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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 September 30, 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, 94063
CALIFORNIA (Zip code)
(Address of principal executive offices)
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 40,011,222 shares of the Registrant's Common Stock issued and
outstanding on October 29, 1999.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 1,729 $ 3,631
Short-term investments 9,403 16,670
--------- ---------
Total cash, cash equivalents and short-term investments 11,132 20,301
Other current assets 570 383
--------- ---------
Total current assets 11,702 20,684
Property and equipment, net 1,739 1,401
Net assets of diagnostics subsidiary 2,606 3,372
Investment in Taiwan-based affiliate 1,174 1,174
Other assets 127 176
--------- ---------
$ 17,348 $ 26,807
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,000 $ 2,500
Accounts payable and other accrued liabilities 2,844 3,671
Accrued compensation and related expenses 1,250 1,458
Unearned contract revenue 1,184 745
--------- ---------
Total current liabilities 6,278 8,374
Long-term obligations 650 647
--------- ---------
Total liabilities 6,928 9,021
--------- ---------
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 138,823 138,335
Accumulated deficit (138,280) (130,497)
Accumulated other comprehensive income 195 266
--------- ---------
Total shareholders' equity 10,420 17,786
--------- ---------
$ 17,348 $ 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30 September 30
-------------------------- -------------------------
1999 1998 1999 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Contract revenue $ 2,003 $ 2,478 $ 6,142 $ 5,915
-------- -------- -------- --------
Operating expenses:
Research and development 3,189 3,316 10,036 9,575
General and administrative 1,087 1,164 3,588 3,491
-------- -------- -------- --------
Total operating expenses 4,276 4,480 13,624 13,066
-------- -------- -------- --------
Operating loss (2,273) (2,002) (7,482) (7,151)
Interest income, net 106 314 399 800
-------- -------- -------- --------
Loss from continuing operations (2,167) (1,688) (7,083) (6,351)
-------- -------- -------- --------
Equity in loss of Taiwan-based
affiliate, net of $1,645 gain
on partial sale in 1998 -- -- -- 1,422
Income/(loss) from discontinued
operations of diagnostics subsidiary (352) (24) (700) 37
-------- -------- -------- --------
Net loss $ (2,519) $ (1,712) $ (7,783) $ (4,892)
======== ======== ======== ========
Loss per share - continuing operations $ (0.05) $ (0.04) $ (0.18) $ (0.16)
======== ======== ======== ========
Net loss per share $ (0.06) $ (0.04) $ (0.20) $ (0.12)
======== ======== ======== ========
Weighted average shares outstanding 39,964 39,668 39,856 39,581
======== ======== ======== ========
</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 nine months ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,783) $ (4,892)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 463 313
Loss/(income) of discontinued diagnostics 700 (37)
subsidiary
Gain on partial sale of Taiwan-based affiliate -- (1,422)
Changes in assets and liabilities:
Receivables and other current assets (187) 290
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (1,032) 300
Unearned contract revenue 439 193
Other -- --
--------- ---------
Net cash used in operating activities (7,400) (5,255)
--------- ---------
Cash flows from investing activities:
Purchases of securities available-for-sale (5,565) (16,435)
Proceeds from sales and maturities of securities
available-for-sale 12,832 16,479
Capital expenditures (801) (1,341)
Proceeds from partial sale of Taiwan-based affiliate -- 4,300
Net remittances from diagnostics subsidiary 44 172
--------- ---------
Net cash provided by investing activities 6,510 3,175
--------- ---------
Cash flows from financing activities:
Payments on short-term borrowings (1,500) --
Proceeds from issuance of common stock 488 378
--------- ---------
Net cash (used in)/provided by financing activities (1,012) 378
--------- ---------
Net decrease in cash and cash equivalents (1,902) (1,702)
Cash and cash equivalents, beginning of the period 3,631 4,230
--------- ---------
Cash and cash equivalents, end of the period 1,729 2,528
Short-term investments, end of the period 9,403 16,825
--------- ---------
Cash, cash equivalents and short-term investments,
end of the period $ 11,132 $ 19,353
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 its diagnostics subsidiary, Genelabs Diagnostics Pte. Ltd. ("GLD"), 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 and nine month periods ended September 30, 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 September 30, 1999 and 1998, the Company's
comprehensive loss amounted to $(2,522,000) and $(1,745,000), respectively, and
for the nine months ended September 30, 1999 and 1998, the Company's
comprehensive loss amounted to $(7,854,000) and $(4,499,000).
3. 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.
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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 the regulatory approval process, 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 Company's principal drug development program is GL701 for systemic
lupus erythematosus ("SLE"), for which two Phase III clinical trials have been
conducted. Based on the results of the first Phase III trial and the preliminary
results of the second Phase III trial, Genelabs intends to submit a New Drug
Application ("NDA") to the U.S. Food and Drug Administration ("FDA"), and has
requested a pre-NDA meeting with the FDA.
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.
RESULTS OF OPERATIONS - THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
The net loss was $2.5 million for the three months ended September 30,
1999, compared to $1.7 million for the same period in 1998. The $0.8 million
increase in net loss in the third quarter of 1999 compared to the third quarter
of 1998 was largely due to a $1.0 million payment received in the third quarter
of 1998 for expansion of hepatitis E virus ("HEV") vaccine rights granted to
SmithKline Beecham plc ("SKB"). In addition, there was a larger net loss at GLD,
the Company's diagnostics subsidiary, in the third quarter of 1999 compared to
the third quarter of 1998. The results of GLD have been treated as a
discontinued operation.
Contract revenues decreased 19% in the third quarter of 1999 compared to
the third quarter of 1998, to $2.0 million in 1999 compared to $2.5 million in
1998. The lower revenue was due to the above noted $1 million payment received
from SKB in the third quarter of 1998, partially offset by higher funding levels
provided by the Company's Defense Advanced Research Projects Agency ("DARPA")
grant. 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,
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continuation of existing corporate collaborations, achievement of milestones
under these collaborations, and establishment of new research, development
and/or licensing agreements.
Operating expenses decreased 5% in the third quarter of 1999 compared to
the third quarter of 1998. In the third quarter of 1999 research and development
expenses were 75% of operating expenses compared to 74% in the third quarter of
1998. Research and development expenses decreased 4% in the third quarter of
1999 compared to the same period in 1998 due to lower clinical trial costs for
GL701, partially offset by increased expenditures on the Company's drug
discovery program, primarily related to the DARPA grant. General and
administrative expenses decreased 7% in the third quarter of 1999 compared to
the third quarter of 1998.
RESULTS OF OPERATIONS - FIRST THREE QUARTERS OF 1999 COMPARED TO FIRST THREE
QUARTERS OF 1998
The net loss was $7.8 million for the nine months ended September 30,
1999, compared to $4.9 million for the same period in 1998. The $2.9 million
increase in net loss during the first nine months of 1999 compared to the first
nine months of 1998 was largely due to the 1998 gain from the partial sale of
Genelabs' investment in its Taiwan-based affiliate. Also contributing to the
higher net loss in the first nine months of 1999 was a higher net loss of the
Company's diagnostics subsidiary compared to a slight income in 1998. The
results of the diagnostics operation have been treated as a discontinued
operation.
Contract revenues increased 4% in the first nine months of 1999 compared
to the first nine months of 1998, increasing to $6.1 million in 1999 compared to
$5.9 million in 1998. The increased revenue was primarily due to higher funding
levels provided by the Company's DARPA grant, partially offset by a decrease in
revenues related to the 1998 expansion of HEV vaccine rights granted to SKB.
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 nine months of 1999 compared to the
first nine months of 1998. In the first nine months of 1999 research and
development expenses were 74% of operating expenses compared to 73% of operating
expenses in the first nine months of 1998. Research and development expenses
increased 5% in the first nine months of 1999, as increased expenditures on the
Company's drug discovery program were partially offset by lower clinical trial
costs for GL701. General and administrative expenses increased 3% in the first
nine months of 1999 compared to the first nine months of 1998.
Net interest income declined to $0.4 million in the first nine months of 1999
compared to $0.8 million in the same period of 1998 due to the Company's lower
average cash and short-term investments balance. The loss from Genelabs
diagnostics subsidiary, treated as a discontinued operation, increased to $0.7
million in the first nine months of 1999 compared to break-even in the first
nine months of 1998. The increased diagnostics net loss was due to lower sales
of its reagents and its western blot diagnostic products, in addition to costs
incurred to defend litigation alleging patent infringement.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment
balances totaling $11.1 million at September 30, 1999, compared to $20.3 million
at December 31, 1998. The $9.2 million decrease in cash, cash equivalents and
short-term investments was primarily attributable to $7.4 million cash used in
operations, but also included $1.5 million in payments on short-term borrowings
and $0.8 million in purchases of research equipment, partially offset by $0.5
million received from the exercise of stock options granted under the Company's
Stock Option Plans. The net cash used in operations included
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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 the sale of equity, contract revenues and grants.
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 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 planned
operations through mid-2000, although the Company intends to seek additional
funds through the sale of equity, 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 that
management believes are particularly relevant at this time. There is more
detailed information about 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.
Regulatory approvals are uncertain.
In September 1999, Genelabs announced positive results from its second
Phase III trial of GL701 for SLE. Based on these preliminary results and the
positive results of its first Phase III trial, the Company plans to submit an
NDA to the FDA. The manufacturing and marketing of the Company's products are
subject to rigorous requirements by the FDA as well as other governmental
agencies. Many biopharmaceutical companies have suffered significant setbacks
with respect to drugs under development, even after obtaining what they believe
to be promising results. Genelabs can provide no assurance that the FDA will
view the results of the Company's clinical trials of GL701 as sufficient to
serve as the basis for submission or approval of an NDA. While Genelabs has
agreements in place for the manufacture of the bulk raw material for GL701 and
for the contract manufacture of the finished dosage, the Company cannot provide
assurance that these outside manufacturers will continue to meet the
requirements of the FDA.
The Company's Research programs are likely to require additional funds.
The Company has incurred losses in each year since its inception and has
accumulated approximately $138 million in net losses through September 30, 1999,
including a net loss of $7.8 million for the first nine months of 1999. To date
the Company has funded its operations from the sale of equity and from contract
revenues provided by corporate collaborations and government grants. Contract
revenues recognized in the future will be dependent upon the continuation of
existing corporate collaborations, continuation of existing grants, achievement
of performance milestones, and establishment of new contracts and grants.
Genelabs may require additional funding for its continuing operations from other
sources including the sale of equity, and this may dilute existing shareholders
or provide certain rights to Genelabs' assets. The unavailability of additional
funds from contract revenues or other sources could delay or prevent the
development, testing, approval or marketing of some or all of
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the Company's products and technologies, which would 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.
Genelabs' success depends on the services of key employees in executive
and research and development positions. 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.
Year 2000 issue
The year 2000 issue is the result of the failure of hardware or software
components to properly handle dates that occur on or after January 1, 2000.
Genelabs has evaluated its computer systems and believes that they will function
properly in the year 2000 and thereafter. The Company has also evaluated the
year 2000 readiness of key suppliers, contractors and collaborators, and
believes that their systems will also function properly. However, the Company
cannot provide assurance that these systems will adequately handle all year 2000
issues. The costs of dealing with the year 2000 issue have largely been limited
to internal costs and software upgrades, and have not been significant. The
Company estimates that these costs were less than $0.2 million in total, and no
additional costs are expected, although Genelabs expects to continue monitoring
its year 2000 readiness.
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
There were no reports on Form 8-K filed during the quarter ended
September 30, 1999.
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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: November 8, 1999 ------------------------------------------
JAMES A.D. SMITH
President
Principal Financial Officer:
/s/ RICHARD A. WALDRON
Date: November 8, 1999 ------------------------------------------
RICHARD A. WALDRON
Vice President and Chief Financial Officer
Principal Accounting Officer:
/s/ MATTHEW M. LOAR
Date: November 8, 1999 ------------------------------------------
MATTHEW M. LOAR
Vice President, Finance
10
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<NAME> GENELABS TECHNOLOGIES, INC./CA
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9,682
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<FN>
<F1>CONSISTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
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