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 September 30, 1997 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 September
30, 1997 was 22,302,651.
<PAGE>
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and nine months ended
September 30, 1997 and 1996.................................... 3
Balance Sheets at September 30, 1997 and December 31,
1996............................................................ 4
Statements of Cash Flows for the nine months ended September
30, 1997 and 1996............................................... 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 5. Other Information............................................ 9
Item 6. Exhibits and Reports on Form 8-K............................. 9
Signatures................................................... 10
Exhibit Index........................................Exhibit Volume
2
<PAGE>
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(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............ $6,539 $6,460 $22,639 $33,444
Costs and expenses:
Research and development:
Direct expenditures........... 10,632 7,976 28,583 21,445
Payments under research
services agreement........ 22 2,514 6,141 7,548
-------- ------- ------- ------
Total research and
development............................. 10,654 10,490 34,724 28,993
General and administrative.............. 2,631 2,651 7,918 7,053
-------- ------- ------- ------
Total costs and expenses............... 13,285 13,141 42,642 36,046
-------- ------- ------- ------
Loss from operations.................... (6,746) (6,681) (20,003) (2,602)
Interest income......................... 3,059 1,639 7,677 4,828
Interest expense........................ (51) (86) (335) (297)
-------- ------- ------- ------
(Loss)Income before taxes............... (3,738) (5,128) (12,661) 1,929
Provision for income taxes.............. 0 48 245 189
------- ------- ------- ------
(LOSS) NET INCOME ...................... $(3,738) $(5,176) $(12,906) $1,740
======= ======= ======= ======
(LOSS) NET INCOME PER SHARE............. $ (0.17) $ (0.28) $ (0.61) $ 0.09
======= ======= ======= ======
Weighted average shares
outstanding............................. 22,228,023 18,684,642 21,261,445 19,538,652
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
ASSETS
------
September December
30, 31,
1997 1996
------------ -----------
(dollars in thousands)
Current assets:
Cash and cash equivalents ...................... $73,815 $27,341
Short-term investments.......................... 144,160 58,282
Prepaid expenses and other current assets....... 2,713 2,935
------------ ------------
Total current assets......................... 220,688 88,558
Long term investments.............................. - 0 - 30,493
Furniture and equipment (net of accumulated
depreciation)...................................... 20,342 18,031
Restricted investments............................. 1,436 1,705
Other assets....................................... 1,034 1,330
----------- ------------
TOTAL........................................ $243,500 $140,117
=========== ============
LIABILITIES
-----------
Current liabilities:
Current portion of long-term debt............... $444 $444
Accounts payable and accrued expenses........... 4,232 3,361
Accrued payroll and related taxes............... 2,330 1,120
Current obligation under capital leases......... 404 811
Deferred income................................. 2,986 2,537
------------- ------------
Total current liabilities.................... 10,396 8,273
Long-term debt, net of current portion............. 2,668 2,668
Obligations under capital leases, net of current
portion............................................ 0 286
Other liabilities.................................. 346 369
------------- ------------
TOTAL........................................ 13,410 11,596
STOCKHOLDERS' EQUITY
--------------------
Common stock....................................... 222 188
Additional paid-in capital......................... 277,128 162,583
Unrealized loss on investments available for sale.. (225) (121)
Retained deficit................................... (47,035) (34,129)
------------- ------------
Total stockholders' equity................... 230,090 128,521
------------- ------------
TOTAL........................................ $243,500 $140,117
============= ============
See accompanying notes to financial statements.
4
<PAGE>
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
1997 1996
-------- --------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................................... $(12,906) $1,740
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Accrued interest on U.S. Treasury bills and commercial
paper............................................... 18 166
Depreciation........................................ 4,642 4,237
(Gain) loss due to disposal and write-down of fixed
assets.............................................. (10) 66
Issuance of and accretion of compensatory stock and
warrants............................................ 0 506
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........ 155 (2,412)
Other assets..................................... 295 (68)
Accounts payable and accrued expenses............ 1,233 707
Accrued payroll and related taxes................ 1,210 1,047
Deferred income.................................. 449 (10)
Income taxes payable............................. 0 39
Other liabilities................................ (23) 6
-------- ---------
Net cash (used in) provided by operating activities. (4,937) 6,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - furniture and equipment........ (7,305) (6,628)
Purchase of short-term investments and marketable
securities............................................ (151,859) (131,206)
Proceeds from sales and maturities of short-term
investments........................................... 96,421 122,289
-------- ---------
Net cash used in investing activities............... (62,743) (15,545)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateral on line of credit - restricted............. 268 295
Payments on capital lease obligations................. (692) (959)
Proceeds from issuance of common stock (net of
expenses)............................................. 114,578 18,907
-------- ---------
Net cash provided by financing activities........... 114,154 18,243
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 46,474 8,722
Cash and cash equivalents - beginning of period.......... 27,341 39,853
-------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD................ $73,815 $48,575
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................ $188 $147
Income taxes........................................ 220 150
See accompanying notes to financial statements.
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, 1996. 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 nine month periods ended September 30,
1997 and 1996, the Company's financial position at September 30, 1997, and the
cash flows for the nine month periods ended September 30, 1997 and 1996. 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 on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1996 Annual Report on Form 10-K.
The results of operations for the three and nine month periods ended September
30, 1997 are not necessarily indicative of future financial results.
NOTE 2. PUBLIC OFFERING OF COMMON STOCK
The Company completed in March 1997 a public offering of 3,000,000 shares of
Common Stock at $37.00 per share for total net proceeds of approximately $105.0
million. The Company subsequently sold in April 1997 an additional 192,750
shares of Common Stock at $37.00 per share pursuant to an over-allotment option
granted to the underwriters. The sale of additional shares increased total net
proceeds to approximately $113.0 million.
NOTE 3. RECENT FASB PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted in the December 31,
1997 financial statements. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of fully diluted earnings per share is not expected
to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income," which is required to be adopted for the Company's December 31, 1998
financial statements. The Statement establishes new rules for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is the total of net income
and all other nonowner changes in equity. The impact of SFAS No. 130 on the
December 31, 1998 financial statements is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information," which is required to be
adopted for the Company's December 31, 1998 financial statements. SFAS No. 131
requires an enterprise to report certain additional financial and descriptive
information about its reportable operating segments. The impact of SFAS No. 131
on the December 31, 1998 financial statements is not expected to be material.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996.
RESULTS OF OPERATIONS
Revenues. The Company had revenues of $6.5 million for the three months
ended September 30, 1997 and for the three months ended September 30, 1996.
Revenues for the three months ended September 30, 1997 and September 30, 1996
consisted primarily of $5.5 million in annual license fees and research payments
from Merck KGaA pursuant to a collaboration agreement entered into July, 1996.
For the nine months ended September 30, 1997, revenues were $22.6 million
compared to $33.4 million for the nine month period ended September 30, 1996.
The 1997 revenues consisted of $5.5 million in annual license fees and research
payments from Merck KGaA pursuant to a collaboration agreement entered into in
July, 1996, $7.5 million in annual license fees and research payments from
Schering Corporation and Schering Plough Ltd. (collectively "SP") pursuant to a
collaboration agreement entered into in June, 1996, $4.5 million in annual
license fees and research payments from Synthelabo pursuant to a collaboration
agreement entered into in June, 1996 and $5.1 million in license fees and
milestone payments from other collaborators. The 1996 revenues consisted of $6.9
million for the achievement of Milestone III pursuant to the Collaboration
Agreement with SmithKline Beecham ("SB"), $9.0 million in license fees and
milestone payments from collaborations with Pioneer Hi-Bred International, Inc.
("Pioneer") and F. Hoffmann-La Roche ("Roche") entered into in the first quarter
of 1996 and $17.5 million in annual license fees and research payments from
collaborations with SP, Synthelabo and Merck KGaA. The Company expects that its
revenues may be limited to annual license fees and research payments from SP,
Synthelabo and Merck KGaA over the next three 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. Total research and development expenses increased to $10.7
million for the three months ended September 30, 1997 from $10.5 million for the
three months ended September 30, 1996. For the nine months ended September 30,
1997, total research and development expenses increased to $34.7 million from
$29.0 million for the nine months ended September 30, 1996. The Company's
payments to The Institute for Genomic Research ("TIGR") were $.02 million and
$6.1 million for the three and nine months ended September 30, 1997 and $2.5
million and $7.5 million for the three and nine months ended September 30, 1996.
(See Item 5: Other Information). The Company's direct expenditures for research
and development increased to $10.6 million for the three months ended September
30, 1997 from $8.0 million for the three months ended September 30, 1996 and
increased to $28.6 million for the nine months ended September 30, 1997 from
$21.4 million for the nine months ended September 30, 1996. 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 as the Company moves towards entering
product candidates into clinical trials.
General and administrative expenses were $2.6 million for the three months
ended September 30, 1997 and $2.7 million for the three months ended September
30, 1996 and increased to $7.9 million for the nine months ended September 30,
1997 from $7.1 million for the nine months ended September 30, 1996. 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 nine months ended September 30, 1997 compared to the three and
nine months ended September 30, 1996 due to higher cash balances.
Net Income. The Company recorded a net loss of $3.7 million, or $0.17 per
share, for the three months ended September 30, 1997 compared to a net loss of
$5.2 million, or $0.28 per share, for the three months ended September 30, 1996.
For the nine months ended September 30, 1997, the Company reported a net loss of
$12.9 million, or $0.61 per share, compared to net income of $1.7 million, or
$0.09 per share, for the nine months ended September 30, 1996. The difference in
results for the three months ended September 30, 1997 and 1996 is primarily due
to higher interest income for the three months ended September 30, 1997 which
resulted from higher cash balance during the period. The difference in results
for the nine months ended September 30, 1997 and 1996 is primarily due to the
higher revenues from license fees and research payments received during the nine
months ended September 30, 1996, and higher
7
<PAGE>
research and development and general and administrative expenses incurred during
the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital plus long-term investments, which include
obligations of the U.S. government and corporate bonds that have maturities
greater than 12 months from the balance sheet date, of $210.2 million at
September 30, 1997 as compared to $110.8 million at December 31, 1996. The
increase resulted from the sale of 3,192,750 shares of Common Stock in a public
offering at $37.00 per share for net proceeds of approximately $113.0 million
offset by the net loss generated during the nine months, capital expenditures,
and payments on capitalized leases.
The Company expects to continue to incur substantial expenses relating to
its research and development efforts, which expenses are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
At September 30, 1997, the Company had outstanding commitments for construction
and equipment purchases totaling approximately $0.6 million. In addition, the
Company is currently negotiating a long term lease for a process development and
manufacturing facility. Construction was recently begun on the facility which is
being built to the company's specifications on a site near the company's
headquarters and research and development laboratories. The Company expects to
finance the cost of certain process and other equipment aggregating
approximately $10.0 million with equipment leases. There can be no assurance
that the Company will be able to obtain such a lease and financing on terms
acceptable to the Company, or at all. In the event that a lease and financing is
not available on acceptable terms, the Company may determine to use its own
capital resources to finance all or part of the estimated $40-$45 million cost
of the facility.
The Company expects that its existing funds, interest income, and committed
license fees and research payments from existing collaboration agreements will
be sufficient to fund the Company's operations for the foreseeable future. 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 Company's funds are currently invested in U.S. Treasury and government
agency obligations, investment-grade commercial paper and interest-bearing
securities. Such investments reflect the Company's policy regarding the
investment of liquid assets, which is to seek a reasonable rate of return
consistent with an emphasis on safety, liquidity and preservation of capital. As
a result of the Company's completion of its public offering of 3,192,750 shares
of Common Stock in March 1997, the Company's management has reviewed its
classification of marketable securities and has classified all marketable
securities as short-term. This classification reflects management's belief that
these securities are available for current operations based on current operating
activities and future business plans.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Management's Discussions and Analysis of
Financial Condition and Results of Operations", including statements concerning
future collaboration agreements, royalties and other payments under
collaboration agreements, and product development and sales and other statements
are forward looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected in
the forward looking statements as a result of risks and uncertainties, including
but not limited to, the following: the scientific progress of the Company in its
research and development programs; the magnitude of these programs; the ability
of the Company to establish additional collaborative and licensing arrangements;
the extent to which the Company engages in clinical development of any products
of its own; the scope and results of pre-clinical testing and clinical trials;
the time and costs involved in obtaining regulatory approvals; the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims; competing technological and market developments; and whether conditions
to milestone payments are met and the timing of such payments, and other risks
and uncertainties detailed elsewhere herein and from time to time in the
Company's filings with the Securities and Exchange Commission.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In June 1997, The Institute for Genomic Research ("TIGR") and HGS
reached an agreement to terminate the Research Services Agreement
dated October 1, 1992, the Intellectual Property Agreement dated
October 1, 1992, the Lease Funding Agreement and Assignment dated
March 2, 1993, the HGS/TIGR Agreement of April 19, 1993 related to
human cDNA sequencing, and all other agreements entered into any time
prior to the Termination Date between the Company and TIGR. Pursuant
to the Termination Agreement, the Company retains rights in
intellectual property arising out of TIGR's research prior to June
20, 1997, but will have no rights to intellectual property resulting
from future research by TIGR. The Company is relieved of its
obligation to provide future funding (including all research and
lease funding) to TIGR, which would have amounted to approximately
$38.2 million. Certain limitations on TIGR's publication of
intellectual property and restrictions on TIGR entering into
commercial agreements contained in the prior agreements were also
terminated. However, pursuant to the Termination Agreement, TIGR has
agreed not to enter into commercial agreements for the next four
years on selected therapeutic proteins and associated diagnostic
tests in development by the Company. In addition, the Company will be
entitled to be paid a percentage of certain payments received by TIGR
from commercial agreements relating to human therapeutic proteins in
which TIGR grants or agrees to grant rights within two years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of per share data.
27.1 Financial data schedule.
-----------------------------------
(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/ MELVIN D. BOOTH
----------------------------------
Melvin D. Booth
President and Chief Operating Officer
BY: /s/ STEVEN C. MAYER
----------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: November 14, 1997
10
<PAGE>
EXHIBIT INDEX
Exhibit Page Number
- ------- -----------
11.1 Computation of per share data.
27.1 Financial data schedule.
-----------------------------------
EXHIBIT 11.1
COMPUTATION OF PER SHARE DATA
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
-------- --------- ---------- -------
NET INCOME (LOSS)................... $(3,738) $ (5,176) (12,906) $1,740
======== ========= ========== =======
PRIMARY:
Weighted average number of
common shares outstanding.. 22,228 18,685 21,261 18,593
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.......... - 0 - - 0 - - 0 - 946
-------- -------- --------- -------
Shares used for computation......... 22,228 18,685 21,261 19,539
======== ======== ========= =======
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK..................... $ (0.17) $ (0.28) $ (0.61) $ 0.09
======== ======== ========= =======
ASSUMING FULL DILUTION:
Weighted average number of
common shares outstanding.. 22,228 18,685 21,261 18,593
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.......... - 0 - - 0 - -0- 946
------ ------ ------ ------
Shares used for computation......... 22,228 18,685 21,261 19,539
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK (ASSUMING FULL DILUTION)(1)... $ (0.17) $ (0.28) $ (0.61) $ 0.09
========= ========= ======== ========
NOTES & ASSUMPTIONS:
(1) Not presented as dilution is less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 73,815
<SECURITIES> 144,160
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 220,688
<PP&E> 37,376
<DEPRECIATION> 17,034
<TOTAL-ASSETS> 243,500
<CURRENT-LIABILITIES> 10,396
<BONDS> 2,668
<COMMON> 222
0
0
<OTHER-SE> 229,868
<TOTAL-LIABILITY-AND-EQUITY> 243,500
<SALES> 0
<TOTAL-REVENUES> 22,639
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335
<INCOME-PRETAX> (12,661)
<INCOME-TAX> 245
<INCOME-CONTINUING> (12,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,906)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
