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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to ________ .
COMMISSION FILE NO. 0-19222
GENELABS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3010150
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
505 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 369-9500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
There were 39,780,042 shares of the Registrant's Common Stock issued and
outstanding on April 30, 1999.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 2,723 $ 3,631
Short-term investments 14,324 16,670
--------- ---------
Total cash, cash equivalents and short-term investments 17,047 20,301
Other current assets 394 383
--------- ---------
Total current assets 17,441 20,684
Property and equipment, net 1,654 1,401
Net assets of diagnostics subsidiary 3,165 3,372
Investment in Taiwan-based affiliate 1,174 1,174
Other assets 163 176
--------- ---------
$ 23,597 $ 26,807
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,000 $ 2,500
Accounts payable and other accrued liabilities 3,444 3,671
Accrued compensation and related expenses 944 1,458
Unearned contract revenue 1,161 745
--------- ---------
Total current liabilities 7,549 8,374
Long-term obligations 623 647
--------- ---------
Total liabilities 8,172 9,021
--------- ---------
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 138,454 138,335
Accumulated deficit (132,874) (130,497)
Accumulated other comprehensive income 163 266
--------- ---------
Total shareholders' equity 15,425 17,786
--------- ---------
$ 23,597 $ 26,807
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Contract revenue $ 1,829 $ 1,814
-------- --------
Operating expenses:
Research and development 3,108 3,076
Selling, general and administrative 1,227 1,095
-------- --------
Total operating expenses 4,335 4,171
-------- --------
Operating loss (2,506) (2,357)
Interest income, net 160 252
-------- --------
Loss from continuing operations (2,346) (2,105)
Equity in loss of Taiwan-based affiliate -- (142)
(Loss)/income from discontinued operations of
diagnostics subsidiary (31) 33
-------- --------
Net loss $ (2,377) $ (2,214)
======== ========
Loss per share from continuing operations $ (0.06) $ (0.05)
======== ========
Net loss per share $ (0.06) $ (0.06)
======== ========
Weighted average shares outstanding 39,779 39,497
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,377) $ (2,214)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 126 97
Loss/(income) of discontinued diagnostics subsidiary 31 (33)
Equity in loss of Taiwan-based affiliate -- 142
Changes in assets and liabilities:
Receivables and other current assets (11) (817)
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (765) (674)
Unearned contract revenue 416 (94)
Other -- (17)
-------- --------
Net cash used in operating activities (2,580) (3,610)
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale (1,425) (2,214)
Proceeds from sales and maturities of securities
available-for-sale 3,771 4,240
Capital expenditures (366) (827)
Net remittances from diagnostics subsidiary 73 346
-------- --------
Net cash provided by investing activities 2,053 1,545
-------- --------
Cash flows from financing activities:
Payments on short-term borrowings (500) --
Proceeds from issuance of common stock 119 254
-------- --------
Net cash (used in)/provided by financing activities (381) 254
-------- --------
Net decrease in cash and cash equivalents (908) (1,811)
Cash and cash equivalents, beginning of the period 3,631 4,230
-------- --------
Cash and cash equivalents, end of the period 2,723 2,419
Short-term investments, end of the period 14,324 14,843
-------- --------
Cash, cash equivalents and short-term investments,
end of the period $ 17,047 $ 17,262
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of Genelabs Technologies, Inc. and its
wholly-owned subsidiaries ("Genelabs" or the "Company") after elimination of all
significant intercompany accounts and transactions. In 1998 the Company adopted
a plan to divest Genelabs Diagnostics Pte. Ltd. ("GLD"), its diagnostics
subsidiary, and accordingly, the operating results of GLD have been segregated
from continuing operations and reported separately. The Company has restated its
prior financial statements in order to present the operating results and net
assets of GLD as a discontinued operation, changing the manner by which GLD is
included in the financial statements but not changing the previously reported
net loss or shareholders' equity.
These financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
These unaudited condensed consolidated financial statements are meant
to be read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
2. COMPREHENSIVE INCOME
During the three months ended March 31, 1999 and 1998, the Company's
comprehensive loss amounted to $(2,480,000) and $(2,078,000), respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning clinical trials, progress of drug discovery
programs, the Company's business plans, anticipated expenditures and the timing
and need for additional funds. Forward looking statements may be identified by
terminology such as "may," "will," "expects," "anticipates," "intends,"
"believes" and similar expressions. Some of the factors that could cause
material differences in actual results of the Company's activities are product
development, regulatory approval and manufacturing risks. Additional factors
include intellectual property rights, the Company's relationships with its
collaborators and potential collaborators, and other factors and risks detailed
under the caption "Risk Factors" in the Company's 1998 Annual Report on Form
10-K and other filings with the U.S. Securities and Exchange Commission.
Shareholders and prospective investors in the Company should carefully consider
these risk factors. The Company disclaims any obligation to update these
statements for subsequent events.
Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a
biopharmaceutical company that focuses on the discovery and development of novel
drugs for serious human diseases.
The aim of the Company's principal drug discovery program is to
produce drug candidates targeted to specific disease-causing genes using
Genelabs' patented technologies. The Company believes these technologies have
the potential to create an entirely new class of pharmaceutical products that
work by binding to DNA and changing the level of expression of a specific gene.
While traditional drugs typically affect the activity of proteins derived from
the expression of genes, Genelabs' drug discovery approach is to target the
disease-causing genes directly. Related technologies are being applied to the
discovery of novel antiviral RNA-binding compounds.
The Company's principal drug development program is GL701 for
systemic lupus erythematosus ("SLE"), for which two Phase III clinical trials
have been conducted. Data from the first Phase III trial demonstrated that GL701
could reduce the use of steroids in steroid-dependent SLE patients with active
disease. Data from the second Phase III trial is expected to be available later
this summer.
RESULTS OF OPERATIONS - FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
The net loss was $2.4 million for the three months ended March 31,
1999, compared to $2.2 million for the same period in 1998, an increase of 7%.
The $0.2 million increase in net loss in the first quarter of 1999 compared to
the first quarter of 1998 was due to higher operating expenses and lower
interest income. These were partially offset by no recorded first quarter 1999
equity in loss of Genelabs' Taiwan-based affiliate, GBL, due to the lower
percentage ownership in 1999 after the 1998 sale of a portion of this
investment.
Contract revenues increased 1% in the first quarter of 1999 compared
to the first quarter of 1998, and were $1.8 million in each quarter. Contract
revenues include grant, licensing, milestone, and research and development
payments. Contract revenues recognized in the future will be dependent upon the
continuation of existing grants, continuation of existing corporate
collaborations, achievement of milestones under these collaborations, and
establishment of new research, development and/or licensing agreements.
Operating expenses increased 4% in the first quarter of 1999 compared
to the first quarter of 1998. In the first quarter of 1999, research and
development expenses were 72% of operating expenses compared to 74% of operating
expenses in 1998. Research and development expenses increased 1% in the first
quarter of 1999,
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rounding to $3.1 million for both quarters, as increased
expenditures on the Company's drug discovery program offset lower clinical trial
costs for GL701. General and administrative expenses increased 12% in the first
quarter of 1999, to $1.2 million compared to $1.1 million in the first quarter
of 1998, primarily due to the Company's expanded business development
activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment
balances totaling $17.0 million at March 31, 1999, compared to $20.3 million at
December 31, 1998. The decrease in cash, cash equivalents and short-term
investments was primarily attributable to cash used in operations, but also
included payments on short-term borrowings and purchases of research equipment.
The net cash used in operations included the expansion of the drug discovery
research program and the continuation of the development of GL701 for SLE.
Genelabs has operated at a loss since its inception and has funded
its operations primarily through public and private offerings of its common
stock, private offerings of its preferred stock and contract revenues. Genelabs
expects to incur substantial additional costs, including research costs for the
Company's drug discovery technologies and development costs for GL701. The
amount of the additional costs will depend on numerous factors including the
progress of Genelabs' research and development programs, the status of its
corporate partnerships, results of clinical trials and actions of regulatory
agencies.
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 2000, although the Company intends to
seek additional funds through corporate collaborations, asset sales or other
means prior to such time. The Company anticipates realizing a net loss for this
time frame and profitability thereafter is subject to significant uncertainty.
Additional funds for the Company's research and development activities may not
be available on acceptable terms, if at all. The unavailability of additional
funds could delay or prevent the development, approval or marketing of some or
all of the Company's products and technologies, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
CERTAIN BUSINESS RISKS
The following discussion summarizes certain business risks which
management believes are particularly relevant at this time. There is more
detailed information about the these risks and additional risks under the
caption "Risk Factors" in the Company's 1998 Annual Report on Form 10-K, which
shareholders and prospective investors are encouraged to review.
Clinical trial results of GL701 are unpredictable.
In 1999, Genelabs expects to announce the preliminary results of its
second Phase III trial of GL701 for SLE. Subsequently, once the data analysis is
complete, Genelabs will decide whether to continue the development of this drug
candidate. Many biopharmaceutical companies have suffered significant setbacks
in advanced clinical trials, even after obtaining promising results in earlier
trials. The Company can provide no assurance that the results of this second
Phase III trial of GL701 for SLE will be sufficient to support proceeding with a
New Drug Application ("NDA") or continuing development of the drug candidate.
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Regulatory approvals are uncertain.
The manufacturing and marketing of the Company's products are subject
to rigorous requirements by the U.S. Food and Drug Administration ("FDA") and by
comparable agencies in other countries and by state regulatory authorities.
There can be no assurance that the Company will be able to obtain or maintain
the necessary approvals for manufacturing or marketing of GL701 or that the data
it obtains in clinical trials will be sufficient to establish its safety and
efficacy. The Company has agreements in place for the manufacture of the bulk
raw material for GL701 and for the contract manufacture of the finished dosage,
but cannot provide assurance that these outside manufacturers will continue to
meet the requirements of the FDA. Genelabs can provide no assurance that the FDA
will view the results of the Company's Phase III trials of GL701 as sufficient
to serve as the basis for filing or approval of an NDA.
Research programs are likely to require additional funds.
The Company has incurred losses in each year since its inception and
has accumulated approximately $133 million in net losses through March 31, 1999,
including a net loss of $2.4 million in the quarter ended March 31, 1999.
Additional financing may be required to fund the Company's continuing operations
and research and development activities, and this may dilute existing
shareholders or provide certain rights to Genelabs' assets. The unavailability
of additional funds could delay or prevent the development, testing, regulatory
approval, manufacturing or marketing of some or all of the Company's products
and technologies and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company depends on key employees for the execution of its business plan
The introduction of Chemistry capabilities into the Company's
research department required restructuring of the responsibilities of some
scientists. Genelabs' success depends on the services of key employees in
executive and research and development positions. The April 1, 1999 retirement
of the Company's President and Chief Executive Officer and her appointment to
Chairman will result in her spending relatively less time at the Company. The
loss of the services of key executives or other employees could have a material
adverse impact on Genelabs' ability to execute its business plan.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998, Institut Pasteur and Pasteur Sanofi Diagnostics
(collectively, the "Plaintiffs") filed a Writ of Summons in the High Court of
the Republic of Singapore against GLD, the wholly-owned diagnostics subsidiary
of Genelabs and Nagase Singapore Pte. Ltd., GLD's Malaysian distributor. In the
Writ, the Plaintiffs allege that GLD has, by making, using and selling HIV-2
Western Blot diagnostic products, infringed a Singaporean patent owned by
Institut Pasteur and exclusively licensed to Pasteur Sanofi. The Plaintiffs are
seeking injunctive relief and damages in an unspecified amount. GLD believes
that it has substantial defenses and is defending the suit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
On March 16, 1999, Genelabs filed a current report on Form 8-K to
announce the planned transition of Dr. Irene A. Chow to retirement, her
appointment to Chairman of the Board, and the appointment of James A.D. Smith to
President.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENELABS TECHNOLOGIES, INC.
(Registrant)
Principal Executive Officer:
/s/ JAMES A.D. SMITH
Date: May 12, 1999
-------------------------------------------
JAMES A.D. SMITH
President
Principal Financial and Accounting Officer:
/s/ MATTHEW M. LOAR
Date: May 12, 1999
-------------------------------------------
MATTHEW M. LOAR
Vice President, Finance
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,723
<SECURITIES> 14,324
<RECEIVABLES> 85
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,441
<PP&E> 9,441
<DEPRECIATION> 7,787
<TOTAL-ASSETS> 23,597
<CURRENT-LIABILITIES> 7,549
<BONDS> 0
0
9,682
<COMMON> 138,454
<OTHER-SE> (132,711)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 23,597
<SALES> 0
<TOTAL-REVENUES> 1,829
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,335<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (160)
<INCOME-PRETAX> (2,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,346)
<DISCONTINUED> (31)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,377)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
<F2>CONSISTS OF RESEARCH AND DEVELOPMENT, AND GENERAL AND ADMINISTRATIVE EXPENSES.
</FN>
</TABLE>
