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FORM 10-Q
UNITED STATES
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, 1999 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, 1999 was 23,133,092.
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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 and nine months
ended September 30, 1999 and 1998.......................................... 3
Balance Sheets at September 30, 1999 and December 31, 1998..................... 4
Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998.......................................... 5
Notes to Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 10
Signatures..................................................................... 11
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 Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------------- --------------- -------------- ---------------
(dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development
collaborative contracts........... $ 7,442 $ 11,279 $ 23,662 $ 27,206
--------------- -------------- -------------- ---------------
Costs and expenses:
Research and development............ 15,308 12,332 43,578 34,689
General and administrative.......... 3,869 3,481 10,836 10,536
---------------- --------------- --------------- ---------------
Total costs and expenses...... 19,177 15,813 54,414 45,225
---------------- --------------- --------------- ---------------
Income (loss) from operations.......... (11,735) (4,534) (30,752) (18,019)
Interest income........................ 3,850 2,656 8,758 8,323
Interest expense....................... (1,828) (47) (1,995) (114)
Equity in income (loss) of joint
venture........................... -0- (202) -0- (602)
---------------- --------------- --------------- ---------------
Income (loss) before taxes............. (9,713) (2,127) (23,989) (10,412)
Provision for income taxes............. -0- -0- 225 225
---------------- --------------- --------------- ---------------
Net income (loss)...................... $ (9,713) $ (2,127) $ (24,214) $ (10,637)
================ =============== =============== ===============
Net income (loss) per share, basic and
diluted............................ $ (0.42) $ (0.09) $ (1.06) $ (0.48)
================ =============== =============== ===============
Weighted average shares outstanding,
basic and diluted.................. 23,051,200 22,410,101 22,937,189 22,376,296
================ =============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ------------------
ASSETS (dollars in thousands)
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 62,493 $ 16,139
Short-term investments................................................ 219,156 165,628
Prepaid expenses and other current assets............................. 5,940 5,374
--------------- ------------------
Total current assets.............................................. 287,589 187,141
Long-term investments...................................................... 20,144 27,228
Property, plant and equipment (net of accumulated depreciation) 23,791 20,965
Restricted investments..................................................... 6,974 6,749
Other assets............................................................... 8,416 2,164
--------------- ------------------
TOTAL ASSETS...................................................... $ 346,914 $ 244,247
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt..................................... $ 444 $ 444
Accounts payable and accrued expenses................................. 6,458 4,642
Accrued payroll and related taxes..................................... 5,106 2,400
Deferred revenues..................................................... 3,728 5,265
--------------- ------------------
Total current liabilities......................................... 15,736 12,751
Long-term debt, net of current portion..................................... 126,780 1,780
Deferred revenues.......................................................... 18,617 20,543
Other liabilities.......................................................... 295 325
--------------- ------------------
Total liabilities................................................. 161,428 35,399
--------------- ------------------
Stockholders' Equity:
Common stock......................................................... 231 228
Additional paid-in capital........................................... 294,828 285,535
Unearned portion of compensatory stock............................... (383) (110)
Retained earnings (deficit).......................................... (102,918) (78,704)
Accumulated other comprehensive income (deficit)..................... (6,272) 1,899
--------------- ------------------
Total stockholders' equity........................................ 185,486 208,848
--------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 346,914 $ 244,247
=============== ==================
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
-------------- --------------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................... $ (24,214) $ (10,637)
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................. (488) 955
Depreciation and amortization................................................ 5,208 4,891
Loss (gain) on disposal of fixed assets...................................... 4 15
Compensation expense related to stock options................................ 94 47
Changes in operating assets and liabilities:
Prepaid expenses and other current assets................................. (592) (5,290)
Other assets.............................................................. (2,502) (984)
Accounts payable and accrued expenses..................................... 1,842 (1,947)
Accrued payroll and related taxes......................................... 2,706 1,564
Deferred revenues......................................................... (3,463) 21,984
Other liabilities......................................................... (30) (3)
-------------- -------------
Net cash provided by (used in) operating activities.......................... (21,435) 10,595
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment............................. (8,064) (5,482)
Purchase of short-term investments and marketable securities..................... (123,548) (140,683)
Purchase of long-term investment................................................. -0- (25,679)
Proceeds from sales and maturities of investments and marketable
securities................................................................... 69,446 143,041
-------------- -------------
Net cash provided by (used in) investing activities.......................... (62,166) (28,803)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted investments........................................................... (225) (72)
Payments on capital lease obligations............................................ -0- (223)
Proceeds from issuance of long term debt (net of expenses)....................... 121,250 -0-
Proceeds from issuance of common stock (net of expenses)......................... 8,930 2,318
-------------- -------------
Net cash provided by (used in) financing activities.......................... 129,955 2,023
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 46,354 (16,185)
Cash and cash equivalents - beginning of period...................................... 16,139 44,346
-------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD............................................ $ 62,493 $ 28,161
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................................... $ 73 $ 122
Income taxes..................................................................... 100 200
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Human Genome
Sciences, Inc. ( the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information. 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, 1999 and 1998, the Company's financial position at
September 30, 1999, and the cash flows for the nine month periods
ended September 30, 1999 and 1998. 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 1998 Annual Report on Form
10-K.
The results of operations for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of future financial
results.
NOTE 2. COMPREHENSIVE INCOME (LOSS)
During the three and nine months ended September 30, 1999 and 1998,
total comprehensive income (loss) amounted to:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (9,713) $ (2,127) $ (24,214) $ (10,637)
Unrealized gain (loss) on short-term investments 280 896 (1,087) 852
Unrealized gain (loss) on long-term investments 1,992 -0- (7,084) -0-
------------ ------------ -------------- -------------
Total comprehensive income (loss) $ (7,441) $ (1,231) $ (32,385) $ (9,785)
============ ============ ============== =============
</TABLE>
NOTE 3. LONG-TERM DEBT
The Company completed the private placement of $100.0 million of
5 1/2% Convertible Subordinated Notes ("Notes") due 2006 during the
quarter ended June 30, 1999. The Notes are convertible into common
stock at $52.20 per share. During the quarter ended September 30,
1999, an additional $25.0 million of Notes were sold. Debt issuance
costs for the total $125.0 million of Notes amounted to $3.8 million.
NOTE 4. RECLASSIFICATION
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current year's presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998.
RESULTS OF OPERATIONS
Revenues. The Company recorded revenues of $7.4 million for the three
months ended September 30, 1999 compared with revenues of $11.3 million for the
three months ended September 30, 1998. Revenues for the three months ended
September 30, 1999 and September 30, 1998 consisted primarily of $6.5 million
and $7.5 million, respectively, in annual license fees and research payments
from Merck KGaA ("Merck") pursuant to a collaboration agreement entered into
July 10, 1996, and for the three months ended September 30, 1998, $2.9 million
in research payments from Pioneer Hi-Bred International, Inc. ("Pioneer
Hi-Bred"), pursuant to a collaboration agreement entered into January 19, 1996.
The decrease in revenues is due primarily to the completion of HGS'
collaboration with Pioneer Hi-Bred.
For the nine months ended September 30, 1999, revenues were $23.7 million
compared to $27.2 million for the nine months ended September 30, 1998.
Revenues for the nine months ended September 30, 1999, consisted of $18.5
million in annual license fees and research payments from collaborations with
Schering Corporation and Schering Plough Ltd. (collectively "SP") and
Sanofi-Synthelabo ("Synthelabo") and Merck and $3.5 million in license fees
and milestone payments from other collaborators, including the recognition of
$1.9 million from Transgene, S.A. Revenues for the nine months ended September
30, 1998, consisted of $19.5 million in annual license fees and research
payments from collaborations with SP, Synthelabo, and Merck, $5.0 million from
Pioneer Hi-Bred and $2.7 million in license fees and milestone payments from
other collaborators, including the recognition of $1.9 million from Transgene,
S.A.
The Company expects that its revenues may be limited to annual license
fees and research payments from SP, Synthelabo and Merck, 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. Revenues from SP, Synthelabo and Merck will substantially
conclude during fiscal year 2000.
Expenses. Research and development expenses were $15.3 million for the
three months ended September 30, 1999 and $12.3 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999,
research and development expenses increased to $43.6 million from $34.7 million
for the nine months ended September 30, 1998. The increase is due primarily to
operational costs related to the start up of the Company's new leased 80,000
square foot process development and production facility as well as increased
expenditures in both pre-clinical and clinical trial research.
General and administrative expenses increased to $3.9 million for the three
months ended September 30, 1999 from $3.5 million for the three months ended
September 30, 1998 and increased to $10.8 million for the nine months ended
September 30, 1999 from $10.5 million for the nine months ended September 30,
1998. The increase for both the three month and nine month periods ended
September 30, 1999 resulted generally from 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 expenses in support of the Company's expanding activities.
Interest income increased for the three and nine months ended September 30,
1999 compared to the three and nine months ended September 30, 1998 due to
higher cash balances. Interest expense increased for the three and nine month
periods due to the issuance of $125.0 million of 5 1/2% Convertible
Subordinated Notes.
Net Income. The Company recorded a net loss of $9.7 million, or $0.42 per
share, for the three months ended September 30, 1999 compared to a net loss of
$2.1 million, or $0.09 per share, for the three months ended September 30,
1998. For the nine months ended September 30, 1999, the Company reported a net
loss of $24.2 million, or $1.06 per share, compared to a net loss of $10.6
million, or $0.48 per share, for the nine months ended September 30, 1998. The
increased loss for the three and nine month periods of 1999 reflects increased
investment in the development of preclinical and clinical drug candidates, the
initiation of operations at the Manufacturing and Process Development Plant and
decreased revenue
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at the Manufacturing and Process Development Plant and decreased revenue
resulting from the 1998 completion of HGS' collaboration with Pioneer Hi-Bred.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $271.9 million at September 30, 1999
as compared to $174.4 million at December 31, 1998. The increase resulted from
the placement of $125.0 million of 5 1/2% Convertible Subordinated Notes due
2006 partially offset by the net loss generated during the nine month period
and capital expenditures.
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 additional 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, 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
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 become Year 2000, or
"Y2K", compliant. Because 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 Y2K based on in-house
testing and information supplied by vendors. For internal systems development,
the Company uses four digit entries for all date items in its databases.
Because these date representations have been built into systems from their
inception, the Company believes they should be fully Y2K compliant. The Company
uses third-party equipment and software that may not be Y2K compliant.
The Company is concerned about the impact of the Y2K problem on
suppliers, government agencies, electrical power, voice and data
communications, shipping and other services required. The Company initiated a
comprehensive program in October 1998 to identify risks, validate essential
systems, confirm that vendor products are Y2K ready, and develop contingency
plans to deal with problems that may arise. A task force representing various
departments in the Company has been formed to carry out the Company's Y2K
program and is currently performing a comprehensive inventory of computer
equipment, software and other devices that may have embedded microprocessors
and software and is leading efforts to confirm that essential systems and
suppliers are tested for correct Y2K behavior. The Company's contingency plans
to address its concerns include building an inventory of key supplies and
assuring that critical equipment has emergency backup power available. The task
force reports to the Chief Information Officer on a regular basis. The task
force has confirmed or received confirmation that all internal mission critical
systems are Y2K compliant. To date the task force has confirmed compliance with
vendors or tested compliance for approximately 98% of its less critical
systems; minimal non-compliance was discovered and has been corrected by the
purchase of compliant software upgrades. The task force substantially completed
its Y2K assessment during the quarter ended September 30, 1999. The assessment
included a simulated date rollover to January 1, 2000 covering a representative
group of critical systems. No errors were detected during the simulation. The
Company will continue to monitor its Y2K readiness during the fourth quarter of
1999.
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continue to monitor its Y2K readiness during the fourth quarter of 1999.
The Company does not believe that the cost of identification and
correction of any Y2K compliance problems, estimated to be less than $100,000,
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, systems maintained by the Company's suppliers, or
utility systems such as electricity, gas, water, and telecommunications, to be
Y2K 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 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 degree of success of the
Company's collaboration partners in identification, research, development and
marketing of products based on the Company's technology; the extent to which
the Company engages in clinical development of products on its own; the degree
of success of the Company in using its technology and data base to select
viable product opportunities; the ability of the Company to develop or arrange
for marketing and sales initiatives with respect to products under development;
the success of the Company in raising additional capital and satisfying
liquidity needs in the future; the scope and results of pre-clinical testing
and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs and uncertainties involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims; competing technological
and market developments; whether conditions to milestone payments are met and
the timing of such payments; and other risks and uncertainties detailed in the
Company's filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not have operations subject to risks of foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The Company does not have significant
exposure to market risks associated with changes in interest rates related to
its corporate debt securities held as of September 30, 1999. The Company
believes that any market change related to its U.S. securities held as of
September 30, 1999 is not material to its financial statements. As of September
30, 1999, the carrying value of the Company's equity investment in Transgene
was approximately $20.1 million. The Company's investment in Transgene is
subject to equity market risk.
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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.
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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/ William A. Haseltine, Ph.D.
---------------------------------------
William A. Haseltine, Ph.D.
Chairman & Chief Executive Officer
BY: /s/ Steven C. Mayer
---------------------------------------
Steven C. Mayer
Senior Vice President and
Chief Financial Officer
Dated: November 12, 1999
11
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EXHIBIT INDEX
Exhibit
Page Number
-----------
27.1 Financial data schedule.
--------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 62,493
<SECURITIES> 219,156
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 287,589
<PP&E> 48,617
<DEPRECIATION> 24,826
<TOTAL-ASSETS> 346,914
<CURRENT-LIABILITIES> 15,736
<BONDS> 126,780
0
0
<COMMON> 231
<OTHER-SE> 185,255
<TOTAL-LIABILITY-AND-EQUITY> 346,914
<SALES> 0
<TOTAL-REVENUES> 23,662
<CGS> 0
<TOTAL-COSTS> 43,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,995
<INCOME-PRETAX> (23,989)
<INCOME-TAX> 225
<INCOME-CONTINUING> (24,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,214)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
