<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission file number 1-13768
ONCORMED, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1842781
----------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
205 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
----------------------------------------
(Address of principal executive offices)
(Zip code)
(301) 208-1888
----------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
At August 5, 1997, there were 7,818,688 shares of Common Stock outstanding at a
par value of $.01.
<PAGE> 2
ONCORMED, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION
<S> <C>
ITEM 1 Financial Statements 3
Balance Sheets as of June 30, 1997 and December 31, 1996 4
Statements of Operations for the Three Months Ended 5
June 30, 1997 and 1996; for the Six Months Ended June 30, 1997
and 1996; and for the Period from Inception (July 12, 1993)
Through June 30, 1997
Statements of Cash Flow for the Six Months Ended 6
June 30, 1997 and 1996 and for the Period from Inception
(July 12, 1993) Through June 30, 1997
Notes to Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 25
ITEM 2 Changes in Securities 25
ITEM 3 Defaults Upon Senior Securities 25
ITEM 4 Submission of Matters To A Vote of Security Holders 25
ITEM 5 Other Information 25
ITEM 6 Exhibit and Reports of Form 8-K 25
Signatures 26
Exhibit Index 27
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
The balance sheet as of June 30, 1997, the statements of operations for
the three months ended June 30, 1997 and 1996, for the six months ended
June 30, 1997 and 1996, and for the period from inception (July 12,
1993) through June 30, 1997 and the statements of cash flow for the six
months ended June 30, 1997 and 1996 and for the period from inception
(July 12, 1993) through June 30, 1997, have been prepared by the
Company without audit. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows for
all periods presented have been made. The results for the quarter ended
June 30, 1997 presented in the accompanying financial statements, are
not necessarily indicative of the results for the entire year or any
other period. The balance sheet at December 31, 1996 has been taken
from the audited financial statements.
The unaudited financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. While
the Company believes that the disclosures made are adequate to make the
information presented therein not misleading, these financial
statements should be read in conjunction with the audited financial
statements and related notes included in the Company's Annual Report
for the year ended December 31, 1996 on Form 10-K filed with the
Securities and Exchange Commission.
3
<PAGE> 4
ONCORMED, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,844,066 $ 6,031,809
Short term investments 1,963,948 1,466,871
Accounts receivable, net allowance for doubtful
accounts of $38,000 and $32,000 147,013 129,366
Other current assets 103,042 306,078
------------ ------------
Total current assets 6,058,069 7,934,124
------------ ------------
Non-current assets:
Property and equipment, net 1,173,609 1,179,851
------------ ------------
Total non-current assets 1,173,609 1,179,851
------------ ------------
TOTAL ASSETS $ 7,231,678 $ 9,113,975
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 195,960 $ 680,575
Accrued expenses and other liabilities 472,462 593,037
Payable to Oncor, Inc. 144,734 124,730
Deferred revenue 67,891 46,420
------------ ------------
Total current liabilities 881,047 1,444,762
------------ ------------
Non-current liabilities:
Note payable to Oncor Finance, Inc. 715,751 715,751
Deferred revenue 2,829 3,583
------------ ------------
Total non-current liabilities 718,580 719,334
------------ ------------
TOTAL LIABILITIES 1,599,627 2,164,096
------------ ------------
Commitments And Contingencies (Notes 1 and 6)
Stockholders' Equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 7,814,022 and 6,991,108 shares issued
and outstanding, respectively 78,140 69,911
Additional paid-in capital 30,045,197 25,741,842
Deferred compensation (57,203) (75,629)
Deficit accumulated during the development stage (24,434,083) (18,786,245)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,632,051 6,949,879
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,231,678 $ 9,113,975
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
(July 12, 1993)
Through
Three Months Ended June 30, Six Months Ended June 30, June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 207,096 $ 115,481 $ 322,375 $ 193,714 $ 1,295,455
OPERATING EXPENSES:
Cost of sales - direct 110,680 41,496 164,646 70,657 626,450
Laboratory operations 666,853 720,390 1,373,658 1,368,304 7,735,690
Selling, general and administrative 1,363,197 1,157,271 2,688,018 2,379,079 14,417,990
Research and development 196,545 167,380 422,161 304,729 2,382,169
Acquired research and development
projects in-process -- -- 1,481,148 -- 1,481,148
------------ ------------ ------------ ------------ ------------
Total expenses 2,337,275 2,086,537 6,129,631 4,122,769 26,643,447
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (2,130,179) (1,971,056) (5,807,256) (3,929,055) (25,347,992)
Interest income 94,066 145,169 188,666 261,172 1,078,880
Interest expense (14,650) (13,130) (29,248) (26,302) (164,971)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (2,050,763) $ (1,839,017) $ (5,647,838) $ (3,694,185) $(24,434,083)
============ ============ ============ ============ ============
NET LOSS PER SHARE
(unaudited) $ (0.26) $ (0.26) $ (0.75) $ (0.56) $ (4.42)
============ ============ ============ ============ ============
SHARES USED IN COMPUTING
NET LOSS PER COMMON
SHARE
(unaudited) 7,814,022 6,970,712 7,567,360 6,619,159 5,526,212
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
Six Months Ended (July 12, 1993)
June 30, Through
1997 1996 June 30, 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,647,838) $(3,694,185) $(24,434,083)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 269,375 243,167 1,312,821
Amortization of deferred compensation 18,426 28,061 222,443
Write off of acquired in-process research
and development costs 1,481,148 -- 1,481,148
Changes in operating assets and liabilities:
Accounts receivable (17,647) (7,422) (147,013)
Other assets 203,036 (215) (103,042)
Accounts payable (484,615) 86,398 195,960
Accrued expenses and other liabilities (120,575) (128,171) 472,462
Deferred revenue 20,717 (35,789) 70,720
Payable to Oncor, Inc. 20,004 26,181 144,734
----------- ----------- ------------
Net cash used in operating activities (4,257,969) (3,481,975) (20,783,850)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (263,133) (292,705) (2,431,432)
Purchases of short-term investments (497,077) (2,530,004) (1,963,948)
----------- ----------- ------------
Net cash used in investing activities (760,210) (2,822,709) (4,395,380)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 2,830,436 13,912,825 25,250,926
Net proceeds from sale of preferred stock -- -- 2,990,439
Net proceeds from exercise of stock options -- 23,379 66,180
Net proceeds from Note payable to Oncor Finance, Inc. -- -- 715,751
Decrease in deferred offering costs -- 299,815 --
----------- ----------- ------------
Net cash provided by financing activities 2,830,436 14,236,019 29,023,296
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,187,743) 7,931,335 3,844,066
CASH AND CASH EQUIVALENTS, beginning of period 6,031,809 718,844 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,844,066 $ 8,650,179 $ 3,844,066
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in exchange for software
and technology $ -- $ -- $ 55,000
=========== =========== ============
Issuance of common stock in exchange for stock
subscription receivable $ -- $ -- $ 25,000
=========== =========== ============
Issuance of common stock and warrants in exchange
for research and development projects in-process $ 1,481,148 $ -- $ 1,481,148
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 29,248 $ 26,302 $ 164,971
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
6
<PAGE> 7
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1997
(Unaudited)
1. BUSINESS DESCRIPTION:
Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware as a subsidiary of Oncor, Inc. ("Oncor"). Oncor
currently owns approximately 25.6% of the Company's outstanding common
stock. The Company was formed to develop and provide gene-based cancer
diagnostic testing and information services for physicians, hospitals,
clinical laboratories and pharmaceutical companies. The Company is in the
development stage and has a limited operating history, has incurred
operating losses since its inception and expects losses to continue and
increase. Since its inception, the Company has been engaged in research
and development programs and organizational efforts, including the
development of its initial services, recruiting its scientific and
management personnel, establishing marketing capabilities, engaging its
Scientific Advisory Board and raising capital. The Company's services are
currently offered principally in the United States. There can be no
assurance that the Company will be successful in the development or
commercialization of its services or that any required additional
financing will be available when needed or on terms acceptable to the
Company.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the entity's assets, liabilities,
revenue and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be short
term investments. The Company invests its excess funds in commercial paper
with high quality banks, money market instruments in U.S. treasury and
investment grade securities, and overnight reverse repurchase agreements
collateralized by U.S. treasury and investment grade securities. Short
term investments are stated at cost, which approximates market.
Other Current Assets
At June 30, 1997, included in other current assets is approximately
$67,000 for prepaid insurance.
7
<PAGE> 8
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
expense is calculated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized over
the shorter of the lease terms or useful lives.
Accrued Expenses
At June 30, 1997, accrued expenses consisted of approximately $217,000 for
payroll and related expenses, $190,000 in professional/legal fees, $36,000
for marketing/operations costs and $29,000 in other expenses.
Revenue Recognition
Revenues are derived from providing genetic testing and information
services and, in certain circumstances, software licensing associated with
its risk assessment service. Revenues from the Company's services are
recognized as those services are provided. Revenues from its risk
assessment service are recognized over the license period.
Research and Development
Research and development costs are charged to expense as incurred.
Net Loss Per Share
Net loss per share is based on the weighted-average number of shares
outstanding during the periods presented. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all shares
(including common shares issuable upon conversion of convertible preferred
stock) and options to purchase shares were treated as if they were
outstanding for all periods prior to the initial public offering. In the
periods after the initial public offering, the effects of options,
warrants, and the outstanding convertible note have not been considered,
since the effect would be antidilutive.
Statement 128 requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all periods presented.
Statement 128 is effective for financial statements issued after December
15, 1997, and requires restatement of prior years' earnings per share.
Since the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of net loss per share.
Accordingly, Statement 128 does not have an impact upon historical net
loss per share as reported.
Reclassification
Certain 1996 balances have been reclassified to conform with 1997
financial statement presentation.
8
<PAGE> 9
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS:
License Agreement
Previously, under the license agreement with Oncor, the Company was
obligated to pay royalties on a semi-annual basis to Oncor for Oncor
technologies existing as of the date of the agreement, equal to the
greater of (i) six percent of the Company's net sales revenues resulting
from services based on Oncor's technologies, subject to certain
adjustments, or (ii) $100,000. In February 1997 the Company and Oncor
agreed to certain changes to the license agreement with Oncor (as amended,
the "Oncor Agreement"). Fees payable to Oncor under the license agreement
with Oncor and the Oncor Agreement of approximately $50,000, $50,000 and
$792,000 are included in laboratory operations expense for the three
months ended June 30, 1997, 1996 and the period from inception (July 12,
1993) to June 30, 1997, respectively.
Pursuant to the Oncor Agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human genome
technologies that are useful for the purposes of development and
commercialization of certain of the Company's services, including: (i)
testing, detection and/or analysis of cancer-predisposing genes; (ii)
genetic assessment of risk of an individual to develop cancer; and (iii)
testing and analysis for the purposes of cancer management. In addition,
Oncor is providing the Company with a non-exclusive worldwide license to
certain of Oncor's existing human genome technologies, and any future
improvements thereto, to be used by the Company in the provision of
services direct to third parties other than those to whom services are
provided pursuant to the exclusive license. The Company does not have the
right to sublicense any Oncor technologies licensed to it by Oncor without
Oncor's prior written consent. Technologies sublicensed to the Company by
Oncor include technologies covered by the collaborative licensing and
research agreements between Oncor and each of The Johns Hopkins University
and the Massachusetts General Hospital. The term of the Oncor Agreement
shall expire in June 2004 unless earlier terminated in accordance with its
terms. Further, in the event of a change of control of Oncor, the
acquiring party shall have the option to either maintain the Oncor
Agreement or to terminate the Oncor Agreement. In the event that the
acquiror terminates the Oncor Agreement, both the exclusive license and
the non-exclusive license shall remain in full force and effect under
rates to be determined.
Under the terms of the Oncor Agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of four percent
(4%) to two percent (2%) of the Company's annual net sales. During the
period from April 1, 1997 to March 31, 1998, the Company is obligated to
pay Oncor a minimum amount equal to $50,000 per quarter. During the period
from April 1, 1998 to March 31, 1999, the Company is obligated to pay
Oncor a minimum amount equal to $25,000 per quarter. Thereafter, there
shall be no minimum payment required to be made by the Company to Oncor in
connection with the agreement.
In addition, subject to certain third-party contractual limitations, prior
to the license or disposition (whether by assignment, transfer or license)
to a third party by the Company or Oncor of their respective technologies,
the non-offering party shall have a right of first offer with respect to
such technologies. If the non-offering party accepts the offer, the
Company and Oncor shall negotiate in
9
<PAGE> 10
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS: (Continued)
good faith the terms and conditions of any such license or acquisition
agreement.
Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to all its own technologies and any
improvements to such technologies assigned to Oncor by the Company. The
Company has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to all its own technologies.
Services Agreements with Oncor, Inc. and Affiliates
As of June 30, 1997, the Company owed Oncor and Codon Pharmaceuticals,
Inc. ("Codon", a 41.6 percent owned affiliate of Oncor) $44,734 for
charges which include fees payable under the Oncor Agreement, consulting
and equipment. In addition, in June 1994 the Company converted $715,751
owed to Oncor for license fees previously incurred and for prior services
rendered into a Convertible Subordinated Promissory Note (the "Note"),
which principal is due in June 1999. The Note bears interest at 7 percent
and is convertible into common stock at Oncor's option at a conversion
price of $20 per share of common stock. During the fourth quarter of 1994,
Oncor assigned the Note to its wholly-owned subsidiary Oncor Finance, Inc.
Interest expense recorded by the Company relating to the Note was $12,665
for the three months ended June 30, 1997.
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
Period from
Inception
Three Months Six Months (July 12, 1993)
Ended June 30, Ended June 30, Through
-------------- -------------- June 30,
1997 1996 1997 1996 1997
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales to related party $ -- $ 5,580 $ -- $ 5,580 $ 47,880
Operating expenses to related party:
Laboratory operations 68,000 68,610 136,000 136,610 900,610
Selling, general and administrative -- 664 -- 2,725 977,896
Research and development 1,039 17,946 1,039 35,892 208,821
</TABLE>
Of the related party expenses for the three months ended June 30, 1997,
$18,000 in laboratory operations was for equipment rental from Codon and
$50,000 was related to the Oncor Agreement.
4. DEFERRED REVENUES:
Deferred revenues consist of prepaid amounts related to laboratory testing
and prepaid fees related to various risk assessment service agreements.
10
<PAGE> 11
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY:
Stock Option Plan
As of June 30, 1997, 2,250,000 shares of the Company's common stock had
been reserved for issuance, of which options to purchase 1,876,000 shares
had been granted. After giving effect to the cancellation of stock options,
shares available for issuance were 547,900 as of June 30, 1997.
Compensation expense for employees is recognized for the difference between
the exercise price of the options granted and the fair market value of the
Company's common stock. Compensation expense of $9,213, $12,988, and
$216,038 has been recognized for the three months ended June 30, 1997 and
1996 and for the period from inception (July 12, 1993) to June 30, 1997,
respectively.
11
<PAGE> 12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the audited financial statements of the Company and notes
thereto, included in the Company's Annual Report for the year ended December 31,
1996 on Form 10-K filed with the Securities and Exchange Commission. This report
contains certain statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, investors should
carefully consider the various factors identified in this report which could
cause actual results to differ materially from those indicated by such
forward-looking statements, including the matters set forth under Certain
Factors Affecting Operations and Market Price of Securities.
OVERVIEW
The Company commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, the Company has been
engaged in research and development activities, organizational efforts and sales
and marketing activities, including the development of its services, the hiring
of its scientific and marketing staff and its initial marketing efforts. The
Company has incurred operating losses since its inception. As of June 30, 1997,
the Company's accumulated deficit was approximately $24.4 million. The Company's
losses have resulted principally from selling, general and administrative
expenses, laboratory operations and research and development expenses. Revenues
are principally derived from providing genetic testing and information services
and, to a lesser extent, software licensing associated with its risk assessment
service. Revenues from the Company's services, other than its risk assessment
service, are recognized as they are provided. Revenues from its risk assessment
service are recognized over the license period. The Company has yet to generate
any significant revenues and the Company cannot anticipate when, or if, it will
be able to generate significant revenues in the future. The Company expects its
operating losses to continue as its sales and marketing efforts, research and
development programs and laboratory operations continue and increase. The
Company's ability to achieve profitability depends on its ability to
successfully market and sell its services. There can be no assurance when, or
if, the Company will become profitable. (See Note 1 to the Financial
Statements.)
RESULTS OF OPERATIONS
Revenues for the three months and six months ended June 30, 1997 were $207,096
and $322,375 compared to $115,481 and $193,714 for the same periods in 1996. The
increase in revenues is primarily due to an increase in laboratory testing
services. The Company is in the development stage and cannot anticipate when, or
if, it will be able to generate any significant revenues.
Cost of sales - direct was $110,680 and $164,646 for the three months and six
months ended June 30, 1997 compared to $41,496 and $70,657 for the same periods
in 1996. Cost of sales - direct includes costs for supplies, direct labor,
shipping, and royalties (other than those under the Oncor Agreement) for testing
services and computer hardware costs associated with the Company's risk
assessment services. The increase in cost of sales - direct for the three months
reflects the corresponding increase in the Company's revenues.
12
<PAGE> 13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
Laboratory operations expenses were $666,853 and $1,373,658 for the three months
and six months ended June 30, 1997 compared to $720,390 and $1,368,304 for the
same periods in 1996. The decrease in laboratory operations expense for the
three months was primarily due to a greater portion of the expenses being
included in cost of sales - direct. The Company believes that this trend will
continue as sales of the Company's services increase. Related party expenses
incurred during these periods consisted of technology license fees paid to Oncor
and laboratory equipment rental paid to Codon.
Selling, general and administrative expenses were $1,363,197 and $2,688,018 for
the three months and six months ended June 30, 1997 compared to $1,157,271 and
$2,379,079 for the same periods in 1996. General and administrative expenses
were $1,042,114 and $2,039,633 for the three months and six months ended June
30, 1997, respectively, compared with $802,811 and $1,710,976 for the three
months and six months ended June 30, 1996, respectively. The increase in general
and administrative expenses was due to increased professional fees, the addition
of personnel and related costs, and increased depreciation expense. Selling
expenses were $321,083 and $648,385 for the three months and six months ended
June 30, 1997, respectively, compared with $354,460 and $668,103 for the three
months and six months ended June 30, 1996, respectively. Selling expenses
remained relatively constant between the two periods. The Company anticipates
that its selling, general and administrative expenses will increase as it
continues to market and sell its portfolio of services. For the three months and
six months ended June 30, 1997, there were no related party selling, general and
administrative expenses compared to $664 and $2,725 for the corresponding
periods in 1996.
Research and development expenses were $196,545 and $422,161 for the three
months and six months ended June 30, 1997, respectively, compared to $167,380
and $304,729 for the same periods in 1996. The increase in research and
development expenses was due to the hiring of additional personnel to work on
various projects. Related party expenses consisted of the costs associated with
consulting services.
Acquired research and development projects in process was $0 and $1,481,148 for
the three months and six months ended June 30, 1997, respectively. There were no
associated expenses for the same periods in 1996. The one-time write off of
$1,481,148 was associated with a License, Services and Marketing Agreement with
Incyte Pharmaceuticals Inc. (the "Incyte Agreement").
Total related party expenses, other than the expenses incurred in connection
with the Oncor Agreement, will continue to decrease and remain nominal in the
future.
Interest income was $94,066 and $188,666 for the three months and six months
ended June 30, 1997, respectively, compared to $145,169 and $261,172 for the
same period in 1996. The decrease in interest income was due to the decreased
amounts available for investment. Interest expense was $14,650 and $29,248 for
the three months and six months ended June 30, 1997, respectively compared to
$13,130 and $26,302 for the same periods in 1996.
For the reasons set forth above, net operating losses were $2,050,763 and
$5,647,838 for the three months and six months ended June 30, 1997,
respectively, compared to $1,839,017 and $3,694,185 for the same periods in
1996.
13
<PAGE> 14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues since the Company's inception. The
Company's operations have been funded through a $1.0 million capital infusion by
Oncor, a $3.0 million private placement of equity securities, approximately
$716,000 in advances from Oncor, approximately $7.4 million of net proceeds from
the Company's initial public offering, approximately $13.9 million of net
proceeds from the Company's follow-on offering completed in February 1996 and
$3.0 million in proceeds related to the Incyte Agreement completed in February
1997. The Company expects its operating losses to continue as its sales and
marketing efforts, research and development programs and laboratory operations
continue and increase. The Company also intends to make additional equipment
purchases and other capital expenditures in the future and intends to purchase
certain laboratory equipment during the third quarter of 1997.
Cash used in operating activities was approximately $4.3 million for the six
months ended June 30, 1997 compared with approximately $3.5 million for the same
period in 1996. The increase was attributable to an increase in the net
operating loss for the six months ended June 30, 1997 as well as a reduction in
accounts payable.
Cash used in investing activities was $760,210 for the six months ended June 30,
1997 compared to $2,822,709 for the same period in 1996. The decrease was due to
a reduction in amounts invested in short term investments.
Cash provided by financing activities was $2.8 million for the six months ended
June 30, 1997 compared with $14.2 million for the same period in 1996. In the
first quarter of 1996, the Company completed the follow-on offering which
resulted in net proceeds of approximately $13.9 million.
Minimum payments due under lease commitments and various research, license and
consulting agreements, excluding payments associated with the Oncor Agreement,
will be approximately $759,515 through 1997.
Pursuant to a License Agreement (the "BRCA2 Agreement"), dated July 7, 1997, by
and among the Company, Cancer Research Campaign Technology Limited ("CRCT") and
Duke University ("Duke"), CRCT and Duke have granted the Company an exclusive,
worldwide royalty-bearing license to certain patents and patent applications
relating to the BRCA2 gene and related discoveries (the "BRCA2 Technology") for
the purpose of providing diagnostic services, diagnostic products and research
products relating thereto. In consideration of the grant of the license, the
Company has paid CRCT an up-front fee. Contemporaneously, Oncormed granted back
to CRCT and Duke certain limited rights to use the BRCA2 Technology to provide
diagnostic services to any UK National Health Service Hospital and to patients
affiliated with Duke, respectively. Unless terminated earlier in accordance with
its terms, the BRCA2 Agreement expires, on a country-by-country basis, on the
date of expiration of the last to expire BRCA2 patent in such country or, if no
BRCA2 patent is granted in a given country, ten (10) years after the first
commercial provision of diagnostic services or diagnostic products in such
country.
The Company has incurred negative cash flows from operations since its
inception. The Company has expended, and will continue to expend substantial
funds to continue its sales and marketing efforts, research and development
programs and laboratory operations. At July 31, 1997, the Company had cash, cash
equivalents and short term investments of approximately $5.1 million. The
Company plans to fund its
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<PAGE> 15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
operations and capital expenditures from its current cash and future revenues as
well as from other sources. The Company's cash requirements, however, may vary
materially from those now planned because of variations in either the amount or
timing of anticipated revenues or anticipated expenses, relations with strategic
partners, changes in the focus and direction of the Company's research and
development programs, the extent of its sales and marketing efforts and
laboratory operations, the size and timing of any acquisitions, competitive and
technological advances and other factors. To the extent that funds generated
from the Company's operations, together with its existing capital resources, are
insufficient to meet the Company's operating requirements, it is likely that the
Company will seek to obtain additional funds through equity or debt financing
and collaborative or other arrangements with corporate partners and others. The
terms and prices of any such financings may be significantly more favorable to
investors than to the Company's existing stockholders. No assurance can be given
that any required additional financing will be available when needed or on terms
acceptable to the Company. If adequate additional funds are not available, the
Company may be required to delay, scale back or eliminate certain of its
research and development programs, its sales and marketing efforts or certain
other aspects of its business or to license to third parties the rights to
commercialize services or technologies that the Company would otherwise
undertake itself. The unavailability of adequate funds in the future would have
a material adverse effect on the Company's business, financial condition and
results of operations.
OTHER MATTERS
In July 1997, the U.S. Patent and Trademark Office issued to Oncormed a patent
(No. 5,642,936) regarding a novel bioinformatics method with applications
ranging from an analytic tool in genomics discovery to a screening method for
the identification of patients at risk for particular diseases.
In August 1997, the U.S. Patent and Trademark Office issued to Oncormed a patent
(No. 5,654,155) for a full length coding sequence of the BRCA1 gene which
encodes the entire BRCA1 protein. Oncormed's rights in the patented BRCA1 gene
sequence include therapeutics, diagnostic products and diagnostic services.
Mutations of the BRCA1 gene are associated with breast, ovarian and prostate
cancer.
CERTAIN FACTORS AFFECTING OPERATIONS AND MARKET PRICE OF SECURITIES
The Company's future business, financial condition, and results of operations,
and the market price for its securities are dependent on the Company's ability
to successfully manage the following business considerations. No assurance can
be given that the Company will be able to manage such considerations
successfully. The failure to manage such considerations could have a material
adverse effect on the Company's business, financial conditions, and results of
operations, and on the market price of its securities.
Development Stage Company; History of Operating Losses; Uncertainty of Future
Profitability
The Company commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, the Company has been
engaged in research and development activities, organizational efforts and sales
and marketing activities, including the development of its services, the hiring
of its scientific and marketing staff and its initial sales and marketing
efforts. The Company has incurred operating losses since its inception. As of
June 30, 1997, the Company's accumulated deficit was approximately $24.4
million. The Company's losses have resulted principally from selling, general
and
15
<PAGE> 16
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
administrative expenses, laboratory operations and research and development
expenses. The Company has yet to generate any significant revenues and the
Company cannot anticipate when, or if, it will be able to generate significant
revenues in the future. The Company expects its operating losses to continue as
its sales and marketing efforts, research and development programs and
laboratory operations continue and increase. The Company's ability to achieve
profitability depends on its ability to successfully market and sell its
services. There can be no assurance when, or if, the Company will become
profitable.
Relationship with Oncor
In February 1997, the Company and Oncor agreed to certain changes to the license
agreement with Oncor (as amended, the "Oncor Agreement"). Pursuant to the Oncor
Agreement, Oncor is providing the Company with an exclusive worldwide license to
certain of Oncor's existing human genome technologies that are useful for the
purposes of development and commercialization of certain of the Company's
services, including: (i) testing, detection and/or analysis of genes; (ii)
genetic assessment of risk of an individual to develop cancer; and (iii) testing
and analysis for the purposes of cancer management. In addition, Oncor is
providing the Company with a non-exclusive worldwide license to certain of
Oncor's existing human genome technologies, and any future improvements thereto,
to be used by the Company in the provision of services direct to third parties
other than services that are provided pursuant to the exclusive license. The
Company does not have the right to sublicense any Oncor technologies licensed to
it by Oncor without Oncor's prior written consent. Technologies sublicensed to
the Company by Oncor include technologies covered by the collaborative licensing
and research agreements between Oncor and each of The Johns Hopkins University
and the Massachusetts General Hospital. The term of the Oncor Agreement shall
expire in June 2004 unless earlier terminated in accordance with its terms.
Further, in the event of a change of control of Oncor, the acquiring party shall
have the option to either maintain the Oncor Agreement or to terminate the Oncor
Agreement. In the event that the acquiror terminates the Oncor Agreement, both
the exclusive license and the non-exclusive license shall remain in full force
and effect under rates to be determined.
Certain of the Company's services are reliant on the technologies licensed
directly from Oncor and from third parties through Oncor which form the basis
for some of the Company's services. The Company's rights under the Oncor
Agreement are subject to certain rights retained by Oncor, which include Oncor's
right to use the licensed technologies for internal, non-commercial research and
development purposes and for development and commercialization of Oncor's
products. Oncor intends to develop its technologies into diagnostic products for
sale to third parties. These third parties may then use these products to
provide services that compete directly with the Company's services, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Oncor Agreement
will be renewed at the end of its initial term or that it will not be terminated
earlier pursuant to its terms. There also can be no assurance that conflicts of
interest between Oncor and the Company will not arise with respect to the Oncor
Agreement, any services that might be provided by Oncor to the Company in the
future or other aspects of the Company's relationship with Oncor.
The Company's rights to technologies licensed to the Company from third parties
through Oncor are subject to various provisions in the license agreements
between such third parties and Oncor. No assurance can be given that Oncor will
perform its obligations under such agreements, that such agreements will not be
terminated or that such agreements can be renewed upon termination or
expiration. If Oncor breaches such agreements or otherwise fails to comply with
such agreements, or if such agreements are terminated or
16
<PAGE> 17
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
otherwise expire, the development or commercialization of certain of the
Company's services may be delayed or terminated, or the Company would have to
expend substantial additional resources on development and commercialization,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Oncor currently owns approximately 25.6% of
the Company's outstanding common stock. Accordingly, Oncor may be able to
effectively control or influence certain actions such as the election of
directors and the authorization of certain transactions that require stockholder
approval and be able to otherwise effectively control the Company's policies
without concurrence of the Company's other stockholders. In addition, Stephen
Turner, Chief Executive Officer and Chairman of the Board of Directors of Oncor,
is a director of the Company, and Timothy J. Triche, M.D., Ph.D., a director of
Oncor, is the Chief Executive Officer and Chairman of the Board of Directors of
the Company.
Additional Financing Requirements; Access to Capital
The Company has incurred negative cash flows from operations since its
inception. The Company has expended, and will continue to expend, substantial
funds to continue its sales and marketing efforts, research and development
programs and laboratory operations. The Company plans to fund its operations and
capital expenditures from its current cash and future revenues as well as from
other sources. The Company's cash requirements, however, may vary materially
from those now planned because of variations in either the amount or timing of
anticipated revenues or anticipated expenses, relations with strategic partners,
changes in the focus and direction of the Company's research and development
programs, the extent of its sales and marketing efforts and laboratory
operations, the size and timing of any acquisitions, competitive and
technological advances and other factors. To the extent that funds generated
from the Company's operations, together with its existing capital resources, are
insufficient to meet the Company's operating requirements, it is likely that the
Company will seek to obtain additional funds through equity or debt financing
and collaborative or other arrangements with corporate partners and others. The
terms and prices of any such financings may be significantly more favorable to
investors than to the Company's existing stockholders. No assurance can be given
that any required additional financing will be available when needed or on terms
acceptable to the Company. If adequate additional funds are not available, the
Company may be required to delay, scale back or eliminate certain of its
research and development programs, its sales and marketing efforts or certain
other aspects of its business or to license to third parties the rights to
commercialize services or technologies that the Company would otherwise
undertake itself. The unavailability of adequate funds in the future would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Limited Patient Populations For Certain Services
Certain of the Company's services currently address subtypes of broader types of
cancers. Patients with such subtypes typically represent only a small percentage
of those patients who are under treatment or have a history of the broader types
of cancer. Accordingly, the market for such services may be limited and such
services may not generate significant revenues.
New and Uncertain Business; Uncertainty of Clinical Utility
The Company's genetic testing and information services represent a new approach
to cancer management for which there is little precedent and for which the
market is evolving. The Company's business is to
17
<PAGE> 18
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
commercialize recent genetic discoveries and mutation detection technologies for
the early detection and management of cancer. The Company's ability to
successfully develop its business is unproven and is dependent on its ability to
establish its services as the standard of care in cancer management and obtain
third party reimbursement for its services; expand the distribution of its
services both domestically and internationally; develop strategic alliances and
collaborations with academic medical centers, research institutions, managed
care organizations, clinical laboratories, health care providers and corporate
partners; identify, license and develop emerging genetic discoveries and
mutation detection technologies; and continue to expand its portfolio of
services. The Company's ability to succeed is also dependent upon the acceptance
by potential customers and patients of the Company's services as effective tools
for cancer management. There can be no assurance that the market for the
Company's services will continue to evolve or that the Company's business
strategy will be successful. The discoveries and technologies which form the
basis for the Company's services have not been widely adopted by the medical
community. Accordingly, the Company is pursuing clinical correlation studies at
academic medical centers and research institutions that are designed to
determine the clinical utility, reliability and accuracy of the Company's
services. There can be no assurance that these studies will confirm the clinical
utility, reliability and accuracy of the Company's services. The failure of
these studies to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertain Availability of Health Care Reimbursement and Market Acceptance of
Services
The successful commercialization of genetic testing and information services
depends in part on the ability of its customers to obtain adequate reimbursement
for such services and related treatments from governmental agencies, private
health care insurers and other third party payors. Government and private third
party payors are increasingly attempting to contain health care costs by
limiting both the extent of coverage and the reimbursement rate for new
diagnostic and therapeutic products and services. Medicare has determined that
the Company's services are screening services and therefore are excluded from
coverage under Medicare. Various third party payors have begun to reimburse some
of the Company's services. There can be no assurance that third party
reimbursement for the Company's services will be consistently available to its
customers or that any such reimbursement will be adequate. Disapproval of, or
limitations in, coverage by third party payors could materially and adversely
affect market acceptance of the Company's services which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Collaborations and Licenses with Others
The Company's strategy for the research, development and commercialization of
certain of its services is to rely in part on various collaborative and license
arrangements with academic medical centers, research institutions and commercial
entities. Accordingly, the Company is dependent in part upon such third parties
performing their obligations. The Company has entered into certain collaborative
and license arrangements, including an arrangement with HCI, Affymetrix, ZENECA
Diagnostics, Incyte and CRCT/Duke, and is continually seeking to enter into
additional arrangements with other collaborators and licensors. There can be no
assurance that the Company will be able to enter into acceptable collaborative
and license arrangements in the future or that the parties with which the
Company has established or will establish arrangements will perform their
obligations under such arrangements. There also can be no assurance that its
current arrangements or any future arrangements will lead to the development of
additional services with
18
<PAGE> 19
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
commercial potential, that the Company will be able to obtain or license
proprietary rights with respect to any technology developed in connection with
these arrangements and that the Company will be able to ensure the
confidentiality of any proprietary rights and information developed in such
arrangements or prevent the public disclosure thereof. In general, the Company's
collaborative and license arrangements provide that they may be terminated under
certain circumstances. There can be no assurance that such arrangements will not
be terminated or that the Company will be able to extend any of its
collaborative and license arrangements upon their expiration. The Company
currently has certain licenses from third parties, either directly or indirectly
through the Oncor Agreement, and in the future may require additional licenses
from these or other parties to develop and market commercially viable services.
There can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, or renewable, that the patents underlying such
licenses, if any, will be valid and enforceable or that the nature of the
technology underlying such licenses will remain proprietary.
The Company's rights to technologies licensed to the Company from third parties
through the Oncor Agreement are subject to the license agreements between such
third parties and Oncor. No assurance can be given that the third parties to
these agreements will perform their obligations under such agreements on a
timely basis or at all. If such third parties breach or terminate their
agreements with Oncor or otherwise fail to, or are unable to, comply with the
provisions of their agreements with Oncor for whatever reason, the Company would
have no direct recourse and would be dependent on Oncor to enforce such
agreements. The agreements between Oncor and the third parties expire at various
times. There can be no assurance that these agreements will be renewed at the
end of their initial terms or that such agreements will not be terminated or
canceled prior to their expiration. The Company has no rights under these third
party agreements and is reliant upon Oncor to negotiate renewals of such
agreements and resolve disputes under such agreements. If the third parties to
the agreements that the Company licenses from Oncor through the Oncor Agreement
breach such agreements or otherwise fail to comply with such agreements, or such
agreements are terminated or otherwise expire, the development or
commercialization of certain of the Company's services may be delayed or
terminated, or the Company would have to expend substantial additional resources
on development and commercialization, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Competition
The Company is engaged in the biotechnology and medical services industries
which are characterized by extensive research and development efforts, rapid
technological progress and intense competition. There are many public and
private companies, including well-known pharmaceutical companies, biotechnology
companies and academic institutions, engaged in developing medical services and
the technology underlying such services. Although there are relatively few
direct competitors of the Company, it is anticipated that the number of direct
competitors will increase significantly in the future. Many of the Company's
current and potential competitors have substantially greater financial and
technological resources, sales and marketing capabilities and experience, and
research and development experience than the Company. Accordingly, the Company's
competitors may succeed in developing services and the underlying technology
more rapidly than the Company and in developing services that are more accurate
and useful and less costly than any of the Company's services. The Company's
competitors also may be more successful than the Company in marketing and
selling such services. In addition, other technologies are, or in the future may
become, the basis for competitive products and services. Oncor may develop
technologies under the Oncor Agreement
19
<PAGE> 20
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
into products that Oncor will sell to third parties. These third parties may
then use these products to provide services that compete directly with the
Company's services, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's competitors.
Competition may increase further as a result of the potential advances in the
technology underlying the services developed by the Company. The Company also is
aware that other companies have developed or may be developing genetic testing
and information technologies, services and products that are and may be
competitive with the Company's services. There can be no assurance that the
Company's competitors will not succeed in developing technologies, services and
products that are more accurate and useful than any being developed by the
Company or that would render the Company's technology and services obsolete or
noncompetitive.
The Company requires all employees and consultants (including certain scientific
advisors) to enter into confidentiality agreements that prohibit the disclosure
of confidential information to anyone outside the Company and require disclosure
and assignment to the Company of their ideas, developments, discoveries or
inventions developed during the course of their service to the Company. However,
no assurance can be given that competitors of the Company will not gain access
to trade secrets and other proprietary information developed by the Company and
disclosed to employees, consultants and/or scientific advisors.
To date, the important competitive factors for the Company's services have been
availability, accuracy and utility. Other competitive factors, such as price,
availability of reimbursement and response time are becoming more important as
the market matures.
Patents and Proprietary Rights
The Company relies on a combination of trade secret and copyright laws and
confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company's success will depend in part on its ability or the
ability of its licensors or sublicensors to obtain patents, defend patents,
maintain trade secrets, defend copyrights and operate without infringing upon
the proprietary rights of others, both in the United States and in foreign
countries. The patent position of companies relying upon biotechnology is highly
uncertain in general and involves complex legal and factual issues, and no
consistent policy has emerged regarding the breadth of claims allowed in
biotechnology patents. Except for a patent issued to the Company in early August
1997 related to the BRCA1 gene, to date, none of the Company, its licensors or
its sublicensors has been granted any patents related to the technology or
genetic discoveries underlying the Company's services. Although the Company and
certain of the Company's licensors and sublicensors have patent applications
pending relating to such technologies and discoveries, there can be no assurance
that patents will be issued as a result of such patent applications or that, if
issued, such patents will be sufficiently broad to afford protection against
competitors with similar technologies or discoveries. There can also be no
assurance that patents, if any, issued to the Company, or for which the Company
has license or sublicense rights, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. The commercial success of the Company also will
depend upon avoiding the infringement of patents issued to third parties,
obtaining licenses to third parties' technologies and genetic discoveries and
maintaining licenses upon which certain of the Company's services are, or might
be, based. In particular, third parties, including potential competitors, have
filed patent applications relating
20
<PAGE> 21
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
to certain genes and genetic mutations, including the BRCA1, BRCA2 and p16 genes
and related mutations, underlying certain of the Company's services, and may in
the future file additional patent applications relating to genes and genetic
mutations. In the event that any such patents are issued to such parties, such
patents may preclude the Company, its licensors and sublicensors from obtaining
patent protection for their technologies and discoveries, may hinder or prevent
the Company from providing related genetic testing services and could require
the Company to enter into licenses with such parties or cease such activities.
There can be no assurance that any required licenses would be available on
acceptable terms, or at all. Litigation, which could result in substantial cost
to the Company, may be necessary to determine the scope and validity of others'
proprietary rights or to enforce the Company's patent, copyright, trade secret
and license and sublicense rights. The failure by the Company to obtain any such
licenses, if required, and the Company's involvement in such litigation, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to its own technologies and any improvements to
such technologies assigned to Oncor by the Company. The amount and timing of
resources devoted to such activities are beyond the Company's control. There can
be no assurance that Oncor will perform such obligations on a timely basis or at
all, or that it will expend sufficient resources on such activities. The Company
has the primary right and obligation to obtain, maintain and enforce proprietary
rights in relation to all its own technologies.
The Company relies on certain technologies, trade secrets and know-how that are
not patentable or proprietary and are available to the Company's competitors.
Although the Company has taken steps to protect its unpatented technologies,
trade secrets and know-how, in part through the use of confidentiality
agreements with its employees, consultants and certain of its contractors, there
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known or be independently developed or discovered by
competitors.
Government Regulation
The Clinical Laboratory Improvement Act ("CLIA"), as amended in 1988, provides
for regulation of clinical laboratories by the United States Department of
Health and Human Services ("HHS"). These regulations mandate that all clinical
laboratories be certified to perform testing on human specimens and provide
specific conditions for certification. These regulations also contain guidelines
for the qualifications, responsibilities, training, working conditions and
oversight of clinical laboratory employees. In addition, specific standards are
imposed for each type of test that is performed in a laboratory. The Company's
laboratory is certified under these regulations and the Company believes that it
is in substantial compliance with these guidelines. CLIA and the regulations
promulgated thereunder are enforced through continuous quality inspections of
test methods, equipment, instrumentation, materials and supplies on a bi-annual
and "spot" basis. While the United States Food and Drug Administration (the
"FDA") does not currently regulate the genetic tests underlying the Company's
services if they are performed in the Company's CLIA certified clinical
laboratory, there can be no assurance that the FDA will not seek to regulate
such tests in the future. If, in the future, the FDA should determine that the
tests underlying the Company's services should receive FDA approval prior to
their provision in the Company's laboratory, there can be no assurance that such
approval would be received on a timely basis or at all. Any change in CLIA or
related regulations, or in the
21
<PAGE> 22
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
interpretation thereof, or in the FDA's position on regulating the tests
underlying the Company's services, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
laboratory is licensed and regulated by the State of Maryland, in which it is
located. The Company's laboratory is also regulated by certain other states from
which the Company may accept specimens. The Company has received approval for a
license from the State of New York and intends to seek approval from other
states as required. No assurance can be given that the Company will be able to
obtain such approvals on a timely basis or at all. The loss of, or the failure
to obtain, any required state license could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is subject to extensive federal, state and local regulation,
including regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other laws, rules and regulations governing
health care, clinical laboratory activities, waste disposal, handling of toxic,
dangerous or radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare and are
therefore excluded from coverage under Medicare, the Company's services may be
subject to laws, rules and regulations governing reimbursement and fraud and
abuses and prohibiting the filing of false claims. These laws, rules and
regulations include "anti-kickback" and "Stark" laws, which contain extremely
broad proscriptions, the violation of which may result in exclusion from
Medicare and Medicaid and criminal and civil penalties. In addition, the Company
is subject to state laws, rules and regulations limiting certain financial
relationships between health care service providers and physicians and other
referral sources. Although the Company believes that it is in substantial
compliance with all applicable laws, rules and regulations, there can be no
assurance that the Company will remain in compliance with applicable laws, rules
and regulations or that changes in, or new interpretations of, existing laws,
rules and regulations would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk of Discrimination Against Customers; Potential Adverse Impact on
Insurability; Confidentiality
The availability of genetic predisposition testing has raised certain ethical,
legal and social issues regarding the appropriate utilization and
confidentiality of information provided by such testing. The medical information
obtained or determined about an individual from the Company's services is of an
extremely sensitive nature. In providing its services, the Company is subject to
certain statutory, regulatory and common law requirements regarding the
confidentiality of such medical information. The Company maintains an internal
regulatory compliance review program to monitor compliance with applicable
confidentiality requirements, and believes that it is in substantial compliance
with such requirements. Failure to comply with such confidentiality requirements
could result in material liability to the Company. It is possible that
discrimination by insurance companies could occur through the raising of
premiums by insurers to prohibitive levels, the cancellation of insurance or the
unwillingness to provide coverage to patients shown to have a genetic
predisposition to a particular disease. The Company could experience a delay in
market acceptance or a reduction in the size of its potential serviceable market
if insurance discrimination were to become a significant factor, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. Similarly, governmental authorities could, for social
or other purposes, limit the use of or prohibit genetic predisposition testing.
If efforts by the Company and others to mitigate potential discrimination are
not successful or if the use of genetic testing is limited, the Company could
experience a delay or reduction in market acceptance of its services, which
would have a material adverse
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Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
effect on the Company's business, financial condition and results of operations.
Limited Sales and Marketing Capacity
The Company has limited experience in selling and marketing genetic testing and
information services and will have to further develop its sales force and/or
rely on collaborators, licensees or others to provide for the sales and
marketing of its services. There can be no assurance that the Company will be
able to establish adequate sales and marketing capacity or make arrangements
with collaborators, licensees or others to perform such activities on acceptable
terms or at all.
Risk of Liability; Adequacy of Insurance Coverage
The marketing and sale of genetic testing and information services could expose
the Company to the risk of certain types of litigation, including medical
malpractice or negligence claims or contract disputes. The Company currently
maintains $10.0 million in medical malpractice insurance coverage. There can be
no assurance, however, that this coverage will be adequate to protect the
Company against future claims or that insurance will be available to the Company
in the future on acceptable terms, if at all. A medical malpractice or other
claim for which the Company was not adequately insured could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Management and Qualified Personnel
The Company is highly dependent upon the efforts of its senior management,
scientific advisory board and consultants. The loss of the services of one or
more members of senior management could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the loss of the services of certain members of the Company's scientific advisory
board and certain consultants could materially and adversely affect the Company
to the extent that the Company is pursuing research and development in areas of
such scientific advisors' or consultants' expertise. Although the Company is the
beneficiary of $1 million key-man life insurance policies on each of its Chief
Executive Officer, Timothy J. Triche, M.D., Ph.D., and its President and Chief
Operating Officer, Douglas Dolginow, M.D., the Company does not believe such
amounts would be adequate to compensate for the loss of either executive. Due to
the specialized scientific nature of the Company's business, the Company is also
highly dependent upon its ability to attract and retain qualified scientific,
technical and key management personnel. There is intense competition for
qualified personnel in the areas of the Company's activities and there can be no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its existing business and
its expansion into areas and activities requiring additional expertise. The loss
of, or failure to recruit, scientific, technical, sales and marketing and
managerial personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's scientific advisors and consultants may be employed by or have
consulting agreements with entities other than the Company, some of which may
compete with the Company. To the extent that members of the Company's scientific
advisory board or consultants have consulting arrangements with or become
employed by any competitor of the Company, the Company could be materially and
adversely affected. Any inventions or processes independently discovered by the
scientific advisors or the consultants
23
<PAGE> 24
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
will not, unless otherwise agreed, become the property of the Company and will
remain the property of such persons or their full-time employers. In addition,
the institutions with which the scientific advisors and consultants are
affiliated may make available the research services of their scientific and
other skilled personnel, including the scientific advisors and consultants, to
competitors of the Company pursuant to sponsored research agreements. Under such
sponsored research agreements, such institutions may be obligated to assign or
license to a competitor of the Company patents and other proprietary information
that may result from research sponsored by an entity other than the Company,
including research performed by a scientific advisor or consultant for a
competitor of the Company.
Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation grants the Board of Directors the
authority to issue up to 2,000,000 shares of preferred stock of the Company, par
value $0.01 per share (the "Preferred Stock"), in the future in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be materially and adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
Although the Company has no present plans to issue any shares of Preferred
Stock, it may do so in the future. The issuance of Preferred Stock could have
the effect of discouraging a third party from acquiring a majority of the
outstanding Common Stock of the Company and preventing stockholders from
realizing a premium on their shares. In addition, the Company is subject to
Section 203 of the Delaware General Corporation Law (the "DGCL"), which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 2 Changes in Securities
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on
June 24, 1997.
(b) Not applicable.
(c) Motions before Stockholders:
(1) Election of six directors:
<TABLE>
<CAPTION>
Broker
Name Votes For Votes Against Non-Votes Abstentions
---- --------- ------------- --------- -----------
<S> <C> <C> <C> <C>
John W. Colloton 6,252,159 0 0 14,950
Douglas Dolginow, M.D. 6,244,859 0 0 22,250
John Pappajohn 6,252,159 0 0 14,950
Wayne C. Patterson 6,252,159 0 0 14,950
Timothy J. Triche, M.D., Ph.D. 6,244,859 0 0 22,250
Stephen Turner 6,061,259 0 0 205,850
</TABLE>
(2) Ratification of Arthur Andersen, LLP as auditors:
6,262,109 votes for, 2,150 votes against, 0
broker non-votes, and 2,850 abstentions.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this Form 10-Q
Exhibit 11 Calculation of Earnings Per Share.
Exhibit 27 Financial Data Schedule (in EDGAR Filing, only).
(b) Reports on Form 8-K
None.
25
<PAGE> 26
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.
ONCORMED, INC.
<TABLE>
<S> <C>
Date: August 13, 1997 /s/ DR. TIMOTHY J. TRICHE
------------------------------
Dr. Timothy J. Triche, Chairman and Chief Executive Officer
Date: August 13, 1997 /s/ DR. DOUGLAS DOLGINOW
----------------------------
Dr. Douglas Dolginow, President and Chief Operating Officer
Date: August 13, 1997 /s/ L. ROBERT JOHNSTON, JR.
-------------------------------
L. Robert Johnston, Jr., Vice President and Chief Financial Officer
</TABLE>
26
<PAGE> 27
ONCORMED, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C>
EX-11 Calculation of Earnings Per Share 28
EX-27 Financial Data Schedule 29
(in EDGAR transmission only)
</TABLE>
27
<PAGE> 1
Exhibit 11
ONCORMED, INC.
EARNINGS PER SHARE
CALCULATION OF SHARES USED IN COMPUTING
NET LOSS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended Six Months Ended (July 12, 1993)
June 30, June 30, Through
1997 1996 1997 1996 June 30, 1997
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 7,814,022 6,970,712 7,567,360 6,619,159 5,268,499
Treasury Stock effect to acquire Common Stock
granted in the twelve months prior to the
Company's initial public offering -- -- -- -- 257,713
------------ ----------- ----------- ----------- ------------
Shares used in computing net loss per share 7,814,022 6,970,712 7,567,360 6,619,159 5,526,212
============ =========== =========== =========== ============
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF OPERATIONS FILED AS PART OF THE ANNUAL REPORT ON
FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT
ON FORM 10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,844,066
<SECURITIES> 1,963,948
<RECEIVABLES> 185,333
<ALLOWANCES> 38,320
<INVENTORY> 0
<CURRENT-ASSETS> 6,058,069
<PP&E> 2,486,432
<DEPRECIATION> 1,312,823
<TOTAL-ASSETS> 7,231,678
<CURRENT-LIABILITIES> 881,047
<BONDS> 0
0
0
<COMMON> 78,140
<OTHER-SE> 29,987,994
<TOTAL-LIABILITY-AND-EQUITY> 7,231,678
<SALES> 322,375
<TOTAL-REVENUES> 322,375
<CGS> 164,646
<TOTAL-COSTS> 6,129,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,248
<INCOME-PRETAX> (5,647,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,647,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,647,838)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> 0
</TABLE>
