'s 333-5769, 33-85914, 33-81894, 333-4806
and 33-52250) pertaining to the Unit Purchase Agreement; the 1995 Employee Stock
Option Plan; the 1994 Annual and Long-Term Incentive Based Compensation Program;
the 1985 Employee Stock Option Plan and the 1991 Employee Stock Purchase Plan;
the 1992 Restricted Stock Award Plan; and the 1987 Directors Stock Option Plan
of Genelabs Technologies, Inc. of our report dated February 12, 1997, with
respect to the consolidated financial statements of Genelabs Technologies, Inc.
included in this Annual Report on Form 10-K for the year ended December 31,
1996.
ERNST & YOUNG LLP
Palo Alto, California
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, AND NOTES THERETO,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874443
<NAME> GENELABS TECHNOLOGIES, INC./CA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,330
<SECURITIES> 19,135
<RECEIVABLES> 3,513
<ALLOWANCES> 343
<INVENTORY> 3,535
<CURRENT-ASSETS> 37,896
<PP&E> 11,655
<DEPRECIATION> 10,192
<TOTAL-ASSETS> 44,119
<CURRENT-LIABILITIES> 7,672
<BONDS> 0
0
9,682
<COMMON> 136,544<F1>
<OTHER-SE> (110,302)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 44,119
<SALES> 11,324
<TOTAL-REVENUES> 13,330
<CGS> 6,177
<TOTAL-COSTS> 6,177
<OTHER-EXPENSES> 19,731<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,181)
<INCOME-PRETAX> (11,397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,397)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
<FN>
<F1>CONSISTS OF BOTH COMMON STOCK ISSUED AND TO BE ISSUED AS OF DECEMBER 31, 1996.
<F2>CONSISTS OF ACCUMULATED DEFICIT AND CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT.
<F3>CONSISTS OF RESEARCH AND DEVELOPMENT, SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES, AND EQUITY LOSS.
</FN>
</TABLE>
