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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, 2000 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 September
30, 2000 was 112,122,356.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and nine months
ended September 30, 2000 and 1999....................................................... 3
Balance Sheets at September 30, 2000 and December 31, 1999................................... 4
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999....................................................... 5
Notes to Financial Statements................................................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................. 15
Signatures................................................................................... 16
Exhibit Index................................................................................ Exhibit Volume
</TABLE>
2
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PART I. FINANCIAL INFORMATION
HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------- ---------------------------------------
(dollars in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Revenue - research and development
collaborative contracts - Third parties $ 7,500 $ 6,800 $ 19,500 $ 20,060
- Related parties 642 642 1,926 3,602
----------------- ---------------- ------------------ ------------------
Total revenues.................... 8,142 7,442 21,426 23,662
----------------- ---------------- ------------------ ------------------
Costs and expenses:
Research and development.................. 23,471 15,308 64,709 43,578
Purchased In-Process R&D.................. 134,050 -0- 134,050 -0-
General and administrative................ 6,274 3,869 18,794 10,836
----------------- ---------------- ------------------ ------------------
Total costs and expenses.......... 163,795 19,177 217,553 54,414
----------------- ---------------- ------------------ ------------------
Income (loss) from operations................ (155,653) (11,735) (196,127) (30,752)
Interest income.............................. 14,954 3,850 37,969 8,758
Interest expense............................. (6,335) (1,828) (15,724) (1,995)
Debt conversion expenses..................... -0- -0- (50,818) -0-
----------------- ---------------- ------------------ ------------------
Income (loss) before taxes................... (147,034) (9,713) (224,700) (23,989)
Provision for income taxes................... -0- -0- 225 225
--------------- ----------------- ------------------ ------------------
Net income (loss)............................ $ (147,034) $ (9,713) $ (224,925) $ (24,214)
================= ================ ================== ==================
Net income (loss) per share, basic and
diluted.................................. $ (1.33) $ (0.11) $ (2.09) $ (0.26)
================= ================ ================== ==================
Weighted average shares outstanding,
basic and diluted........................ 110,646,143 92,204,800 107,665,837 91,748,756
================= ================ ================== ==================
</TABLE>
See accompanying notes to financial statements.
3
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HUMAN GENOME SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ ---------------------
ASSETS (dollars in thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 134,036 $ 180,839
Short-term investments............................................................ 703,313 273,716
Prepaid expenses and other current assets......................................... 11,620 4,294
------------------ ---------------------
Total current assets......................................................... 848,969 458,849
Long-term investments................................................................... 127,950 17,709
Property, plant and equipment (net of accumulated depreciation)......................... 33,008 25,557
Restricted investments.................................................................. 12,144 11,637
Other assets............................................................................ 35,552 13,973
------------------ ---------------------
TOTAL ASSETS................................................................. $ 1,057,623 $ 527,725
================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt................................................. $ 709 $ 444
Accounts payable and accrued expenses............................................. 12,294 7,511
Accrued payroll and related taxes................................................. 6,583 2,380
Deferred revenues................................................................. 3,568 3,568
------------------ ---------------------
Total current liabilities.................................................... 23,154 13,903
Long-term debt, net of current portion.................................................. 533,676 326,336
Deferred revenues....................................................................... 16,049 17,975
Other liabilities....................................................................... 467 443
------------------ ---------------------
Total liabilities............................................................ 573,346 358,657
------------------ ---------------------
Stockholders' Equity:
Common stock...................................................................... 1,121 933
Additional paid-in capital........................................................ 781,338 299,324
Unearned portion of compensatory stock options.................................... (258) (335)
Retained earnings (deficit)....................................................... (345,798) (120,873)
Accumulated other comprehensive income (loss)..................................... 47,874 (9,981)
------------------ ---------------------
Total stockholders' equity................................................... 484,277 169,068
------------------ ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,057,623 $ 527,725
================== =====================
</TABLE>
See accompanying notes to financial statements.
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HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
--------------- ----------------
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ (224,925) $ (24,214)
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...................... (5,974) (488)
Depreciation and amortization..................................................... 7,617 5,208
Purchased In-Process Research and Development..................................... 134,050 -0-
Inducement costs paid in the form of common stock................................. 19,433 -0-
Loss (gain) on disposal of fixed assets........................................... 9 4
Compensation expense related to stock options..................................... 150 94
Changes in operating assets and liabilities:
Prepaid expenses and other current assets..................................... (7,039) (592)
Other assets.................................................................. (16,902) (2,502)
Accounts payable and accrued expenses......................................... 4,093 1,842
Accrued payroll and related taxes............................................. 4,119 2,706
Deferred revenues............................................................. (1,926) (3,463)
Other liabilities............................................................. 13 (30)
--------------- ----------------
Net cash provided by (used in) operating activities............................... (87,282) (21,435)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment.................................. (12,364) (8,064)
Purchase of short-term investments and marketable securities.......................... (563,965) (123,548)
Purchase of long-term investment...................................................... (54,766) -0-
Acquisition, net of acquired cash..................................................... 875 -0-
Proceeds from sales and maturities of short-term investments and marketable
securities........................................................................ 143,509 69,446
--------------- ----------------
Net cash provided by (used in) investing activities............................... (486,711) (62,166)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt (net of expenses)............................ 508,584 121,250
Restricted investments................................................................ (507) (225)
Proceeds from issuance of common stock (net of expenses).............................. 19,113 8,930
--------------- ----------------
Net cash provided by (used in) financing activities............................... 527,190 129,955
--------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (46,803) 46,354
Cash and cash equivalents - beginning of period............................................ 180,839 16,139
-------------- ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD.................................................. $ 134,036 $ 62,493
============== ================
</TABLE>
See accompanying notes to financial statements.
5
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HUMAN GENOME SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
-------------- ----------------
(dollars in thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................................... $ 41,717 $ 73
Income taxes............................................................................... 200 100
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS):
In January 2000, the Company converted $118,285 of 5 1/2% Convertible
Subordinated Notes Due 2006 into common stock and incurred $19,433 in inducement
costs paid in the form of common stock as an inducement to convert. In addition,
the Company reclassified $3,470 of unamortized debt financing costs associated
with these notes to stockholders' equity as part of the conversion.
In March 2000, the Company converted $200,000 of 5% Convertible Subordinated
Notes Due 2006 into common stock. In connection with this conversion, the
Company made a $30,000 cash "make-whole" payment. In addition, the Company
reclassified $6,037 of unamortized debt financing costs associated with these
notes to stockholders' equity as part of the conversion.
See accompanying notes to financial statements.
6
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(In thousands, except share and per share data)
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, 2000 and 1999, the
Company's financial position at September 30, 2000, and the cash flows for
the nine month periods ended September 30, 2000 and 1999. 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 1999 Annual Report on Form 10-K and the
Company's March 31, 2000 and June 30, 2000 Quarterly Reports on Form 10-Q.
The results of operations for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of future financial
results.
Share and per share amounts have been restated to reflect a two-for-one
stock split paid in the form of a stock dividend on January 28, 2000 and a
second two-for-one stock split paid in the form of a stock dividend on
October 5, 2000.
7
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(In thousands, except share and per share data)
NOTE 2. ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION
On September 8, 2000, the Company acquired all of the outstanding shares
of capital stock of Principia Pharmaceutical Corporation ("Principia")
from its shareholders. The cost of the acquisition was $135,071, including
fees and expenses. The purchase price was paid with 1,582,204 shares of
the Company's Common Stock. The consolidated financial statements include
the results of operations of Principia since the date of acquisition.
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets and liabilities acquired
at their estimated fair value as of the date of acquisition. Of the
purchase price, $521 was allocated to Principia's net assets, and the
remainder was allocated as follows:
Assembled Workforce $ 500
Purchased In-Process Research & Development $ 134,050
Accumulated amortization of the Assembled Workforce, which is being
amortized over four years, is $10 as of September 30, 2000. The charge of
$134,050 for Purchased In-Process Research & Development was recorded as
an expense in the Company's results of operations for the three and nine
months ended September 30, 2000.
The Company's unaudited pro forma consolidated condensed statements of
operations information for the nine months ended September 30, 2000 and
1999, assuming the acquisition of Principia was effected at the beginning
of each period, and including the one-time write-off of the Purchased
In-Process Research and Development, are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
September 30,
2000 1999
------------------------- ---------------------
<S> <C> <C>
Revenue .......................................... $ 21,426 $ 23,662
Net loss (a)..................................... $ (228,186) $ (25,887)
Weighted average shares outstanding,
basic and diluted............................. 109,115,283 93,330,960
Net income (loss) per share,
basic and diluted (a)......................... $ (2.09) $ (0.28)
</TABLE>
(a) The pro forma net loss shown above for the nine months ended September
30, 2000 includes the one-time charge for Purchased In-Process Research &
Development of $134,050, or $1.23 per share. Excluding this one-time
charge, the pro forma net loss for this period would have been $94,136, or
$0.86 per share.
In addition, the loss for the nine month period ended September 30, 2000
includes a charge of $50.8 million, or $0.47 per share, relating to the
conversion of convertible subordinated notes into equity. Excluding these
debt conversion expenses which are included in the above pro forma net
loss, our net loss for the nine months ended September 30, 2000 would have
been $40.1 million, or $0.37 per share,
This pro forma information does not purport to be indicative of the
results which may have been obtained had the acquisition been consummated
at the date assumed.
8
<PAGE> 9
HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(In thousands, except share and per share data)
NOTE 3. COMPREHENSIVE INCOME (LOSS)
During the three and nine month periods ended September 30, 2000 and 1999,
total comprehensive income (loss) amounted to:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (147,034) $ (9,713) $ (224,925) $ (24,214)
Unrealized gain (loss) on short-term
investments 3,198 280 3,381 (1,087)
Unrealized gain (loss) on long-term
investments 19,730 1,992 54,474 (7,084)
---------------- ------------- --------------- -------------------
Total comprehensive
income (loss) $ (124,106) $ (7,441) $ (167,070) $ (32,385)
================ ============= =============== ===================
</TABLE>
Realized gains on investments, which are included in the Company's net
income (loss), were $91 and $6 for the three months ended September 30,
2000 and 1999, respectively. Realized losses on investments, which are
included in the Company's net income (loss), were $0 and $31 for the three
months ended September 30, 2000 and 1999, respectively.
Realized gains on investments, which are included in the Company's net
income (loss), were $101 and $51 for the nine months ended September 30,
2000 and 1999, respectively. Realized losses on investments, which are
included in the Company's net income (loss), were $13 and $75 for the nine
months ended September 30, 2000 and 1999, respectively.
NOTE 4. NEW SEC INTERPRETATIONS
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," which provides guidance related to
revenue recognition. The SEC delayed the required effective date of SAB
101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999, which is the Company's fourth quarter of 2000. SAB 101
requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation in
accordance with APB Opinion No. 20, "Accounting Changes."
Historically the Company has recognized non-refundable license fees,
research payments, additional payments and milestone payments in
connection with collaboration agreements when the revenue is earned in
accordance with the applicable performance requirements and/or contractual
terms. This revenue recognition policy was applicable to certain
agreements the Company entered into with Schering-Plough,
Sanofi-Synthelabo and Merck KgaA during 1996. The Company recognized
revenue under these agreements when it had performed all significant
obligations and the customer was obligated to pay. The Company generally
considered any remaining performance obligations, such as maintaining
access to its genomic databases, as insignificant. However, SAB 101
provides guidance that indicates revenue recognition over the
collaboration term is generally the preferred treatment for all fees,
regardless of the significance of remaining performance obligations.
9
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(In thousands, except share and per share data)
NOTE 4. NEW SEC INTERPRETATIONS, CONTINUED
The Company is currently in the process of evaluating the impact SAB 101
will have on its financial position and results of operations. Based upon
the proposed implementation schedule of SAB 101, the Company has
preliminarily determined that it will record a cumulative effect of a
change in accounting principle of between $8.0 million and $13.0 million
as a charge to earnings during the fourth quarter of 2000. The Company
expects to recognize an equivalent amount as revenue over the remaining
term of the applicable agreements, which will be during the first and
second quarters of 2001.
NOTE 5. COLLABORATIVE AGREEMENTS
On February 29, 2000, the Company entered into an agreement with Cambridge
Antibody Technology plc ("CAT"). The ten-year agreement provides the
Company with rights to use CAT technology to develop and sell an unlimited
number of fully human antibodies for therapeutic and diagnostic purposes.
The Company also has rights to use CAT antibody technology for the use and
sale of research tools, for which the Company will pay CAT a share of
revenues received. The Company will also pay CAT clinical development
milestones and royalties based on product sales. The Company and CAT also
plan to combine resources to develop and sell therapeutic antibody
products. CAT has the right to select up to twenty-four of the Company's
proprietary antigens for laboratory development. The Company has the
option to share clinical development costs and to share the profits
equally with CAT on up to eighteen such products. CAT has rights to
develop six such products on its own. The Company is entitled to clinical
development milestones and royalty payments on the products developed by
CAT.
In March 2000, the Company paid $12,000 in licensing fees to CAT, which
includes research support at CAT for ten years to help them to develop the
Company's human antibody products. The Company has capitalized this cost
and is amortizing it on a straight-line basis of ten years. In April 2000,
the Company purchased 1,670,000 ordinary shares of CAT for the sterling
equivalent of approximately $54,744, giving the Company an equity stake of
approximately six percent in CAT.
NOTE 6. LONG-TERM DEBT
The Company completed the private placement of $225,000 of 5% Convertible
Subordinated Notes Due 2007 ("5% Notes") and $300,000 of 3 3/4%
Convertible Subordinated Notes Due 2007 ("3 3/4% Notes") during the
quarter ended March 31, 2000. The 5% Notes and the 3 3/4% Notes are
convertible into common stock at $56.25 and $109.50 per share,
respectively. Debt issuance costs for the total $525,000 of Notes amounted
to approximately $16,550, including accrued expenses.
5 1/2% Convertible Subordinated Notes Due 2006
In January 2000, the Company concluded an offer to the holders of its
$125,000 aggregate principal amount of 5 1/2% Notes to convert their notes
into common stock. As an inducement to convert, the Company offered its 5
1/2% Note holders an additional one hundred and eighty dollars per
thousand dollars of principal amount of the 5 1/2% Notes, payable in the
Company's common stock. This inducement was in addition to the 76.6284
shares issuable for each thousand dollars of principal amount of 5 1/2%
Notes convertible at $13.05 per share. As a result of the conversions, the
Company converted $118,285 of 5 1/2% Notes to common stock and issued a
total of 9,572,208 shares of common stock, including a total of 508,244
shares of common stock issued as an inducement to convert. In the first
quarter of fiscal 2000, the Company recorded a one-time charge of $20,818,
including $19,433 in inducement costs associated with this conversion. In
addition, the Company reclassified $3,470 of unamortized debt financing
costs to stockholders' equity as part of the conversion.
10
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HUMAN GENOME SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(In thousands, except share and per share data)
NOTE 6. LONG-TERM DEBT, CONTINUED
5% Convertible Subordinated Notes Due 2006
In March 2000, the Company announced and completed the call of its
$200,000 aggregate principal amount of 5% Convertible Subordinated Notes
Due 2006. All of the holders of the notes converted their notes into
common stock at a price of $35.8125 per share, which is equivalent to
27.9232 shares of common stock per one thousand dollars of principal
amount of notes. As a result of the conversion, the Company issued
5,584,584 shares of common stock to the holders of these Notes. In
addition, the Company made a "make-whole" payment of one hundred and fifty
dollars per one thousand dollars of principal amount of notes, which
resulted in a one-time charge to earnings of $30,000. In addition, the
Company reclassified $6,037 of unamortized debt financing costs to
stockholders' equity as part of the conversion.
NOTE 7. STOCKHOLDERS' EQUITY
On January 5, 2000, the Company's Board of Directors approved a
two-for-one stock split to be effected in the form of a stock dividend
payable to stockholders of record as of January 14, 2000. On January 28,
2000, the Company effected the two-for-one stock split.
On September 12, 2000, the Company's Board of Directors approved a
two-for-one stock split to be effected in the form of a stock dividend
payable to stockholders of record as of September 28, 2000. On October 5,
2000, the Company effected the two-for-one stock split.
All share, per share, and common stock amounts presented in the financial
statements and related footnotes for all periods presented have been
restated to reflect both of these two-for-one stock splits.
In October 2000, the Company issued 12,650,000 shares of Common Stock in
connection with a secondary offering. See Note 8, Subsequent Event, for
additional discussion.
NOTE 8. SUBSEQUENT EVENT
On November 1, 2000, the Company completed a secondary offering of its
Common Stock by issuing 12,650,000 shares at an aggregate value of
$948,750, or $75.00 per share. Stock issuance costs for the offering
amounted to approximately $36,047, including accrued expenses. The Company
received net proceeds of $912,703. Following the offering, the Company has
approximately 124,772,000 shares of Common Stock outstanding.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues. We had revenues of $8.1 million for the three months ended
September 30, 2000 compared with revenues of $7.4 million for the three months
ended September 30, 1999. Revenues for the three months ended September 30,
2000 represented the recognition of $6.5 million in revenue from Merck KGaA,
$1.0 million in revenue from MedImmune in connection with a licensing agreement
we signed with MedImmune in 1997, and $0.6 million in revenue from
Transgene, S.A. Revenues for the three months ended September 30, 1999
represented primarily the recognition of $6.5 million in revenue from Merck and
$0.9 million in license fees and milestone payments from other collaborators,
including the recognition of $0.6 million revenue from Transgene. Revenues of
$21.4 for the nine months ended September 30, 2000, consisted of $12.0 million
in annual license fees and research payments from collaborations with Schering
and Synthelabo, $6.5 million in revenue recognized from Merck and $1.9 million
in revenue recognized from Transgene, and $1.0 million in revenue from
MedImmune. Revenues of $23.7 for the nine months ended September 30, 1999,
consisted of $12.0 million in annual license fees and research payments from
collaborations with Schering and Synthelabo $6.5 million in revenue recognized
from Merck and $5.2 million in license fees and milestone payments from other
collaborators, including the recognition of $1.9 million in revenue from
Transgene. Related party revenues include revenues from Transgene and other
collaborators in which we hold a minority interest.
We expect that our revenues may be limited to annual license fees and
research payments from our collaborations with Schering, 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 we enter into any such
further arrangements. Revenues from Schering, Synthelabo and Merck will
substantially conclude during fiscal year 2000.
Expenses. Research and development expenses were $23.5 million for the
three months ended September 30, 2000 compared to $15.3 million for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
research and development expenses increased to $64.7 million from $43.6 million
for the nine months ended September 30, 1999. The increase is due primarily to
increased expenditures in preclinical research, as well as increased operational
costs related to our leased 84,000 square foot manufacturing and process
development facility and increased expenditures in clinical trial research.
Purchased In-Process R&D expenses of $134.1 million for the three and nine
months ended September 30, 2000 relate to the acquisition of Principia
Pharmaceutical Corporation on September 8, 2000. This amount represents that
portion of the $135.1 million purchase price allocated to in-process research
and development. See Note 2 of the Notes to Financial Statements for additional
discussion.
General and administrative expenses increased to $6.3 million for the three
months ended September 30, 2000 from $3.9 million for the three months ended
September 30, 1999. General and administrative expenses increased to $18.8
million for the nine months ended September 30, 2000 from $10.8 million for the
nine months ended September 30, 1999. The increase for the three and nine month
periods ended September 30, 2000 resulted generally from higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins we discovered, along with transaction-related
expenses in support of our expanding activities. Interest income increased for
the three and nine month periods ended September 30, 2000 compared to the three
and nine month periods ended September 30, 1999 due to higher cash balances.
Interest expense increased for the three and nine month periods due primarily to
the issuance of $525.0 million of convertible subordinated notes during the
first quarter of fiscal 2000 along with interest expense associated with
previously-issued convertible subordinated notes that were converted to equity
during the first quarter of fiscal 2000.
Debt conversion expenses of $50.8 million for the nine months ended
September 30, 2000 relate to the first quarter of fiscal 2000 conversion costs
of $318.3 million aggregate principal amount of convertible subordinated notes
into equity. We converted $118.3 million of our $125.0 million aggregate
principal amount
12
<PAGE> 13
of 5 1/2% Notes Due 2006 into common stock at a cost of $20.8 million,
substantially all of which was paid in the form of common stock. In addition, we
converted all of our $200.0 million aggregate principal amount of 5% Notes Due
2006 into common stock at a cost of $30.0 million, all of which was paid in
cash.
Net Income. We recorded a net loss of $147.0 million, or $1.33 per share,
for the three months ended September 30, 2000 compared to a net loss of $9.7
million, or $0.11 per share, for the three months ended September 30, 1999. The
increased loss for the three month period of 2000 reflects the charge of $134.1
million, or $1.21 per share, for Purchased In-Process R&D along with the
increased investment in the development of preclinical and clinical drug
candidates, the operation of the manufacturing and process development facility,
and increased general and administrative activities, partially offset by
increased net interest income. Excluding the charge for Purchased In-Process
R&D, our net loss would have been $13.0 million, or $0.12 per share, compared to
$9.7 million, or $0.11 per share, for the three months ended September 30, 1999.
For the nine months ended September 30, 2000, we reported a net loss of
$224.9 million, or $2.09 per share, compared to a net loss of $24.2 million, or
$0.26 per share, for the nine months ended September 30, 1999. The increased
loss for the nine month period ended September 30, 2000 compared to the prior
year is due primarily to the charge of $134.1 million, or $1.25 per share for
Purchased In-Process R&D along with the expense of $50.8 million, or $0.47 per
share, relating to the conversion of convertible subordinated notes into equity.
Excluding the Purchased In-Process R&D and debt conversion expenses, our net
loss for the nine months ended September 30, 2000 would have been $40.1 million,
or $0.37 per share, compared to $24.2 million, or $0.26 per share, for the nine
months ended September 30, 1999. This increase is due primarily to increased
expenditures in preclinical research and other increases described above for the
three months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $825.8 million at September 30, 2000 as
compared to $444.9 million at December 31, 1999. The increase resulted from the
placement of $525.0 million of convertible subordinated notes partially offset
by the net operating loss generated during the nine month period, our $54.7
million investment in CAT, our capital expenditures, and our $30.0 million cash
"make-whole" payment in connection with the conversion of $200.0 million of
convertible subordinated notes into equity.
We expect to continue to incur substantial expenses relating to our
research and development efforts, which are expected to increase relative to
historical levels as we focus on preclinical and clinical trials required for
the development of therapeutic protein and antibody product candidates.
Our liquidity increased significantly during November 2000 as a result
of the completion of a secondary offering of our common stock. The offering
raised approximately $912.7 million, net of fees and accrued expenses.
We expect that our existing funds, interest income, and committed
license fees and research payments from existing collaboration agreements will
be sufficient to fund our operations for the foreseeable future. Our future
capital requirements and the adequacy of our available funds will depend on many
factors, including scientific progress in our research and development programs,
the magnitude of those programs, our ability 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.
Our funds are currently invested in U.S. Treasury and government agency
obligations, high grade corporate debt securities and commercial paper. Such
investments reflect our 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.
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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: our scientific progress in our research and
development programs; the magnitude of these programs; the ability to establish
additional collaborative and licensing arrangements; the degree of success of
our collaboration partners in identification, research, development and
marketing of products based on our technology; the extent to which we engage in
clinical development of any products on our own; the degree of success in using
our technology and database to select viable product opportunities; our ability
to develop or arrange for marketing and sales initiatives with respect to
products under development; the success 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; and whether conditions to milestone payments are met
and the timing of such payments; other risks and uncertainties detailed
elsewhere herein and from time to time in our filings with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. Our investment portfolio is comprised primarily of
low-risk U.S. Treasury securities and corporate debt having a rating of at least
A1\P1. Moreover, these securities have average terms of approximately eight
months. The short-term nature of these securities and the fact that the
securities are almost always held until maturity significantly decrease the risk
of a material loss caused by a market change. For these reasons, we believe we
do not have significant exposure to market risks associated with changes in
interest rates related to our corporate debt securities held as of September 30,
2000. We believe that any market change related to our U.S. securities held as
of September 30, 2000 is not material to our financial statements.
During September 2000, a privately-held company in which we held an equity
investment, Ciphergen Biosystems, Inc. successfully completed an initial public
offering of its common stock. Because Ciphergen is now a publicly-traded
company, we now carry our investment at market value. As of September 30, 2000,
the carrying values of our equity investments in Transgene, Cambridge Antibody
Technology, and Ciphergen were approximately $21.9 million, $99.1 million, and
$6.9 million, respectively. Our investments in Transgene and Ciphergen are
subject to equity market risk. Our investment in CAT is denominated in pounds
sterling and is subject to both foreign currency risk as well as equity market
risk.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
------------------------------------------
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, on September
21, 2000, announcing the acquisition of Principia
Pharmaceutical Corporation on September 8, 2000 and a
two-for-one stock split payable in the form of a stock
dividend on October 5, 2000 to stockholders of record as of
September 28, 2000.
We filed a Current Report on Form 8-K, on October
23, 2000, announcing the commencement of a public offering
of shares of our common stock, which we completed on
November 1, 2000.
We filed a Current Report on Form 8-K/A, on
November 14, 2000, under which we submitted the financial
statements and pro forma financial information prescribed
by Rule 3-05 of Regulation S-X and Article 11 of Regulation
S-X, respectively, in connection with the acquisition of
Principia Pharmaceutical Corporation.
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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 14, 2000
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EXHIBIT INDEX
Exhibit
Page Number
27.1 Financial data schedule
