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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDEDMENT NO. 1 TO
FORM 10-K ON FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
[_] 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: 0-26642
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MYRIAD GENETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0494517
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
320 Wakara Way, Salt Lake City, UT 84108
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 584-3600
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value Per Share
(Title of Class)
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. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant (without admitting that any person whose shares are
not included in such calculation is an affiliate) on September 1, 2000 was
$1,621,749,204, based on the last sale price as reported by The Nasdaq Stock
Market.
As of September 1, 2000 the registrant had 22,269,640 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in
Part III of this Annual Report on Form 10-K is incorporated from the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on November 17, 2000.
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PART I
Item 1. BUSINESS
Overview
We are a leader in the use of gene-based medicine to develop novel
therapeutic and molecular diagnostic products. We are focused on the emerging
field of proteomics, which involves establishing the relationship between
protein function and particular diseases by identifying disease-specific
proteins. We employ a variety of proprietary proteomic technologies to discover
important disease genes and to understand the role these genes and their related
proteins play in the onset and progression of disease. We have integrated these
technologies using powerful bioinformatics and robotics systems to conduct our
research efforts on a high-throughput basis. This integrated proteomics platform
has enabled us to identify numerous proteins as promising targets for new
proprietary drugs and molecular diagnostic tests.
Using our proprietary technologies, we have identified 22 drug targets to
date. We have delivered 13 of these drug targets to our strategic partners based
on our discovery of genes involved in breast cancer, brain cancer, prostate
cancer, heart disease, dementia and other disorders. We have received total
payments from our seven current strategic partners in excess of $100 million. We
will receive additional milestone and royalty payments if our strategic partners
develop and commercialize drugs from the thirteen targets we have delivered to
them. Our current partners include Bayer Corporation, Eli Lilly and Company,
Hitachi Ltd., Hoffmann-LaRoche Inc., Pharmacia Corporation, Novartis
Corporation, Schering-Plough Corporation and Schering AG. We have also
established a portfolio of nine new drug targets that we have retained for our
own small molecule drug development program. We expect to independently develop,
test and commercialize small molecule therapeutics from drug targets selected
from our internal portfolio, particularly in the area of cancer. Outside of the
oncology area, we will seek to enter into future strategic partnerships for the
clinical development of many of these targets.
We also focus on developing, marketing and selling products used for
predictive medicine and personalized medicine. We have developed and
commercialized two innovative molecular diagnostic tests, one of which is used
for analyzing breast and ovarian cancer susceptibility and the other for
therapeutic management of hypertensive patients. In August 2000, we announced
the future launch of a predictive medicine test for hereditary colon cancer and
uterine cancer. We market these products using our own internal sales force in
the United States and we have entered into marketing collaborations with other
organizations in the United Kingdom, Ireland, Canada and Japan. Revenues from
these proprietary tests, which we analyze in our CLIA approved laboratory, grew
approximately 70% from the prior year to $8.8 million in the fiscal year ended
June 30, 2000.
We believe that the future of medicine lies in the creation of new classes
of drugs that prevent disease from occurring or progressing and that treat the
cause, not just the symptoms, of the disease. In addition, we believe that
advances in the emerging field of molecular diagnostics will improve our ability
to determine which patients are subject to a greater risk of developing these
diseases and who therefore should receive these new preventative medicines.
Industry Background
Proteomics and Gene-Based Drug Development
Understanding the cause of a disease at the level of genes, proteins and
biological pathways can be very helpful in determining how best to treat the
disease. Historically, technologies used to discover treatments for the symptoms
of diseases have been less effective against complex diseases that arise through
a combination of genetic and environmental factors, such as cancer and heart
disease. In order to treat complex diseases effectively, it is imperative to
understand how the body uses its genetic information, how genetic mutations can
lead to disease, and how drugs can be developed to halt or reverse disease
progression. As the scientific community learns more about the genetic basis of
disease, we believe that the current methods of drug development will be
revolutionized.
The majority of diseases are treated by modifying the activities of
biological pathways through drugs that interact with the proteins produced by
the genes in affected cells and tissues. The quest for safer and more effective
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treatments for a wider range of diseases has led pharmaceutical companies to
employ genomics and proteomics in their drug discovery and development programs.
Modern gene-based small molecule drug discovery and development programs
typically involve the following steps:
Target Discovery. Target discovery involves identifying genes and their
proteins related to disease susceptibility, onset or progression. A better
understanding of some diseases has resulted from the identification of disease-
related proteins and the subsequent understanding of their function.
Protein Function and Biological Pathway Determination. Proteins control
virtually all cellular processes, including important disease processes. The
determination of a protein's function clarifies the role of a protein in the
biological pathway of a disease.
Target Validation. After identifying a disease-related protein, the
decision must be made as to whether the protein can be a drug target. If a
protein is not qualified to serve as a target, other proteins in the same
disease pathway can be examined as potential targets. A protein target that is
identified must be validated to confirm that the potential target is at a
control point in a disease-related pathway and that a drug which interacts with
the target is expected to have a beneficial effect.
Assay Development and High-Throughput Screening. A specific assay must be
developed for each validated target to identify compounds that inhibit or
activate a specific protein. To identify potential drugs, a target is tested
through high-throughput screening against a chemically diverse library, usually
comprised of hundreds of different small molecule compounds. The screening
process frequently produces several compounds that interact with the identified
target.
Drug Development. Compounds that may be suitable for development into
potential drugs undergo selection and optimization. Once selected, the compound
is optimized by synthesizing and testing a series of closely related compounds.
Based on expected activity, safety and bioavailability, the most promising leads
are selected. Following optimization, lead compounds enter into preclinical
testing to establish their efficacy and safety in animals. If preclinical tests
are successful, candidate drugs enter clinical trials to determine their
efficacy and safety in humans.
Predictive and Personalized Medicine
Predictive medicine identifies those individuals at risk for the
development of specific diseases, and guides the healthcare management of those
predisposed individuals to delay the onset or prevent the occurrence of specific
diseases. Once a predisposed individual is identified, that individual can make
more informed decisions in selecting the most appropriate surveillance measures
for prevention, and therapy. Personalized medicine establishes a genetic
response profile to drug therapy for specific individuals. Knowing how a patient
will likely respond to particular drugs may decrease the occurrence of adverse
side effects from medications while improving their effectiveness, possibly
leading to better outcomes and lower overall healthcare costs. Both predictive
and personalized medicine are of interest to healthcare payors who seek to lower
costs and improve the effectiveness of medical care.
Molecular Diagnostics. Molecular diagnostics is the analysis of genes and
their proteins to predict individuals' risks for developing diseases and their
responses to specific treatments. As drugs are developed and approved for use,
knowledge about side effects and efficacy in specific individuals emerges. Using
this pharmacogenomic knowledge, personal genetic profiles can be developed to
predict responses of individuals to drugs.
Our Business Strategy
Our business strategy is to understand the relationship between proteins
and diseases in order to develop the next generation of therapeutic and
molecular diagnostic products. Through our proprietary technologies, we are
uniquely positioned to identify these proteins and develop novel therapeutic and
molecular diagnostic products. Our business strategy includes the following key
elements:
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. Expand our proprietary proteomic databases. We will continue to expand
our existing genetic and medical databases in Utah and Quebec. These
proprietary databases not only enable us to accelerate our gene
discovery efforts, they are also useful in target validation,
pharmacogenomics and disease association studies.
. Discover important disease genes, understand their function and
identify lead compounds. We will expand ProNet(R), our proprietary
proteomic technology, to uncover additional disease pathways, discover
functions for many proteins and identify high quality drug targets. In
addition, we will continue to employ our ProTrap/(TM)/ technology for
high-throughput screening in order to rapidly develop assays for our
high throughput screening platform. We believe this will result in the
identification of numerous lead compounds for potential drug
development.
. Selectively develop and commercialize therapeutic products. We intend
to take selected compounds, particularly in the area of cancer,
through the clinical development process. We are focusing on cancer
due to the large unmet need for effective and less toxic drugs, and
the oftentimes shorter and less expensive clinical trials resulting
from the potential for fast track status that the FDA has typically
afforded novel cancer drugs. Additionally, we will be able to leverage
the expertise of our existing oncology sales force in the marketing of
these novel cancer therapies.
. Capitalize on our strategic alliances with major pharmaceutical
companies. We expect to maintain and expand our strategic alliances
focused on the discovery of novel drug targets. Moreover, as we
identify and develop lead compounds, we plan to partner many of these
compounds with major pharmaceutical companies prior to pursuing human
clinical trials. This will shift much of the financial risk associated
with later stage drug development to our partners, while permitting us
to benefit from our partners' drug development expertise and marketing
strength.
. Grow and expand our molecular diagnostic business. We will continue to
increase the domestic and foreign market penetration of our existing
molecular diagnostic tests and create additional tests to capitalize
on the emerging areas of predictive and personalized medicine.
Our Integrated Proteomic Platform
We have developed and integrated a powerful set of proteomic technologies
and databases that enable us to discover genes of commercial importance and
understand their role in disease pathways. Our technology platform provides the
basis to develop therapeutic and molecular diagnostic products, based on a
vastly improved understanding of the genetic basis of disease. Our proteomic
platform consists of the following key elements.
Genetic and Medical Databases
Our genetic databases, which are based on distinct populations, provide us
with a unique competitive advantage because they enable us to correlate the
inheritance of gene mutations through multiple generations with the occurrence
of disease. We have created an extensive computerized genealogical database
whose ancestries are centered on the pioneer families of Utah. This population
is valuable for genetic research because of its Northern European ancestry, its
large families, and its profound interest in recording its genealogy.
Information from this population, such as medical records, DNA samples,
genealogy and other health-related data, has been identified by our researchers
and collaborators and assembled into our computerized genealogy database. This
database has allowed us to discover genes involved in breast cancer, ovarian
cancer, melanoma, brain cancer, prostate cancer, heart disease, and diabetes.
We have linked our database of Utah families to a disease registry from
Intermountain Health Care, which operates 40 hospitals and clinics in the
western United States. This information includes data such as laboratory tests,
prescription medications, drug allergies, surgical procedures and patient
criteria.
We have recently augmented this genetic medical information of the Utah
population by developing databases of individuals with specific diseases in
Quebec. This genetically isolated population complements the Utah
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population and further strengthens our ability to more rapidly identify disease-
causing genes. A database of affected individuals from Quebec, a population that
is twice as old as Utah allows us to quickly identify important disease-causing
genes. We have worldwide exclusive rights and access to the Utah and Quebec
databases.
Our high-throughput sequencing and mutation screening systems use a
robotics platform and bioinformatics software custom designed by our scientists
and software engineers. This integrated system has been expanded to incorporate
the introduction of a large number of genes and research populations, permitting
the rapid comparison of novel mutations in candidate genes between individuals
with diseases and healthy individuals drawn from the same population. This high-
throughput, automated system enables us to rapidly detect genes, which are
highly correlated with disease, and in many instances can be shown to be causal.
ProNet(R) Database
We believe that because virtually all cellular processes are controlled by
proteins, including important disease processes, knowledge of protein
interactions can be extremely valuable in the identification of novel drug
targets for therapeutic development. In order to determine the function of genes
and their role in disease pathways, we use our proprietary ProNet(R) technology
to develop our ProNet(R) database of human proteins, the proteins with which
they interact and their involvement in important disease pathways. Each protein
and its interacting partners form a network, which reads like a map, positioning
the protein in the disease pathway and tracing the protein's role in that
pathway.
Using our ProNet(R) technology, we screen target proteins through our
proprietary libraries constructed from a variety of different tissues and
organs, such as heart, brain, kidney, liver, breast and prostate. We have
constructed over 15 proprietary libraries each containing approximately 10
million protein fragments. We apply our proprietary automation and robotic
capabilities to the protein search process to allow high-throughput processing
of protein interactions. Our current capacity allows us to identify over 100
protein interactions each day. Every new interaction is entered into our
ProNet(R) database.
We believe that ProNet(R) provides a significant opportunity to identify
and develop novel drug targets by:
. discovering new proteins in the disease pathways;
. discovering functions for many novel proteins;
. identifying new functions for known proteins;
. identifying proteins involved in critical interactions along the
pathway; and
. selecting high quality drug discovery targets from disease pathways.
Our clients access these data through secure Internet connections. We have
created the following three types of ProNet(R) databases:
. Proprietary ProNet(R) databases for specific pharmaceutical company
clients. These databases address specific diseases and disease
pathways of strategic importance to our pharmaceutical partners.
Specific drug targets are selected by our partners for their
proprietary drug discovery research.
. Main ProNet(R) database of proteins and biological pathways, which
contains proprietary interactions that we have discovered. These
interactions are distinct from those identified for client companies.
. ProNet(R) Online database of protein-protein interactions from the
public domain. We use this database as a marketing tool and it is
freely available to the public through the Internet at www.myriad-
pronet.com.
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ProTrap/TM/ Technology
We have developed a new technology platform called ProTrap/TM/. The
ProTrap/TM/ technology allows us quickly and cost effectively to build high-
throughput drug screens using a yeast-based system. We believe that yeast-based
screens offer a number of distinct cost and time advantages in comparison to the
more commonly used mammalian or cell-free screens. Yeast are inexpensive and
easy to grow and yeast screens can be run on our liquid handling robots.
In the ProTrap/TM/ system, yeast are manipulated genetically so that they
produce a human or viral protein. When the protein is produced in one of a
variety of proprietary yeast strains, it causes the strain to change in a way
that can be easily detected. Therefore, when a small molecular weight compound
inhibits or activates the protein, a further change in the characteristics of
the yeast strain is easily detectable. The drug discovery screens are designed
to be run in parallel, such that each screen controls for false positives in
other screens. The result is greater efficiency and a higher screening
throughput.
Our ProTrap/TM/ technology has a wide variety of other potential
applications and can be extended to complement our other target validation
technologies by determining the functions of proteins. It complements ProNet(R)
by quickly finding new disease gene pathways. Finally, it can determine the
biological activity of a mutant protein that may have utility in
pharmacogenomics.
Bioinformatics and Robotics
The gene and drug discovery process generates vast amounts of information.
Accordingly, we have designed proprietary bioinformatics systems, which provide
significant analytical and data management capabilities. Our systems are based
on integrated, protocol-driven database management software, which is used to
track experiments and collect relevant data. In addition, we have developed a
proprietary laboratory information management system. This system has the
advantages of simplicity of design, ease of maintenance, and speed of
development. To date, we have used our information management system for our
high-throughput systems for protein analysis, genotyping, genomic sequencing,
mutation screening and compound screening. This has been of fundamental
importance in sample tracking and quality assessment and quality control. We
believe our strength in bioinformatics provides us with a substantial
competitive advantage.
We employ state-of-the-art robotics platforms in all of our high-throughput
systems. We use the same robotics software and hardware development and
maintenance teams to ensure efficiency throughout our operations. We operate
flexible robotics systems in our research and molecular diagnostics laboratories
and high-throughput robotics systems in our sequencing and drug screening
laboratories. Each of our robotics systems is connected continually in a real
time interface with our proprietary laboratory information management system to
maintain a high degree of precision in sample tracking. Our robotics systems
have been designed to ensure that the sample volumes used for each of the
applications are kept at minimum levels to maintain reagent cost savings in each
of our operations. The high level of automation as well as the concerted effort
in optimizing biochemistry and reducing reagent volumes allows us to produce
data at a very competitive cost in the industry.
Therapeutic Product Development
The pharmaceutical industry has been successful in developing medicines to
treat the symptoms of disease. However, as the current generation of compounds
nears the end of its patent protection, the industry has begun to seek new
approaches to disease treatment. We believe that the future of medicine will be
in the creation of new drugs that either prevent disease from initially
developing or prevent disease from progressing by treating the cause, not just
the symptoms, of disease. We believe that we can capture a greater portion of
the potential value of drug targets that we discover by identifying and
developing lead compounds and taking some of those compounds in the oncology
area through human clinical trials. If we develop therapeutic products in the
area of cancer, then given the concentrated nature of the oncology market, we
would be able to leverage the efforts of our existing oncology sales force.
Outside of the oncology area, we intend to partner these lead compounds with
major pharmaceutical companies.
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We formed Myriad Pharmaceuticals, our wholly owned subsidiary, to use our
proprietary proteomics technologies to discover and develop novel therapeutic
products. We believe that our ProNet(R) database of important disease pathways
provides us with a significant advantage in drug discovery because it enables us
to generate a large number of potential drug targets. Once these targets have
been identified, our ProTrap/(TM)/ technology enables us to rapidly screen a
large number of these drug targets against our library of small molecule
compounds. This integrated platform enables us to pursue a rapid and cost
effective approach to identifying potentially valuable drug candidates
In contrast to the drug discovery model employed by much of the
biotechnology industry, which screens relatively few drug targets against large
libraries of compounds, we are able to screen large numbers of protein targets
against our diverse library of compounds and rigorously select those candidates
we believe to be the most promising. To date, we have 22 drug targets in
development. Of these 22, we have licensed 13 to our strategic partners for
further development and we have retained nine for internal development. Our
current in house drug discovery efforts target cancer, AIDS and rheumatoid
arthritis. In addition, we are exploring the biology around genes that we
believe are involved in a variety of disease areas, including arteriosclerosis,
chronic pain, chronic obstructive pulmonary disease and sleep disorders, and
have selected 110 proteins for further evaluation using our ProNet(R)
technology.
High-Throughput Screening
Our high-throughput screening is highly automated using robot workstations
and a proprietary computerized management system that monitors each step of the
process, confirms that each step has been performed to eliminate operator errors
and automatically correlates results with compound identity and drug target.
Current capacity is approximately 36 million screening data points per year.
We have built drug discovery screens for each of our nine proprietary drug
targets and all nine have been run against our compound library. We have
identified a number of proprietary compounds from our drug discovery screens,
including drug candidates for colon cancer, rheumatoid arthritis, and HIV
targets, which satisfy the initial criteria of showing selectivity for one
molecular target without obvious toxicity. Furthermore, the compounds have been
shown to display a good dose response curve, showing increased activity at
higher concentrations and decreased activity at lower concentrations.
We have built mammalian cell secondary assays to evaluate the initial
compounds arising from the primary drug discovery screens. To date, we have
completed the construction of several of these assays for colon cancer, other
solid tumors, HIV and inflammatory diseases and have developed protocols to
evaluate the mammalian toxicity of all compounds found in our drug discovery
screens. We are currently working to build secondary screens for the remainder
of our drug targets.
MPI-42511 Candidate Therapeutic Compound for Colon Cancer
Our lead therapeutic development program addresses the treatment and
prevention of colorectal cancer. Based upon an important colon cancer pathway
developed with our ProNet technology, we identified a novel drug target, built
and implemented a high-throughput drug discovery screen that resulted in the
discovery of a small molecule compound. The compound, MPI-42511, showed
selectivity for the target both in the initial screen and in a human cell line
assay. Subsequently, we have demonstrated the anti-colon cancer activity of the
compound against a variety of human colon cancer cell lines. A range of
chemical analogues of MPI-42511 have been generated and evaluated for optimal
drug characteristics in colon cancer models. Pre-clinical studies with MPI-
42511 in colon cancer model organisms have been initiated.
Candidate Therapeutic Compound for AIDS
We have established a substantial development program for the treatment of
the Human Immunodeficiency Virus (HIV). The program was initiated from the
discovery, using ProNet(R), of an intriguing protein interaction
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between the HIV virus and the human host cell. A high-throughput screen was
constructed and has identified compounds that showed selectivity against the
target. The target is neither of the protease inhibitor nor reverse-
transcriptase inhibitor class and thus represents the potential for novel drug
therapy as the two common currently prescribed drugs become less effective
through increased viral resistance. These compounds are now being further
evaluated for their activity against the virus.
Molecular Diagnostics
We are committed to the development and marketing of novel molecular
diagnostic products for the emerging market opportunities of predictive medicine
and personalized medicine. Predictive medicine determines which individuals are
at risk for the development of specific diseases, and guides the healthcare
management of those predisposed individuals to delay the onset or prevent the
occurrence of specific diseases. This allows healthcare resources to be focused
on individuals who have the greatest need and may reduce waste in the healthcare
system. Personalized medicine establishes an individual's genetic response
profile to a specific drug. Knowing how individual patients are likely to
respond to a particular drug may lead to more effective choice of medication,
reduced adverse side effects and lower overall healthcare costs.
Through our wholly owned subsidiary, Myriad Genetic Laboratories, we have
established a central molecular diagnostics facility to provide genetic
information services worldwide to healthcare providers. We have also developed a
clinical database of information on genetic mutations of each gene discovered,
including the frequency of occurrence in different ethnic population groups and
the clinical effect of these mutations. From these mutations we can identify an
individual's genetic predisposition to disease. Through our database of
mutations we can provide healthcare professionals with detailed genetic
information regarding the risk profile of these different ethnic groups. We also
provide educational and support services to physicians and healthcare
professionals as part of our genetic information business. The molecular
diagnostic tests we have developed and currently market are not subject to FDA
approval, but are subject to oversight and approval by CLIA. We have obtained
all approvals required by CLIA.
Our strategy is to first introduce molecular diagnostic products in the
United States, and then to make them available worldwide through strategic
marketing partnerships abroad. We have developed three molecular diagnostic
products, BRACAnalysis(R) and CardiaRisk(R), that we are currently marketing in
the United States directly through our own sales force, and COLARIS, which will
be launched in the fall of 2000. We are in the process of developing additional
molecular diagnostic tests for genetic susceptibility to prostate cancer and
melanoma.
BRACAnalysis(R): Predictive Medicine for Breast and Ovarian Cancer
Susceptibility
It is estimated that approximately 180,000 women in the United States are
diagnosed with breast cancer each year and approximately 25,000 women are
diagnosed with ovarian cancer annually. Each year in the United States, an
estimated 43,000 women will die from breast cancer, which has the second highest
cancer mortality rate among women, and an estimated 14,500 women will die of
ovarian cancer. We reported the discovery of the BRCA1 breast and ovarian
cancer predisposing gene in the October 7, 1994, issue of the journal Science,
and in December 1995, announced the discovery of the complete sequence of BRCA2
breast cancer gene, as reported in the journal Nature Genetics. BRCA1 and BRCA2
appear to be responsible for approximately 84% of the early onset hereditary
breast cancer and approximately 90% of hereditary ovarian cancer. Hereditary
breast cancer is believed to account for approximately 10% of all cases of
breast cancer. A study of women in the United States published in the American
Journal of Human Genetics indicates that a woman with a BRCA1 mutation has an
86% risk of developing breast cancer by age 80 as compared to a general
population risk of 10%. Additionally, according to a study published in Lancet,
the risk to a woman with a BRCA1 mutation of developing ovarian cancer by age 70
is approximately 44%, compared to a general population risk of approximately 1%.
Women with BRCA2 mutations have approximately the same risk of breast cancer as
BRCA1 mutation carriers. BRCA2 mutations also increase the risk of ovarian
cancer in women, although not as much as in those with BRCA1 mutations.
BRACAnalysis(R), is a comprehensive analysis of the BRCA1 and BRCA2 genes
for determining a woman's susceptibility to breast and ovarian cancer.
BRACAnalysis(R) provides important information that we believe will help the
patient and her physician make better informed lifestyle, surveillance,
chemoprevention and treatment
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decisions. The price per test is currently $2,580 and is covered by health
maintenance organizations and health insurance providers in the United States.
CardiaRisk(R): Personalized Medicine for Hypertension Management
Approximately 50 million people in the United States are hypertensive.
Hypertension has a significant genetic component and is a major risk factor for
cardiovascular disease, kidney failure and stroke. The angiotensinogen gene, or
AGT gene, is believed to be involved in the salt-dependent form of hypertension,
which accounts for approximately 35% of all hypertension. Therapy for these
patients includes the use of a low-salt diet, other dietary regimens, and
numerous drug therapies to control blood pressure. Results of a recent study of
1,509 patients by the National Institutes of Health showed that of all patients
placed on a low-salt diet, only patients with the AGT mutation achieved a
significant reduction in blood pressure over the three-year course of the study.
Patients in this study with the variant form of the AGT gene were also found to
be 42% more likely to experience hypertension earlier in life and more severely.
CardiaRisk(R) identifies individuals likely to respond to specific high
blood pressure therapies by screening for mutations of the AGT gene. Mutations
of this gene determine a patient's potential reaction to different courses of
therapy for hypertension. Using CardiaRisk(R) to help predict the specific
therapies and drugs to which a patient will respond may improve patient
compliance, reduce adverse side effects and decrease overall healthcare costs.
CardiaRisk(R) is a fully automated test that we perform using DNA extracted from
a patient's blood sample. The cost for the test is $295 and it is not currently
reimbursed by health insurance. We believe CardiaRisk(R) is one of the first
commercially available personalized medicine products.
COLARIS: Predictive Medicine for Hereditary Colon Cancer and Uterine Cancer
We announced in August 2000 the launch of COLARIS(TM), a molecular
diagnostic test for genetic susceptibility to colorectal and uterine cancer.
Colorectal cancer is the second leading cause of cancer deaths in the United
States, with 130,200 new cases expected to be diagnosed in the year 2000.
Familial forms of colorectal cancer were estimated in 1997 to account for 10% to
30% of all cases according to the American Society of Clinical Oncologists. The
molecular diagnostic considerations in these hereditary syndromes are similar to
those necessary for breast and ovarian cancer at-risk individuals, which we have
already commercialized. To illustrate the predictive medicine value of molecular
testing in colorectal cancer syndromes, it has been shown that individuals who
carry gene mutations can lower their risk of developing cancer by more than 50%
with appropriate surveillance measures.
Predictive Medicine Tests under Development
Prostate Cancer. We are preparing to introduce a molecular diagnostic test
for prostate cancer in calendar year 2001, based upon our discovery of the HPC2
prostate cancer gene. Prostate cancer is diagnosed in approximately 180,000 men
each year in the United States. According to the American Cancer Society, over
31,000 men will die of the disease in 2000, making it the second most common
cause of cancer death in men. Early diagnosis is effective in increasing the
survival for patients with prostate cancer. Diagnosis at the local and regional
stages is associated with a five-year survival rate approaching 100%, although
survival rates for more advanced tumors decline rapidly. Tests such as PSA have
had a positive effect on survival with prostate cancer, and serial PSA
determinations among patients identified as high risk from a molecular
diagnostic test offer potential for early diagnosis with longer survival.
Recent genetic studies suggest that approximately 10% of prostate cancer is due
to hereditary predisposition.
Melanoma. We are planning to introduce a molecular diagnostic test for
genetic susceptibility to melanoma in calendar year 2001. The incidence of
melanoma, a malignant form of skin cancer, has increased approximately 4% per
year since the early 1970's. In the year 2000, approximately 44,000 Americans
will be diagnosed with melanoma, according to the journal Science. We discovered
that mutations in the p16 gene are involved in cancer and can be inherited and
predispose individuals to melanoma, as reported in the September 1994 issue of
the journal Nature Genetics. Melanoma is lethal within five years in 86% of
cases where it has spread to another site in the body. However, when melanoma is
diagnosed at an early stage, fewer than 10% of patients die within five years.
We
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believe that approximately 10% of melanoma cases are hereditary. We have
substantial expertise in the genetic analysis of melanoma and have begun to
identify important disease-predisposing p16 mutations.
Sales and Marketing
We are currently marketing BRACAnalysis(R) and CardiaRisk(R), and we expect
to market other diagnostic products, including COLARIS(TM), in the United States
directly through our own direct sales force. The potential international market
for our molecular diagnostic products is estimated to be at least twice the size
of the United States market. After introducing molecular diagnostic products in
the United States, we plan to introduce our products in foreign markets
primarily through strategic marketing partners. We have recently completed
marketing agreements with the following foreign marketing partners:
Partner Territory
------- ---------
Falco Biosystems, Ltd. Japan
MDS Laboratory Services Canada
Rosgen Ltd. United Kingdom and Ireland
Strategic Alliances
In order to limit the financial risks associated with the development of
therapeutic products, including costs associated with related clinical trials of
such drugs, our strategy is to enter into alliances with corporate partners who
assume such risks and other assorted financial costs. In addition to our current
strategic alliances, we are actively pursuing other partners in areas that we
believe may enhance our ability to develop and exploit our technology. The
financial structure of our strategic alliances varies with each agreement and
may include research payments, equity investments, milestone payments, upfront
payments, license fees, subscription fees, option payments, and royalty payments
or profit sharing.
Events that trigger milestone payments to us may include:
. the discovery of a gene or protein;
. the determination of the function of a gene or protein;
. the identification of a lead compound;
. the filing of an investigational new drug application with the FDA;
. the commencement of Phase III clinical trials; and
. the submission of a new drug application with the FDA.
We are dependent on each strategic partner to commercialize the therapeutic
products identified during our collaboration. If our partner commercializes the
product, we will receive a royalty on sales of the product or share in the
profits derived from sales of the drug. If any of our strategic partners cease
efforts to commercialize any therapeutic products identified during our
collaboration, the rights to commercialize those products will revert back to
us.
Eli Lilly and Company. In August 1992, we entered into a Research
Collaboration and License Agreement with Eli Lilly and its former subsidiary,
Hybritech Incorporated, under which Eli Lilly and Hybritech made an equity
investment in us, and provided funding over a three-year period to support our
research and development program to discover the BRCA1 gene. The total equity
investment, research funding and potential milestone payments under this
collaboration may provide us with up to $4,000,000. In addition, we may also
receive future milestone payments and future royalty payments on therapeutic and
diagnostic product sales. We granted Eli Lilly and Company an exclusive
worldwide license to therapeutic products developed from this collaboration. We
granted Hybritech, currently a wholly owned subsidiary of Bechman Coulter Inc.,
an exclusive worldwide license to
10
<PAGE>
certain diagnostic products developed from this collaboration. Royalty terms are
tied to the life of any patents that may result from this research. The research
portion of this collaboration was concluded successfully on schedule in August
1995. We have received approximately $2,200,000 in non-refundable research and
milestone payments during the life of this agreement.
Novartis Corporation. In April 1995, we commenced a five-year
collaborative research and development arrangement with Novartis Corporation.
The total equity investment, research funding and potential milestone payments
under this collaboration may provide us with up to $60,000,000. The research
effort focused on the discovery of genes and drug targets involved in the field
of cardiovascular disease. We granted Novartis an exclusive worldwide license to
human therapeutic products developed from this collaboration. The research phase
of the Novartis collaboration concluded successfully on schedule in April 2000.
In March 1998, we announced that Novartis had licensed the therapeutic rights to
the CHD1 heart disease gene, triggering a milestone payment to us of $500,000.
In addition, we may receive future royalty payments on therapeutic products sold
by Novartis. Royalty terms are tied to either the life of any patents that may
result from this research or ten years following the first commercial sale of a
therapeutic product, whichever is longer. We have received $25,500,000 in non-
refundable research and milestone payments during the life of this agreement.
Bayer Corporation. In September 1995, we commenced a five-year
collaborative research and development arrangement with Bayer Corporation. The
total equity investment, research funding and potential milestone payments under
this collaboration may provide us with up to $71,000,000. In November 1997 and
again in December 1998, we announced expansions of our collaborative research
and development arrangement with Bayer. The expanded collaboration may provide
us with additional research funding and potential milestone payments of up to
$137,000,000. We granted Bayer an exclusive worldwide license to human
therapeutic products developed from this collaboration. We are entitled to
receive royalties from sales of therapeutic products commercialized by Bayer for
a term of ten years following the first commercial sale or 20 years following
discovery of a disease gene, whichever is longer. We have received approximately
$33,000,000 in non-refundable research payments during the life of this
agreement.
Schering-Plough Corporation. In April 1997, we commenced a three-year
collaborative research and development arrangement with Schering-Plough
Corporation. The total equity investment, research funding, license fees and
potential milestone payments under this collaboration may provide us with up to
$60,000,000. We granted Schering-Plough an exclusive worldwide license to
therapeutic products developed from this collaboration. The research phase of
the Schering-Plough collaboration concluded successfully on schedule in April
2000. In October 1997, we announced that Schering had licensed the therapeutic
rights to the MMAC1 cancer gene. In March 1998, we demonstrated the tumor-
suppressor activity of the MMAC1 gene. Each event triggered milestone payments
from Schering to us, in the aggregate amount of $2,500,000. In May 2000, we
announced that Schering had licensed the therapeutic rights to the HPC2 prostate
cancer gene, triggering an additional milestone payment to us of $1,000,000. In
addition, we may receive future royalty payments on therapeutic products sold by
Schering-Plough for a term of ten years following the first commercial sale of a
therapeutic product or the life of any patent that may result from this
research, whichever is longer. We have received $16,500,000 in non-refundable
research and milestone payments during the life of this agreement.
Schering AG. In October 1998, we entered into a five-year collaboration
with Schering AG, to utilize ProNet(R) for drug discovery and development. Under
the agreement, we will have an option to co-promote all new therapeutic products
in North America and receive 50 percent of the profits from North American sales
of all new drugs discovered with ProNet(R). Outside of North America, we granted
Schering AG an exclusive license to therapeutic products developed from this
collaboration. We may receive future royalty payments from the sale of these
products. The total research funding, license fees, subscription fees, option
payments and potential milestone payments under this collaboration may provide
us with up to $51,000,000. If we choose to co-promote a drug developed by
Schering AG as a 50 percent partner, we are required to pay funds to Schering AG
to establish equal ownership. If we do not choose to co-promote a drug developed
under this collaboration, Schering AG will receive a worldwide exclusive license
to therapeutic products developed from this collaboration from which we may
receive future royalty payments. Royalty terms are tied to either the life of
any patents that may result from this research or ten years following the first
commercial sale of a therapeutic product, whichever is longer. In October 1999,
we announced the expansion of our collaboration with Schering AG to include
research in the field of cardiovascular disease.
11
<PAGE>
Pharmacia Corporation. In November 1998, we entered into a 15 month
collaboration with Pharmacia Corporation (formerly Monsanto Company) to utilize
ProNet(R) for drug discovery and development. We granted Pharmacia non-exclusive
access to proteins contained in the pathways analyzed under the collaboration
and an option to obtain an exclusive, worldwide license to therapeutic products
developed from this collaboration. In December 1999, Pharmacia exercised its
option to extend the research term for an additional 12 months and exercised its
option to expand the research funding. The total research funding, option
payments, license fees and potential milestone payments under this collaboration
may provide us with up to $28,000,000. In addition, we are entitled to receive
royalties from sales of therapeutic products commercialized by Pharmacia for a
term of the later of 15 years from the first commercial sale or the life of any
resulting patent. We have received approximately $1,000,000 in non-refundable
research payments during the life of this agreement.
Novartis Agricultural Discovery Institute, Inc. In July 1999, we entered
into a two-year collaboration and license agreement with the Novartis
Agricultural Discovery Institute, Inc. ("NADII"). The genomic collaboration
will focus on the discovery of the genetic structure of cereal crops. We granted
NADII a royalty-free worldwide co-exclusive right for commercial use of any
resulting data. We will have joint ownership with NADII to all data developed
under this agreement and a right to receive 50 percent of all proceeds derived
from the sale of the data. The total funding under this collaboration is
expected to provide us with up to $33,500,000. Upon completion, we and NADII
intend to jointly offer commercial access to the genomic databases and share
equally in any resulting proceeds. We have received approximately $21,000,000 in
non-refundable research payments during the life of this agreement.
Hoffmann-LaRoche Inc. In December 1999, we entered into a 12 month
collaboration with Hoffmann-LaRoche Inc. to utilize ProNet(R) for drug discovery
and development in the area of cardiovascular disease. The total research
funding, license fees and potential milestone payments under this collaboration
may provide us with up to $13,000,000. We granted Roche exclusive access to
proteins contained in the pathways analyzed under this collaboration and an
option to obtain an exclusive, worldwide license to the therapeutic and
diagnostic products developed from this collaboration. In addition, we are
entitled to receive royalties from sales of therapeutic products commercialized
by Roche for a term of ten years from the first commercial sale. We have
received approximately $500,000 in non-refundable research payments during the
life of this agreement.
Hitachi Ltd. In May 2000, we entered into a three year strategic alliance
with Hitachi Ltd. Under the terms of the agreement, we will work with Hitachi to
exploit the ProNet(R) technology together in Japan and Hitachi will establish a
designated ProNet(R) facility to expedite the discovery of novel protein-protein
interactions for Japanese customers. We granted Hitachi an exclusive, royalty-
bearing license in Japan to the ProNet(R) database and technology. Total
payments under this collaboration are expected to provide us with $26,000,000.
In addition, we are entitled to receive royalties from sales of the database in
Japan and from sales of therapeutic products commercialized by Hitachi. We are
entitled to receive royalties for a period of ten years. We have received
approximately $7,500,000 in non-refundable research payments during the life of
this agreement.
We intend to enter into additional collaborative relationships with other
corporate partners to locate and sequence genes, to discover protein networks
associated with other common diseases, and to identify lead compounds which may
be developed into commercial therapeutic products by those partners.
Patents and Proprietary Rights
We intend to seek patent protection in the United States and major foreign
jurisdictions for the genes we discover, mutations and products of the genes and
related processes, transgenic animals, and other inventions which we believe are
patentable and where we believe our interests would be best served by seeking
patent protection. We also intend to seek patent protection or rely upon trade
secret rights to protect certain other technologies which may be used in
discovering and characterizing new genes and which may be used in the
development of novel diagnostic and therapeutic products. To protect our trade
secrets and other proprietary information, we require that our employees and
consultants enter into confidentiality and invention assignment agreements.
These confidentiality and invention assignment agreements may not provide us
with adequate protection. In addition, any such patents may not issue, and the
breadth or the degree of protection of any claims of such patents may not afford
us with significant protection.
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<PAGE>
We own or have licensed rights to 28 issued patents and numerous patent
applications in the United States as well as numerous foreign patent
applications relating to genes, proteins, and protein interactions associated
with cancer, heart disease, neurological disease and hypertension, processes for
identifying and sequencing genes, and other related gene discovery technologies.
However, any patent applications which we have filed or will file or to which we
have licensed or will license rights may not issue, and patents that do issue
may not contain commercially valuable claims. In addition, any patents issued to
us or our licensors may not afford meaningful protection for our technology or
products or may be subsequently circumvented, invalidated or narrowed.
Our processes and potential products may also conflict with patents which have
been or may be granted to competitors, academic institutions or others. As the
biotechnology industry expands and more patents are issued, the risk increases
that our processes and potential products may give rise to interferences in the
U.S. Patent and Trademark Office, or to claims of patent infringement by other
companies, institutions or individuals. These entities or persons could bring
legal actions against us claiming damages and seeking to enjoin clinical
testing, manufacturing and marketing of the related product or process. If any
of these actions are successful, in addition to any potential liability for
damages, we could be required to cease the infringing activity or obtain a
license in order to continue to manufacture or market the relevant product or
process. We may not prevail in any such action and any license required under
any such patent may not be made available on acceptable terms, if at all.
Our failure to obtain a license to any technology that we may require to
commercialize our technologies or potential products could have a material
adverse effect on our business. There is also considerable pressure on academic
institutions to publish discoveries in the genetic field. Such a publication by
an academic collaborator of ours prior to the filing date of our application, if
it covers a gene claimed in the application, may preclude the patent from
issuing or the filing of foreign patent applications, or if a patent was issued,
may invalidate the patent.
We also rely upon unpatented proprietary technology, and in the future may
determine in some cases that our interests would be better served by reliance on
trade secrets or confidentiality agreements rather than patents or licenses.
These include our positional cloning, protein interaction, robotics and
bioinformatics technologies. We may not be able to protect our rights to such
unpatented proprietary technology and others may independently develop
substantially equivalent technologies. If we are unable to obtain strong
proprietary rights to our processes or products after obtaining regulatory
clearance, competitors may be able to market competing processes and products.
Others may obtain patents having claims which cover aspects of our products or
processes which are necessary for or useful to the development, use or
manufacture of our services or products. Should any other group obtain patent
protection with respect to our discoveries, our commercialization of molecular
diagnostic services and potential therapeutic products could be limited or
prohibited.
In addition, we are a party to various license agreements which give us the
rights to use certain technology in our research, development and testing
processes. We may not be able to continue to license this technology on
commercially reasonable terms, if at all. Our failure to maintain rights to this
technology could have a material adverse effect on our business.
Competition
Competition is intense in our existing and potential markets. The technologies
for discovering genes that predispose persons to major diseases and approaches
for commercializing those discoveries are new and rapidly evolving. Rapid
technological developments could result in our potential services, products, or
processes becoming obsolete before we recover a significant portion of our
related research and development costs and associated capital expenditures. Our
competitors in the United States and abroad are numerous and include, among
others, major pharmaceutical and diagnostic companies, specialized biotechnology
firms, universities and other research institutions. Many of our potential
competitors have considerably greater financial, technical, marketing and other
resources than we do, which may allow these competitors to discover important
genes before we can. If we do not discover disease-predisposing genes,
characterize their functions, develop genetic tests and related information
services based on such discoveries, obtain regulatory and other approvals, and
launch such services or products before our competitors, we could be adversely
affected. Moreover, any molecular diagnostic tests that we may develop could be
made obsolete by less expensive or more effective tests or methods that may be
developed in the future. We expect competition to intensify in the fields in
which we are involved as technical advances occur in these fields and become
more widely known.
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<PAGE>
We also expect to encounter significant competition with respect to any drugs
that may be developed using our technologies. Companies that complete clinical
trials, obtain required regulatory approvals and commence commercial sales of
therapeutic products prior to us or our collaborative partners may achieve a
significant competitive advantage. We and our collaborative partners may not be
able to develop such products successfully and we may not obtain patents
covering such products that provide protection against competitors. Moreover,
competitors may succeed in developing therapeutic products that circumvent our
products, our competitors may succeed in developing technologies or products
that are more effective than those developed by us and our collaborative
partners or that would render our and our competitors' technologies or products
less competitive or obsolete.
Governmental Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of our proposed products and services and in our ongoing research and
development activities. The therapeutic products and molecular diagnostic tests
developed by us will require regulatory approval by governmental agencies prior
to commercialization. Various federal statutes and regulations also govern or
influence the testing, manufacturing, safety, labeling, storage, record keeping,
and marketing of therapeutic products. The process of obtaining these approvals
and the subsequent compliance with applicable statutes and regulations require
the expenditure of substantial time and financial resources. Any failure by us
or our collaborators, licensors or licensees to obtain, or any delay in
obtaining, regulatory approval could have a material adverse effect on our
business.
Therapeutics. Under our current strategic alliances, our partners have the
right to develop certain therapeutic products based on our gene discoveries. We
also intend to develop independently therapeutic products based on gene
discoveries that we have not licensed to partners. Such products will be subject
to regulation by the FDA and foreign regulatory authorities and require approval
before they may be clinically tested and commercially marketed for human
therapeutic use in the United States and other countries. The precise regulatory
requirements with which we and our corporate partners will have to comply are
undergoing frequent revisions and refinement. It is also uncertain whether the
clinical data generated in such studies will be acceptable to the FDA such that
the FDA will approve the marketing of such products. In addition, obtaining FDA
approval for therapeutic products is a costly and time consuming process.
The steps required before a pharmaceutical agent may be marketed in the United
States include:
. preclinical laboratory, in vivo and formulation studies;
. the submission to the FDA of an Investigational New Drug, or IND,
application, which must become effective before human clinical trials may
commence;
. adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug;
. submission of a New Drug Application, or NDA, to the FDA; and
. FDA approval of the NDA, including approval of all product labeling and
advertising.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approvals for any of our
products will be granted on a timely basis, if at all.
Human clinical trials are typically conducted in three sequential phases which
may overlap:
. PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.
. PHASE II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of the
product for specific targeted diseases and to determine dosage tolerance
and optimal dosage.
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<PAGE>
. PHASE III: When Phase II evaluations demonstrate that a dosage range of the
product is effective and has an acceptable safety profile, Phase III trials
are undertaken to further evaluate dosage and clinical efficacy and to
further test for safety in an expanded patient population at geographically
dispersed clinical study sites.
In the case of products for severe or life-threatening diseases such as
cancer, the initial human testing is often conducted in patients rather than in
healthy volunteers. Since these patients already have the target disease, these
studies may provide initial evidence of efficacy traditionally obtained in Phase
II trials and thus these trials are frequently referred to as Phase I/II trials.
We cannot be certain that we or any of our partners will successfully complete
Phase I, Phase II or Phase III testing of any compound within any specific time
period, if at all. Furthermore, the FDA or the sponsor may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical studies
are submitted to the FDA as part of a NDA. The FDA may deny a NDA if the
applicable regulatory criteria are not satisfied or may require additional
clinical data. Even if such data is submitted, the FDA may ultimately decide
that the NDA does not satisfy the criteria for approval. Once issued, the FDA
may withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products which have been commercialized, and the FDA has the
power to prevent or limit further marketing of a product based on the results of
these post-marketing programs.
On November 21, 1997, President Clinton signed into law the Food and Drug
Administration Modernization Act. That Act codified the FDA's policy of granting
''fast track'' approval for therapies intended to treat severe or life-
threatening diseases. This new policy is intended to facilitate the study of
life saving therapies and shorten the total time for marketing approvals;
however, there can be no assurance that these fast track procedures will shorten
the time of approval for any of our products.
Satisfaction of the above FDA requirements or similar requirements of state,
local and foreign regulatory agencies typically takes several years and the
actual time required may vary substantially, based upon the type, complexity and
novelty of the product or indication. Government regulation may delay or prevent
marketing of potential products for a considerable period of time and impose
costly procedures upon our or our partners' activities. The FDA or any other
regulatory agency may not grant any approvals on a timely basis, if at all.
Success in early stage clinical trials does not assure success in later stage
clinical trials. Data obtained from clinical activities is not always conclusive
and may be susceptible to varying interpretations which could delay, limit or
prevent regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications and dosages.
Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain regulatory approvals may have a material
adverse effect on our business. In addition, we cannot predict what adverse
governmental regulations may arise from future U.S. or foreign governmental
action.
Any products manufactured or distributed by us or our partners pursuant to FDA
approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the drug. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with current good manufacturing practices, or cGMP, which impose
certain procedural and documentation requirements upon us and our third-party
manufacturers. We cannot be certain that we or our present or future suppliers
will be able to comply with the cGMP regulations and other FDA regulatory
requirements.
Molecular Diagnostics. We are subject to governmental regulation at the
federal, state, and local levels as a clinical laboratory. We have received CLIA
certification from the Department of Health and Human Services. On the state
level, New York has implemented regulations concerning molecular diagnostic
testing and we have received approval from the State of New York for both breast
cancer susceptibility and hypertension/heart disease risk. We are aware of
several other states that require licensing or registration of general clinical
laboratory activities. We believe that we have taken all steps required of us in
such jurisdictions in order for us to conduct business in those jurisdictions.
However, we may not be able to maintain state level regulatory compliance in all
15
<PAGE>
states where we may do business. Failure to maintain state regulatory
compliance, or changes in state regulatory schemes, could result in a
substantial curtailment or even prohibition of our clinical activities and could
have a material adverse effect on our business.
CLIA authorizes the Department of Health and Human Services to regulate
clinical laboratories. These regulations, which affect us, mandate that all
clinical laboratories be certified to perform testing on human specimens and
provide specific conditions for certification. These regulations also contain
guidelines for the qualification, responsibilities, training, working conditions
and oversight of clinical laboratory employees. In addition, specific standards
are imposed for each type of test which is performed in a laboratory. CLIA and
the regulations promulgated thereunder are enforced through quality inspections
of test methods, equipment, instrumentation, materials and supplies on a
periodic basis. Any change in CLIA or these regulations or in the interpretation
thereof could have a material adverse effect on our business.
Our business is also subject to regulation under state and federal laws
regarding environmental protection and hazardous substances control, including
the Occupational Safety and Health Act, the Environmental Protection Act, and
the Toxic Substance Control Act. We believe that we are in material compliance
with these and other applicable laws and that our ongoing compliance will not
have a material adverse effect on our business. However, statutes or regulations
applicable to our business may be adopted which impose substantial additional
costs to assure compliance or otherwise materially adversely affect our
operations.
Human Resources
As of September 1, 2000, we had 338 full-time equivalent employees, including
41 persons holding doctoral degrees and three medical doctors. Most of our
employees are engaged directly in research, development, production and
marketing activities. We believe that the success of our business will depend,
in part, on our ability to attract and retain qualified personnel.
Our employees are not covered by a collective bargaining agreement, and we
consider our relations with our employees to be good.
Item 2. FACILITIES
Our headquarters and facilities are located in Salt Lake City, Utah. We
currently lease a 92,000 square foot building dedicated to research and
development, administration and laboratory space which has received federal
certification under CLIA to serve as a genetic predisposition testing
laboratory. Activity related to our research and molecular diagnostics segments
is performed at this location. Additionally, we lease 6,440 square feet for
various research support functions. The lease on our primary facility has a term
of ten years, and provides for a renewal option for a term of up to ten
additional years.
We believe that our existing facilities and equipment are well maintained
and in good working condition. We believe our current facilities will provide
adequate capacity for the foreseeable future. We continue to make investments in
capital equipment as needed to meet the research requirements of our
collaborative agreements, our lead compound development requirements, and the
anticipated demand for our molecular diagnostic tests.
Item 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 15, 2000, the Company held a Special Meeting of Shareholders (the
"Special Meeting"). A quorum of 14,464,640 shares of Common Stock of the Company
(of a total 21,870,706) outstanding shares, or approximately 66.14%) was
represented at the Special Meeting in person or by proxy, which was held to vote
on the following proposal.
1. To consider and act upon a proposal recommended by the Board of
Directors to amend the Company's Restated Certificate of Incorporation
to increase the Company's authorized common stock from 15 million
shares to 60 million shares.
The proposal was adopted, with 11,706,506 voting FOR, 2,746,418 voting
AGAINST and 11,716 abstentions.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock began trading on the Nasdaq National Market
on October 6, 1995 under the symbol "MYGN". The following table sets forth, for
the last two fiscal years, the high and low sales prices for the Common Stock,
as reported by the Nasdaq National Market:
High Low
---- ---
Fiscal 2000:
Fourth Quarter......................... $ 76.063 $19.00
Third Quarter.......................... $116.063 $21.313
Second Quarter......................... $ 25.375 $ 8.25
First Quarter.......................... $ 9.75 $ 4.323
Fiscal 1999:
Fourth Quarter......................... $ 6.188 $ 4.375
Third Quarter.......................... $ 5.75 $ 4.25
Second Quarter......................... $ 6.25 $ 3.938
First Quarter ........................ $ 8.00 $ 2.875
As of September 1, 2000, there were approximately 140 stockholders of
record of the Common Stock and, according to the Company's estimates,
approximately 2,500 beneficial owners of the Common Stock. The Company has not
paid dividends to its stockholders since its inception and does not plan to pay
cash dividends in the foreseeable future. The Company currently intends to
retain earnings, if any, to finance the growth of the Company.
Sale of Unregistered Securities
During the three months ended June 30, 2000, the Company issued a total of
2,742 shares of Common Stock to a director and a consultant of the Company
pursuant to the exercise of stock options at a weighted average price of $0.49
per share.
On June 15, 2000 the Company sold 600,000 shares of Common Stock for an
aggregate purchase price of $24,000,000. The sale was made to an accredited
investor in a private placement that was exempt from registration under
Regulation S of the Securities Act of 1933 (the "Securities Act").
No person acted as an underwriter with respect to the transactions set
forth above. In each of the foregoing instances, the Company relied on Section
4(2) of the Securities Act or Regulation S or Rule 701 promulgated under the
Securities Act for the exemption from the registration requirements of the
Securities Act, since no public offerings or offerings inside the United
States were involved.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated financial data as of and
for each of the five years ended June 30, 2000. The selected consolidated
financial data as of and for each of the five years ended June 30, 2000 have
been derived from our consolidated financial statements. The consolidated
financial statements and the report thereon for the year ended June 30, 2000 are
included elsewhere in this Annual Report on Form 10-K. The information below
should be read in conjunction with the consolidated financial statements (and
notes thereon) and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in Item 7.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Research revenue.......................... $ 25,219,766 $ 20,093,057 $ 20,999,598 $ 14,732,054 $ 6,628,624
Molecular diagnostic revenue.............. 8,793,272 5,220,349 2,210,983 504,045 --
------------- ------------ ------------ ------------ ------------
Total revenues....................... 34,013,038 25,313,406 23,210,581 15,236,099 6,628,624
Costs and expenses:
Molecular diagnostic cost of
revenue.............................. 3,986,473 3,066,354 1,391,368 340,461 --
Research and development................ 28,098,769 23,452,220 23,002,340 18,580,229 12,990,566
Selling, general and
administrative....................... 13,474,923 11,105,520 11,807,023 8,755,217 2,525,814
------------- ------------ ------------ ------------ ------------
Total costs and expenses.............. 45,560,165 37,624,094 36,200,731 27,675,907 15,516,380
------------- ------------ ------------ ------------ ------------
Operating loss....................... (11,547,127) (12,310,688) (12,990,150) (12,439,808) (8,887,756)
Other income (expense):
Interest income......................... 3,208,506 2,348,827 3,223,683 3,414,379 3,173,749
Interest expense........................ -- (6,278) (32,681) (66,661) (97,414)
Other................................... (383,481) (27,314) 2,113 (114,190) (86,052)
------------- ------------ ------------ ------------ ------------
Net loss.............................. ($8,722,102) ($9,995,453) ($9,797,035) ($9,206,280) ($5,897,473)
============= ============ ============ ============ ============
Basic and diluted net loss per
share (1).............................. ($0.43) ($0.53) ($0.53) ($0.52) ($0.39)
=================================================================================
Basic and diluted weighted average shares
outstanding (1).......................... 20,220,446 18,782,244 18,578,962 17,807,836 15,217,096
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Consolidated Balance
Sheet Data:
Cash, cash equivalents and
marketable investment
securities............................ $ 88,655,844 $38,926,459 $53,109,493 $63,077,439 $70,002,780
Working capital......................... 57,263,118 8,348,224 21,806,290 38,796,960 41,665,513
Total assets............................ 106,375,305 53,550,940 67,391,972 76,063,331 79,607,497
Notes payable less current
portion............................... -- -- -- 128,844 471,640
Stockholders' equity..................... 77,706,647 48,215,736 57,481,013 66,178,975 70,185,747
</TABLE>
(1) All references to the number of common shares and per share amounts in this
Annual Report on Form 10-K have been restated to reflect the effect of our
stock split. See "Subsequent Events" included in Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Overview
We are a leader in the emerging field of proteomics and gene-based medicine
focusing on the development of therapeutic and molecular diagnostic products. We
have developed, and will continue to expand upon, a number of proprietary
proteomic databases which permit us, through the use of our bioinformatics and
robotics technologies, to identify human genes and related proteins that may
play a role in the onset or progression of major human diseases. We formed two
wholly owned subsidiaries, Myriad Pharmaceuticals, Inc. and Myriad Genetic
Laboratories, Inc., to commercialize our therapeutic and molecular diagnostic
discoveries. Myriad Pharmaceuticals, Inc. independently and in conjunction with
collaborative partners, focuses on the discovery and development of therapeutic
products. Myriad Genetic Laboratories, Inc. focuses on the development of
molecular diagnostic products that access a person's risk of developing a
specific disease and permits physicians and their patients to take appropriate
health care measures to reduce the risk.
We have devoted substantially all of our resources to maintaining our research
and development programs, supporting collaborative research agreements,
operating a molecular diagnostic laboratory, establishing genomic sequencing,
establishing high-throughput screening, and undertaking drug discovery and
development. Our revenues have consisted primarily of research payments received
pursuant to collaborative agreements, upfront fees, milestone payments, and
sales of molecular diagnostic products. We have yet to attain profitability and,
for the year ended June 30, 2000, we had a net loss of $8,722,102 and as of June
30, 2000 had an accumulated deficit of $52,661,982.
16
<PAGE>
In April 1995, we commenced a five-year collaborative research and development
arrangement with Novartis Corporation. The total equity investment, research
funding and potential milestone payments under this collaboration may provide us
with up to $60,000,000. The research phase of the Novartis collaboration
concluded successfully on schedule in April 2000. We are entitled to receive
royalties from sales of therapeutic products commercialized by Novartis.
In September 1995, we commenced a five-year collaborative research and
development arrangement with Bayer Corporation. The total equity investment,
research funding and potential milestone payments under this collaboration may
provide us with up to $71,000,000. In November 1997 and again in December 1998,
we announced expansions of our collaborative research and development
arrangement with Bayer. The expanded collaboration may provide us with
additional research funding and potential milestone payments of up to
$137,000,000. We are entitled to receive royalties from sales of therapeutic
products commercialized by Bayer.
In October 1996, we announced the introduction of BRACAnalysis(R), a
comprehensive BRCA1 and BRCA2 gene sequence analysis for susceptibility to
breast and ovarian cancer. In January 1998, we announced the introduction of
CardiaRisk(R), which may assist physicians both in identifying which
hypertensive patients are at a significantly increased risk of developing
cardiovascular disease and identifying which patients are likely to respond to
low salt diet therapy and antihypertensive drug therapy. In August 2000, we
announced the future launch of COLARIS(TM), a predicitive medicine test for
hereditary colon cancer and uterine cancer. We plan to begin accepting
COLARIS(TM) samples in the fall of 2000. We, through our wholly owned subsidiary
Myriad Genetic Laboratories, Inc., recognized molecular diagnostic revenues,
primarily from BRACAnalysis(R), of $8,793,272 for the year ended June 30, 2000.
In April 1997, we commenced a three-year collaborative research and
development arrangement with Schering-Plough Corporation. The total equity
investment, research funding, license fees and potential milestone payments
under this collaboration may provide us with up to $60,000,000. The research
phase of the Schering-Plough collaboration concluded successfully on schedule in
April 2000. We are entitled to receive royalties from sales of therapeutic
products commercialized by Schering-Plough.
In October 1998, we entered into a five-year collaboration with Schering AG to
utilize our protein interaction technology, ProNet(R), for drug discovery and
development. Under the agreement, we will have an option to co-promote all new
therapeutic products in North America and receive 50% of the profits from North
American sales of all new drugs discovered with ProNet(R). The total research
funding, license fees, subscription fees, option payments and potential
milestone payments under this collaboration may provide us with up to
$51,000,000. If we choose to co-promote a drug developed by Schering AG as a 50%
partner, we may be required to pay funds to Schering AG to establish equal
ownership.
In November 1998, we entered into a 15 month collaboration with Pharmacia
Corporation (formerly Monsanto Company) to utilize ProNet(R) for drug discovery
and development. In December 1999, Pharmacia exercised its option to extend the
research term for an additional 12 months and exercised its option to expand the
research funding. The total research funding, option payments, license fees and
potential milestone payments under this collaboration may provide us with up to
$28,000,000. We are entitled to receive royalties from sales of therapeutic
products commercialized by Pharmacia.
In July 1999, we entered into a two-year collaboration and license agreement
with the Novartis Agricultural Discovery Institute, Inc. The genomic
collaboration will focus on the discovery of the genetic structure of cereal
crops. The total funding under this collaboration is expected to provide us with
$33,500,000. Upon completion, we intend to jointly offer with NADII commercial
access to the genomic databases and share equally in any resulting proceeds.
In October 1999, we announced the expansion of our collaboration with Schering
AG to include research in the field of cardiovascular disease. We also entered
into a Securities Purchase Agreement and a Standstill Agreement with Schering
Berlin Venture Corporation to sell to Schering Berlin 606,060 shares of our
common stock for an aggregate purchase price of $5,000,000.
In December 1999, we entered into a 12 month collaboration with Hoffmann-
LaRoche Inc. to utilize ProNet(R) for drug discovery and development in the area
of cardiovascular disease. The total research funding, license fees
17
<PAGE>
and potential milestone payments under this collaboration may provide us with up
to $13,000,000. In addition, we are entitled to receive royalties from sales of
therapeutic products commercialized by Roche.
In May 2000, we entered into a three year strategic alliance with Hitachi Ltd.
Under the terms of the agreement, we will work with Hitachi to exploit the
ProNet(R) technology together in Japan and Hitachi will establish a designated
ProNet(R) facility to expedite the discovery of novel protein-protein
interactions for Japanese customers. Total research and license payments under
this collaboration are expected to provide us with $26,000,000. In addition, we
are entitled to receive royalties from sales of therapeutic products
commercialized by Hitachi.
We intend to enter into additional collaborative relationships to locate and
sequence genes and discover protein networks associated with other common
diseases as well as to continue to fund internal research projects. We may be
unable to enter into additional collaborative relationships on terms acceptable
to us. We expect to incur losses for at least the next several years, primarily
due to expansion of our research and development programs, expansion of our drug
discovery and development efforts, increased staffing costs and expansion of our
facilities. Additionally, we expect to incur substantial sales, marketing and
other expenses in connection with building our molecular diagnostic business. We
expect that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial.
RESULTS OF OPERATIONS
Years ended June 30, 2000 and 1999.
Research revenues for our fiscal year ended June 30, 2000 were $25,219,766
as compared to $20,093,057 for the fiscal year ended June 30, 1999. The
increase of 26% in our research revenue is primarily attributable to revenue
recognized from the NADII collaboration that began in July 1999, the Roche
collaboration which began in December 1999, and the Hitachi collaboration which
began in May 2000. Research revenue from the research collaboration agreements
is generally recognized as related costs are incurred. Consequently, as these
programs progress and costs increase or decrease, revenues increase or decrease
proportionately.
Molecular diagnostic revenues of $8,793,272 were recognized in the fiscal
year ended June 30, 2000, an increase of 68% or $3,572,923 over the prior year.
Molecular diagnostic revenue is comprised of sales of molecular diagnostic tests
resulting from our discovery of disease genes. Sales and marketing efforts
since that time, together with increased demand as a result of wider acceptance
of the test by the medical community, have given rise to the increased revenues
for the fiscal year ended June 30, 2000. There can be no assurance, however
that molecular diagnostic revenues will continue to increase at the historical
rate.
Research and development expenses for the year ended June 30, 2000 increased
to $28,098,769 from $23,452,220 for the prior year, an increase of 20%. This
increase was primarily due to an increase in research activities as a result of
our recent collaborations with NADII, Roche, and Hitachi as well as those
programs we fund internally. The increased level of research spending also
includes the ongoing drug discovery efforts of Myriad Pharmaceuticals, our
wholly-owned subsidiary, continued development and utilization of ProNet, and
third-party sponsored research programs.
Selling, general and administrative expenses for the fiscal year ended June
30, 2000 were $13,474,923 compared to $11,105,520 for the fiscal year ended June
30, 1999. This increase of 21% was primarily attributable to costs associated
with the ongoing promotion of our molecular diagnostic business including
preparations for the launch of COLARIS, a predictive medicine test for
hereditary colon and uterine cancer scheduled to be available in the fall of
2000. Increased costs also resulted from the establishment of international
license agreements and the related costs of increasing our infrastructure to
support increased molecular diagnostic testing volumes. We expect our selling,
general and administrative expenses will continue to fluctuate as needed in
support of our molecular diagnostic business and our research and development
efforts.
Cash, cash equivalents, and marketable investment securities were $88,655,844
at June 30, 2000 as compared to $38,926,459 at June 30, 1999. This increase of
approximately $49,750,000 in our cash, cash equivalents and marketable
investment securities was primarily attributable to the private sale of
approximately $34,000,0000 worth
18
<PAGE>
of our Common Stock during the year, as well as receipt of $500,000 from license
payments, $1,000,000 in non-recurring milestone payments and approximately
$44,000,000 in research payments from our collaborators. These cash receipts
were offset by expenditures we incurred in the ordinary course of business. As a
result of our increased cash position, interest income for the fiscal year ended
June 30, 2000 was $3,208,506 as compared to $2,348,827 for the fiscal year ended
June 30, 1999. The loss on disposition of assets of $383,481 in the fiscal year
ended June 30, 2000 was primarily the result of our retiring unproductive
assets.
Years ended June 30, 1999 and 1998.
Research revenues for the Company's fiscal year ended June 30, 1999 were
$20,093,057 as compared to $20,999,598 for the fiscal year ended June 30, 1998.
Greater research revenue recognized during the fiscal year ended June 30, 1998
versus the fiscal year ended June 30, 1999 is the result of $3,950,000 in
research milestones and contract expansion payments we received 1998. Excluding
the milestone and contract expansion payments, our ongoing research revenue
increased $3,043,459 for the fiscal year ended June 30, 1999 versus fiscal 1998.
Research revenue from the research collaboration agreements is generally
recognized as related costs are incurred. Consequently, as these programs
progress and costs increase or decrease, revenues increase or decrease
proportionately.
Molecular diagnostic revenues of $5,220,349 were recognized in the fiscal
year ended June 30, 1999, an increase of 136% or $3,009,366 over the fiscal year
ended June 30, 1998. Molecular diagnostic revenue is comprised of sales of
diagnostic tests resulting from the our discovery of disease genes. We launched
the test for genetic predisposition to breast and ovarian cancer in October 1996
and we launched the test for heart disease and hypertension risk in January
1998. Sales and marketing efforts since that time have given rise to the
increased revenues for the fiscal year ended June 30, 1999.
Research and development expenses for the year ended June 30, 1999 increased
to $23,452,220 from $23,002,340 for the prior year. This increase was primarily
due to an increase in research activities as a result of our collaborations with
Novartis, Bayer, Schering, Schering AG, and Pharmacia, as well as those programs
we funded internally. The increased level of research spending includes ongoing
development of the Company's ProNet(TM) and mutation screening technologies,
third-party sponsored research programs, and the formation of Myriad
Pharmaceuticals, Inc. ("Myriad Pharmaceuticals"). Myriad Pharmaceuticals, our
wholly-owned subsidiary, was created to develop therapeutic lead compounds for
selected common diseases with large potential markets that are under-served by
current therapeutic options.
Selling, general and administrative expenses for the fiscal year ended June
30, 1999 decreased $701,503 from the fiscal year ended June 30, 1998. During
the fiscal year ended June 30, 1998, we pursued a plan to dramatically increase
our sales force. Start-up expenses for the sales staff included training,
relocation, and sales supplies. For the fiscal year ended June 30, 1999, we
maintained a steady, well-trained sales force which resulted in fewer selling
expenses. In addition, during the fiscal year ended June 30, 1998, we incurred
significant expenses in defense of our intellectual property, including the
successful settlement of legal actions with OncorMed. Such expenses were
drastically reduced during the fiscal year ended June 30, 1999.
Interest income for the fiscal year ended June 30, 1999 decreased to
$2,348,827 from $3,223,683 for the fiscal year ended June 30, 1998. Cash, cash
equivalents, and marketable investment securities were $38,926,459 at June 30,
1999 as compared to $53,109,493 at June 30, 1998. This decrease in cash, cash
equivalents and marketable investment securities was attributable to
expenditures incurred in the ordinary course of business and has resulted in
reduced interest income. Interest expense for the year ended June 30, 1999,
amounting to $6,278, was due entirely to borrowings under the Company's
equipment financing facility.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17,163,535 during the fiscal
year ended June 30, 2000 as compared to $14,137,559 used during the prior year.
Trade receivables increased $1,100,765 between June 30, 1998 and June 30, 1999.
This increase is primarily attributable to the 68% increase in molecular
diagnostic revenue during fiscal 2000. Trade receivables as a percentage of
molecular diagnostic revenue continues to be in the 25-27%
19
<PAGE>
range for both June 30, 2000 and June 30, 1999. Other receivables decreased
$1,456,749 during the fiscal year ended June 30, 2000 primarily as a result of
our receipt of collaborative partner payments for research work performed in the
prior year. Prepaid expenses increased $2,056,284 during the fiscal year ended
June 30, 2000. The increase is primarily due to advance payments to purchase lab
supplies at a discount, advanced royalties, and insurance premiums. Accounts
payable and accrued expenses increased by $4,495,772 during the fiscal year
ended June 30, 2000 primarily as a result of our efforts to manage cash flows
and extend payment terms as well as increased accrued year end payroll related
expenses, and accrued broker fees. Deferred revenue, representing the difference
in collaborative payments we have received and research revenue which we have
recognized, increased by $18,837,682 during the fiscal year ended June 30, 2000
in large part due to upfront payments from NADII and Hitachi as well as
marketing license fees we received from recent molecular diagnostic license
agreements.
The Company's investing activities used $4,335,576 of cash in the fiscal year
ended June 30, 2000 and provided cash of $4,506,423 in the fiscal year ended
June 30, 1999. Investing activities were comprised primarily of capital
expenditures for research equipment, office furniture, and facility improvements
and changes to marketable investment securities. During the fiscal year ended
June 30, 2000, we invested cash received from private equity placements,
collaborative research payments, upfront payments, milestone payments, marketing
license payments and molecular diagnostic sales to short-term and long-term
investments in order to take advantage of higher interest rates. These funds
were invested in accordance with our investment guidelines as established by our
Board of Directors.
Financing activities provided $37,981,833 during the fiscal year ended June
30, 2000. We recognized proceeds from three separate financings during the
year. In September 1999, we entered into a Subscription Agreement pursuant to
which we sold 710,000 shares our unregistered Common Stock for a purchase price
of $4,987,750. In conjunction with the Subscription Agreement, we issued a 3-
year warrant to purchase an additional 35,500 shares at a premium of 10%. In
October 1999, we entered into a Securities Purchase Agreement and a one-year
Standstill Agreement with Schering Berlin to sell to Schering Berlin 606,060
shares of unregistered Common Stock. Schering Berlin agreed to acquire the
unregistered shares for an aggregate purchase price of $5,000,0000. Under the
terms of this agreement, the shares carry certain demand and piggyback
registration rights. In June 2000, we sold 600,000 shares of unregistered
Common Stock to a European pharmaceutical company that resulted in proceeds of
$24,000,000. We have no obligation to register the shares associated with the
September 1999 financing and the June 2000 financing with the Securities and
Exchange Commission. Additional cash was provided from the exercise of stock
options during the fiscal year ended June 30, 2000.
We believe that with our existing capital resources, we will have adequate
funds to maintain our current and planned operations for at least the next two
years, although no assurance can be given that changes will not occur that would
consume available capital resources before such time. Our future capital
requirements will be substantial and will depend on many factors, including:
. the progress of our research and development programs;
. the progress of our drug discovery and drug development programs;
. the cost of developing and launching additional molecular diagnostic
tests;
. the costs of filing, prosecuting and enforcing patent claims;
. the costs associated with competing technological and market developments;
. the payments received under collaborative agreements and changes in
collaborative research relationships;
. the costs associated with potential commercialization of our gene
discoveries, if any, including the development of manufacturing, marketing
and sales capabilities; and
. the cost and availability of third-party financing for capital
expenditures and administrative and legal expenses.
20
<PAGE>
Because of our significant long-term capital requirements, we intend to raise
funds when conditions are
favorable, even if we do not have an immediate need for additional capital at
such time.
Subsequent Events
In August 2000, we announced a stock split to be effected in the form of a
stock dividend of one new share for each share of Common Stock outstanding. The
record date for the split was set as August 28, 2000 and the distribution date
was set as September 11, 2000. All references to the number of common shares
and per share amounts in this Annual Report on Form 10-K have been restated to
reflect the effect of the split for all periods presented.
In August 2000, we also closed on an equity financing with Acqua Wellington
North American Equities Fund, Ltd. We sold 350,000 shares of our Common Stock
to Acqua Wellington for gross proceeds in excess of $22 million. We have agreed
to register these shares with the Securities and Exchange Commission.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and
maturities of three years or less, with a maximum average maturity of 12 months.
These securities are classified either as available-for-sale or held-to-
maturity. Available-for-sale securities are recorded on the balance sheet at
fair market value with unrealized gains or losses reported as part of
accumulated other comprehensive loss. Held-to-maturity securities are recorded
at amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Gains and losses on investment security transactions are reported on
the specific-identification method. Dividend and interest income are recognized
when earned. A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary results in a
charge to earnings and establishes a new cost basis for the security. Premiums
and discounts are amortized or accreted over the life of the related held-to-
maturity security as an adjustment to yield using the effective-interest method.
The securities held in the Company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of June 30, 2000, the Company has determined that in the event of
a hypothetical ten percent increase in interest rates, the resulting decrease in
fair market value of the Company's marketable investment securities would be
insignificant to the financial statements as a whole.
Certain Factors That May Affect Future Results of Operations
Some of the matters discussed in this Annual Report on Form 10-K include
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. In some cases you can identify forward-looking
statements by terminology such as "may", "will", "should", "potential",
"continue", "expects", "anticipates", "intends", "plans", "believes",
"estimates", and similar expressions. We have based these forward-looking
statements on our current expectations and projections about future events. We
caution investors that actual results may vary significantly and are subject to
a number of factors and uncertainties, including, but not limited to, the
following: intense competition related to the discovery of disease-related genes
and the possibility that others may discover, and we may not be able to gain
rights with respect to, genes important to the establishment of a successful
genetic testing business; difficulties inherent in developing genetic tests once
genes have been discovered; our limited experience in operating a genetic
testing laboratory; our limited marketing and sales experience and the risk that
tests which we have or may develop may not be marketed at acceptable prices or
receive commercial acceptance in the markets that we are targeting or expect to
target; uncertainty as to whether there will exist adequate reimbursement for
our services from government, private healthcare insurers and third-party
payors; uncertainties as to the extent of future government regulation of our
business; uncertainties as to whether we and our collaborators will be
successful in developing and obtaining regulatory approval for, and commercial
acceptance of, therapeutics based on the discovery of disease-related genes and
proteins; uncertainties as to our ability to develop therapeutic lead compounds,
which is a new business area for us; and the risk that markets will not exist
for therapeutic lead compounds that we develop or if such markets exist, that we
will not be able to sell compounds which we develop at acceptable prices.
These forward-looking statements are made as of the date of this report, and we
assume no obligation to update them or to explain the reasons why actual results
may differ. In light of these assumptions, risks, and uncertainties, the results
and events discussed in the forward-looking statements contained in this Annual
Report on Form 10-K might not occur.
Item 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MYRIAD GENETICS, INC.
Index to Financial Statements Number
----------------------------- ------
<S> <C>
Independent Auditors' Report......................................................................... F-1
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years Ended June 30, 2000,
1999 and 1998................................................................................... F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for
the Years Ended June 30, 2000, 1999 and 1998.................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000,
1999 and 1998................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Share Ownership" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation--Employment
Agreements, Termination of Employment and Change of Control Arrangements" in the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a). The following documents are filed as part of this annual report
on Form 10-K.
Item 14(a)(1). See "Index to Consolidated Financial Statements and Financial
and (2) Statement Schedules" at Item 8 to this Annual Report on Form 10-
K. Other financial statement schedules have not been included
because they are not applicable or the information is included
in the financial statements or notes thereto.
Item 14(a)(3) Exhibits
--------
The following is a list of exhibits filed as part of this Annual
Report on Form 10-K.
Exhibit
Number Description
------ -----------
(3.1)p - Restated Certificate of Incorporation of the Registrant (Filed
as Exhibit 3.1)
(3.1 (a)) - Restated Certificate of Incorporation of the Registrant
(3.1 (b)) - Certificate of Amendment of Restated Certificate of
Incorporation
(3.2)p - Restated By-Laws of the Registrant (Filed as Exhibit 3.2)
(4.1)p - See Exhibits 3.1, 3.1(a), 3.1(b) and 3.2 (Filed as Exhibit 4.1)
(4.2)* - Form of Common Stock Certificate (Filed as Exhibit 4.2)
(10.1)z$ - 1992 Employee, Director and Consultant Stock Option Plan as
amended and restated September 24, 1999 (Filed as Exhibit 10.1)
(10.2)*$ - Employee Stock Purchase Plan (Filed as Exhibit 10.2)
(10.3)*$ - Employment Agreement between Myriad Genetics, Inc., Myriad
Genetic Laboratories, Inc. and Peter D. Meldrum, dated May 15,
1993 (Filed as Exhibit 10.3)
(10.4)*$ - Employment Agreement between Myriad Genetics, Inc., Myriad
Genetic Laboratories, Inc. and Mark H. Skolnick, Ph.D., dated
January 1, 1994 (Filed as Exhibit 10.4)
(10.5)*$ - Employment Agreement between Myriad Genetics, Inc., Myriad
Genetic Laboratories, Inc. and Jay M. Moyes, dated July 12,
1993 (Filed as Exhibit 10.5)
(10.6)* - Form of Registration Agreement executed in connection with the
private placement of Series A Preferred Stock (Filed as Exhibit
10.6)
(10.7)* - Stock Purchase Agreement for Series C Convertible Preferred
Stock between the Registrant and Novartis Corporation, dated
April 27, 1995 (Filed as Exhibit 10.7)
(10.8)* - Standstill Agreement between the Registrant and Novartis
Corporation, dated April 27, 1995 (Filed as Exhibit 10.8)
(10.9)* - Voting Agreement between the Registrant and Novartis
Corporation, dated April 27, 1995 (Filed as Exhibit 10.9)
(10.10)# - Collaborative Research and License Agreement between the
Registrant and Novartis Corporation, dated April 27, 1995
(Cardiovascular Diseases) (Filed as Exhibit 10.10)
(10.11)# - Research Collaboration and License Agreement between the
Registrant, Eli Lilly & Company and Hybritech Incorporated,
dated August 1, 1992 (Breast Cancer--BRCA1) (Filed as Exhibit
10.11)
(10.12)# - Collaborative Agreement between the Registrant and Hybritech
Incorporated, dated March 5, 1993 (BRCA1 Test Kits) (Filed as
Exhibit 10.12)
(10.13)# - Exclusive License Agreement between the Registrant and the
University of Utah Research Foundation, dated August 4 1993, as
amended (Genes Predisposing to Cancer) (Filed as Exhibit 10.14)
(10.14)# - Standard Research Agreement and Form of License Agreement
between the Registrant and the University of Utah, effective
January 1, 1993, as amended (Genes Predisposing to Cancer)
(Filed as Exhibit 10.14)
(10.15)# - Exclusive License Agreement between the Registrant and the
University of Utah Research Foundation, dated August 4, 1993
(Angiotensinogen Variants and Predisposition to Hypertension)
(Filed as Exhibit 10.15)
(10.16)# - Exclusive License Agreement between the Registrant and the
University of Utah Research Foundation, dated June 21, 1994
(MTS1 or p16) (Filed as Exhibit 10.16)
(10.17)# - Exclusive License Agreement between the Registrant and the
University of Utah Research Foundation, dated November 23, 1994
(Breast Cancer--BRCA2) (Filed as Exhibit 10.17)
(10.18)# - Standard Research Agreement dated May 1, 1995 between the
Registrant and the University of Utah (Cardiovascular Disorders
and Coronary Heart Disease Database) (Filed as Exhibit 10.18)
(10.19)# - Exclusive License Agreement dated May 1, 1995 between the
Registrant and the University of Utah Research Foundation
(Cardiovascular Disorders and Coronary Heart Disease Database)
(Filed as Exhibit 10.19)
(10.20)# - Standard Research Agreement dated July 31, 1995 between the
Registrant and the University of Utah (Obesity Database) (Filed
as Exhibit 10.20)
(10.21)# - Exclusive License Agreement dated July 31, 1995 between the
Registrant and the University of Utah Research Foundation
(Obesity Database) (Filed as Exhibit 10.21)
(10.22)# - Co-Exclusive License Agreement among the Registrant, the
University of Utah Research Foundation and Institut National de
la Sante et de la Recherche Medicale, dated October 6, 1993
(Angiotensinogen and Predisposition to Essential Hypertension)
(Filed as Exhibit 10.22)
(10.23)# - License Agreement between the Registrant and California
Institute of Technology, dated April 21, 1994 (MTS1 or p16)
(Filed as Exhibit 10.23)
(10.24)* - Research Agreement between the Registrant and California
Institute of Technology, dated June 3, 1994 (MTS1 or p16)
(Filed as Exhibit 10.24)
(10.25)* - Stock Purchase Agreement for Series D Convertible Preferred
Stock between the Registrant and Bayer Corporation, dated
September 11, 1995 (Filed as Exhibit 10.25)
(10.26)* - Standstill Agreement between the Registrant and Bayer
Corporation, dated September 11, 1995 (Filed as Exhibit 10.26)
(10.27)* - Voting Agreement between the Registrant and Bayer Corporation,
dated September 11, 1995 (Filed as Exhibit 10.27)
(10.28)# - Collaborative Research and License Agreement between the
Registrant and Bayer Corporation, dated September 11, 1995
(Filed as Exhibit 10.28)
(10.29)# - Standard Research Agreement between the Registrant and IHC
Health Services, Inc., dated as of September 1, 1995 (Filed as
Exhibit 10.29)
(10.30)@ - Research Agreement between the Registrant and IHC Health
Services, Inc., dated as of June 24, 1996
(10.31)!@ - Patent and Technology License Agreement dated September 26,
1996 among the Board of Regents of the University of Texas
System, the University of Texas M.D. Anderson Cancer Center and
the Registrant (Filed as Exhibit 10.1)
(10.32)! - Lease Agreement, dated October 12, 1995, between the Boyer
Research Park Associates V, by its general partner, the Boyer
Company and the Registrant (Filed as Exhibit 10.2)
(10.33)! - Amendment to Lease Agreement, dated March 29, 1996 between the
Boyer Research Park Associates V, by its general partner, the
Boyer Company and the Registrant (Filed as Exhibit 10.3)
(10.34)!@ - Letter Agreement, dated March 4, 1996, among the University of
Utah, Genetic Epidemiology and the Registrant regarding
Extension of Standard Research agreement and Form of License
Agreement between the Registrant and the University of Utah,
effective January 1, 1993, as amended (Genes Predisposing to
Cancer) (Filed as Exhibit 10.4)
(10.35)q@ - Patent and Technology License Agreement dated December 2, 1996
among the Board of Regents of the University of Texas System,
the University of Texas M.D. Anderson Cancer Center and the
Registrant (Filed as Exhibit 10.1)
(10.36)=@ - Collaborative Research and License Agreement among the
Registrant, Schering Corporation and Schering-Plough, Ltd.,
dated April 22, 1997 (Prostate and Other Cancers) (Filed as
Exhibit 10.36)
(10.37)= - Standstill Agreement between the Registrant and Schering
Corporation, dated April 22, 1997 (Filed as Exhibit 10.37)
(10.38)= - Stock Purchase Agreement for Common Stock between the
Registrant and Schering Corporation, dated April 22, 1997
(Filed as Exhibit 10.38)
(10.39)++@ - Standard Research Agreement between the Company and Valley
Mental Health dated September 1, 1997 (central nervous system
disorders) (Filed as Exhibit 10.1)
(10.40)++ - International Swap Dealers Association, Inc. Master Agreement
("ISDA Master Agreement") between the Registrant and Swiss Bank
Corporation, London Branch dated October 8, 1997 (Filed as
Exhibit 10.2)
(10.41)++ - Schedule to ISDA Master Agreement between the Registrant and
Swiss Bank Corporation, London Branch dated October 8, 1997
(Filed as Exhibit 10.3)
(10.42)++ - Confirmation for Contract A entered into pursuant to ISDA
Master Agreement between the Registrant and Swiss Bank
Corporation, London Branch dated October 8, 1997 (Filed as
Exhibit 10.4)
(10.42)++ - Confirmation for Contract B entered into pursuant to ISDA
Master Agreement between the Registrant and Swiss Bank
Corporation, London Branch dated October 8, 1997 (Filed as
Exhibit 10.5)
(10.43)%@ - Amendment and Supplement to Collaborative Research and License
Agreement dated November 19, 1997 between Bayer Corporation and
the Registrant (Filed as Exhibit 10.1)
(10.44)k - Lease Agreement-Research Park Building Phase II, dated March 6,
1998, between the Research Park Associated VI, by its general
partner, the Boyer Company, L.C. and the Registrant
(10.45)& - Memorandum of Lease between the Company and Boyer Foothill
Associates, Ltd. dated August 24, 1998 (Filed as Exhibit 10.1)
(10.46)& - Memorandum of Lease between the Company and Boyer Research Park
Associates VI, L.C. dated August 24, 1998 (Filed as Exhibit
10.2)
(10.47)& - Subordination Agreement and Estoppel, Attornment and Non-
Disturbance Agreement (Lease to Deed of Trust) between the
Company and Wells Fargo Bank, National Association dated June
24, 1998 (Filed as Exhibit 10.3 )
(10.48)w - Master Lease Agreement dated December 31, 1998 between General
Electric Capital Corporation and the Company (Filed as Exhibit
10.1)
(10.49)w - Addendum No. 1 to Master Lease Agreement dated December 31,
1998 between General Electric Capital Corporation and the
Company (Filed as Exhibit 10.2)
(10.50)w - Addendum No. 2 to Master Lease Agreement dated December 31,
1998 between General Electric Capital Corporation and the
Company (Filed as Exhibit 10.3)
(10.51)w - Biotech Equipment Schedule Schedule No. 001 dated December 31,
1998 to Master Lease Agreement dated December 31, 1998 between
General Electric Corporation and the Company (Filed as Exhibit
10.4)
(10.52)w - Annex A to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation
and the Company (Filed as Exhibit 10.5)
(10.53)w - Annex B to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation
and the Company (Filed as Exhibit 10.6)
(10.54)w - Addendum to Schedule No. 001 to Master Lease Agreement dated as
of December 31, 1998 between General Electric Corporation and
the Company (Filed as Exhibit 10.7)
(10.55)w@ - Collaborative Research, License and Co-Promotion agreement
dated as of October 5, 1998 between Schering Aktiengesellschaft
and the Company (Filed as Exhibit 10.8)
(10.56)w@ - Collaborative ProNet Research and License Agreement dated as of
November 11, 1998 between Monsanto Company and the Company
(Filed as Exhibit 10.9)
(10.57)w@ - Letter Amendment to the Collaborative Research and License
Agreement dated as of November 30, 1998 between Bayer
Corporation and the Company (Filed as Exhibit 10.10)
(10.58)m@ - Collaboration and License Agreement between the Company and
Novartis Agricultural Discovery Institute, Inc. dated July 27,
1999 (Filed as Exhibit 10.1)
(10.59)m - Subscription Agreement between the Company and Peter Friedli
dated September 30, 1999 (Filed as Exhibit 10.2)
(10.60)m - Securities Purchase Agreement and Standstill Agreement between
the Company and Schering Berlin Venture Corporation dated
October 15, 1999 (Filed as Exhibit 10.3)
(10.61)f - Mater Lease Agreement dated October 25 between Comdisco
Laboratory and Scientific Group, a Division of Comdisco
Healthcare Group, Inc. and the Company (Filed as Exhibit 10.1)
(10.62)f - Addendum to the Master Lease Agreement dated October 25, 1999
between Comdisco Laboratory and Scientific Group, a Division of
Comdisco Healthcare Group, Inc. and the Company (Filed as
Exhibit 10.2)
(10.63)f - Amendment No. 1 to the Master Lease Agreement dated October 25,
1999 between Comdisco Laboratory and Scientific Group, a
Division of Comdisco Healthcare Group, Inc. and the Company
(Filed as Exhibit 10.3)
(10.64)f - Equpment Schedule No. SG01 dated November 10, 1999 to the
Master Lease Agreement dated October 25, 1999 between Comdisco
Laboratory and Scientific Group, a Division of Comdisco
Healthcare Group, Inc. and the Company (Filed as Exhibit 10.4)
(10.65)v - Purchase Agreement dated as of August 28, 2000 between the
Registrant and Acqua Wellington North American Equities Fund,
Ltd.
(10.66)v - Registration Rights Agreement dated as of August 28, 2000
between the Registrant and Acqua Wellington North American
Equities Fund, Ltd.
(21.1)v - List of Subsidiaries of the Registrant
(23.1)v - Consent of KPMG LLP
(27.1)v - Financial Data Schedule
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement filed on
Form S-1, File No. 33-95970
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement filed on
Form S-1, File No. 33-95970, and for which Confidential Treatment has
been granted by the Securities and Exchange Commission as to certain
portions.
@ Confidential Treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
p Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending September 30, 1995.
$ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this
report.
! Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending September 30, 1996.
q Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending December 31, 1996.
= Previously filed and incorporated herein by reference from the Form 10-
K for the period ending June 30, 1997.
++ Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending September 30, 1997.
% Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending December 31, 1997.
z Previously filed and incorporated herein by reference from the
Company's Registration Statement filed on Form S-8, effective December
22, 1999, File No. 333-93363.
k Previously filed and incorporated herein by reference from the Form 10-
K for the period ending June 30, 1998.
& Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending September 30, 1998.
w Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending December 31, 1998.
m Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending September 30, 1999.
f Previously filed and incorporated herein by reference from the Form 10-
Q for the period ending December 31, 1999.
v Previously filed and incorporated herein by reference from the Form
10-K for the period ending June 30, 2000.
Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.
Item 14(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the year ended
June 30, 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Form 10-K on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized.
MYRIAD GENETICS, INC.
By: /s/ Peter D. Meldrum
---------------------------
Peter D. Meldrum
President and Chief Executive Officer
Date: November 15, 2000
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Myriad Genetics, Inc.:
We have audited the accompanying consolidated balance sheets of Myriad Genetics,
Inc. and subsidiaries, as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended June
30, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Myriad Genetics,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
Salt Lake City, Utah KPMG LLP
August 22, 2000
F-1
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
--------------------------------------
Assets 2000 1999
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 56,214,736 5,404,944
Marketable investment securities 24,286,955 4,477,138
Prepaid expenses 2,678,984 622,700
Trade accounts receivables, less allowance for doubtful
accounts of $145,000 in 2000 and $73,439 in 1999 2,352,154 1,322,950
Other receivables 398,947 1,855,696
---------------- -----------------
Total current assets 85,931,776 13,683,428
---------------- -----------------
Equipment and leasehold improvements:
Equipment 16,965,545 13,351,229
Leasehold improvements 4,005,729 3,520,253
---------------- -----------------
20,971,274 16,871,482
Less accumulated depreciation and amortization 9,719,556 6,871,981
---------------- -----------------
Net equipment and leasehold improvements 11,251,718 9,999,501
Long-term marketable investment securities 8,154,153 29,044,377
Other assets 1,037,658 823,634
---------------- -----------------
$ 106,375,305 53,550,940
================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,262,359 2,917,810
Accrued liabilities 4,905,857 1,754,634
Deferred revenue 19,500,442 662,760
---------------- -----------------
28,668,658 5,335,204
---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.01 par value. Authorized 60,000,000 shares;
issued and outstanding 21,866,482 shares in 2000 and 18,857,464
shares in 1999 218,666 188,575
Additional paid-in capital 130,235,403 92,283,661
Accumulated other comprehensive loss (85,440) (68,846)
Deferred compensation -- (247,774)
Accumulated deficit (52,661,982) (43,939,880)
---------------- -----------------
Total stockholders' equity 77,706,647 48,215,736
---------------- -----------------
$ 106,375,305 53,550,940
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Research revenue $ 25,219,766 20,093,057 20,999,598
Molecular diagnostic revenue 8,793,272 5,220,349 2,210,983
--------------- -------------- --------------
Total revenues 34,013,038 25,313,406 23,210,581
Costs and expenses:
Molecular diagnostic cost of revenue 3,986,473 3,066,354 1,391,368
Research and development expense 28,098,769 23,452,220 23,002,340
Selling, general, and administrative expenses 13,474,923 11,105,520 11,807,023
--------------- -------------- --------------
Total cost and expenses 45,560,165 37,624,094 36,200,731
--------------- -------------- --------------
Operating loss (11,547,127) (12,310,688) (12,990,150)
Other income (expense):
Interest income 3,208,506 2,348,827 3,223,683
Interest expense -- (6,278) (32,681)
Other (383,481) (27,314) 2,113
--------------- -------------- --------------
2,825,025 2,315,235 3,193,115
--------------- -------------- --------------
Net loss $ (8,722,102) (9,995,453) (9,797,035)
=============== ============== ==============
Basic and diluted loss per common share $ (0.43) (0.53) (0.53)
=============== ============== ==============
Basic and diluted weighted average shares outstanding 20,220,446 18,782,244 18,578,962
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Accumu-
lated
other
Additi- compre- Compre-
tional hensive Deferred Accum- hensive Stock-
Common stock paid-in income compen- ulated income holders'
----------------------
Shares Amount capital (loss) sation deficit (loss) equity
----------- ---------- ----------- --------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 30, 1997 18,445,104 184,451 91,513,514 5,382 (1,376,980) (24,147,392) 66,178,975
Issuance of
common stock for
cash upon exercise
of options and
warrants 211,408 2,114 392,071 -- -- -- 394,185
Issuance of common
stock for cash 18,490 185 178,074 -- -- -- 178,259
Amortization of
deferred
compensation -- -- -- -- 530,534 -- 530,534
Forfeiture of deferred
compensation -- -- (270,000) -- 270,000 -- --
Net loss -- -- -- -- -- (9,797,035) (9,797,035) (9,797,035)
Unrealized gains (losses)
on marketable
investment securities:
Unrealized holding
gains arising
during period -- -- -- -- -- -- 13,064 --
Less: classification
adjustment for
gains included
in net loss -- -- -- -- -- -- (16,969) --
------------
Other comprehensive loss -- -- -- (3,905) -- -- (3,905) (3,905)
------------
Comprehensive loss -- -- -- -- -- -- (9,800,940) --
============
----------- ---------- ----------- --------- ----------- ------------ -----------
Balances at
June 30, 1998 18,675,002 186,750 91,813,659 1,477 (576,446) (33,944,427) 57,481,013
Issuance of
common stock for
cash upon exercise
of options and warrants 137,654 1,377 364,918 -- -- -- 366,295
Issuance of common
stock for cash 44,808 448 203,146 -- -- -- 203,594
Amortization of
deferred compensation -- -- -- -- 230,610 -- 230,610
Forfeiture of deferred
compensation -- -- (98,062) -- 98,062 -- --
Net loss -- -- -- -- -- (9,995,453) (9,995,453) (9,995,453)
Unrealized losses
on marketable
investment securities:
Unrealized holding
losses arising
during period -- -- -- -- -- -- (115,287) --
Less: classification
adjustment for
losses included
in net loss -- -- -- -- -- -- 44,964 --
------------
Other comprehensive loss -- -- -- (70,323) -- -- (70,323) (70,323)
------------
Comprehensive loss -- -- -- -- -- -- (10,065,776) --
============
----------- ---------- ----------- --------- ----------- ------------ -----------
Balances at
June 30, 1999 18,857,464 188,575 92,283,661 (68,846) (247,774) (43,939,880) 48,215,736
</TABLE>
F-4 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Accumu-
lated
other
Additi- compre- Compre-
tional hensive Deferred Accum- hensive Stock-
Common stock paid-in income compen- ulated income holders'
---------------------
Shares Amount capital (loss) sation deficit (loss) equity
---------- --------- ----------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock for
cash upon exercise
of options and warrants 1,092,958 $ 10,930 6,525,622 -- -- -- -- 6,536,552
Issuance of common
stock for cash, net of
offering costs 1,916,060 19,161 31,426,120 -- -- -- -- 31,445,281
Amortization of
deferred compensation -- -- -- -- 247,774 -- -- 247,774
-- --
Net loss -- -- -- -- -- (8,722,102) (8,722,102) (8,722,102)
Unrealized losses
on marketable
investment securities:
Unrealized holding
losses arising
during period -- -- -- -- -- -- (63,638) --
Less: classification
adjustment for
losses included
in net loss -- -- -- -- -- -- 47,044
----------
Other comprehensive loss -- -- -- (16,594) -- -- (16,594) (16,594)
----------
Comprehensive loss -- -- -- -- -- -- (8,738,696) --
==========
---------- --------- ----------- --------- ---------- ---------- ----------
Balances at
June 30, 2000 21,866,482 $ 218,666 130,235,403 (85,440) -- (52,661,982) 77,706,647
========== ========= =========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,722,102) (9,995,453) (9,797,035)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,284,734 3,223,779 3,272,936
Loss (gain) on sale of equipment 383,481 (17,650) 14,856
Loss (gain) on sale of investment securities 47,044 44,964 (16,969)
Bad debt expense 71,561 7,439 66,000
Changes in operating assets:
Trade receivables (1,100,765) (859,062) (354,161)
Prepaid expenses (2,056,284) (356,021) 179,581
Other receivables 1,456,749 (1,738,643) 177,914
Other assets 465,663 -- (941,405)
Accounts payable and accrued expenses 4,495,772 (2,387,557) 3,346,712
Deferred revenue 18,837,682 (2,059,355) (2,977,312)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 17,163,535 (14,137,559) (7,028,883)
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sale of equipment 14,851 3,604,579 4,133
Capital expenditures (4,617,196) (3,975,813) (3,185,906)
Investment in biotechnology company (750,000) -- --
Purchase of investment securities held-to-maturity (4,126,628) (17,462,407) (117,237,699)
Maturities of investment securities held-to-maturity 5,957,410 20,001,804 117,100,138
Purchase of investment securities available-for-sale (19,857,144) (274,244,194 (723,380,886)
Sale of investment securities available-for-sale 19,043,131 276,582,454 724,018,727
-------------- -------------- --------------
Net cash provided by (used in) investing activities (4,335,576) 4,506,423 (2,681,493)
-------------- -------------- --------------
Cash flows from financing activities:
Payments on notes payable -- (128,843) (342,797)
Net proceeds from issuance of common stock 37,981,833 569,889 572,444
-------------- -------------- --------------
Net cash provided by financing activities 37,981,833 441,046 229,647
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 50,809,792 (9,190,090) (9,480,729)
Cash and cash equivalents at beginning of year 5,404,944 14,595,034 24,075,763
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 56,214,736 5,404,944 14,595,034
============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ -- 6,278 32,681
Supplemental disclosures of noncash investing and financing activities:
Decrease in additional paid-in capital as a result of
forfeitures of stock options $ -- (98,062) (270,000)
Fair value adjustment on marketable investment securities
charged to stockholders' equity (16,594) (70,323) (3,905)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
(1) Summary of Significant Accounting Policies
(a) Organization and Business Description
Myriad Genetics, Inc. and subsidiaries (collectively, the Company) is
a genomics company focused on the development of therapeutic and
diagnostic products based on the discovery of major common human
disease genes and their biological pathways. The Company utilizes
analyses of extensive family histories and genetic material, as well
as a number of proprietary technologies, to identify inherited gene
mutations which increase the risk to individuals of developing these
diseases. The discovery of disease-predisposing genes and their
biochemical pathways provides the Company with three significant
commercial opportunities: (i) the development and marketing of
molecular diagnostic and information services, (ii) the marketing of
subscriptions to the ProNet database of protein interactions, and
(iii) the development of therapeutic products for the treatment and
prevention of major diseases associated with these genes and their
biochemical pathways. The Company's operations are located in Salt
Lake City, Utah.
(b) Principles of Consolidation
The consolidated financial statements presented herein include the
accounts of Myriad Genetics, Inc., and its wholly owned subsidiaries
Myriad Genetic Laboratories, Inc., Myriad Pharmaceuticals, Inc. and
Myriad Financial, Inc. All intercompany amounts have been eliminated
in consolidation.
(c) Cash Equivalents
Cash equivalents of $27,205,844 and $1,595,446 at June 30, 2000 and
1999, respectively, consist of short-term securities. The Company
considers all highly liquid debt instruments with maturities at date
of purchase of 90 days or less to be cash equivalents.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed using the straight-line method based on
the lesser of estimated useful lives of the related assets or lease
terms. Equipment and leasehold improvements have depreciable lives
which range from five to seven years.
(e) Income Taxes
Income taxes are recorded using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(Continued)
F-7
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
(f) Revenue Recognition
The Company recognizes revenue from research contracts in accordance
with the terms of the contract and the related research activities
undertaken. This includes recognizing research revenue from research
contracts over time as research is performed using the percentage-of-
completion method based on costs incurred relative to total estimated
contract costs. Payments to the Company under these agreements cover
the Company's direct costs and an allocation for overhead and general
and administrative expenses. Payments received on uncompleted long-
term research contracts may be greater than or less than incurred
costs and estimated earnings and have been recorded as other
receivables or deferred revenues in the accompanying consolidated
balance sheets.
Molecular diagnostic revenue is recognized upon completion of the test
and communication of results. Payments received in advance of
molecular diagnostic work performed are recorded as deferred revenue.
Revenues related to technology license fees when continuing
involvement or services by the Company are required, are generally
recognized over the period of performance. Up-front payments related
to marketing agreements are recognized ratably over the life of the
agreement.
(g) Net Loss Per Common and Common Equivalent Share
Loss per common share is computed based on the weighted-average number
of common shares and, as appropriate, dilutive potential common shares
outstanding during the period. Stock options are considered to be
potential common shares.
Basic loss per common share is the amount of loss for the period
available to each share of common stock outstanding during the
reporting period. Diluted loss per share is the amount of loss for the
period available to each share of common stock outstanding during the
reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential
common shares outstanding during the period.
In calculating loss per common and common-equivalent share the net
loss and the weighted average common and common-equivalent shares
outstanding were the same for both the basic and diluted calculation.
For the years ended June 30, 2000, 1999, and 1998, there were
antidilutive potential common shares of 3,892,248, 4,144,330, and
4,137,440, respectively. Accordingly, these potential common shares
were not included in the computation of diluted earnings per share for
the years presented, but may be dilutive to future basic and diluted
earnings per share.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
(Continued)
F-8
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
(i) Marketable Investment Securities
The Company accounts for marketable investment securities by grouping
them into one of two categories: held-to-maturity or available-for-
sale. Held-to-maturity securities are those securities that the
Company has the ability and intent to hold until maturity. All other
securities are classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Available-
for-sale securities are recorded at fair value. Unrealized holdings
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
Gains and losses on investment security transactions are reported on
the specific-identification method. Dividend and interest income are
recognized when earned. A decline in the market value of any
available-for-sale or held-to-maturity security below cost that is
deemed other than temporary results in a charge to earnings and
establishes a new-cost basis for the security. Premiums and discounts
are amortized or accreted over the life of the related held-to-
maturity security as an adjustment to yield using the effective-
interest method.
(j) Fair Value Disclosure
At June 30, 2000, the book value of the Company's financial
instruments approximates fair value except as disclosed in note 2.
(k) Stock-Based Compensation
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 permits entities to adopt a fair
value based method of accounting for stock options or similar equity
instruments. However, it also allows an entity to continue measuring
compensation cost for stock based compensation using the intrinsic-
value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The Company has elected to continue to apply the provisions of
APB 25 and provide pro forma disclosures required by SFAS 123.
(l) Other Assets
Other assets are comprised of a purchased patent, security deposits
and an investment in a privately held biotechnology company.
Amortization of the patent is computed using the straight-line method
over the estimated useful life of nine years. Accumulated amortization
related to the patent totaled $79,688 and $42,188 at June 30, 2000 and
1999, respectively. The private company investment represents a 15
percent ownership interest and is accounted for under the cost method.
Management reviews the valuation of both the patent and investment for
possible impairment on an ongoing basis by comparing the carrying
value to undiscounted future cash flows from the related assets.
(Continued)
F-9
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
(m) Accrued Liabilities
At June 30, 2000, accrued liabilities are comprised of accrued payroll
of $1,390,563, accrued vacation of $673,631, and other accrued
liabilities of $2,841,663. At June 30, 1999, the balance was comprised
of accrued payroll of $690,221, accrued vacation of $498,670, and
other accrued liabilities of $565,743.
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), that
establishes new accounting and reporting standards for companies to
report information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. For a derivative not designated as a hedging instrument,
changes in the fair value of the derivative are recognized in earnings
in the period of change. The Company will adopt SFAS 133 on July 1,
2000. Management does not believe the adoption of SFAS 133 will have a
material effect on the Company's results of operations, financial
position or liquidity.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin No. 101, Revenue Recognition, (SAB
101) to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements; however, SAB 101 does
not change existing literature on revenue recognition. SAB 101
explains the staff's general framework for revenue recognition,
stating that four criteria need to be met in order to recognize
revenue. The four criteria, all of which must be met, are the
following:
. There must be persuasive evidence of an arrangement;
. Delivery must have occurred or services must have been rendered;
. The selling price must be fixed or determinable; and
. Collectibility must be reasonably assured.
The Company will adopt SAB 101 during the quarter ended December 31,
2000. The Company believes that its current revenue recognition policy
is in compliance with this guidance; however, the Company continues to
evaluate the impact, if any, of SAB 101 and any possible, subsequent
interpretations of SAB 101 on the Company's policies and procedures.
(Continued)
F-10
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
The FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25 (FIN 44) in March 2000. The interpretation clarifies
the application of APB 25 for only certain issues such as the
following: (a) the definition of employee for purposes of applying APB
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. The Company will adopt FIN 44 on
July 1, 2000. Management does not believe that the interpretation will
have a material effect on the Company's results of operations,
financial position or liquidity.
(2) Marketable Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale and held-to-maturity
securities by major security type and class of security at June 30, 2000
and 1999, were as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding
cost gain losses Fair value
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
At June 30, 2000:
Held-to-maturity:
U.S. government obligations $ 15,081,371 42,889 (58,065) 15,066,195
Other bonds and notes 2,010,932 - (10,932) 2,000,000
------------ -------- ---------- -----------
$ 17,092,303 42,889 (68,997) 17,066,195
============ ======== ========== ===========
Available-for-sale:
U.S. government obligations $ 9,609,981 - (13,333) 9,596,648
Mortgage-backed securities 1,337,514 - (46,305) 1,291,209
Corporate bonds and notes 3,511,553 - (26,350) 3,485,203
Certificates of deposit and
domestic bank obligations 975,197 548 - 975,745
------------ -------- ---------- -----------
$ 15,434,245 548 (85,988) 15,348,805
============ ======== ========== ===========
At June 30, 1999:
Held-to-maturity:
U.S. government obligations $ 15,079,412 - (153,713) 14,925,699
Corporate bonds and notes 3,843,675 92 (1,266) 3,842,501
------------ -------- ---------- -----------
$ 18,923,087 92 (154,979) 18,768,200
============ ======== ========== ===========
Available-for-sale:
U.S. government obligations $ 6,767,578 - (20,233) 6,747,345
Mortgage-backed securities 123,104 - (607) 122,497
Corporate bonds and notes 7,590,354 561 (48,567) 7,542,348
Certificate of deposit 186,238 - - 186,238
------------ -------- ---------- -----------
$ 14,667,274 561 (69,407) 14,598,428
============ ======== ========== ===========
</TABLE>
F-11 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
Maturities of debt securities classified as available-for-sale and held-to-
maturity are as follows at June 30, 2000. (Maturities of mortgage backed
securities have been presented based upon estimated cash flows assuming no
change in the current interest rate environment):
<TABLE>
<CAPTION>
Amortized Fair
cost value
------------ -----------
<S> <C> <C>
Held-to-maturity:
Due within one year $ 10,989,903 10,963,734
Due after one year through three years 6,102,400 6,102,461
------------ -----------
$ 17,092,303 17,066,195
=========== ===========
Available-for-sale:
Due within one year $ 13,365,133 13,297,052
Due after one year through three years 2,069,112 2,051,753
------------ -----------
$ 15,434,245 15,348,805
============ ===========
</TABLE>
(3) Leases
The Company leases office and laboratory space and equipment under three
noncancelable operating leases. Future minimum lease payments under these
leases as of June 30, 2000 are as follows:
<TABLE>
<S> <C>
Fiscal year ending:
2001 $ 4,537,905
2002 4,537,905
2003 4,042,197
2004 2,633,931
2005 1,721,373
Thereafter 4,557,318
------------
$ 22,030,629
============
</TABLE>
Rental expense was $3,777,738 in 2000, $1,855,679 in 1999, and $1,282,308
in 1998.
The Company sold certain fixed assets for $3,551,784 in December of 1998.
The assets were leased back from the purchaser over a period of four years.
There was no gain or loss on this transaction and the resulting lease is
being accounted for as an operating lease.
F-12 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
(4) Stock-Based Compensation
Prior to 1992, the Company granted nonqualified stock options to directors,
employees, and other key individuals providing services to the Company. In
1992, the Company adopted the "1992 Employee, Director, and Consultant
Fixed Stock Option Plan" and has reserved 6,000,000 shares of common stock
for issuance upon the exercise of options that the Company plans to grant
from time to time under this plan. The exercise price of options is
equivalent to the estimated fair market value of the stock at the date of
grant. The number of shares, terms, and exercise period are determined by
the Board of Directors on an option-by-option basis. Options generally vest
ratably over five years and expire ten years from date of grant. As of June
30, 2000, 1,048,748 shares are reserved for future grant under the 1992
plan. For financial statement presentation purposes, the Company has
recorded as deferred compensation the excess of the deemed value of the
common stock at the date of grant over the exercise price. All deferred
compensation was amortized ratably over the vesting period. Amortization
expense was $247,774, $230,610, and $530,534 for the years ended June 30,
2000, 1999, and 1998, respectively.
A summary of activity is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- ------------------------------ -----------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares shares shares price shares price
------------ ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Options
outstanding at
beginning of year 3,909,582 $ 6.32 3,284,954 $9.24 2,669,414 $8.54
Plus options granted 1,286,850 36.51 2,155,186 5.31 985,200 9.91
Less:
Options exercised (1,007,232) 5.92 (137,654) 3.14 (163,480) 1.96
Options canceled or expired (362,452) 7.24 (1,392,904) 11.98 (206,180) 9.34
----------- ------------ ------------
Options
outstanding at
end of year 3,826,748 $16.48 3,909,582 $6.32 3,284,954 $9.24
=========== =========== ===========
Options exercisable
at end of year 1,093,510 $ 6.17 1,444,960 $5.67 1,165,868 $6.12
Weighted-average
fair value of options
granted during the year $27.51 $3.00 $6.01
</TABLE>
F-13 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
The following table summarizes information about fixed stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- ------------------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
Range of at remaining average at average
exercise June 30, contractual exercise June 30, exercise
prices 2000 life price 2000 price
---------------- -------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.02 - 5.13 1,456,978 6.35 $ 4.02 702,294 $ 2.98
5.56 - 13.00 948,786 8.04 8.48 236,782 10.69
13.56 - 25.06 1,006,334 9.10 22.37 154,434 13.78
31.50 - 72.31 414,650 9.93 64.25 - -
------------ --------------
$ .02 - 72.31 3,826,748 7.88 $16.48 1,093,510 $ 6.17
============= ==============
</TABLE>
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized for those options granted whose
exercise price was equivalent to the estimated fair market value at the
date of grant. Had compensation cost for these plans been determined
consistent with SFAS 123, the Company's net loss and loss per share would
have been the following pro forma amounts:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ -------------
<S> <C> <C> <C> <C>
Net loss As reported $ 8,722,102 9,995,453 9,797,035
Pro forma 13,565,122 14,585,479 13,590,274
Basic and diluted loss
per share As reported $ 0.43 0.53 0.53
Pro forma 0.67 0.78 0.73
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 2000, 1999, and 1998, respectively:
risk-free interest rates of 6.3 percent, 4.8 percent, and 5.5 percent;
expected dividend yields of zero percent for all years; expected lives of
5.4 years, 4.3 years, and 5.6 years; and expected volatility of 89 percent,
69 percent, and 63 percent.
During the year ended June 30, 1999, the Company issued options to purchase
223 shares of its wholly owned subsidiary Myriad Pharmaceuticals, Inc. to
the president of that subsidiary. The exercise price was equal to the fair
market value at the date of grant. The underlying shares are convertible to
150,048 shares of the Company's common stock.
F-14 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
On October 22, 1998, the Board of Directors authorized a stock option
repricing amendment. Option holders electing to participate in the
repricing of eligible options were required to surrender one option for
every four options held. Under the repricing amendment, 1,178,388 options
were surrendered in exchange for 883,924 repriced options. The exercise
price of the repriced options is equal to the fair market value of the
Company's common stock on October 22, 1998. Directors', executive
officers', and outside consultants' options were excluded from the
repricing.
(5) Income Taxes
There was no income tax expense in 2000, 1999, or 1998 due to net operating
losses. The difference between the expected tax benefit and the actual tax
benefit is primarily attributable to the effect of net operating losses
being offset by an increase in the Company's valuation allowance. The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at June 30, 2000 and
1999, are presented below:
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 27,109,000 21,288,000
Unearned revenue 7,274,000 247,000
Research and development credits 1,463,000 604,000
Accrued expenses 851,000 408,000
Capital loss carryforwards 28,000 -
------------ ------------
Total gross deferred tax assets 36,725,000 22,547,000
Less valuation allowance (36,123,000) (21,009,000)
------------ ------------
Net deferred tax assets 602,000 1,538,000
Deferred tax liability - equipment,
principally due to differences in
depreciation 602,000 1,538,000
------------ ------------
Total gross deferred tax liability 602,000 1,538,000
------------ ------------
Net deferred tax liability $ - -
============ ============
The net change in the total valuation allowance for the years ended June
30, 2000 and 1999, was an increase of $15,114,000 and $3,464,000,
respectively. Of the subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets as of June 30, 2000,
approximately $16,870,000 will be recognized as additional paid-in capital
and the remainder will be allocated as an income tax benefit to be reported
in the consolidated statement of operations.
At June 30, 2000, the Company had total tax net operating losses of
approximately $72,679,000 and total research and development credit
carryforwards of approximately $1,463,000, which can be carried forward to
reduce federal income taxes. If not utilized, the tax loss and research and
development credit carryforwards expire beginning in 2007 through 2020.
F-15 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
Under the rules of the Tax Reform Act of 1986, the Company has undergone
changes of ownership and, consequently, the availability of the Company's
net operating loss and research and experimentation credit carryforwards in
any one year is limited. The maximum amount of carryforwards available in a
given year is limited to the product of the Company's value on the date of
ownership change and the federal long-term tax-exempt rate, plus any
limited carryforward not utilized in prior years. Management believes that
these limitations will not prevent these net operating losses from being
utilized.
(6) Common Stock Warrants
During the year ended June 30, 2000 the Company completed private
placements of common stock wherein the placement agents received warrants
to purchase 65,500 shares of the Company's common stock through the year
2003 at a weighted average price of $22.51, of which 65,500 are still
outstanding at June 30, 2000.
(7) Employee Deferred Savings Plan and Stock Purchase Plan
The Company has a deferred savings plan which qualifies under Section
401(k) of the Internal Revenue Code. Substantially all of the Company's
employees are covered by the plan. The Company makes matching contributions
of 50 percent of each employee's contribution with the employer's
contribution not to exceed four percent of the employee's compensation. The
Company's contribution to the plan was $379,930, $358,325, and $273,851 in
2000, 1999, and 1998, respectively.
The Company has an Employee Stock Purchase Plan (the Plan) which was
adopted and approved by the Board of Directors and stockholders in December
1994, under which a maximum of 400,000 shares of common stock may be
purchased by eligible employees. At June 30, 2000, 113,436 shares of common
stock had been purchased under the Plan. Because the discount allowed to
employees under the Plan approximates the Company's cost to issue equity
instruments, the Plan is not deemed to be compensatory and, therefore, is
excluded from the pro forma loss shown in note 4.
(8) Collaborative Research Agreements
In May 2000, the Company entered into a $26.0 million license agreement and
research collaboration to utilize the Company's protein interaction
technology (ProNet(TM)). Under the agreement, the licensee will receive a
nonexclusive, fully paid, world-wide license to utilize ProNet(TM) and
receive support and related upgrades from the Company on a when-and-if-
available basis over the support period. Revenue related to the license
agreement and research collaboration are being recognized as the costs of
the contract are incurred on a percent complete basis.
In December 1999, the Company entered into a 12 month collaboration to
utilize ProNet(TM) for drug discovery and development in the area of
cardiovascular disease. The Company may receive up to $13.0 million in
total research funding, license fees and potential milestone payments.
Revenue related to this research collaboration is being recognized as the
research is performed on a percent complete basis.
In August 1999, the Company entered into a two-year collaboration to
perform research related to cereal crop genomics. The Company expects to
receive $33.5 million over the term of the agreement. Revenue related to
this research collaboration is being recognized as the research is
performed on a percent complete basis.
F-16 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
In April 1995, the Company entered into a five-year collaborative research
and license agreement with a pharmaceutical company. Under the agreement,
the Company received $5.0 million per year which was recognized as revenue
as the research was performed on a percent complete basis. This
collaboration was completed in April of 2000.
In September 1995, the Company entered into a collaborative research and
license agreement to perform various research for a pharmaceutical company.
This agreement was expanded in 1997 and 1998. Under the agreement, as
expanded, the Company expects to receive $42.7 million through December
2002, which is being recognized as revenue as the research is performed on
a percent complete basis.
Under some agreements the Company may license to the collaborator certain
rights to therapeutic applications. The Company is entitled to receive
royalties from sales of therapeutic products made by its collaborators.
Revenue from research collaborations is recognized as research is performed
using the percentage-of-completion method based on costs incurred relative
to total estimated contract costs.
Because the Company has granted therapeutic rights to some of its
collaborative licensees, the success of the programs is partially dependent
upon the efforts of the licensees. Each of the above agreements may be
terminated early. If any of the licensees terminates the above agreements,
such termination may have a material adverse effect on the Company's
operations.
(9) License Agreements
The Company has entered into license agreements with certain organizations
and academic institutions. The agreements grant the Company exclusive
worldwide licenses to certain technologies and patent applications that the
Company believes will be useful in the development of therapeutic and
molecular diagnostic products. Under the agreements, the Company may be
required to make future milestone payments upon achievement of certain
events. The Company is also required to make royalty payments based on net
sales of products subject to a minimum royalty upon commencement of sales.
(10) Segment and Related Information
The Company's business units have been aggregated into two reportable
segments: (i) research and (ii) molecular diagnostics. The research segment
is focused on the discovery and sequencing of genes related to major common
diseases, the discovery of proteins and their related biological pathways,
and the development of therapeutic products for the treatment and
prevention of major diseases. The molecular diagnostics segment provides
testing to determine predisposition to common diseases.
F-17 (Continued)
<PAGE>
MYRIAD GENETICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999, and 1998
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (note 1). The Company
evaluates segment performance based on loss from operations before interest
income and expense and other income and expense. The Company's assets are
not identifiable by segment.
<TABLE>
<CAPTION>
Molecular
Research diagnostics Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Year ended June 30, 2000:
Revenues $ 25,219,766 8,793,272 34,013,038
Depreciation and amortization 2,494,333 790,401 3,284,734
Segment operating loss 5,373,891 6,173,236 11,547,127
Year ended June 30, 1999:
Revenues $ 20,093,057 5,220,349 25,313,406
Depreciation and amortization 2,262,503 961,276 3,223,779
Segment operating loss 6,315,948 5,994,740 12,310,688
Year ended June 30, 1998:
Revenues $ 20,999,598 2,210,983 23,210,581
Depreciation and amortization 2,170,771 1,102,165 3,272,936
Segment operating loss 3,010,490 9,979,660 12,990,150
2000 1999 1998
---------------- --------------- ---------------
Total operating loss for reportable segments (11,547,127) (12,310,688) (12,990,150)
Unallocated amounts:
Interest income 3,208,506 2,348,827 3,223,683
Interest expense - (6,278) (32,681)
Other (383,481) (27,314) 2,113
--------------- -------------- --------------
Net loss (8,722,102) (9,995,453) (9,797,035)
=============== ============== ==============
</TABLE>
All of the Company's revenues were derived from research and testing
performed in the United States. Additionally, all of the Company's long-
lived assets are located in the United States. All of the Company's
research segment revenue was generated from seven, four, and three
collaborators in fiscal 2000, 1999, and 1998, respectively. Additionally,
revenue from two of the seven collaborators was in excess of ten percent of
the Company's consolidated revenues for each year presented.
F-18 (Continued)
<PAGE>
(11) Common Stock Split
On August 16, 2000, the Board of Directors declared a two-for-one stock
split on the Company's common stock. All references to the number of common
shares and per share amounts in the consolidated financial statements and
related footnotes have been restated to reflect the effect of the split for
all periods presented.
(12) Subsequent Events
In August 2000, the Company received $22 million from the private placement
of 350,000 shares of common stock.
F-19
