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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 March 31, 1998 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
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The number of shares of the registrant's common stock outstanding on April 30,
1998 was 22,375,159.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months
ended March 31, 1998 and 1997.......................................... 3
Balance Sheets at March 31, 1998 and December 31, 1997....................... 4
Statements of Cash Flows for the three months
ended March 31, 1998 and 1997.......................................... 5
Notes to Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 10
Signatures................................................................... 10
Exhibit Index................................................................ Exhibit Volume
</TABLE>
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PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
------------ ------------
(dollars in thousands, except share
and per share amounts)
<S> <C> <C>
Revenue - research and development
collaborative contracts ........................ $1,991 $1,272
Costs and expenses:
Research and development:
Direct expenditures ...................... 10,855 8,908
Payments under research services agreement - 3,464
------------ ------------
Total research and development ....................... 10,855 12,372
General and administrative ........................... 3,685 2,389
------------ ------------
Total costs and expenses ................. 14,540 14,761
------------ ------------
Income (loss) from operations ........................ (12,549) (13,489)
Interest income ...................................... 2,850 1,676
Interest expense ..................................... (34) (228)
------------ ------------
Income (loss) before taxes ........................... (9,733) (12,041)
Provision for income taxes ........................... - -
------------ ------------
Net Income (Loss) .................................... $ (9,733) $ (12,041)
============ ============
Basic and diluted net income (loss) per share ........ $ (0.44) $ (0.62)
============ ============
Weighted average shares outstanding,
basic and diluted .................................. 22,342,147 19,466,557
============ ============
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $47,799 $44,346
Short-term investments .................................. 146,638 160,866
Prepaid expenses and other current assets ............... 3,760 2,120
--------- ---------
Total current assets .............................. 198,196 207,332
Long-term investments ......................................... 24,620 -
Property, plant and equipment (net of accumulated depreciation)
and amortization ............................................ 20,954 20,647
Restricted investments ........................................ 6,493 6,582
Other assets .................................................. 2,068 1,671
--------- ---------
TOTAL ............................................. $252,330 $236,232
========= =========
LIABILITIES
-----------
Current liabilities:
Current portion of long-term debt ....................... $444 $444
Accounts payable and accrued expenses ................... 4,969 4,656
Accrued payroll and related taxes ....................... 2,658 2,077
Current obligation under capital leases ................. 67 223
Deferred revenues ....................................... 5,534 3,020
--------- ---------
Total current liabilities ......................... 13,672 10,420
Long-term debt, net of current portion ........................ 2,224 2,224
Other liabilities ............................................. 21,755 334
--------- ---------
TOTAL ............................................. 37,651 12,978
STOCKHOLDERS' EQUITY
--------------------
Common stock .................................................. 224 223
Additional paid-in capital .................................... 279,790 278,626
Unearned portion of compensatory stock ........................ (98) (121)
Accumulated other comprehensive income ........................ 19 48
Retained earnings (deficit) ................................... (65,256) (55,522)
--------- ---------
Total stockholders' equity ........................ 214,679 223,254
--------- ---------
TOTAL ............................................. $252,330 $236,232
========= =========
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
-------- ---------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................................ $ (9,733) $ (12,041)
Adjustments to reconcile net income (loss) income to net cash provided
by (used in)operating activities:
Accrued interest on U.S. Treasury bills and commercial paper ........................ 190 241
Depreciation and amortization ....................................................... 1,653 1,583
Compensation on expense related to stock options and warrants ....................... 24 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ...................................... (1,550) 708
Other assets ................................................................... (396) (30)
Accounts payable and accrued expenses .......................................... (128) 2,132
Accrued payroll and related taxes .............................................. 581 596
Deferred revenue ............................................................... 2,514 2,628
Other liabilities .............................................................. 21,420 (10)
-------- ---------
Net cash provided by (used in)operating activities .................................. 14,575 (4,193)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment .................................... (1,520) (1,736)
Purchase of short-term investments and marketable securities ............................. (51,477) (38,306)
Purchase of long-term investment ......................................................... (24,620) -
Proceeds from sales and maturities of investments and marketable securities .............. 65,398 28,356
-------- ---------
Net cash provided by (used in) investing activities ................................. (12,219) (11,686)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted investments ................................................................... 89 305
Payments on capital lease obligations .................................................... (156) (300)
Proceeds from issuance of common stock (net of expenses) ................................. 1,164 106,132
-------- ---------
Net cash provided by (used in)financing activities .................................. 1,097 106,137
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................................... 3,453 90,258
Cash and cash equivalents - beginning of period ............................................... 44,346 27,341
-------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD ..................................................... $ 47,799 $ 117,599
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 43 $ 68
</TABLE>
See accompanying notes to financial statements.
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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 month periods ended March 31, 1998 and 1997,
the Company's financial position at March 31, 1998, and the cash flows for the
three month periods ended March 31, 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 month period ended March 31, 1998 are
not necessarily indicative of future financial results.
NOTE 2. GENE THERAPY COLLABORATION AGREEMENT
During the quarter, 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, of which $24.6 million had been received as of 3/31/98, 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.
NOTE 3. 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.
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NOTE 4. 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 stockholders' 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.
During the first quarter of 1998 and 1997, total comprehensive income (loss)
amounted to $(9,762,000) and $(12,201,000), respectively.
NOTE 5. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Numerator:
Net loss $(9,733,000) $(12,041,000)
=========== ============
Denominator:
Denominator for basic earnings per
share - weighted-average shares 22,342,147 19,466,557
=========== ============
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 22,342,147 19,466,557
=========== ============
Basic loss per share $ (0.44) $ (0.62)
=========== ============
Diluted loss per share $ (0.44) $ (0.62)
=========== ============
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997.
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Revenues. The Company had revenues of $2.0 million for the three
months ended March 31, 1998 compared with revenues of $1.3 million for the three
months ended March 31, 1997. Revenue for the three months ended March 31, 1998
consisted of the recognition of $1.4 million from Pioneer Hi-Bred International,
Inc. ("Pioneer") for ongoing research services pursuant to their collaboration
agreement and the recognition of $0.6 million from the Transgene collaboration
(see Note 2). Revenue for the three months ended March 31, 1997 consisted of the
recognition of $0.8 million from Pioneer Hi-Bred International, Inc. ("Pioneer")
and $0.5 million from Pharmacia & UpJohn Company ("Pharmacia") for ongoing
research services pursuant to their respective collaboration agreements. The
Company expects that its revenues may be limited to annual license fees and
research payments from Schering Plough Corporation, Synthelabo S.A. and Merck
KGaA over the next three years, 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 decreased from $12.4
million for the three months ended March 31, 1997 to $10.9 million for the three
months ended March 31, 1998. This decrease is from the reduction of payments
under a research services agreement of $3.5 million pursuant to the early
termination of various agreements between the Company and The Institute of
Genomic Research, ("TIGR"), partially offset by increases in expenses from the
Company's start of clinical trials.
General and administrative expenses increased from $2.4 million for the
three months ended March 31, 1997 to $3.7 million for the three months ended
March 31, 1998. 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 G&A
activity in support of the Company's expanding activities. Interest income was
higher for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997 due to higher cash balances.
Net Income (Loss). The Company recorded a net loss of $9.7 million, or
$0.44 per share for the three months ended March 31, 1998 compared to a net loss
of $12.0 million, or $0.62 per share for the three months ended March 31, 1997.
The difference in results for the three months ended March 31, 1998 and 1997 is
primarily due to the reduction in TIGR's funding offset by higher other R & D
expenses, slightly higher revenues and interest income and higher G & A expenses
for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $184.5 million at March 31, 1998 as
compared to $196.9 million at December 31, 1997. The decrease resulted from the
net loss generated during the quarter, 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
The Company expects that its existing funds, interest income, and committed
license fees and research payments from it's current 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
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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, and 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in "Management's Discussion 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 an 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 to time in the Company's
filings with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
None.
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
Sr. Vice President and Chief Financial Officer
Dated: May 15, 1998
10
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit Number
- ------- ------
<S> <C>
27 Financial data schedule...............................
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 47,799
<SECURITIES> 146,638
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 198,196
<PP&E> 39,283
<DEPRECIATION> 18,329
<TOTAL-ASSETS> 252,330
<CURRENT-LIABILITIES> 13,672
<BONDS> 2,224
0
0
<COMMON> 224
<OTHER-SE> 214,455
<TOTAL-LIABILITY-AND-EQUITY> 252,330
<SALES> 0
<TOTAL-REVENUES> 1,991
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> (9,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,733)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
