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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 NUMBER 0-19222
GENELABS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-3010150
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
505 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 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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<CAPTION>
AS OF MARCH 13,
2000
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Aggregate market value of the voting stock held by
non-affiliates of the Registrant.......................... $369,000,000
Number of shares of Common Stock outstanding................ 40,731,844
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III (Items 10,
11, 12 and 13) hereof.
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PART I
ITEM 1. BUSINESS.
All statements in this 10-K 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 regulatory approval, 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," "plans," "believes," "potential" and similar expressions. Some of the
factors that could cause material differences in actual results of the Company's
activities are uncertainty of regulatory approval, the outcome of drug discovery
and product development efforts, manufacturing risks, and intellectual property
rights. These and additional factors and risks are discussed below, especially
under "Risk Factors" at the end of this Item 1. 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 engaged in the
discovery and development of a new class of pharmaceutical products that
selectively regulate gene expression and the development of GL701, our
proprietary hormone treatment for systemic lupus erythematosus ("SLE" or
"lupus"). We have completed two pivotal clinical trials of GL701 for the
treatment of lupus in women, and intend to begin the submission of a New Drug
Application for GL701 to the U.S. Food and Drug Administration ("FDA") in the
first half of 2000. We intend that significant funding for the discovery and
development of our future products would be provided by revenue from the sales
of GL701, should it receive FDA approval.
Our goal is to be the world leader in the development of drugs based on
selective regulation of gene expression. Because functions of all cells, tissues
and organs are controlled by gene expression and the resulting production of
proteins, the potential application of our technology is broad and profound. For
example, we may be able to restore proper gene function in disease-causing
cells, whether this involves increasing or decreasing the expression level of a
specific gene. Our technology would also allow treatment of diseases by
selectively promoting the production of specific beneficial proteins in the
body. Genelabs owns key patents covering the development of drugs that
selectively regulate gene expression by directly binding to DNA, the fundamental
material of genes. We have also developed a related technology for the
development of proprietary compounds that act directly on the genetic material
of viruses to inhibit their replication. By directly acting on the genetic
material, we believe these technologies can be applicable to a wide range of
indications, including diseases such as cancer and diabetes and diseases caused
bacteria and viruses.
Public and private efforts are expending enormous scientific and financial
resources to the sequencing of the human genome, the complete set of human
genes, as well as the genomes of many pathogenic organisms. Genelabs' drug
discovery efforts will benefit greatly from this ongoing genomic research as the
descriptions and functions of specific genes, the intended targets of our
potential products, are detailed and better understood. There are many potential
advantages of drugs that could selectively regulate gene expression. Because
they act at the root cause of disease caused by a malfunctioning specific gene,
drugs that selectively regulate gene expression could have therapeutic effects
superior to alternative treatments. Because these drugs are intended to act only
at the sites of specific genes, they may also have fewer and more acceptable
side effects than currently available therapies. In many instances these drugs
may be small molecular compounds, which means they may be orally administered.
Drugs that selectively regulate gene expression may also have advantages in the
cost and time of their development and cost of manufacture, especially in
comparison to protein-based drugs.
In addition to our internal research efforts, Genelabs licensed GL701 from
Stanford University and has developed it into a near-term product opportunity as
a treatment for SLE. There are approximately 200,000 lupus patients in the
United States and over a million worldwide. Lupus is a life-long autoimmune
disease that causes the immune system to attack the body's own tissues and
organs. It primarily affects women, many of
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whom experience initial symptoms when they are in their late teens or early
twenties. There is no known cure for lupus and currently approved drug
treatments are inadequate. Prednisone, a commonly used steroid drug treatment
for lupus, has many serious side effects including osteoporosis, atherosclerosis
and diabetes, and is a leading cause of disability and death in lupus patients.
If approved by the FDA, GL701 will be the first new treatment for this
debilitating disease in 40 years. Genelabs believes GL701 is ideally suited as
the Company's first pharmaceutical product because it addresses a clear, unmet
medical need in an area for which no current therapies compete or are being
actively promoted. In addition, infrastructure requirements for launching GL701
are relatively minor compared to those needed for other new drugs, since a
concentrated physician specialty treats most lupus patients. Therefore, Genelabs
plans to commercially introduce GL701 to the U.S. market itself, and to
commercialize GL701 elsewhere in the world through partnerships or licensing
arrangements with major pharmaceutical companies.
The Company believes that Genelabs is uniquely positioned in the
biopharmaceutical industry with both a near-term drug candidate that has
completed clinical trials and a proprietary and potentially industry-changing
approach to drug discovery.
DRUG DISCOVERY PROGRAM
DNA-Binding
The tissues and organs of the human body are made up of cells that perform
different functions. Cells operate as biological factories producing proteins
such as hormones, cytokines, cell receptors, and enzymes that perform critical
functions in maintaining human health. The malfunctioning of cells and the
inappropriate production in the amount or types of proteins can cause or
predispose humans to disease. The overproduction or underproduction of certain
proteins, hormones, growth factors and tumor suppressors can lead to diseases
and health deficiencies including diabetes, cancer, and cardiovascular and
neurological diseases. The regulation of protein production and, thereby, cell
function is a promising approach to the treatment of many human diseases.
The production of each protein is directed, or encoded, by a specific gene.
In the nucleus of every human cell are the chromosomes containing the same set
of approximately 140,000 genes, referred to as the human genome. However, in any
individual human cell, only about 10,000 of the genes, a subset distinct for
that cell type, are activated or expressed to produce their encoded proteins.
Regulatory elements of genes determine in which cells of the body a gene is
expressed. Therefore, a typical human cell will produce approximately 10,000
different proteins, and distinct cell types produce different sets of proteins,
some of which may be exclusive to a particular type of cell. The body's
production of insulin, for example, takes place only in the beta cells in the
pancreas despite the fact that the gene encoding insulin exists in all cells.
Gene expression controls functions of all cells, tissues and organs. The
regulatory region of a gene is the site responsible for controlling gene
expression and is therefore an attractive target for drug intervention. The
operation of the gene's regulatory region is controlled by specialized proteins
in cells called transcription factors. Transcription factors recognize and bind
to specific DNA sequences in the regulatory region, and determine whether the
gene "turns on" or "turns off" the production of its specific functional
protein. A disruption in the level or proper function of one or more
transcription factors can lead to inappropriate gene expression and, in turn, to
disease. Drugs that could bind to specific genes, control their expression, and
restore the proper function of cells would have significant therapeutic
benefits.
The objective of the Company's DNA-binding research program is to create
this new class of drugs. The Company has created proprietary technologies to
design drugs that selectively regulate gene expression by binding to the
gene-specific DNA sequences adjacent to or overlapping the regulatory binding
site of key transcription factors. When a drug binds to this specific DNA
sequence, the transcription factor is knocked off of the gene's regulatory
region, and gene expression is changed. This can be selectively done with
transcription factors that are either promoting ("turning on") or suppressing
("turning off") the expression of specific genes. Genelabs has issued U.S and
foreign patents covering this technology, including regulation of gene
expression by binding small molecular compounds to the gene-specific sites
adjacent to or overlapping the transcription factor binding sites, which are not
gene-specific.
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Genelabs' DNA-binding drug discovery program is enabled by an integrated
platform of technologies that include:
- Gene promoter analysis for discovering and validating key DNA sequences
involved in controlling the expression of disease-causing genes. This
analysis determines the specific DNA sequence targets for which Genelabs
will design a drug.
- High-throughput screening of random and structure-biased chemical
libraries to select small DNA-binding molecules, or drug subunits, that
are the building blocks for Genelabs' drug candidates.
- Multiple proprietary and nonproprietary assay systems, including
Genelabs' proprietary Merlin(TM) assay system, for identifying the DNA
sequence-binding preferences of the DNA-binding molecules. These assays
characterize the specific DNA sequences to which the compounds will bind.
- Chemistry capabilities for generating additional DNA-binding drug
subunits and for combining the DNA-binding molecules in multiple
combinations to create molecules that bind to longer and thereby more
gene-specific DNA targets.
- Generation of lead compounds using cell-based assays to validate the
effects of a DNA-binding molecule against a specific gene target.
The initial phase of the drug discovery process utilizes Genelabs'
expertise and proprietary technologies to identify and characterize small
molecules that bind to short sections of DNA. A database of information on these
molecules' DNA-binding properties forms the basis for selecting drug candidate
subunits. In the next phase, based on information about the DNA sequences of
disease-causing genes, the Company links these small molecules together in
selected combinations to form potential drug candidates that bind to longer and
thereby more gene-specific DNA targets. Genelabs believes that its potential
drug candidates will be sufficiently gene-target specific to produce the desired
therapeutic effect with minimal toxicity.
To date, the Company's technologies have identified DNA sequence-binding
preferences for many molecules. Several compounds have been designed and
synthesized from these molecules. In addition, the Company has performed tests
that demonstrated predicted effects on the expression of target genes. In these
tests, Genelabs' scientists engineered a drug candidate-binding DNA sequence
into the regulatory site of a test gene and inserted the engineered test gene
into cultured human cells, the results of which demonstrated a dose dependent
alteration in the expression of the targeted test gene. Tests performed in
unaltered bacterial cells on similar binding sites also demonstrated alterations
in the expression of test genes. These data demonstrated that the potential drug
candidates affect the targeted gene and are not toxic at the levels shown to
alter the gene's protein production.
Genelabs has identified key DNA sequences in several commercially
attractive disease-related genes that are likely to be effective drug targets,
including breast cancer, autoimmune diseases, hepatitis B virus and vancomycin
resistant enterococci. Many of the Company's discoveries regarding these
sequences are novel and Genelabs has filed, and intends to file, patent
applications covering the discoveries, as appropriate. The Company is actively
engaged in synthesizing drug candidates that may alter the expression of these
medically important gene targets.
Genelabs believes that drugs based on its proprietary DNA-binding
technology would have significant advantages compared to other methods of
attempting to control gene expression. Other drugs that target transcription
factors, or that target other intracellular regulatory proteins controlling the
role and activities of transcription factors, could undesirably affect the
expression of other genes or create unforeseen consequences in important
cellular functions. Transcription factors are typically not gene-specific, and
any one of them may bind to and contribute to the regulation of the expression
of hundreds of different genes. Furthermore, several transcription factors may
be involved in the expression of any given gene.
RNA-Binding
In addition to its DNA-binding drug discovery approach, described above,
the Company has related RNA-binding technologies. These RNA-binding technologies
utilize Genelabs' long-standing expertise in
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viral discovery, which led to the discovery of several previously unidentified
viruses such as hepatitis E and hepatitis G. Due to the structural similarity of
DNA and RNA, the Company has built upon its DNA expertise and created
RNA-binding technologies utilizing related chemistries, but addressing entirely
different therapeutic areas with similarly large markets. The aim of Genelabs'
RNA-binding technology is to create drugs that directly attack the
double-stranded RNA structure uniquely present during the replication of certain
viruses, and thereby prevent their reproduction. There are numerous viral
targets that could be addressed by this approach, such as influenza and
hepatitis C.
Certain viruses generate long sequences of double-stranded RNA during
replication that are not found in uninfected human cells. Double-stranded RNA is
essential for the life cycle of these viruses, and is also a biological trigger
for host defense systems such as interferon production. Because Genelabs'
compounds target the structure, not the specific sequence, of double-stranded
RNA, Genelabs believes that drugs designed using its technology could be broad
spectrum antiviral compounds effective in the treatment of multiple viral based
diseases.
Through its DNA- and RNA-binding technologies, the Company believes it has
entirely new approaches to identifying therapeutics for disease intervention.
The Company's strategy is to identify, develop and commercialize a broad
portfolio of drug candidates from these technologies.
The Company is in its third year of a three-year research grant from the
Defense Advanced Research Projects Agency ("DARPA") to apply Genelabs'
DNA-binding and RNA-binding technologies to the discovery of drugs that can be
used as countermeasures to agents of biological warfare. Genelabs receives
research funding and has the right to commercialize any invention it makes under
the grant. The Company and DuPont Pharmaceuticals Company ("DuPont") were
parties to a collaborative research and license agreement entered into at the
end of 1996 which provided funding over three years. This agreement was
terminated by DuPont at the end of 1999 and provides for certain ongoing cross
licenses between the parties, milestone payments and royalties related to
technology covered under the agreement.
DRUG DEVELOPMENT PROGRAM: GL701 FOR SYSTEMIC LUPUS ERYTHEMATOSUS
Genelabs has successfully completed two Phase III clinical trials involving
572 women for its near-term product opportunity, GL701 for SLE. The FDA has
granted Fast Track designation to GL701 for SLE and has also granted GL701
orphan drug status. These designations provide for expedited submission and
review of a New Drug Application and allow up to seven years of U.S. marketing
exclusivity. Genelabs plans to commercially introduce GL701 to the U.S. market
itself, and to commercialize GL701 elsewhere in the world through partnerships
or licensing arrangements with major pharmaceutical companies. Genelabs plans to
file a New Drug Application ("NDA") with the FDA in 2000.
According to various industry sources, lupus affects approximately 200,000
patients in the U.S., and Genelabs believes that there are at least one million
patients worldwide. Lupus is a severe, chronic and frequently debilitating
autoimmune disease that can affect the lungs, heart, kidneys, skin, joints and
nervous system. In the U.S., there have been no new products approved for the
treatment of lupus in 40 years, and the current treatments are usually
inadequate, due either to limited benefits or to severe adverse side effects.
GL701, Genelabs' therapeutic candidate for SLE, is a pharmaceutical formulation
designed for oral administration that contains highly purified prasterone (the
synthetic equivalent of dehydroepiandrosterone or "DHEA", a naturally occurring
hormone) as the active ingredient. Genelabs has exclusive rights under U.S.
patents granted to Stanford University for the use of DHEA to treat SLE.
Clinical Rationale behind GL701
GL701 provides an external source of DHEA, which is the most abundant
steroid hormone produced by the adrenal glands, testes, ovaries, and brain.
Lupus patients generally have abnormally low levels of DHEA (approximately 50%),
and studies have shown that hormonal influences play a role in the development
and progression of the disease. Early studies at Stanford University indicated
that oral use of DHEA could be effective and safe for the treatment of SLE. A
Phase II clinical study conducted at Stanford University in 1993 and published
in Arthritis and Rheumatism in December 1995, indicated that DHEA-treated
patients
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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 commonly used steroid
drug treatment for lupus, has many serious side effects including osteoporosis,
atherosclerosis and diabetes, and is a leading cause of disability and death in
lupus patients.
Genelabs Clinical Trial Results
Since licensing GL701 from Stanford in 1993, Genelabs has successfully
completed two Phase III double-blind, placebo controlled clinical trials of
GL701 for lupus. The first of these Phase III trials, completed in 1997,
evaluated GL701's ability to reduce steroid dependency in women with mild to
moderate lupus. All 191 women with SLE in this trial previously required
prednisone or other steroids for their treatment. Patients in the trial received
daily doses of 200 mg of GL701, 100 mg of GL701 or placebo for seven to nine
months. Data presented to the American College of Rheumatology on behalf of the
Company showed that patients who received 200 mg daily doses of GL701 achieved
the study's primary endpoint at a higher rate than patients who received
placebo. The primary endpoint of this study was a sustained reduction in steroid
dose to 7.5 mg per day or less (i.e., physiologic levels equivalent to those
normally produced by the adrenal glands). The beneficial effect was most evident
in the 137 lupus patients with active disease, defined as those patients with a
Systemic Lupus Erythematosus Disease Activity Index ("SLEDAI") score greater
than 2 at study entry. Among these patients, 51% of those who received daily
doses of 200 mg of GL701 achieved the primary endpoint compared to 29% of those
who received placebo (p = 0.03).
The second Phase III study, completed in 1999, evaluated GL701's ability to
improve or stabilize clinical outcome and disease symptoms in women with active
lupus. The 381 women with SLE enrolled in this trial were randomized to receive
either an oral dose of 200 mg of GL701 or placebo once a day for 12 months. In
this trial, treatment with GL701 demonstrated a consistent pattern of efficacy
across a number of primary and secondary variables. Patients treated with GL701
showed a 35% greater rate of response than the placebo group: 66% of GL701
patients responded to treatment compared to 49% of placebo patients. This
improvement in response was statistically significant (p = 0.005) and was the
protocol-specified primary endpoint, defined as improvement or stabilization in
all four scoring instruments measured, with no clinical deterioration. The
scoring instruments were SLEDAI, Systemic Lupus Activity Measure, Krupp Fatigue
Severity Score, and Patient Global Assessment. Because of the inherent
variability in these scoring instruments, the classification of a patient as a
responder allowed for a slight deterioration in any of the four scores from
baseline.
The advantage of GL701 over placebo was consistent among secondary efficacy
variables. A serious manifestation of SLE called flare, characterized by
increased disease severity, occurred among 24% fewer patients who received GL701
than those who received placebo. In addition, certain specific symptoms
associated with SLE occurred less frequently among GL701 recipients, including
muscle pain, nasal and mouth ulcers and hair loss. Finally, in a subset of
patients who had been taking steroids for at least six months prior to entering
the study and who were eligible for bone density measurements using Dual X-ray
Absorptiometry, the study showed that GL701 increased bone density. Since many
lupus patients are currently on steroids and steroids are known to decrease bone
density, potentially leading to osteoporosis, GL701 may provide benefits beyond
the immediate symptoms of lupus. Adverse events related to taking this hormone
were mild and expected and included acne, facial hair growth, hormonal changes
and a reduction in HDL cholesterol.
Both clinical trials showed GL701 to be well tolerated by patients.
Incorporating the results of both of these trials, Genelabs plans to complete
its submission of an NDA for GL701 for SLE in the second half of 2000.
INVESTMENTS AND PARTNERED PROGRAMS
Novel Viruses Discovered by Genelabs - In connection with its discovery of
the hepatitis E virus ("HEV"), Genelabs has granted SmithKline Beecham p.l.c.
("SB") an exclusive worldwide royalty-bearing
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license to make, use and sell an HEV vaccine. SB is developing this vaccine and
has successfully completed two Phase I trials, showing the vaccine to be safe
and immunogenic. In collaboration with Walter Reed Army Institute of Research
and the National Institutes of Health, SB plans to begin a Phase II trial of
this vaccine candidate. In addition to SB's vaccine license, Genelabs has
granted Abbott Laboratories a royalty-bearing, non-exclusive worldwide license
to develop and commercialize diagnostic products for HEV.
In connection with its discovery of the hepatitis G virus ("HGV"), Genelabs
has entered into royalty-bearing license agreements with Roche Diagnostics GmbH
and Chiron Corporation and Ortho Diagnostic Systems Inc. to develop and
commercialize diagnostic products for HGV. Although the presence of HGV has been
detected in blood samples contained in the U.S., Europe, Japan and elsewhere, to
date there are no known diseases specifically caused by HGV. Additionally, there
are currently no assays developed for screening the blood bank supply.
In connection with its discovery of certain polypeptide regions of the
hepatitis C virus ("HCV"), Genelabs has entered into a royalty-bearing license
agreement with Pasteur Sanofi Diagnostics, acquired by Bio-Rad Laboratories,
Inc. in late 1999. The Chiron and Ortho agreements referred to above also
contain certain rights under Genelabs' HCV patents.
Minority Investment in Taiwan-based Biopharmaceutical Company -- Genelabs
holds a 12% equity interest in a Taiwan-based company, Genelabs Biotechnology
Co. Ltd. ("GBL"), which develops, manufactures and distributes pharmaceutical
products in Asia. GBL holds the Asian rights to market GL701, except for Japan,
and is conducting a Phase II clinical trial of Genelabs' anti-cancer compound
GL331.
GL331: Cancer -- The University of North Carolina at Chapel Hill and Yale
University have granted Genelabs a license covering certain compounds, including
GL331, a topoisomerase II inhibitor under development as a potential treatment
for certain 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 completed a Phase I human clinical safety study
at M.D. Anderson Cancer Center in Houston, Texas, which determined the maximum
tolerable dose of the drug. Genelabs licensed Asian marketing rights, excluding
Japan, to GBL, and GBL is conducting a Phase II study of this compound in
patients with small cell lung cancer. If the results of this study are positive,
Genelabs plans to further develop GL331.
Asthma Genomics Program -- The Company's scientists have isolated certain
novel genes on human chromosome 5 in a region that has been genetically linked
to asthma. Patent applications have been filed in the U.S. and internationally
to claim these novel sequences and Genelabs has entered into a pilot research
collaboration with a major pharmaceutical company in order to investigate the
relevance of these genes to asthma. This pilot research collaboration only
partially funds this program, and if Genelabs is not successful in securing
additional external funding, the program is likely to be terminated.
PATENTS AND LICENSES
The Company seeks patent protection for its proprietary technologies and
potential products in the U.S. and internationally. Genelabs owns 32 issued U.S.
patents, 9 of which cover its novel drug discovery technologies. The remaining
23 issued U.S. patents cover GL701, the Company's HEV and HGV discoveries,
immunomodulatory genes, and other proprietary technologies. Genelabs also owns
47 international patents that cover similar claims to its U.S. patents. In
addition, Genelabs possesses many pending patent applications covering the
Company's novel drug discovery technologies and other proprietary technologies,
but Genelabs cannot estimate how many of these pending patent applications will
be granted as patents. The Company also has exclusive and non-exclusive licenses
under a number of patents and patent applications owned by third parties.
Genelabs(R) and the Genelabs logo are registered trademarks of Genelabs
Technologies, Inc. This Form 10-K also includes trade names and trademarks of
companies other than Genelabs.
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GOVERNMENT REGULATION
The research and development, manufacture, distribution and marketing of
human pharmaceutical and medical device products are subject to regulation by
the FDA in the U.S. 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. In the U.S., prior
to the testing of a new drug in human subjects, the FDA requires the submission
of an Investigational New Drug Application ("IND") which consists of, among
other things, results of preclinical laboratory and animal tests, information on
the chemical compositions, manufacturing and controls of the products, a
protocol, an investigator's brochure and a proposed clinical program.
Preclinical tests include laboratory evaluation of the product and animal
studies to assess the potential safety and efficacy of the product and its
formulation. Unless the FDA objects, the IND becomes effective 30 days after
receipt by the FDA. FDA objection to the initiation of clinical trials is not
uncommon, and the FDA may request 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.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of the NDA for approval of the
marketing and commercial shipment of the new drug. 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 does not satisfy the criteria for
approval or it may limit the 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. 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 U.S. 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 or biological product is likely to take a number of years and
involve the expenditure of substantial resources.
The Company's 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
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protection and hazardous substance control and to other present and possible
future local, state and federal regulations.
EMPLOYEES
As of December 31, 1999, the Company had 93 full-time employees. 72
employees were involved in research and development, and 21 were in
administration. The Company's employees are not represented by any collective
bargaining agreements, and the Company has never experienced a work stoppage.
RISK FACTORS
There are a number of risk factors that should be considered by Genelabs'
shareholders and prospective investors. It is not possible to comprehensively
address all risks that exist, but the following risks in particular should be
considered, in addition to the other information in this 10-K.
- Regulatory approvals are uncertain
- Market acceptance of GL701 is uncertain
- Genelabs has limited sales, marketing and distribution capabilities and
experience
- The Company is dependent on outside manufacturing and supplier sources
- Clinical trial results are unpredictable
- Research programs will require additional funds
- Genelabs is in an early stage of development
- The Company depends on key employees for the execution of its business
plan
- Competition in biotechnology is intense
- Patent and trade secret protection is uncertain
- The Company's stock price is volatile
A more detailed discussion of each of these risk factors follows.
REGULATORY APPROVALS ARE UNCERTAIN
The production and marketing of the Company's products are subject to
rigorous requirements by the FDA as described in more detail under the caption
"Government Regulation" in Item 1 of this Form 10-K, and also by comparable
agencies in other countries and by state regulatory authorities. 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 obtained in clinical trials will be sufficient
to establish the safety and efficacy of its products. In particular, 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 approval of an
NDA.
Even if the Company obtains regulatory approval for GL701, identification
of certain side effects after it is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval or require
reformulation, additional testing, and changes in labeling of the product. The
Company's inability to obtain or maintain requisite governmental approvals, the
identification of side effects or other factors could
9
<PAGE> 10
delay or preclude the Company from further developing or marketing GL701, 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
SLE. Orphan drug status may, under present regulations, entitle the Company to
seven years of U.S. marketing exclusivity provided that the Company is the first
to sponsor an approved new drug application for such indication. 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.
The Company is also subject to other regulations 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.
MARKET ACCEPTANCE OF GL701 IS UNCERTAIN
A number of factors may affect the rate and depth of market acceptance of
GL701 for SLE. Among these factors are the availability of third-party
reimbursement, the price of GL701 relative to other drugs for SLE treatment, the
perception by physicians and other members of the health care community of the
efficacy and safety of GL701, and the effectiveness of the sales and marketing
efforts by Genelabs. In addition, side effects or unfavorable publicity
concerning GL701 or other drugs on the market could have a material adverse
effect on the Company's ability to obtain physician, patient or third-party
payor acceptance.
GL701 contains highly purified prasterone, the synthetic equivalent of
DHEA, as the active ingredient. Products containing synthetic forms of DHEA are
currently being marketed by others as dietary supplements. DHEA is an androgenic
hormone produced by the body and is not a component of the diet. The Company's
position is that this hormone should be classified as a drug and be subject to
regulation and approval by the FDA. The Company has submitted documentation to
the FDA requesting clarification of DHEA's status as a drug and removal from the
market as a dietary supplement. The Company has also submitted documentation to
the Drug Enforcement Administration ("DEA") requesting clarification of DHEA's
status as an anabolic steroid. However, to date the FDA and DEA have taken no
action to limit or regulate the sale of these products, and no assurance can be
given as to the willingness or ability of the FDA or DEA to do so in the future.
In the event that GL701 receives FDA approval, the concurrent sale of these
products could adversely affect the market for or the selling price of GL701.
GENELABS HAS LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES AND
EXPERIENCE
The Company has only limited sales, marketing and distribution
capabilities, and has never commercially introduced a product to the market. If
the Company successfully develops any new products, including GL701, Genelabs
must develop a marketing and sales force with technical expertise and supporting
distribution capability in order to market the product directly, or Genelabs
must rely on larger pharmaceutical companies to market its products. The Company
expects to incur significant expenses in developing, training, maintaining and
managing its sales organization. The cost of establishing and maintaining the
sales force may exceed GL701 product revenues and the Company's direct marketing
and sales efforts may not be successful.
THE COMPANY IS DEPENDENT ON OUTSIDE MANUFACTURING AND SUPPLIER SOURCES
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 meet or continue to meet FDA or product specification
standards or that the Company's manufacturing requirements can be met in a
consistent and timely manner. In addition, the Company may be unable to obtain
sufficient contract manufacturing capacity due to competing demands on the
contract
10
<PAGE> 11
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. The
Company's 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 by a third
party manufacturer. In particular, the active ingredient for GL701 currently is
supplied to the Company by a limited number of sources. In addition, currently
the company has a single manufacturer to supply the finished product. The
disqualification or loss of this manufacturer or one of these suppliers could
have a material adverse effect on the Company because of difficulties and costs
in obtaining and qualifying alternate suppliers. 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 or an interruption in supply could impair the Company's
ability to manufacture and market its products. If Genelabs is unable to renew
or extend an agreement with a manufacturer or supplier, if an existing agreement
is terminated, or if a third party manufacturer or supplier otherwise cannot
meet our needs for a product, the Company may not be able to obtain an
alternative source of manufacture or supply. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
CLINICAL TRIAL RESULTS ARE UNPREDICTABLE
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. The Company
cannot ensure that 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 can provide no
assurance that any additional clinical trials conducted for GL701 will support
other potential uses of the product or be sufficient to support additional label
indications or continuing development of the drug candidate.
RESEARCH PROGRAMS WILL REQUIRE ADDITIONAL FUNDS
The Company has incurred losses in each year since its inception and has
accumulated approximately $143 million in net losses through December 31, 1999,
including a net loss of $12.8 million in 1999. The Company anticipates realizing
a net loss at least until 2001, and profitability thereafter is subject to
significant uncertainty. Genelabs cannot provide assurance that revenues will be
sufficient to fund operations or that the Company will achieve profitability or
positive cash flow. Additional financing will be required to fund the Company's
continuing operations and research and development activities. This financing
may dilute existing shareholders or provide certain rights to Genelabs' assets.
Genelabs' fundraising strategy is to sell additional equity in order to
have the necessary resources to commercially launch GL701. If financing
arrangements contemplated by management are not completed, the Company may have
to seek other sources of capital or reevaluate its operating plans. Longer-term,
the Company plans to fund its operations principally from revenue from sales of
GL701, should it receive FDA approval. However, there can be no assurance that
the Company will ever be able to generate revenue from sales of GL701. Genelabs
is currently pursuing foreign GL701 licensing agreements, but can provide no
11
<PAGE> 12
assurance that license agreements can be obtained on acceptable terms, if at
all. Genelabs can provide no assurance that it will be able to find buyers
willing to purchase its equity or license its products or technology on
commercially favorable terms, if at all.
The unavailability of additional funds through the above-described
potential financing sources will delay or prevent the development, testing,
regulatory approval, manufacturing or marketing of some or all of the Company's
products and technologies and would have a material adverse effect on the
Company's business, financial condition and results of operations.
GENELABS IS IN AN EARLY STAGE OF DEVELOPMENT
Genelabs' product candidates have never been sold commercially and its drug
discovery technologies are at an early stage of development. The Company's
technologies, including the DNA and RNA-binding technologies, have not been
proven to have a therapeutic effect and are still under development. There can
be no assurance that these technologies or any of the Company's product
candidates resulting therefrom will be successfully developed.
Genelabs' drug discovery technologies will require substantial additional
research and development efforts prior to any commercial use, including
extensive preclinical testing and clinical trials as well as potentially lengthy
regulatory approval. There can be no assurance that any of these products or
technologies 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.
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.
COMPETITION IN BIOTECHNOLOGY IS INTENSE
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
products and technologies, Genelabs faces competition from a number of major
pharmaceutical companies as well as emerging biotechnology companies. 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 resources and more 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. These institutions also compete with Genelabs to recruit
scientific personnel and to establish proprietary technology positions.
PATENT AND TRADE SECRET PROTECTION IS UNCERTAIN
The biotechnology, pharmaceutical and diagnostic industries are subject to
conflicting patent rights of various parties. The patent positions of all
companies in these industries, including Genelabs, are uncertain and involve
complex legal and factual issues. A patent application may be rejected or the
claims may be significantly altered or narrowed before a patent issues. As a
consequence, Genelabs does not know whether
12
<PAGE> 13
any of its patent applications will result in the issuance of patents. Genelabs
can provide no assurance that its patents will effectively protect its
technologies. The priority of patent applications is determined under complex
and sometimes conflicting U.S. and international laws. Therefore, Genelabs
cannot assure that its patent applications would have priority over competitors'
patent applications, if any. Should the priority of a patent application come
into question, Genelabs may have to participate in interference proceedings to
determine priority of invention, which could result in substantial costs, even
if the eventual outcome is favorable. Additionally, Genelabs may have to
participate in opposition proceedings in European and other countries prior to
the granting of a patent. The biotechnology industry is very competitive and
other companies may own patents and applications and other proprietary rights
relating to products or technology similar Genelabs' technologies. Genelabs
cannot provide assurance that any patents it owns or controls will protect it
against infringement litigation or afford commercially significant protection of
its technology. The patent laws of foreign countries differ from those of the
U.S. and the degree of protection, if any, afforded by foreign patents may be
different.
If another company were to successfully bring legal action against Genelabs
claiming patent or other intellectual property right infringements, Genelabs
could be liable for damages and prevented from using or selling such products or
technologies. Genelabs might also be required to obtain a license to use,
manufacture or sell the affected product or technology. Genelabs cannot provide
assurance that it will prevail in any dispute regarding its intellectual
property or that it will be able to obtain an acceptable license. Any
litigation, whether or not resolved in favor of Genelabs, could be expensive and
time-consuming, could consume substantial management resources and could have a
material adverse effect on Genelabs' 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 even though the Company has obtained U.S.
patents relating to the use of DHEA to treat SLE and reduce steroid dosage in
lupus patients, the compound itself cannot be patented.
There may be intellectual property owned by third parties that is important
to Genelabs' drug discovery programs or for other indications for GL701 of which
Genelabs is not currently aware. Furthermore, in the future others may obtain
patents or develop proprietary rights necessary or useful for the operation of
Genelabs' business. Certain of these potentially competing patents or rights may
be sufficiently broad to prevent or delay the Company from practicing its
technology, and Genelabs may need to obtain licenses under these patents.
Genelabs also relies on unpatented proprietary technology including trade
secrets, know-how and continuing technological innovation to enhance and develop
its competitive position. The Company seeks to protect these types of
information through a policy of having its employees, consultants and advisors
execute confidentiality and assignment of invention agreements. Genelabs cannot
assure that these agreements will not be breached or that Genelabs will have
adequate legal recourse in case of such breach. It is possible that others will
independently develop the same or similar proprietary information, and Genelabs
cannot provide assurance about protecting its rights in unpatented proprietary
technology. 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 unpatented proprietary technology.
THE COMPANY'S STOCK PRICE IS VOLATILE
The market price of the Company's common stock, like the stock prices of
many publicly traded biopharmaceutical companies, has been and will probably
continue to be highly volatile. A variety of events can impact the stock price.
Several of the events concerning Genelabs that can impact the price are
discussed in this Risk Factors section. Numerous events occurring outside of
Genelabs' control may also impact the price of Genelabs common stock. Securities
class action lawsuits have been brought against other companies following
periods of volatility in the market price of their common stock. This type of
litigation, if brought against Genelabs, could result in substantial costs and
diversion of management's time, which could materially affect our business plan,
financial condition and results of operations.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company leases its principal research, clinical development and office
facilities under an operating lease expiring in November 2002. This location
encompasses approximately 50,000 square feet located in Redwood City,
California, with an annual base rent of $855,000. Genelabs believes that this
facility is 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
The Company owns 100% of the common stock of Genelabs Diagnostics Pte. Ltd.
("GLD") through a series of separate domestic and foreign corporations. On
October 2, 1998, Genelabs adopted a plan to divest this subsidiary and began
accounting for GLD as a discontinued operation. 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 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 (acquired by Bio-Rad Laboratories,
Inc. in late 1999). The Plaintiffs are seeking injunctive relief and damages in
an unspecified amount. On February 4, 2000, the High Court of the Republic of
Singapore found that GLD infringed the patent. Although the court has not yet
ruled on the amount of damages and GLD has appealed the decision, High Court
decisions are generally affirmed on appeal in Singapore. Affirmation of the
finding and assessment of damages against GLD would have a significant negative
impact on GLD, including the possibility that the damages assessed could exceed
the net assets of GLD, the loss of GLD's ability to manufacture its primary
product line, and other factors that Genelabs believes will prevent the Company
from realizing value from GLD. Accordingly, Genelabs has written off its
investment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The executive officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Irene A. Chow, Ph.D........ 61 Chairman of the Board of Directors
James A. D. Smith.......... 41 President and Chief Executive Officer
Marc Gurwith, M.D.......... 60 Vice President, Drug Development and Chief Medical Officer
Rich B. Meyer, Jr., 56 Vice President, Research
Ph.D.....................
Richard A. Waldron......... 46 Vice President, Chief Financial Officer
Debra Catz Bannister....... 47 Vice President, Corporate Communications and Investor
Relations
Lynn M. Hughes............. 44 Vice President, Human Resources and Corporate Services
Heather Criss Keller....... 34 Vice President, Legal Affairs and Secretary
Matthew M. Loar............ 37 Vice President, Finance
</TABLE>
Irene A. Chow has been Chairman since April 1999. From July 1995 through
March 1999 she was President and Chief Executive Officer. From May through June
1995 she was President and Chief Operating Officer. From August 1993 through
April 1995 she was President of Genelabs' Biopharmaceutical Division. Dr. Chow
has been a director of the Company since 1993. In addition to her duties at the
Company, Dr. Chow is also the chairman of the board of Genelabs Biotechnology
Co. Ltd. Prior to joining Genelabs in 1993, Dr. Chow held several positions at
Ciba-Geigy Corporation, most recently as Senior Vice President of Drug
Development for the pharmaceuticals division. 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.
14
<PAGE> 15
James A. D. Smith has been Chief Executive Officer since January 2000 and
President since April 1999. From October 1996 through March 1999 he was Chief
Operating Officer. From June 1995 through September 1996 he was Vice President,
Marketing and Business Development, and from January 1994 through June 1995 he
was Director of Marketing. Prior to joining Genelabs, Mr. Smith was with ICN
Pharmaceuticals for more than ten years in various marketing and business
development positions, most recently as Director of Worldwide Business
Development. Mr. Smith has a B.S. in Molecular and Cellular Biology from the
University of California, San Diego.
Marc Gurwith has been Vice President, Drug Development and Chief Medical
Officer since August 1997. From January 1995 until August 1997 he was Vice
President, Clinical Research and Associate Medical Director at Sequus
Pharmaceuticals. Previously, he served as Vice President of Medical and
Scientific Affairs at Boehringer Mannheim Pharmaceuticals and Senior Director of
Clinical Research at Wyeth-Ayerst Research. Dr. Gurwith received his M.D. from
Harvard University, his J.D. from Temple University School of Law and his B.A.
from Yale University.
Rich B. Meyer, Jr. has been Vice President, Research since October 1998.
From 1993 to October 1998 he was Vice President, Research and Development and
Chief Scientific Officer of Epoch Pharmaceuticals, Inc., a company he joined in
1986. Before joining Epoch, Dr. Meyer was a group leader at the Nucleic Acid
Research Institute and Associate Professor of Medicinal Chemistry and Acting
Associate Dean for Research of the Graduate School at Washington State
University. He has also been Assistant Professor in the Department of
Pharmaceutical Chemistry at the University of California, San Francisco. Dr.
Meyer received his Ph.D. in Chemistry from the University of California, Santa
Barbara.
Richard A. Waldron has been Vice President, Chief Financial Officer since
June 1999. From July 1995 through March 1999 he was Vice President and Chief
Financial Officer of GeneMedicine, Inc. From 1990 to 1995, he was a managing
director and the head of finance for technology-based companies at Rauscher
Pierce Refsnes, Inc., an investment banking firm. From 1985 to 1990, he was a
senior vice president responsible for health care investment banking at Cowen &
Company. Mr. Waldron received his M.B.A. degree with honors from Harvard
University and his A.B. degree magna cum laude in Economics from Princeton
University.
Debra Catz Bannister has been Vice President, Corporate Communications and
Investor Relations since April 1996. From 1993 until April 1996 she was
Director, Corporate Relations at CV Therapeutics. Previously, she served in
similar positions at Aviron, Synergen and Genentech. She has also been a Senior
Consultant at Regis McKenna, Inc. and has held a number of positions in
advertising and marketing communications.
Lynn M. Hughes has been Vice President, Human Resources and Corporate
Services since February 2000. From 1996 through joining Genelabs, she was
Director, Human Resources at COR Therapeutics, Inc. where she built their sales
force prior to the commercial introduction of Integrilin. Prior to joining COR,
she held Human Resources positions with Navigation Technologies, Sony
Electronics and Silicon Graphics. Ms. Hughes holds P.H.R. and C.C.P. Human
Resources certifications, and received her B.A. from the University of North
Florida.
Heather Criss Keller has been Vice President, Legal Affairs and Secretary
since February 2000. From October 1998 through January 2000 she was Director of
Legal Affairs, appointed Secretary in August 1999. From September 1996 until
July 1998 she was Senior Corporate Counsel at Heartport, Inc. Prior to joining
Heartport, Ms. Keller was an associate with the law firm of Brobeck, Phleger &
Harrison LLP. Ms. Keller received a J.D. from Vanderbilt University School of
Law and a B.A. from Duke University.
Matthew M. Loar has been Vice President, Finance since January 1999. From
November 1996 until January 1999 he was Director of Finance and Controller, and
from September 1995 through November 1996 he was Finance Manager. From 1991
through September 1995 he was Corporate Accounting Manager at CBR Cement
Corporation and prior to that was Audit Manager at Coopers & Lybrand. Mr. Loar
is a Certified Public Accountant and has a B.A. in Legal Studies from the
University of California, Berkeley.
15
<PAGE> 16
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 Stock
Market on June 13, 1991 under the symbol "GNLB." The following table sets forth
for the periods indicated the high and low sale prices of the Company's common
stock as reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1999
1st Quarter........................................ 3 5/32 1 11/16
2nd Quarter........................................ 2 1/2 1 7/16
3rd Quarter........................................ 4 1/2 1 1/2
4th Quarter........................................ 6 2 15/32
1998
1st Quarter........................................ 4 5/8 2 7/16
2nd Quarter........................................ 4 1/32 2 3/4
3rd Quarter........................................ 3 3/32 1 1/2
4th Quarter........................................ 3 1/16 1 1/2
</TABLE>
As of March 13, 2000, there were approximately 648 holders of record of
Genelabs Common Stock.
Genelabs 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 FINANCIAL DATA
The selected financial data presented below summarizes certain financial
information from the Company's consolidated financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue........................... $ 8,017 $ 7,800 $ 3,115 $ 2,006 $ 8,499
Research and development expenses.......... 13,953 12,615 12,022 9,647 11,451
General and administrative expenses........ 4,704 4,349 4,508 5,063 5,474
Loss from continuing operations............ (10,139) (8,139) (12,038) (11,482) (7,823)
Net loss................................... (12,821) (6,605) (12,897) (11,397) (10,511)
Loss per share from continuing
operations.............................. (0.25) (0.21) (0.31) (0.32) (0.28)
Net loss per share......................... (0.32) (0.17) (0.33) (0.32) (0.38)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 8,099 $20,301 $21,099 $30,465 $22,557
Working capital................................ 3,010 12,310 15,793 25,805 15,289
Total assets................................... 11,689 26,807 29,925 41,908 33,862
Shareholders' equity........................... 5,571 17,786 23,210 35,924 25,752
</TABLE>
16
<PAGE> 17
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. Forward-looking statements involve a number of risks and
uncertainties that are discussed under "Risk Factors" in Item 1 and elsewhere on
this Form 10-K. 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 engaged in the
discovery and development of a new class of pharmaceutical products that
selectively regulate gene expression and the development of GL701, our
proprietary hormone treatment for systemic lupus erythematosus ("SLE" or
"lupus"). We have completed two pivotal clinical trials of GL701 for the
treatment of lupus in women, and intend to begin the submission of a New Drug
Application for GL701 to the FDA in the first half of 2000. We intend that
significant funding for the discovery and development of our future products
would be provided by revenue from the sales of GL701, should it receive FDA
approval.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 COMPARED TO 1998
The net loss increased to $12.8 million in 1999 from $6.6 million in 1998,
largely due to two nonoperating items that account for $4.2 million of the $6.2
million increase in net loss. Genelabs' continuing operations account for the
remaining $2.0 million increase in net loss in 1999, comprised primarily of $1.3
million in increased research and development expenditures and $0.5 million in
lower interest income. The nonoperating items include a $2.8 million increase in
net loss related to the Company's discontinued diagnostics subsidiary, which was
written-off in 1999. As a result of this write-off, Genelabs is carrying its
diagnostics subsidiary at no value in the financial statements, based on the
Company's belief that Genelabs will not realize any value for its ownership of
this company. The other nonoperating item impacting the comparison was the $1.4
million net gain on the partial sale of the Company's investment in a
Taiwan-based biopharmaceutical company in 1998.
Contract revenues increased to $8.0 million in 1999 compared to $7.8
million in 1998. The increase was largely due to $1.2 million in additional
revenue from the Company's Defense Advanced Research Projects Agency grant in
1999 compared to 1998. Partially offsetting this increase in revenues was a
decrease in 1999 relating to a one-time receipt of $1 million in revenue
recognized in 1998 from Genelabs' expansion of hepatitis E virus vaccine rights
granted to SmithKline.
Operating expenses increased to $18.7 million in 1999 from $17.0 million in
1998. In 1999, 75% of operating expenses were in research and development,
compared to 74% in 1998. Research and development expenses increased to $14.0
million in 1999 compared to $12.6 million in 1998. Research and development
expenses increased for both of the Company's areas of focus -- development of
GL701 for the treatment of lupus and discovery of novel DNA-binding drugs.
During 1999, costs increased in the GL701 program as the Company purchased
additional drug supply to complete the clinical program and analyzed the results
of its second Phase III clinical trial in preparation for submitting a New Drug
Application with the FDA. Costs in the drug discovery program increased as the
Company hired the chemists who are synthesizing molecules for the DNA- and
RNA-binding programs. General and administrative expenses increased 8% in 1999,
to $4.7 million from $4.3 million in 1998.
Interest income decreased to $0.5 million from $1.0 million in 1998, due to
Genelabs lower average cash balance during 1999.
Results from the discontinued diagnostics business, GLD, declined
substantially in 1999, to a loss of $2.7 million compared to a profit of $0.1
million in 1998. This $2.8 million difference was comprised of a decrease in
gross profit of $0.8 million, costs of $0.5 million for defending an HIV-2
patent infringement lawsuit, and a $2.2 million charge to write-off the net
assets of GLD, partially offset by $0.7 million in reduced operating expenses.
On February 4, 2000, the High Court of the Republic of Singapore found that GLD
infringed an HIV-2 patent owned by Institut Pasteur and exclusively licensed to
Bio-Rad Laboratories Inc., formerly Pasteur Sanofi Diagnostics. Although the
court has not yet ruled on the amount of damages and
17
<PAGE> 18
GLD has appealed the decision, the court has ruled that in the interim GLD must
pay a royalty to Bio-Rad on sales of the products at issue in the lawsuit. If
GLD is unsuccessful in its appeal, there will be a separate hearing to determine
the amount of damages. If the interim royalty amount is applied retroactively to
the period of alleged infringement, the damages awarded to the plaintiffs would
exceed the net assets of GLD. In addition, affirmation of the High Court ruling
and assessment of damages against GLD would have additional negative impacts on
GLD, including the possibility that GLD could no longer manufacture or sell its
primary product line. High Court decisions are generally affirmed on appeal in
Singapore. For these reasons, Genelabs believes that it is probable that the
value of its investment in GLD has been impaired and that there is reasonable
basis for estimating the amount of the loss. The Company has considered the
interim Bio-Rad royalty rate in estimating the amount of the impairment.
Accordingly, Genelabs has written off its investment of $2.2 million at December
31, 1999.
In 1999, the company did not sell any of the shares it holds in its
Taiwan-based investment, and accordingly there was no related gain or loss
recorded, as compared to the net $1.4 million gain during 1998.
1998 COMPARED TO 1997
The net loss decreased to $6.6 million in 1998 compared to $12.9 million in
1997. The decrease in net loss was due to increased contract revenue and a gain
on the sale of an investment, partially offset by slightly higher operating
expenses.
Contract revenues increased to $7.8 million in 1998 compared to $3.1
million in 1997. The increase is attributable to two primary factors. The first
of these was recognition of approximately $3.5 million in revenue under a grant
from DARPA for development of agents to counteract biological warfare. Second,
the Company received a $1 million payment from SmithKline Beecham for expansion
of their rights to market a vaccine they are developing for the hepatitis E
virus under license from Genelabs.
Operating expenses increased to $17.0 million in 1998 compared to $16.5
million in 1997. In 1998, 74% of the operating expenses were in research and
development, compared to 73% in 1997. Research and development expenses
increased to $12.6 million in 1998 from $12.0 million in 1997. The increase in
research and development was due to significantly higher spending on the
Company's drug discovery program, partially offset by lower spending on GL701
for lupus. Increased expenditures on the drug discovery program consisted
primarily of sourcing chemical compounds as possible DNA- or RNA-binding agents,
screening these compounds for DNA- and RNA-binding activity, and characterizing
potential drug target binding sites on disease-causing genes. The decreased
expenditures on the GL701 program consisted of lower purchases of drug supply
necessary for conducting the clinical trials and lower clinical trial costs
since the majority of patients had completed their treatment by the end of 1998.
General and Administrative expenses decreased 4% in 1998, to $4.3 million from
$4.5 million in 1997.
Interest income decreased to $1.0 million in 1998 from $1.4 million in
1997, due to declines in short-term interest rates and lower average balances in
the Company's short-term investment accounts.
In 1998, the Company recorded a $1.6 million gain on the partial sale of
its investment in GBL, offset by $0.2 million of equity in losses through the
time of the sale. Since the sale reduced Genelabs' ownership of this company to
less than 20%, Genelabs stopped recording its proportionate share of GBL's
income or loss, accounting for the decreased equity in loss compared to 1997.
Results from the discontinued diagnostics business, GLD, improved to income
of $0.1 million in 1998 compared to a loss of $0.3 million in 1997. The improved
operating results in 1998 were due to a 1997 charge resulting from a terminated
sales agreement in which the customer could not meet its contractual
obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $8.1 million at December 31, 1999, compared to $20.3 million at
December 31, 1998. The $12.2 million decrease in cash, cash equivalents and
short-term investments was primarily attributable to $10.0 million cash used in
operations, $1.5 million used to repay short-term borrowings and $0.9 million
used to purchase research
18
<PAGE> 19
equipment. The net cash used in operations included the continuation of the
development of GL701 for lupus and expansion of the drug discovery research
program, particularly the Company's chemistry capabilities. The cash uses were
partially offset by $0.9 million received from issuance of common stock under
employee stock plans.
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. Due to the net
losses, income taxes have not been a significant expense. 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 current
operations through the end of 2000, although the Company intends to seek
additional funds through the sale of equity, corporate partnerships or licensing
arrangements. The Company anticipates realizing a net loss until sometime after
GL701 is commercially marketed, 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.
To date, Genelabs has not experienced any problems related to the year 2000
issue. The total costs incurred by the Company for the year 2000 issue were less
than $0.2 million. While it is possible that the Company could still experience
problems related to the year 2000 issue, Genelabs believes this is unlikely.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Genelabs' exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments. Genelabs considers the risk
minimal as the Company has maintained a short six to nine-month average
maturity, to date has not used derivative instruments, and has placed its
investments with high quality debt issuers, primarily the U.S. government.
Genelabs' exposure to market risk for changes in foreign currency exchange
rates relates primarily to the Company's investment in GBL, which is separately
identified on the balance sheet. Genelabs may attempt to divest a portion of its
shares in GBL, in which case changes in foreign currency exchange rates would
impact the proceeds received upon sale of these shares. The Company does not
believe that such foreign currency exchange rate changes will materially impact
the value reported in the financial statements, even if the changes are
significant.
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.
19
<PAGE> 20
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
2000 Annual Meeting of Shareholders to be held on June 1, 2000 (the "Proxy
Statement"). 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.
20
<PAGE> 21
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. All financial
statement schedules have been omitted because they are not applicable or because
the information is included elsewhere in the Consolidated Financial Statements
or notes thereto.
(a)(3) and (c) Index to Exhibits. The following documents are filed herewith or
incorporated by reference herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
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, 1998
(the "1998 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).
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 (incorporated herein by reference to Exhibit 4.04 to
Registrant's Registration Statement on Form S-8 (File No.
333-30083) filed on June 26, 1997).
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 Amendment to Registrant's 1994 Annual and Long-Term
Incentive Based Compensation Program (incorporated herein by
reference to Exhibit 10.05 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997 ("the 1997
Form 10-K")).
10.06 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).
10.07 Registrant's 1995 Stock Option Plan, as amended to date
(incorporated herein by reference to the 1997 Form 10-K).
10.08 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).
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.09 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).
10.10 Amendment to Industrial Net Lease Agreement by and between
Registrant and Metropolitan Life Insurance Company dated
June 17, 1997 (incorporated herein by reference to Exhibit
10.36 to Registrant's Form 10-Q for the quarter ended
September 30, 1997).
10.11 License Agreement, dated as of October 1, 1993, by and
between Registrant and Stanford University (incorporated
herein by reference to Exhibit 10.16 to the 1996 Form 10-K).
*
10.12 Agreement, dated as of January 26, 1996, by and between
Registrant and Dr. Edgar G. Engleman (incorporated herein by
reference to Exhibit 10.15 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996
Form 10-K")). *
10.13 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).
*
10.14 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")). *
10.15 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). *
10.16 Joint Investment Agreement for formation of Genelabs
Biotechnology Co., 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). *
10.17 Technology Transfer Agreement, dated as of November 21,
1995, by and between Registrant and Genelabs Biotechnology
Co., Ltd. (incorporated herein by reference to Exhibit 10.29
to the 1995 Form 10-K). *
10.18 Grant from the Space and Naval Warfare Systems Command,
sponsored by the Defense Advanced Research Projects Agency,
effective as of February 3, 1998 (incorporated herein by
reference to the 1997 Form 10-K).
10.19 First Modification to Grant from the Space and Naval Warfare
Systems Command (incorporated herein by reference to Exhibit
10.26 to the 1998 Form 10-K).
10.20 Second Modification to Grant from the Space and Naval
Warfare Systems Command.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedules (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.
(b) Reports on Form 8-K.
On November 30, 1999, Genelabs filed a Current Report on Form 8-K
announcing that GL701, its investigational drug for systemic lupus
erythematosus, demonstrated a statistically significant advantage over placebo
and the FDA agreed that Genelabs' NDA submission appeared adequate for
submission.
22
<PAGE> 23
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, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
</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> 24
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Genelabs
Technologies, Inc. at December 31, 1999 and 1998, and the consolidated results
of operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Palo Alto, California
February 10, 2000
F-2
<PAGE> 25
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents.............................. $ 2,534 $ 3,631
Short-term investments................................. 5,565 16,670
--------- ---------
Total cash, cash equivalents and short-term
investments..................................... 8,099 20,301
Other current assets...................................... 471 383
--------- ---------
Total current assets........................................ 8,570 20,684
Property and equipment, net................................. 1,706 1,401
Net assets of diagnostics subsidiary........................ -- 3,372
Minority investment in Taiwan-based biopharmaceutical
company................................................... 1,174 1,174
Other assets................................................ 239 176
--------- ---------
$ 11,689 $ 26,807
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 1,000 $ 2,500
Accounts payable and other accrued liabilities............ 2,288 3,671
Accrued compensation and related expenses................. 1,303 1,458
Unearned contract revenue................................. 969 745
--------- ---------
Total current liabilities................................... 5,560 8,374
Long-term obligations....................................... 558 647
--------- ---------
Total liabilities........................................... 6,118 9,021
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, 10,000 shares convertible Series A issued
and outstanding, with liquidation preference of
$10,000................................................ 9,682 9,682
Common stock, no par value, 75,000,000 shares authorized,
40,224,624 and 39,736,542 shares issued and outstanding
at December 31, 1999 and 1998, respectively............ 139,207 138,335
Accumulated deficit....................................... (143,318) (130,497)
Accumulated other comprehensive income.................... -- 266
--------- ---------
Total shareholders' equity.................................. 5,571 17,786
--------- ---------
$ 11,689 $ 26,807
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 26
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenue.................................... $ 8,017 $ 7,800 $ 3,115
----------- ----------- -----------
Operating expenses:
Research and development.......................... 13,953 12,615 12,022
General and administrative........................ 4,704 4,349 4,508
----------- ----------- -----------
Total operating expenses.................. 18,657 16,964 16,530
----------- ----------- -----------
Operating loss...................................... (10,640) (9,164) (13,415)
Interest income, net................................ 501 1,025 1,377
----------- ----------- -----------
Loss from continuing operations..................... (10,139) (8,139) (12,038)
(Loss)/income from discontinued operations of
diagnostics subsidiary............................ (2,682) 112 (282)
Equity in loss of minority investment, net of $1,645
gain on partial sale in 1998...................... -- 1,422 (577)
----------- ----------- -----------
Net loss............................................ $ (12,821) $ (6,605) $ (12,897)
=========== =========== ===========
Loss per share from continuing operations........... $ (0.25) $ (0.21) $ (0.31)
=========== =========== ===========
Net loss per share.................................. $ (0.32) $ (0.17) $ (0.33)
=========== =========== ===========
Weighted average shares outstanding................. 39,928,164 39,602,559 38,983,069
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 27
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A COMMON ACCUMULATED
CONVERTIBLE STOCK OTHER TOTAL
PREFERRED COMMON TO BE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK ISSUED DEFICIT INCOME EQUITY
----------- -------- ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996............... $9,682 $129,591 $6,953 $(110,995) $ 693 $ 35,924
--------
Comprehensive loss:
Net loss............................... (12,897) (12,897)
Foreign currency translation
adjustment........................... (877) (877)
--------
Total comprehensive loss........ (13,774)
124 shares issued under the employee
stock purchase plan.................. 413 413
189 shares issued under stock
options.............................. 647 647
1,900 shares issued in a private
placement, net....................... 6,953 (6,953) --
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1997............... 9,682 137,604 -- (123,892) (184) 23,210
--------
Comprehensive loss:
Net loss............................... (6,605) (6,605)
Foreign currency translation
adjustment........................... 450 450
--------
Total comprehensive loss........ (6,155)
222 shares issued under the employee
stock purchase plan.................. 499 499
105 shares issued under stock
options.............................. 232 232
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1998............... 9,682 138,335 -- (130,497) 266 17,786
Comprehensive loss:
Net loss............................... (12,821) (12,821)
Foreign currency translation
adjustment........................... (266) (266)
--------
Total comprehensive loss........ (13,087)
114 shares issued under the restricted
stock plan........................... 234 234
199 shares issued under the employee
stock purchase plan.................. 275 275
175 shares issued under stock
options.............................. 363 363
------ -------- ------- --------- ----- --------
BALANCE, DECEMBER 31, 1999............... $9,682 $139,207 $ -- $(143,318) $ -- $ 5,571
====== ======== ======= ========= ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 28
GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(12,821) $ (6,605) $(12,897)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense................. 578 437 54
Loss/(income) of discontinued diagnostics
subsidiary.......................................... 2,682 (112) 282
Equity in loss of minority investment, net of $1,645
gain on partial sale in 1998........................ -- (1,422) 577
Changes in assets and liabilities:
Receivables and other current assets.................. (88) 330 611
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations.............. (596) (96) 1,088
Unearned contract revenue............................. 224 (98) (357)
-------- -------- --------
Net cash used in operating activities............ (10,021) (7,566) (10,642)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments...................... (4,460) (24,556) (19,797)
Proceeds from sales and maturities of short-term
investments........................................... 15,565 24,755 22,063
Capital expenditures..................................... (860) (1,434) (100)
Proceeds from partial sale of minority investment........ -- 4,300 --
Net remittances (to)/from diagnostics subsidiary......... (607) 678 457
Other.................................................... (86) (7) (141)
-------- -------- --------
Net cash provided by investing activities........ 9,552 3,736 2,482
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 872 731 8,013
Proceeds from short-term borrowings...................... -- 2,500 --
Payments on short-term borrowings........................ (1,500) -- --
-------- -------- --------
Net cash (used in)/provided by financing
activities..................................... (628) 3,231 8,013
-------- -------- --------
Net decrease in cash and cash equivalents.................. (1,097) (599) (147)
Cash and cash equivalents, beginning of the period......... 3,631 4,230 4,377
-------- -------- --------
Cash and cash equivalents, end of the period............... 2,534 3,631 4,230
Short-term investments, end of the period.................. 5,565 16,670 16,869
-------- -------- --------
Cash, cash equivalents and short-term investments, end of
the period............................................... $ 8,099 $ 20,301 $ 21,099
======== ======== ========
Supplemental Cash Flow Information:
Interest paid............................................ $ 68 $ -- $ --
-------- -------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE> 29
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Genelabs Technologies, Inc. ("Genelabs" or the "Company") is engaged in the
discovery and development of a new class of pharmaceutical products that
selectively regulate gene expression and the development of GL701, our
proprietary hormone treatment for systemic lupus erythematosus ("SLE" or
"lupus"). We have completed two pivotal clinical trials of GL701 for the
treatment of lupus in women, and intend to begin the submission of a New Drug
Application for GL701 to the FDA in the first half of 2000.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Accelerated Clinical Research Organization,
Inc., Genelabs Diagnostic Inc., and Genelabs Technologies, Inc. (Delaware). All
intercompany accounts and transactions have been eliminated. Genelabs operates
in one business segment, the discovery and development of pharmaceutical
products. See Note 4 for discussion of the Company's diagnostics subsidiary.
The Company will require additional financial resources to complete the
development and commercialization of its products. In the near-term, management
plans to finance the Company through issuances of equity securities. Thereafter,
management intends to fund its operations principally from revenue received from
sales of GL701, should the FDA approve this drug candidate. If the financing
arrangements contemplated by management are not completed, the Company may have
to seek other sources of capital or reevaluate its operating plans.
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.
REVENUE RECOGNITION
Non-refundable up-front payments received in connection with research and
development collaboration agreements are deferred and recognized on a
straight-line basis over the relevant periods specified in the agreement,
generally the research term. Payments received from rights granted to corporate
partners are recognized upon receipt if they are nonrefundable and the Company
has no future performance obligations.
Revenue related to government grants or collaborative research with the
Company's corporate collaborators is recognized as research services are
performed over the term of each contract. Under these agreements, the Company is
required to perform research and development activities as specified in each
respective agreement. The payments received under each respective agreement are
not refundable and are generally based on a contractual cost per full-time
equivalent employee working on the project. Research and development expenses
under the collaborative research agreements approximate or exceed the revenue
recognized under such agreements over the term of the respective agreements.
Deferred revenue may result when the Company does not incur the required level
of effort during a specific period in comparison to funds received under the
respective contracts. Milestone and royalty payments, if any, will be recognized
pursuant to collaborative agreements upon the achievement of events specified in
the respective contracts.
Revenue recognized from several of the Company's grants and collaborations
represent 10% or more of total contract revenue. In 1999, there were two
significant sources of revenue that accounted for 64% and 19% of total contract
revenue. In 1998, there were three significant sources of revenue that accounted
for 45%, 29%, and 13% of total contract revenue. In 1997, there were two sources
of revenue that accounted for 70% and 15% of total contract revenue.
F-7
<PAGE> 30
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
STOCK BASED COMPENSATION
The Company grants employee stock options at an exercise price equal to the
fair market value of the shares at the date of grant. The Company accounts for
employee stock-based compensation using the intrinsic value method and,
accordingly, recognizes no compensation expense for stock options granted to
employees.
Stock compensation expense for options granted to non-employees is recorded
at the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The fair value of
options granted to non-employees is remeasured and adjusted over the vesting
term of the underlying options.
EARNINGS PER SHARE
Net loss per share has been computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per share
has not been presented, as, due to the Company's net loss position, it is
antidilutive. Had the Company been in a net income position, diluted earnings
per share for 1999, 1998 and 1997 would have included an additional 287,000,
230,000 and 598,000 shares, respectively, related to the Company's outstanding
stock options, and 3,833,000, 3,465,000 and 3,333,000 shares, respectively,
related to the Series A Convertible Preferred Stock.
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 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.
The Company invests funds that are not required for immediate operating
needs principally in a diversified portfolio of debt securities. Management
determines the appropriate classification of these marketable debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. As of December 31, 1999 and 1998, 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
accumulated other comprehensive income. 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. The Company has
not experienced any significant losses on its investments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on equipment 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.
F-8
<PAGE> 31
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. AVAILABLE-FOR-SALE SECURITIES
The following table summarizes the estimated fair value and cost of
available-for-sale securities at December 31:
<TABLE>
<CAPTION>
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
DESCRIPTION:
U.S. Treasury securities and obligations of U.S government
agencies.................................................. $5,244 $12,333
Corporate debt securities................................... 1,517 4,054
Asset-backed securities..................................... -- 1,081
Money-market mutual funds................................... 250 89
------ -------
$7,011 $17,557
====== =======
BALANCE SHEET CLASSIFICATION:
Included in cash and cash equivalents....................... $1,446 $ 887
Included in short-term investments.......................... 5,565 16,670
------ -------
$7,011 $17,557
====== =======
MATURITY:
Due within one year......................................... $7,011 $12,117
Due after one year through two years........................ -- 5,440
------ -------
$7,011 $17,557
====== =======
</TABLE>
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Laboratory equipment........................................ $ 3,863 $ 3,384
Leasehold improvements...................................... 4,312 4,009
Office and other equipment.................................. 1,760 1,682
------- -------
9,935 9,075
Less accumulated depreciation and amortization.............. (8,229) (7,674)
------- -------
$ 1,706 $ 1,401
======= =======
</TABLE>
4. DISCONTINUED OPERATION -- DIAGNOSTICS SUBSIDIARY
The Company owns 100% of the common stock of Genelabs Diagnostics Pte. Ltd.
("GLD") through a series of separate domestic and foreign corporations. In 1998,
Genelabs adopted a plan to divest this subsidiary and began accounting for GLD
as a discontinued operation. On February 4, 2000, the High Court of the Republic
of Singapore found that GLD infringed an HIV-2 patent owned by Institut Pasteur
and exclusively licensed to Bio-Rad Laboratories Inc., formerly Pasteur Sanofi
Diagnostics. Although the court has not yet ruled on the amount of damages and
GLD has appealed the decision, the court has ruled that in the interim GLD must
pay a royalty to Bio-Rad on sales of the products at issue in the lawsuit. If
GLD is unsuccessful in its appeal, there will be a separate hearing to determine
the amount of damages. If the interim royalty amount is applied retroactively to
the period of alleged infringement, the damages awarded to the plaintiffs would
exceed the net assets of GLD. In addition, affirmation of the High Court ruling
and assessment of damages against GLD would have additional negative impacts on
GLD, including the possibility that GLD could no longer manufacture or sell its
primary product line. High Court decisions are generally affirmed on appeal in
F-9
<PAGE> 32
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Singapore. For these reasons, Genelabs believes that it is probable that the
value of its investment in GLD has been impaired and that there is reasonable
basis for estimating the amount of the loss. The Company has considered the
interim Bio-Rad royalty rate in estimating the amount of the impairment.
Accordingly, Genelabs has written off its investment of $2.2 million at December
31, 1999. Included in the amount written-off was the cash held by GLD, which has
been reflected in the statement of cash flows as "net remittances to diagnostics
subsidiary." Given the ownership structure and operating arrangements between
Genelabs and GLD, the Company believes that there is no reasonable possibility
of additional losses to Genelabs related to this lawsuit. Summarized financial
information for GLD is as follows:
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Product sales........................................... $ 6,604 $7,905 $9,675
Cost of sales........................................... 3,673 4,207 5,818
------- ------ ------
Gross profit............................................ 2,931 3,698 3,857
Operating expenses...................................... 3,393 3,586 4,139
------- ------ ------
(Loss)/income prior to write-off........................ (462) 112 (282)
Charge recorded in consolidation to write-off the
investment in GLD..................................... 2,220 -- --
------- ------ ------
(Loss)/income from discontinued operations.............. $(2,682) $ 112 $ (282)
======= ====== ======
</TABLE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $1,031 $ --
Accounts receivable......................................... 1,196 1,551
Inventories................................................. 1,906 2,098
Net property & equipment and other assets................... 512 716
------ ------
Total assets...................................... $4,645 $4,365
====== ======
Liabilities, principally current............................ $4,645 $ 993
Net equity of Genelabs Diagnostics Pte. Ltd................. -- 3,372
------ ------
Total liabilities and net equity.................. $4,645 $4,365
====== ======
</TABLE>
5. MINORITY INVESTMENT IN TAIWAN-BASED BIOPHARMACEUTICAL COMPANY
At December 31, 1999, Genelabs owned approximately 12% of Genelabs
Biotechnology Co., Ltd. ("GBL"), which manufactures and distributes
pharmaceutical products for the Asian market. During 1999, Genelabs reduced its
ownership in this company from 16% to 12% by not participating in a GBL equity
offering. During 1998, the Company reduced its ownership in this company from
40% to 16% by selling a portion of its investment and also by not contributing
cash during a GBL equity offering. Concurrent with the reduction in ownership
interest to less than 20% in 1998, the Company changed its method of accounting
for this investment from the equity method to the cost method.
F-10
<PAGE> 33
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. SHORT-TERM BORROWINGS
At December 31, 1999, the Company's short-term borrowings consisted of a
$1.0 million reverse repurchase agreement bearing interest at 5.45%,
collateralized by one of the U.S. treasury securities held in the Company's
short-term investment accounts. The total interest expense for 1999 was $79,000,
and the weighted average interest rate of borrowings outstanding during 1999 was
5.1%.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its primary office and laboratory facilities under a
non-cancelable operating lease that has a term expiring November 2002. The
Company is required to pay certain maintenance expenses in addition to monthly
rent. There are no other material lease obligations. At December 31, 1999,
future minimum lease payments under all operating leases with original terms
greater than one year are $961,000, $928,000 and $859,000 for 2000, 2001, and
2002, respectively, for a total of $2,748,000, excluding sublease rentals. Total
lease expense, net of sublease income, was $911,000, $953,000 and $838,000 for
1999, 1998 and 1997, respectively.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect Genelabs' financial
position or results of operations. However, the ultimate outcome of any
litigation is uncertain. If an unfavorable outcome were to occur, the impact
could be material. Furthermore, any litigation, regardless of the outcome, can
have an adverse impact on the Company's results of operations as a result of
defense costs, diversion of management resources, and other factors.
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In May 1995, the Company sold 10,000 shares of Series A Convertible
Preferred Stock to two corporate investors for $10 million. During the three
month period after May 15, 2000, the investors have the right to convert all of
the Preferred Shares into either (1) 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
into more than 49.99% of Genelabs common stock after the conversion, or (2)
49.99% of Genelabs' diagnostics business, if the remainder of this business is
purchased by the Preferred Stockholders at its then fair market value. The
Series A Convertible Preferred stockholders are entitled to non-cumulative
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
At December 31, 1999, the Company had 21,754,000 shares reserved for future
issues and conversions, which includes 15,000,000 shares reserved for conversion
of the Series A Convertible Preferred Stock.
9. STOCK-BASED COMPENSATION
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 1,500,000 shares of Common Stock have been reserved.
Eligible employees are entitled to purchase stock at 85% of the price at the
beginning or ending of six-month purchase periods, whichever is lower, and stock
may be purchased at the same price for up to four periods. Purchases are limited
to a maximum of $25,000 per year and employees can
F-11
<PAGE> 34
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
contribute up to 10% of total compensation. Through December 31, 1999 and 1998,
a cumulative total of 858,000 and 663,000 shares, respectively, had been issued
under the Stock Purchase Plan.
Stock Award Plans. The Company has stock award plans that provide for the
issuance of shares of Common Stock to employees and independent contractors who
are not officers or directors. There are 700,000 shares of Common Stock reserved
for issuance under these plans. Through December 31, 1999 and 1998, a cumulative
total of 220,000 and 106,000 shares had been issued under these plans.
Stock Option Plan. The Company's stock option plan provides for the
issuance of incentive stock options and nonqualified stock options to employees,
officers, directors and independent contractors. The number of stock options
granted is determined by the Board of Directors or a committee designated by the
Board of Directors, except for grants to directors, who receive options based on
a formula. Stock options generally may not be granted at prices lower than fair
market value on the date of grant and vest over periods ranging from two to four
years, with expiration no later than ten years from the date of grant. At
December 31, 1999, 1,807,000 shares were available for future grants.
Stock option transactions from 1997 through 1999 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, 1996..................... 2,902,000 $3.83 $1.41 - $9.16
Granted............................................ 880,000 $4.34 $2.09 - $7.09
Exercised.......................................... (260,000) $2.66 $1.41 - $4.81
Canceled........................................... (282,000) $5.02 $2.37 - $8.56
--------- ----- -------------
Outstanding at December 31, 1997..................... 3,240,000 $3.96 $1.41 - $9.16
Granted............................................ 626,000 $2.94 $1.78 - $4.38
Exercised.......................................... (104,000) $1.97 $1.41 - $2.63
Canceled........................................... (340,000) $4.44 $1.41 - $8.50
--------- ----- -------------
Outstanding at December 31, 1998..................... 3,422,000 $3.79 $1.41 - $9.16
Granted............................................ 1,214,000 $2.18 $1.53 - $3.53
Exercised.......................................... (175,000) $2.07 $1.41 - $3.47
Canceled........................................... (636,000) $4.10 $1.66 - $9.16
--------- ----- -------------
Outstanding at December 31, 1999..................... 3,825,000 $3.34 $1.41 - $8.81
========= ===== =============
</TABLE>
The exercise price ranges and average remaining terms of options
outstanding and exercisable at December 31, 1999 were:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPTIONS OPTIONS
RANGE OF EXERCISE OUTSTANDING AT WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
PRICES DECEMBER 31, 1999 REMAINING TERM EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
----------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.41 - $2.97 2,522,000 7.1 years $2.32 1,242,000 $2.43
$3.03 - $5.81 676,000 7.1 years $4.01 441,000 $4.14
$6.25 - $8.81 627,000 6.3 years $6.48 556,000 $6.50
--------- --------- ----- --------- -----
$1.41 - $8.81 3,825,000 6.9 years $3.30 2,239,000 $3.78
========= ========= ===== ========= =====
</TABLE>
There were options for 2,084,000 and 1,778,000 shares exercisable at
December 31, 1998 and 1997, respectively.
Disclosure of Fair Value of Stock Options. As disclosed in Note 1, Genelabs
accounts for employee stock options using their intrinsic value at the time of
grant. However, generally accepted accounting
F-12
<PAGE> 35
GENELABS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
principals require companies that account for stock options under the intrinsic
value method to also disclose the pro forma impact as if they had accounted for
stock options using a fair value approach. Accordingly, for disclosure purposes,
the fair value of stock options was estimated at the date of grant using a
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. This model requires highly
subjective assumptions regarding expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and changes in the volatility assumptions can materially
affect the fair value estimate, the Company's management believes that this
model does not necessarily provide a representative measure of the fair value of
the options actually granted under the Company's stock-based compensation plans.
To determine the pro forma disclosure, the Company used the following weighted
average assumptions for 1999, 1998 and 1997, respectively: dividend yields of
zero, risk-free interest rates of 6.0%, 5.0% and 5.6%, volatility factors of
1.0, 0.8 and 0.8, and a one-year expected life of the options after vesting.
Based on these assumptions, the weighted-average fair value of options granted
during 1999, 1998 and 1997 was $1.38, $1.70 and $2.56, respectively. For
purposes of pro forma disclosures, the estimated fair value of the options is
expensed ratably over the options' vesting period. If the Company elected to
record the fair value estimate of stock options in its financial statements, the
net loss for 1999, 1998 and 1997, respectively, would have been $14,339,000,
$8,168,000 and $14,767,000 and the net loss per share would have been $0.36,
$0.21 and $0.38.
10. INCOME TAXES
At December 31, 1999, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $115 million and $8
million, respectively. In addition, the Company has federal and California
research and development tax credit carryforwards of approximately $2 million
and $1 million, respectively. The federal net operating loss and federal and
California credit carryforwards expire in various amounts between the years 2000
and 2019. The California net operating loss carryforwards expire in various
amounts between the years 2000 and 2004. Under provisions of the Internal
Revenue Code, the availability of the Company's net operating loss and tax
credit carryforwards may be subject to future limitations if future financing
transactions result in significant ownership changes. To date, no restriction in
the ability to utilize the Company's carryforwards is anticipated.
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 income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 39,500 $ 35,800
Research credits.......................................... 2,900 2,500
Capitalized research expenditures......................... 1,600 1,300
Other individually immaterial items, net.................. 1,200 1,500
-------- --------
Total deferred tax assets................................. 45,200 41,100
Valuation allowance for deferred tax assets................. (45,200) (41,100)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
For 1999, 1998 and 1997, the valuation allowance increased by $4.1 million,
$1.8 million and $5.7 million, respectively. Approximately $1.4 million 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-13
<PAGE> 36
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.
June 21, 2000
GENELABS TECHNOLOGIES, INC.
By: /s/ JAMES A.D. SMITH
------------------------------------
James A.D. Smith
President, Chief Executive Officer
and Director
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ JAMES A.D. SMITH President, Chief Executive June 21, 2000
----------------------------------------------------- Officer and Director
James A.D. Smith
PRINCIPAL FINANCIAL OFFICER:
* Vice President, June 21, 2000
----------------------------------------------------- Chief Financial Officer
Richard A. Waldron
PRINCIPAL ACCOUNTING OFFICER:
* Vice President, Finance June 21, 2000
-----------------------------------------------------
Matthew M. Loar
CHAIRMAN OF THE BOARD OF DIRECTORS:
* June 21, 2000
-----------------------------------------------------
Irene A. Chow
ADDITIONAL DIRECTORS:
* June 21, 2000
-----------------------------------------------------
J. Richard Crout
* June 21, 2000
-----------------------------------------------------
Thomas E. Dewey, Jr.
-----------------------------------------------------
Frank L. Douglas
* June 21, 2000
-----------------------------------------------------
Arthur Gray, Jr.
* June 21, 2000
-----------------------------------------------------
H. H. Haight
* June 21, 2000
-----------------------------------------------------
Alan Y. Kwan
</TABLE>
F-14
<PAGE> 37
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* June 21, 2000
-----------------------------------------------------
Nina K. Wang
*By: /s/ JAMES A.D. SMITH
-------------------------------------------------
James A.D. Smith
Attorney-in-Fact
</TABLE>
F-15
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.27 Second Modification to Grant from the Space and Naval
Warfare Systems Command.
23.01 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
</TABLE>
