FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1996 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. Employer Identification Number)
9410 Key West Avenue, Rockville, Maryland 20850-3331
(Address of principal executive offices and zip code)
(301) 309-8504
(Registrant's telephone Number)
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
-------- ------
The number of shares of the registrant's common stock outstanding on July 31,
1996 was 18,668,574.
======================================================================
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TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Statements of Operations for the three and six months
ended June 30, 1996 and 1995............................................... 3
Balance Sheets at June 30, 1996 and December 31, 1995.......................... 4
Statements of Cash Flows for the six months
ended June 30, 1996 and 1995............................................... 5
Notes to Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................ 8
Item 6. Exhibits and Reports on Form 8-K............................................... 9
Signatures..................................................................... 10
Exhibit Index.................................................................. Exhibit Volume
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
--------------- --------------- ---------------- ---------------
(dollars in thousands, except (dollars in thousands, except
per share amounts) per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development
collaborative contracts............ $ 13,050 $ 5,000 $ 26,984 $ 5,000
Costs and expenses:
Research and development:
Direct expenditures............ 6,978 5,721 13,469 10,559
Payments under research
services agreement........... 2,513 2,558 5,034 4,947
--------------- --------------- ---------------- ---------------
Total research and development.......... 9,491 8,279 18,503 15,506
General and administrative.............. 2,379 2,213 4,402 3,931
--------------- --------------- ---------------- ---------------
Total costs and expenses....... 11,870 10,492 22,905 19,437
--------------- --------------- ---------------- ---------------
Income (loss) from operations........... 1,180 (5,492) 4,079 (14,437)
Interest income......................... 1,603 1,043 3,189 2,124
Interest expense........................ (103) (156) (211) (293)
--------------- --------------- ---------------- ---------------
Income (loss) before taxes.............. 2,680 (4,605) 7,057 (12,606)
Provision (benefit) for income taxes.... 51 350 141 (1,651)
--------------- --------------- ---------------- ---------------
NET INCOME (LOSS)....................... $ 2,629 $ (4,955) $ 6,916 $ (10,955)
=============== =============== ================ ===============
NET INCOME (LOSS) PER SHARE............. $ 0.13 $ (0.33) $ 0.35 $ (0.74)
=============== =============== ================ ===============
Weighted average shares outstanding..... 19,599,038 14,885,811 19,537,641 14,872,372
=============== =============== ================ ===============
See accompanying notes to financial statements.
</TABLE>
3
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1996 1995
---------------- ------------------
(dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 36,585 $ 39,853
Short-term investments................................................... 81,476 65,609
Prepaid expenses and other current assets................................ 13,666 2,163
--------------- ------------------
Total current assets................................................. 131,727 107,625
Furniture and equipment (net of accumulated depreciation)..................... 18,115 16,005
Restricted investments........................................................ 1,699 2,000
Other assets.................................................................. 1,334 1,333
--------------- ------------------
TOTAL................................................................ $ 152,875 $ 126,963
=============== ==================
LIABILITIES
-----------
Current liabilities:
Current portion of long-term debt........................................ $ 444 $ 444
Accounts payable and accrued expenses.................................... 2,524 2,341
Accrued payroll and related taxes........................................ 1,182 692
Current obligation under capital leases.................................. 1,105 1,174
Deferred income.......................................................... 1,950 2,000
Income taxes payable..................................................... 141 -0-
--------------- ------------------
Total current liabilities............................................ 7,346 6,651
Long-term debt, net of current portion........................................ 3,112 3,112
Obligations under capital leases, net of current portion...................... 657 1,220
Other liabilities............................................................. 388 374
--------------- ------------------
TOTAL................................................................ 11,503 11,357
STOCKHOLDERS' EQUITY
--------------------
Common stock.................................................................. 187 182
Additional paid-in capital.................................................... 161,366 142,624
Unearned portion of compensatory stock and warrants........................... (546) (885)
Unrealized gain (loss) on investments available for sale...................... (189) 47
Retained earnings (deficit)................................................... (19,446) (26,362)
--------------- ------------------
Total stockholders' equity........................................... 141,372 115,606
--------------- ------------------
TOTAL................................................................ $ 152,875 $ 126,963
================ ==================
See accompanying notes to financial statements.
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4
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
-------------- ---------------
<S> <C> <C>
(dollars in thousands)
Cash flows from operating activities:
Net income (loss).................................................................$ 6,916 $ (10,955)
Adjustments to reconcile net income (loss) to net cash (used in) operating
activities:
Accrued interest on U.S. Treasury bills and commercial paper.................. (536) 264
Depreciation.................................................................. 2,766 2,008
Loss due to disposal of furniture and equipment............................... 66 467
Issuance of and accretion of compensatory stock and warrants.................. 339 352
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.................................. (11,559) (319)
Funds available - facility fund............................................ - 0 - (52)
Other assets............................................................... (1) (81)
Accounts payable and accrued expenses...................................... (300) (107)
Accrued payroll and related taxes.......................................... 490 173
Deferred income............................................................ (50) - 0 -
Income taxes payable....................................................... 141 (2,134)
Other liabilities.......................................................... 14 (13)
-------------- ---------------
Net cash (used in) operating activities....................................... (1,714) (10,397)
-------------- ---------------
Cash flows from investing activities:
Capital expenditures - furniture and equipment.................................... (4,459) (5,188)
Purchase of short-term investments and marketable securities...................... (89,135) (31,009)
Proceeds from sales and maturities of short-term investments...................... 73,624 43,269
-------------- ---------------
Net cash (used in) provided by investing activities........................... (19,970) 7,072
-------------- ---------------
Cash flows from financing activities:
Proceeds of long-term debt........................................................ - 0 - 2,348
Collateral on line of credit - restricted......................................... 301 (5)
Payments on capital lease obligations............................................. (632) (639)
Proceeds from issuance of common stock (net of expenses).......................... 18,747 149
-------------- ---------------
Net cash provided by financing activities..................................... 18,416 1,853
-------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................. (3,268) (1,472)
Cash and cash equivalents - beginning of period....................................... 39,853 36,027
-------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIOD.............................................$ 36,585 $ 34,555
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................................$ 100 $ 113
Income taxes.................................................................. -0- 508
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying financial statements of Human Genome Sciences, Inc. ( the
"Company") have not been audited by independent auditors, except for the balance
sheet at December 31, 1995. In the opinion of the Company's management, the
financial statements reflect all adjustments necessary to present fairly the
results of operations for the three and six month periods ended June 30, 1996
and 1995, the Company's financial position at June 30, 1996, and the cash flows
for the six month periods ended June 30, 1996 and 1995. These adjustments are of
a normal recurring nature.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly report or Form 10-Q.
Therefore these financial statements should be read in conjunction with the
Company's 1995 Annual Report on Form 10-K.
The results of operations for the three and six month periods ended June 30,
1996 are not necessarily indicative of future financial results.
Note 2. Income Taxes
The Company produced income before taxes of $2,629,000 and $6,916,000 during the
three and six months ended June 30, 1996, respectively. As of December 31, 1995,
the Company had net operating loss carryforwards for federal income tax purposes
of approximately $22 million and available tax credit carryforwards of
$4,347,000 that expire between the years 2000 and 2010. The Company estimates
that the net operating loss carryforwards and tax credit carryforwards will be
sufficient to offset ordinary taxable income, if any, during 1996, and thus has
provided for income taxes during the current period based upon the Alternative
Minimum Tax provisions of the Internal Revenue Code.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Three and Six Month Periods ended June 30, 1996 and 1995.
Results of Operations
- ---------------------
Revenues. The Company had revenues of $13.1 million for the three months
ended June 30, 1996 compared with revenues of $5.0 million for the three months
ended June 30, 1995. For the six months ended June 30, 1996, revenues were $27.0
million compared to $5.0 million for the six month period ended June 30, 1995.
The 1996 revenue consisted of $6.9 million upon the achievement of Milestone III
pursuant to the Collaboration Agreement with SmithKline Beecham ("SB"), $8.1
million in license fees and milestone payments from collaborations with Pioneer
Hi- Bred International, Inc. ("Pioneer") and F. Hoffmann-La Roche ("Roche")
entered in the first quarter of 1996 and $12.0 million in annual license fees
and research payments from collaborations with Schering-Plough Ltd. ("SP") and
Synthelabo entered in the second quarter of 1996. Pursuant to a collaboration
agreement entered into with Merck KGaA in July 1996, the Company anticipates
receipt of the initial annual license fee and research payment in the third
quarter of 1996. The Company's future revenue sources includes annual license
fees and research payments from SP, Synthelabo and Merck KGaA over the next four
years, interest income, payments under existing Collaboration Agreements which
are contingent on meeting certain product milestones, license fees, proceeds
from the sale of rights and other payments from other collaborators and
licensees under existing or future arrangements, to the extent that the Company
enters into any such further arrangements.
Expenses. Research and development expenses increased to $9.5 million for
the three months ended June 30, 1996 from $8.3 million for the three months
ended June 30, 1995. For the six months ended June 30, 1996, research and
development expenses increased to $18.5 million from $15.5 million for the six
months ended June 30, 1995. The Company's payments to The Institute for Genomic
Research ("TIGR") were $2.5 million and $5.0 million for each of the three and
six months ended June 30, 1996 and 1995. The Company's direct expenditures for
research and development increased to $7.0 million for the three months ended
June 30, 1996 from $5.7 million for the three months ended June 30, 1995 and
increased to $13.5 million for the six months ended June 30, 1996 from $10.6
million for the six months ended June 30, 1995. These increases resulted
primarily from significant expansions in the Company's cell biology, protein
expression and pharmacology departments and reflect the Company's increasing
emphasis on determining the biological functions and possible medical utilities
of genes and proteins discovered as a result of the Company's gene discovery
efforts. Expenses will continue to increase in support of research and
development on HGS potential products and in support of the new collaborations.
General and administrative expenses increased to $2.4 million for the three
months ended June 30, 1996 from $2.2 million for the three months ended June 30,
1995 and increased to $4.4 million for the six months ended June 30, 1996 from
$3.9 million for the six months ended June 30, 1995. The increase resulted
primarily from significantly higher legal expenses associated with filing a
larger number of patent applications relating to genes and proteins discovered
by the Company. Interest income was significantly higher for the three and six
months ended June 30, 1996 compared to the three and six months ended June 30,
1995 due to higher cash balances.
Net Income. The Company recorded net income of $2.6 million, or $0.13 per
share, for the three months ended June 30, 1996 compared to a net loss of $5.0
million, or $0.33 per share, for the three months ended June 30, 1995. For the
six months ended June 30, 1996, the Company reported net income of $6.9 million,
or $0.35 per share, compared to a net loss of $11.0 million, or $0.74 per share,
for the six months ended June 30, 1995. The difference in results for the three
and six months ended June 30, 1996 and 1995 is primarily due to the receipt of
$13.1 million and $27.0 million in license fees and research payments during the
three and six months ended June 30, 1996, respectively, which was partially
off-set by higher expenses.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $124.4 million at June 30, 1996 compared
to $101.0 million at December 31, 1995. The increase resulted from the net
income generated during the six months, and the sale of 339,065 shares of Common
Stock to SB upon completion of the third milestone ("Milestone III") under the
Company's collaboration agreement with SB for $18.1 million, which were
partially off-set by capital expenditures and payments on capitalized leases.
7
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The Company's funds are currently invested in U.S. Treasury and government
agency obligations, investment-grade commercial paper and interest-bearing
securities having a maximum maturity of two years.
The Company is committed to pay TIGR approximately $48.0 million during the
next seven years, including approximately $18.4 million through June 30, 1998.
At June 30, 1996, the Company had outstanding commitments for construction and
equipment purchases totaling approximately $550,000.
The Company expects that its existing funds, interest income, anticipated
annual payments from SP, Synthelabo and Merck KGaA and payments from Pioneer and
Roche, upon successful completion of various milestones will be sufficient to
fund the Company's operations for approximately three years. The Company may
require additional sources of financing or funds prior to the time that it will
receive any revenues from product sales or royalties on product sales by
licensees. The Company's future capital requirements and the adequacy of its
available funds will depend on many factors, including scientific progress in
its research and development programs, the magnitude of those programs, the
ability of the Company to establish collaborative and licensing arrangements,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and competing technological and market developments.
The statements contained herein regarding matters that are not statements of
historical fact, including statements as to future collaboration agreements,
royalties and products sales, are forwarding-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results may differ materially from the statements made, as a result of
various factors, including the early stage of the Company's research and
development programs; risks associated with future research and development by
the Company and its collaborators; clinical study results; the regulatory
approval process; risks associated with obtaining patent protection; competitive
products and other factors which are listed from time to time in the Company's
Annual Report on Form 10-K and in other documents filed by the Company with the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, held on May 15, 1996,
the following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld
------------ --------
<S> <C> <C>
Robert A. Armitage 14,506,766 43,755
Melvin D. Booth 14,506,766 43,755
James H. Cavanaugh, Ph.D. 14,506,766 43,755
William W. Crouse 14,506,766 43,755
Beverly Sills-Greenough 14,506,766 43,755
William A. Haseltine, Ph.D. 14,506,766 43,755
Donald D. Johnston 14,506,766 43,755
Max Link, Ph.D. 14,506,766 43,755
Bradley G. Lorimier 14,506,766 43,755
Craig A. Rosen, Ph.D. 14,506,616 43,905
Joshua Ruch 14,506,766 43,755
James B. Wyngaarden, M.D. 14,506,766 43,755
</TABLE>
8
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The following proposals were approved at the Company's Annual meeting of
Shareholders:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
------------------ --------------- -----------------
<S> <C> <C> <C>
1. Approval of an amendment to the 1994
Stock Option Plan to increase the number
of shares available for issuance from
950,000 to 2,450,000 12,718,387 262,291 17,570
2. Ratification of the selection of Ernst &
Young, LLP as the Company's
independent auditors for the fiscal year
ending December 31, 1996 14,530,021 10,750 9,750
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1++ Amendment to SmithKline Beecham and Human Genome
Sciences, Inc. Collaboration Agreement and License
Agreement and Amended and Restated License Agreement
dated June 28, 1996.
10.2++ SmithKline Beecham and Human Genome Sciences, Inc.
License Agreement Dated June 28, 1996
10.3++ Therapeutic Collaboration and License Agreement by
and among Human Genome Sciences, Inc., Schering
Corporation, Schering-Plough Ltd., and SmithKline
Beecham Corporation dated June 28, 1996.
10.4++ Gene Therapy Collaboration and License Agreement by
and among Human Genome Sciences, Inc., Schering
Corporation , and Schering-Plough Ltd., dated June
28, 1996.
10.5++ Collaboration and License Agreement by and among
Human Genome Sciences, Inc., SmithKline Beecham
Corporation and Synthelabo dated June 30, 1996.
11.1 Computation of per share data.
27.1 Financial data schedule
- -----------------------------------
++ Confidentiality treatment has been requested. The copy filed as an
exhibit omits the information subject to the confidentiality
request.
(b) Reports on Form 8-K
None.
9
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMAN GENOME SCIENCES, INC.
BY: /s/ William A. Haseltine, Ph.D.
---------------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer
BY: /s/ Melvin D. Booth
---------------------------------------
Melvin D. Booth
President and Chief Operating Officer and
Acting Chief Financial Officer
Dated: August 14, 1996
10
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit Number
- ------- ------
<S> <C>
10.1++ Amendment to SmithKline Beecham and Human Genome Sciences, Inc.
Collaboration Agreement and License Agreement and Amended and Restated
License Agreement dated June 28, 1996..............................................
10.2++ SmithKline Beecham and Human Genome Sciences, Inc. License Agreement Dated
June 28, 1996......................................................................
10.3++ Therapeutic Collaboration and License Agreement by and among Human Genome
Sciences, Inc., Schering Corporation, Schering-Plough Ltd., and SmithKline
Beecham Corporation dated June 28, 1996............................................
10.4++ Gene Therapy Collaboration and License Agreement by and among Human Genome
Sciences, Inc., Schering Corporation , and Schering-Plough Ltd., dated June 28,
1996...............................................................................
10.5++ Collaboration and License Agreement by and among Human Genome Sciences, Inc.,
SmithKline Beecham Corporation and Synthelabo dated June 30, 1996.................
11.1 Computation of per share data......................................................
27.1 Financial data schedule............................................................
- -----------------------------------
++ Confidentiality treatment has been requested. The copy filed as an
exhibit omits the information subject to the confidentiality
request.
</TABLE>
COMPUTATION OF PER SHARE DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Income (Loss).................................... $ 2,629 $ (4,955) $ 6,916 $ (10,955)
=============== ============== ============== ==============
Primary:
Weighted average number of common shares 18,655 14,886 18,546 14,872
outstanding...............................
Shares issuable upon exercise of dilutive stock
options and warrants --- net of shares
assumed to be repurchased (at the average
market price for the period) from exercise
proceeds.................................. 944 - 0 - 991 - 0 -
--------------- -------------- -------------- --------------
Shares used for computation.......................... 19,599 14,886 19,537 14,872
=============== ============== ============== ==============
Earnings (loss) per share of common stock $ 0.13 $ (0.33) $ 0.35 $ (0.74)
=============== ============== ============== ==============
Assuming full dilution:
Weighted average number of common shares 18,655 14,886 18,546 14,872
outstanding...............................
Shares issuable upon exercise of dilutive stock
options and warrants --- net of shares
assumed to be repurchased (at the higher
of period-end market price or the average
market price for the period) from exercise
proceeds.................................. 944 - 0 - 991 - 0 -
--------------- -------------- -------------- --------------
Shares used for computation.......................... 19,599 14,886 19,537 14,872
=============== ============== ============== ==============
Earnings (loss) per share of common stock
(assuming full dilution) (1)........................ $ 0.13 $ (0.33) $ 0.35 $ (0.74)
=============== ============== ============== ==============
</TABLE>
Notes & assumptions:
(1) Not presented as dilution is less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,585
<SECURITIES> 81,476
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 131,727
<PP&E> 27,834
<DEPRECIATION> 9,719
<TOTAL-ASSETS> 152,875
<CURRENT-LIABILITIES> 7,346
<BONDS> 3,769
0
0
<COMMON> 187
<OTHER-SE> 141,185
<TOTAL-LIABILITY-AND-EQUITY> 152,875
<SALES> 0
<TOTAL-REVENUES> 26,984
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 7,057
<INCOME-TAX> 141
<INCOME-CONTINUING> 6,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,916
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
