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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2000.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________.
COMMISSION FILE NO. 0-19222
GENELABS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-3010150
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
505 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 369-9500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
There were 40,795,449 shares of the Registrant's Common Stock issued and
outstanding on May 1, 2000.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 1,663 $ 2,534
Short-term investments 3,880 5,565
--------- ---------
Total cash, cash equivalents and short-term
investments 5,543 8,099
Other current assets 278 471
--------- ---------
Total current assets 5,821 8,570
Property and equipment, net 1,767 1,706
Minority investment in Taiwan-based
biopharmaceutical company 1,174 1,174
Other assets 188 239
--------- ---------
$ 8,950 $ 11,689
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 1,000
Accounts payable and other accrued liabilities 2,046 2,288
Accrued compensation and related expenses 858 1,303
Unearned contract revenue 741 969
--------- ---------
Total current liabilities 3,645 5,560
Long-term obligations 456 558
--------- ---------
Total liabilities 4,101 6,118
--------- ---------
Shareholders' equity:
Preferred stock 9,682 9,682
Common stock 141,317 139,207
Accumulated deficit (146,150) (143,318)
--------- ---------
Total shareholders' equity 4,849 5,571
--------- ---------
$ 8,950 $ 11,689
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Contract revenue $ 1,982 $ 1,829
------------ ------------
Operating expenses:
Research and development 3,687 3,108
General and administrative 1,199 1,227
------------ ------------
Total operating expenses 4,886 4,335
------------ ------------
Operating loss (2,904) (2,506)
Interest income, net 72 160
------------ ------------
Loss from continuing operations (2,832) (2,346)
Loss from discontinued operations of
diagnostics subsidiary -- (31)
------------ ------------
Net loss $ (2,832) $ (2,377)
============ ============
Loss per share from continuing operations $ (0.07) $ (0.06)
============ ============
Net loss per share $ (0.07) $ (0.06)
============ ============
Weighted average shares outstanding 40,557,878 39,778,998
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,832) $ (2,377)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 135 126
Loss of discontinued diagnostics subsidiary -- 31
Changes in assets and liabilities:
Other current assets 193 (11)
Accounts payable, accrued liabilities, accrued
compensation and long-term obligations (789) (765)
Unearned contract revenue (228) 416
-------- --------
Net cash used in operating activities (3,521) (2,580)
-------- --------
Cash flows from investing activities:
Purchases of securities available-for-sale -- (1,425)
Proceeds from sales and maturities of securities
available-for-sale 1,685 3,771
Capital expenditures (196) (366)
Other 51 73
-------- --------
Net cash provided by investing activities 1,540 2,053
-------- --------
Cash flows from financing activities:
Payments on short-term borrowings (1,000) (500)
Proceeds from issuance of common stock 2,110 119
-------- --------
Net cash provided by/(used in) financing activities 1,110 (381)
-------- --------
Net decrease in cash and cash equivalents (871) (908)
Cash and cash equivalents, beginning of the period 2,534 3,631
-------- --------
Cash and cash equivalents, end of the period 1,663 2,723
Short-term investments, end of the period 3,880 14,324
-------- --------
Cash, cash equivalents and short-term investments,
end of the period $ 5,543 $ 17,047
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Genelabs Technologies, Inc. and its subsidiaries
("Genelabs" or the "Company") after elimination of all significant intercompany
accounts and transactions. Genelabs is engaged in the discovery and development
of a new class of pharmaceutical products that selectively regulate gene
expression and in 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 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.
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
These unaudited condensed consolidated financial statements are meant to be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
2. COMPREHENSIVE INCOME
During the three months ended March 31, 2000 and 1999, the Company's
comprehensive loss amounted to $(2,832,000) and $(2,480,000), respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning 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, intellectual property
rights and other factors and risks detailed under the caption "Risk Factors" in
the Company's 1999 Annual Report on Form 10-K and other filings with the U.S.
Securities and Exchange Commission. Shareholders and prospective investors in
the Company should carefully consider these risk factors. The Company disclaims
any obligation to update these statements for subsequent events.
Genelabs Technologies, Inc. is engaged in the discovery and development of
a new class of pharmaceutical products that selectively regulate gene expression
and in the development of GL701, our proprietary hormone treatment for a disease
called systemic lupus erythematosus, which we refer to as 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, the U.S. Food and Drug Administration, 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
by 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.
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In addition to our internal research efforts, we have licensed GL701 from
Stanford University and 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 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. We believe GL701 is ideally
suited as our 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, we plan
to commercially introduce GL701 to the U.S. market ourselves, and to
commercialize GL701 elsewhere in the world through partnerships or licensing
arrangements with major pharmaceutical companies.
We believe 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.
RESULTS OF OPERATIONS - FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
The net loss was $2.8 million for the three months ended March 31, 2000,
compared to $2.4 million for the same period in 1999.
Contract revenues were $2.0 million in the first quarter of 2000 compared
to $1.8 million in the first quarter of 1999. The increase in contract revenues
was due to a pilot research program entered into for one of Genelabs non-core
research programs. Contract revenues include grant, licensing, milestone, and
research and development payments. Contract revenues recognized in the future
will be dependent upon the continuation of existing grants, continuation of
existing corporate collaborations, achievement of milestones under these
collaborations, and establishment of new research, development and/or licensing
agreements.
Operating expenses increased to $4.9 million in the first quarter of 2000
compared to $4.3 million in the first quarter of 1999. In the first quarter of
2000, research and development expenses were 75% of operating expenses compared
to 72% of operating expenses in 1999. Research and development expenses
increased to $3.7 million in the first quarter of 2000, compared to $3.1 million
for the first quarter of 1999. The increase was primarily attributable to the
development of GL701 for the treatment of lupus as the Company prepared its New
Drug Application submission. General and administrative expenses were $1.2
million in both the first quarter of 2000 and the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investment balances
totaling $5.5 million at March 31, 2000, compared to $8.1 million at December
31, 1999. The decrease in cash, cash equivalents and short-term investments was
primarily attributable to cash used in operations and cash used to repay
short-term borrowings, partially offset by inflows received from the exercise of
stock options.
Genelabs has operated at a loss since its inception and has funded its
operations primarily through public and private offerings of its common stock,
private offerings of its preferred stock and contract revenues. Genelabs expects
to incur substantial additional costs, including research costs for the
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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 some time 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.
CERTAIN BUSINESS RISKS
The following discussion summarizes certain business risks which management
believes are particularly relevant at this time. There is more detailed
information about the these risks and additional risks under the caption "Risk
Factors" in the Company's 1999 Annual Report on Form 10-K, which shareholders
and prospective investors are encouraged to review.
Research programs will require additional funds.
We have incurred losses since our inception and have accumulated
approximately $146 million in net losses through March 31, 2000, including a net
loss of $2.8 million in the first quarter of 2000. We anticipate realizing a net
loss at least until 2001, and profitability thereafter is subject to significant
uncertainty. We cannot assure you that revenues will be sufficient to fund
operations or that we will achieve profitability or positive cash flow.
Additional financing will be required to fund our continuing operations and
research and development activities. This financing may dilute existing
shareholders or provide certain rights to our assets. Our fund raising 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, we may have to seek other sources of capital or reevaluate
our operating plans. Longer-term, we plan to fund our operations principally
from revenue from sales of GL701, should it receive FDA approval. However, we
cannot assure you that we will ever be able to generate revenue from sales of
GL701. We are currently pursuing foreign GL701 licensing agreements, but cannot
assure you that license agreements can be obtained on acceptable terms, if at
all. We cannot assure you that we will be able to find buyers willing to
purchase our equity or license our 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 our products
and technologies and would have a material adverse effect on our business,
financial condition and results of operations.
Regulatory approvals are uncertain.
The manufacturing and marketing of the Company's products are subject to
rigorous requirements by the FDA, formally known as the U.S. Food and Drug
Administration, and by comparable agencies in other countries and by state
regulatory authorities. We cannot assure you that we will be able to obtain or
maintain the necessary approvals for manufacturing or marketing of GL701. We
have agreements in place for the manufacture of the bulk raw material for GL701
and for the contract manufacture of the finished dosage, but cannot assure you
that these outside manufacturers will continue to meet the requirements of
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the FDA. We also cannot assure you that the FDA will view the results of our
Phase III trials of GL701 as sufficient to serve as the basis for approval of a
New Drug Application.
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. GL701 contains highly purified prasterone, the synthetic
equivalent of DHEA, as the active ingredient. Other companies are currently
marketing products containing synthetic forms of DHEA as dietary supplements. If
GL701 receives FDA approval, the concurrent sale of these products could
adversely affect the market for or the selling price of GL701. Genelabs has only
limited sales, marketing and distribution capabilities, and has never
commercially introduced a product to the market.
We are in an early stage of development.
Our product candidates have never been sold commercially and our drug
discovery technologies are at an early stage of development. Our technologies,
including the DNA and RNA-binding technologies, have not been proven to have a
therapeutic effect and are still under development. Our DNA and RNA-binding
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 processes. We
cannot assure you that these technologies or any of our product candidates
resulting therefrom will be successfully developed.
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENELABS TECHNOLOGIES, INC.
(Registrant)
Principal Executive Officer:
/s/ JAMES A.D. SMITH
Date: May 9, 2000 ----------------------------------------
JAMES A.D. SMITH
President and Chief Executive Officer
Principal Financial Officer:
/s/ RICHARD A. WALDRON
Date: May 9, 2000 ----------------------------------------
RICHARD A. WALDRON
Vice President, Chief Financial Officer
Principal Accounting Officer:
/s/ MATTHEW M. LOAR
Date: May 9, 2000 ----------------------------------------
MATTHEW M. LOAR
Vice President, Finance
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,663
<SECURITIES> 3,880
<RECEIVABLES> 278
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,821
<PP&E> 10,131
<DEPRECIATION> 8,364
<TOTAL-ASSETS> 8,950
<CURRENT-LIABILITIES> 3,645
<BONDS> 0
0
9,682
<COMMON> 141,317
<OTHER-SE> (146,150)
<TOTAL-LIABILITY-AND-EQUITY> 8,950
<SALES> 0
<TOTAL-REVENUES> 1,982
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (72)
<INCOME-PRETAX> (2,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,832)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
