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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 June 30, 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
------ ------
The number of shares of the registrant's common stock outstanding on June 30,
1998 was 22,380,674.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six months
ended June 30, 1998 and 1997.............................................. 3
Balance Sheets at June 30, 1998 and December 31, 1997........................ 4
Statements of Cash Flows for the six months
ended June 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 4. Submission of Matters to a Vote of Security Holders.......................... 9
Item 6. Exhibits and Reports on Form 8-K............................................. 10
Signatures................................................................... 11
Exhibit Index................................................................ Exhibit Volume
</TABLE>
2
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PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 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..................................... $ 13,936 $ 14,828 $ 15,927 $ 16,100
Costs and expenses:
Research and development:
Direct expenditures..................... 11,502 9,043 22,357 17,951
Payments under research
services agreement...................
- 0 - 2,655 - 0 - 6,119
---------------- --------------- ---------------- ----------------
Total research and development...................... 11,502 11,698 22,357 24,070
General and administrative.......................... 3,370 2,898 7,055 5,287
---------------- --------------- ---------------- ----------------
Total costs and expenses................ 14,872 14,596 29,412 29,357
---------------- --------------- ---------------- ----------------
Income (loss) from operations....................... (936) 232 (13,485) (13,257)
Interest income..................................... 2,817 2,942 5,667 4,618
Interest expense.................................... (33) (56) (67) (284)
Equity in income (loss) of joint venture............ (400) - 0 - (400) - 0 -
---------------- --------------- ---------------- ----------------
Income (loss) before taxes.......................... 1,448 3,118 (8,285) (8,923)
Provision for income taxes.......................... 225 245 225 245
---------------- --------------- ---------------- ----------------
Net income (loss)................................... $ 1,223 $ 2,873 $ (8,510) $ (9,168)
================ ================ ================ ----------------
Net income (loss) per share, basic.................. $ 0.05 $ 0.13 $ (0.38) $ (0.44)
================ ================ ================ ----------------
Net income (loss) per share, diluted................ $ 0.05 $ 0.13 $ (0.38) $ (0.44)
================ ================ ================ ----------------
Weighted average shares outstanding, basic.......... 22,375,666 22,059,408 22,359,698 20,770,145
================ ================ ================ ================
Weighted average shares outstanding, diluted........ 22,934,244 22,723,247 22,359,698 20,770,145
================ ================ ================ ================
</TABLE>
See accompanying notes to financial statements.
3
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1998 1997
----------------- ----------------
(dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $54,740 $44,346
Short-term investments............................................... 133,270 160,866
Prepaid expenses and other current assets............................ 10,688 2,120
-------------- --------------
Total current assets........................................... 198,698 207,332
Long-term investment....................................................... 25,678 - 0 -
Property, plant and equipment (net of accumulated depreciation
and amortization).................. 21,639 20,647
Restricted investments..................................................... 6,573 6,582
Other assets............................................................... 982 1,671
-------------- --------------
TOTAL.......................................................... $253,570 $236,232
============== ==============
LIABILITIES
-----------
Current liabilities:
Current portion of long-term debt.................................... $444 $444
Accounts payable and accrued expenses................................ 4,131 4,656
Accrued payroll and related taxes.................................... 2,587 2,077
Current obligation under capital leases.............................. - 0 - 223
Deferred revenues.................................................... 5,952 3,020
-------------- --------------
Total current liabilities...................................... 13,114 10,420
Long-term debt, net of current portion..................................... 2,224 2,224
Other liabilities.......................................................... 22,159 334
-------------- --------------
TOTAL.......................................................... 37,497 12,978
STOCKHOLDERS' EQUITY
--------------------
Common stock............................................................... 224 223
Additional paid-in capital................................................. 279,963 278,626
Unearned portion of compensatory stock..................................... (85) (121)
Accumulated other comprehensive income..................................... 4 48
Retained earnings (deficit)................................................ (64,033) (55,522)
-------------- --------------
Total stockholders' equity..................................... 216,073 223,254
-------------- --------------
TOTAL.......................................................... $253,570 $236,232
============== ==============
</TABLE>
See accompanying notes to financial statements.
4
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
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(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................. $ (8,510) $ (9,168)
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.................. 791 (110)
Depreciation and amortization................................................. 3,222 3,145
Loss (gain) due to disposal and write-down of property, plant and
equipment................................................................ 9 (10)
Compensation expense related to stock options................................. 36 - 0 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets................................ (8,540) (10,394)
Other assets............................................................. 689 184
Accounts payable and accrued expenses.................................... (769) (630)
Accrued payroll and related taxes........................................ 510 587
Deferred revenues........................................................ 2,932 462
Other liabilities........................................................ 21,824 (15)
--------------- --------------
Net cash provided by (used in) operating activities........................... 12,194 (15,949)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment............................... (3,979) (4,113)
Purchase of short-term investments and marketable securities....................... (86,269) (60,127)
Purchase of long-term investment................................................... (25,678) - 0 -
Proceeds from sales and maturities of investments and marketable
securities...................................................................... 113,003 54,020
--------------- --------------
Net cash provided by (used in) investing activities........................... (2,923) (10,220)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted investments............................................................. 9 287
Payments on capital lease obligations.............................................. (223) (507)
Proceeds from issuance of common stock (net of expenses)........................... 1,337 113,028
--------------- --------------
Net cash provided by (used in) financing activities........................... 1,123 112,808
--------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 10,394 86,639
Cash and cash equivalents - beginning of period......................................... 44,346 27,341
--------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD............................................... $ 54,740 $ 113,980
--------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 84 $ 129
Income taxes.................................................................. - 0 - - 0 -
</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 and six month periods ended June 30, 1998
and 1997, the Company's financial position at June 30, 1998, and the cash flows
for the six month periods ended June 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 six month periods ended June 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 June 30, 1998 and
1997 amounted to $1,208,000 and $2,951,000, respectively and for the six months
ended June 30, 1998 and 1997 amounted to $(8,554,000) and $(9,250,000),
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997.
RESULTS OF OPERATIONS
Revenues. The Company had revenues of $13.9 million for the three months
ended June 30, 1998 compared with revenues of $14.8 million for the three months
ended June 30, 1997. Revenues for the three months ended June 30, 1998 and June
30, 1997 consisted primarily of $7.5 million in annual license fees and research
payments from Schering Corporation and Schering-Plough Ltd. (collectively "SP")
pursuant to collaboration agreements entered into July 28, 1996 and $4.5 million
in annual license fees and research payments from Synthelabo, S.A. pursuant to
collaboration agreements entered into June 30, 1996. For the six months ended
June 30, 1998, revenues were $15.9 million compared to $16.1 million for the six
month period ended June 30, 1997. The 1998 revenue consisted of $12.0 million in
annual license fees and research payments from collaborations with SP and
Synthelabo and $3.9 million in license fees and milestone payments from other
collaborators including the recognition of $1.3 million from Transgene, S.A. The
1997 revenue consisted of $12.0 million in annual license fees and research
payments from collaborations with SP and Synthelabo and $4.1 million in license
fees and milestone payments from other collaborators including $1.0 million from
F. Hoffman - La Roche Ltd. and Hoffman - La Roche Inc. 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. Research and development expenses were $11.5 million for the
three months ended June 30, 1998 and $11.7 million for the three months ended
June 30, 1997. For the six months ended June 30, 1998, research and development
expenses decreased to $22.4 million from $24.1 million for the six months ended
June 30, 1997. This decrease results primarily from 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 of
Genomic Research, ("TIGR"), partially offset by increases in expenses from the
Company's start of clinical trials.
General and administrative expenses increased to $3.4 million for the three
months ended June 30, 1998 from $2.9 million for the three months ended June 30,
1997 and increased to $7.1 million for the six months ended June 30, 1998 from
$5.3 million for the six months ended June 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 G&A activity in support of the Company's
expanding activities. Interest income was significantly higher for the six
months ended June 30, 1998 compared to the six months ended June 30, 1997 due to
higher cash balances.
Net Income. The Company recorded net income of $1.2 million, or $0.05 per
share, for the three months ended June 30, 1998 compared to net income of $2.9
million, or $0.13 per share, for the three months ended June 30, 1997. For the
six months ended June 30, 1998, the Company reported a net loss of $8.5 million,
or $0.38 per share, compared to a net loss of $9.2 million, or $0.44 per share,
for the six months ended June 30, 1997. The difference in results for the three
months ended June 30, 1998 and 1997 is primarily due to lower revenues and
higher operating expenses for the three months ended June 30, 1998 and to the
recognition of a $400,000 loss related to HGS' investment in a recently formed
company, Vascular Genetics, Inc. The difference in results for the six months
ended June 30, 1998 and 1997 is primarily due to higher interest income received
during the six months ended June 30, 1998.
7
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LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $185.6 million at June 30, 1998 as
compared to $196.9 million at December 31, 1997. The decrease resulted from the
net loss generated during the six month period, 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 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.
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
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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 20, 1998, the
following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld
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<S> <C> <C>
TERMS EXPIRING IN 2001
Robert A. Armitage 17,038,145 66,890
Jurgen Drews, M.D. 17,054,585 50,450
James B. Wyngaarden, M.D 17,053,886 51,149
</TABLE>
The following proposals were approved at the Company's Annual meeting of
Shareholders
<TABLE>
<CAPTION>
Affirmative Negative Broker
Votes Votes Abstentions Non Votes
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
1. Approval of the amendment to the 1994 Stock
Option Plan to increase the number of shares
available for issuance from 3,450,000 to 10,756,477 2,443,676 35,893 3,868,989
5,950,000.
2. Ratification of the selection of Ernst &
Young, LLP as the Company's independent
auditors for the fiscal year ending
December 31, 1998 17,072,288 17,112 15,635 - 0 -
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
- ----------------------------
(b) Reports on Form 8-K
None.
10
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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: August 12, 1998
11
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EXHIBIT INDEX
Exhibit
Page Number
-----------
27.1 Financial data schedule.
---------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 54,740
<SECURITIES> 133,270
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 198,698
<PP&E> 39,928
<DEPRECIATION> 18,289
<TOTAL-ASSETS> 253,570
<CURRENT-LIABILITIES> 13,114
<BONDS> 2,224
0
0
<COMMON> 224
<OTHER-SE> 215,849
<TOTAL-LIABILITY-AND-EQUITY> 253,570
<SALES> 15,927
<TOTAL-REVENUES> 15,927
<CGS> 0
<TOTAL-COSTS> 29,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (8,285)
<INCOME-TAX> 225
<INCOME-CONTINUING> (8,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,510)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
