<PAGE> 1
================================================================================
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
<TABLE>
<S> <C>
For quarterly period ended September 30, 1998 Commission File Number 0-22962
</TABLE>
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
<TABLE>
<S> <C>
Delaware 22-3178468
(State of organization) (I.R.S. Employer Identification Number)
</TABLE>
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, 1998 was 22,438,276.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Statements of Operations for the three and nine months
ended September 30, 1998 and 1997....................... 3
Balance Sheets at September 30, 1998 and December 31, 1997.... 4
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997....................... 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 6. Exhibits and Reports on Form 8-K.............................. 10
Signatures.................................................... 11
Exhibit Index................................................. Exhibit Volume
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------ ----------- -------------
(dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development collaborative
contracts..................................... $ 11,279 $ 6,539 $ 27,206 $ 22,639
Costs and expenses:
Research and development
Direct expenditures..................... 12,332 10,632 34,689 28,583
Payments under research services
agreement............................. - 0 - 22 - 0 - 6,141
------------- ------------ ----------- ------------
Total research and development...................... 12,332 10,654 34,689 34,724
General and administrative.......................... 3,481 2,631 10,536 7,918
------------- ------------ ----------- ------------
Total costs and expenses................ 15,813 13,285 45,225 42,642
------------- ------------ ----------- ------------
Income (loss) from operations....................... (4,534) (6,746) (18,019) (20,003)
Interest income..................................... 2,656 3,059 8,323 7,677
Interest expense.................................... (47) (51) (114) (335)
Equity in income (loss) of joint venture............ (202) - 0 - (602) - 0 -
------------- ------------ ----------- ------------
Income (loss) before taxes.......................... (2,127) (3,738) (10,412) (12,661)
Provision for income taxes.......................... - 0 - - 0 - 225 245
------------- ------------ ----------- ------------
Net income (loss)................................... $ (2,127) $ (3,738) $ (10,637) $ (12,906)
------------- ------------ ----------- ------------
Net income (loss) per share, basic and diluted...... $ (0.09) $ (0.17) $ (0.48) $ (0.61)
------------- ------------ ----------- ------------
Weighted average shares outstanding................. 22,410,101 22,228,023 22,376,296 21,261,445
============= ============ =========== ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30, December 31,
1998 1997
------------- -------------
(dollars in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents ..................................... $28,161 $44,346
Short-term investments......................................... 158,417 160,866
Prepaid expenses and other current assets...................... 7,400 2,120
------------- -----------
Total current assets..................................... 193,978 207,332
Long-term investment................................................. 25,679 - 0 -
Property, plant and equipment (net of accumulated depreciation
and amortization).............................................. 21,575 20,647
Restricted investments............................................... 6,654 6,582
Other assets......................................................... 2,655 1,671
------------- -----------
TOTAL.................................................... $250,541 $236,232
============= ===========
LIABILITIES
-----------
Current liabilities:
Current portion of long-term debt.............................. $444 $444
Accounts payable and accrued expenses.......................... 3,061 4,656
Accrued payroll and related taxes.............................. 3,641 2,077
Current obligation under capital leases........................ - 0 - 223
Deferred revenues.............................................. 3,819 3,020
------------- -----------
Total current liabilities................................ 10,965 10,420
Long-term debt, net of current portion............................... 2,224 2,224
Other liabilities.................................................... 21,517 334
------------- -----------
TOTAL.................................................... 34,706 12,978
STOCKHOLDERS' EQUITY
--------------------
Common stock......................................................... 224 223
Additional paid-in capital........................................... 280,944 278,626
Unearned portion of compensatory stock............................... (74) (121)
Accumulated other comprehensive income............................... 900 48
Retained earnings (deficit).......................................... (66,159) (55,522)
------------- -----------
Total stockholders' equity............................... 215,835 223,254
------------- -----------
TOTAL.................................................... $250,541 $236,232
============= ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1998 1997
------------ -------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ................................................................... $ (10,637) $ (12,906)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Accrued interest on U.S. Treasury bills and commercial paper.................... 955 18
Depreciation and amortization................................................... 4,891 4,642
Loss (gain) due to disposal and write-down of property, plant and
equipment..................................................................... 15 (10)
Compensation expense related to stock options................................... 47 - 0 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets..................................... (5,290) 155
Other assets.................................................................. (984) 295
Accounts payable and accrued expenses......................................... (1,947) 1,233
Accrued payroll and related taxes............................................. 1,564 1,210
Deferred revenues............................................................. 799 449
Other liabilities............................................................. 21,182 (23)
------------ ------------
Net cash provided by (used in) operating activities............................. 10,595 (4,937)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment................................. (5,482) (7,305)
Purchase of short-term investments and marketable securities......................... (140,683) (151,859)
Purchase of long-term investment..................................................... (25,679) - 0 -
Proceeds from sales and maturities of investments and marketable securities.......... 143,041 96,421
------------ ------------
Net cash provided by (used in) investing activities............................. (28,803) (62,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted investments............................................................... (72) 268
Payments on capital lease obligations................................................ (223) (692)
Proceeds from issuance of common stock (net of expenses)............................. 2,318 114,578
------------ ------------
Net cash provided by (used in) financing activities............................. 2,023 114,154
============ ============
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (16,185) 46,474
Cash and cash equivalents - beginning of period........................................... 44,346 27,341
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................................. $ 28,161 $ 73,815
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................................ $ 122 $ 188
Income taxes.................................................................... 200 220
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
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, 1997. 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,
1998 and 1997, the Company's financial position at September 30, 1998, and the
cash flows for the nine month periods ended September 30, 1998 and 1997. 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 1997 Annual Report on Form 10-K.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of future financial results.
NOTE 2. RECENT PRONOUNCEMENTS
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.
NOTE 3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standard No. 130
("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the Company's net income
(loss) or stockholder's equity. SFAS No. 130 requires unrealized gains or losses
on the Company's available-for-sale securities, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
Comprehensive net income (loss) for the three months ended September 30, 1998
and 1997 amounted to $(1,231,000) and $(3,759,000), respectively and for the
nine months ended September 30, 1998 and 1997 amounted to $(9,785,000) and
$(13,009,000), respectively.
NOTE 4. GENE THERAPY COLLABORATION AGREEMENT
During the first quarter of 1998, the Company entered into a gene therapy
collaboration with Transgene, S.A., (Transgene"), of Strasbourg, France. Under
this agreement, the Company received a 10% equity stake in Transgene valued at
$25.6 million based on Transgene's initial public offering share price in
exchange for their right to develop and co-market gene therapy products from 10
genes within the Company's database. The Company has recorded the equity at the
IPO value with an offsetting entry to deferred revenues and will recognize the
$25.6 million of revenue from this transaction over the shorter of the ten-year
life of the agreement or prorated upon the selection of genes by Transgene.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997.
RESULTS OF OPERATIONS
Revenues. The Company had revenues of $11.3 million for the three months
ended September 30, 1998 compared with revenues of $6.5 million for the three
months ended September 30, 1997. Revenues for the three months ended September
30, 1998 consisted primarily of $7.5 million in annual license fees and research
payments from Merck KGaA and $2.9 million from Pioneer Hi-Bred International.
Revenues for the three months ended September 30, 1997 consisted primarily of
$5.5 million in annual license fees and research payments from Merck KGaA. For
the nine months ended September 30, 1998, revenues were $27.2 million compared
to $22.6 million for the nine months ended September 30, 1997. The 1998 revenue
consisted of $19.5 million in annual license fees and research payments from
collaborations with Schering Corporation and Schering Plough Ltd. (collectively
"SP"), Synthelabo and Merck KGaA, and $7.7 million in license fees and milestone
payments from other collaborators, including the recognition of $1.9 million
from Transgene, S.A. The 1997 revenues consisted of $17.5 million in annual
license fees and research payments from SP, Synthelabo and Merck KGaA, and $5.1
million in license fees and milestone payments from other collaborators. 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 two 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 $12.3 million for
the three months ended September 30, 1998 from $10.7 million for the three
months ended September 30, 1997. For the nine months ended September 30, 1998
and 1997, total research and development expenses were $34.7 million. The
increase in expenses for the three and nine months ended September 30, 1998 and
1997 is due primarily to the Company's start of clinical trials in 1998. The
increase in expenses for the nine months is offset by the reduction of payments
under a research services agreement of $6.1 million pursuant to the early
termination of various agreements between the Company and The Institute for
Genomic Research.
General and administrative expenses increased to $3.5 million for the three
months ended September 30, 1998 from $2.6 million for the three months ended
September 30, 1997 and increased to $10.5 million for the nine months ended
September 30, 1998 from $7.9 million for the nine months ended September 30,
1997. The increase resulted from significantly higher legal expenses associated
with filing and prosecuting a larger number of patent applications relating to
genes and proteins discovered by the Company and increased other general and
administrative activity in support of the Company's expanding activities.
Interest income was higher for the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997 due to higher average cash balances.
Net Income. The Company recorded a net loss of $2.1 million, or $0.09 per
share, for the three months ended September 30, 1998 compared to a net loss of
$3.7 million, or $0.17 per share, for the three months ended September 30, 1997.
For the nine months ended September 30, 1998, the Company reported a net loss of
$10.6 million, or $0.48 per share, compared to a net loss of $12.9 million, or
$0.61 per share, for the nine months ended September 30, 1997. The difference in
results for the three and nine months ended September 30, 1998 and 1997 is
primarily due to higher revenues partially offset by higher operating expenses
and to the recognition of losses related to HGS' investment in a recently formed
company, Vascular Genetics, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $183.0 million at September 30, 1998
as compared to $196.9 million at December 31, 1997. The decrease resulted from
the net loss generated during the nine month period, capital expenditures, and
payments on capitalized leases.
7
<PAGE> 8
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.
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 cash, cash equivalents, and short-term investments are
currently invested in U.S. Treasury and government agency obligations, high
grade corporate debt securities and commercial paper. 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Since the Company was founded in 1992, most if not all of the
Company's computer equipment and software adopt modern design principles. The
Company believes the majority of purchased computer systems, operating systems,
and database management systems are ready for Year 2000 based on in-house
testing and information supplied by vendors. For internal systems development,
the Company uses fully-specified dates for all date items in the databases.
These date representations have been built into systems from their inception and
should be fully Year 2000 compliant. The Company utilizes third-party equipment
and software that may not be Year 2000 compliant.
The Company is concerned about the impact of the Year 2000 problem on
suppliers, government agencies, electrical power, voice and data communications,
shipping and other services required. The Company has initiated a comprehensive
program to identify risks, validate essential systems, confirm that vendor
products are Year 2000 ready, and to develop contingency plans to deal with
problems that may arise. A task force of people representing various departments
in the Company have been formed to carry out the Company's Year 2000 program.
The task force is currently performing a comprehensive inventory of computer
equipment, software and other devices that may have embedded microprocessors and
software. The task force will lead efforts to confirm that essential systems and
suppliers are tested for correct Year 2000 behavior. The task force reports to
the Chief Information Officer on a regular basis.
The Company does not believe that the cost of identification and
correction of any Year 2000 compliance problems will have a material adverse
effect on the Company's business, financial condition or operating results.
However, there can be no assurance that a failure of the Company's internal
computer systems, third-party equipment, software used by the Company, or
systems maintained by the Company's suppliers, to be Year 2000 compliant, will
not have a material adverse effect on the Company's business, financial
condition or operating results.
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
8
<PAGE> 9
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.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
- -------------------------------------
(b) Reports on Form 8-K
None.
10
<PAGE> 11
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
--------------------------------
William A. Haseltine
Chairman and CEO
BY: /s/ Steven C. Mayer
--------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: November 13, 1998
11
<PAGE> 12
EXHIBIT INDEX
Exhibit
Page Number
-----------
27.1 Financial data schedule.
- ----------------------------------
<PAGE> 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,161
<SECURITIES> 158,417
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 193,978
<PP&E> 40,534
<DEPRECIATION> 18,959
<TOTAL-ASSETS> 250,541
<CURRENT-LIABILITIES> 10,965
<BONDS> 2,224
0
0
<COMMON> 224
<OTHER-SE> 215,611
<TOTAL-LIABILITY-AND-EQUITY> 250,541
<SALES> 0
<TOTAL-REVENUES> 27,206
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 45,225
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> (10,412)
<INCOME-TAX> 225
<INCOME-CONTINUING> (10,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,637)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
