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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-10824
Genome Therapeutics Corp.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2297484
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
100 Beaver Street, Waltham, Massachusetts 02453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (781) 398-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 2002 was approximately $131,327,000.
The number of shares outstanding of the registrant's common stock as of
March 27, 2002 was 22,831,030.
Documents Incorporated By Reference
Portions of the registrant's proxy statement for use at its Annual Meeting
to be held on June 25, 2002 are incorporated by reference into Part III.
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PART I
ITEM 1. Business
Overview
We are a biopharmaceutical company focused on the discovery and development
of pharmaceutical and diagnostic products. We have eight established product
development programs. Our lead product candidate, Ramoplanin, is in Phase III
clinical trials for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE). We have six alliances with
pharmaceutical companies including Schering-Plough, AstraZeneca, Wyeth-Ayerst
and bioMerieux, and a joint venture with ArQule. In addition to these eight
projects, we have a portfolio of earlier stage internal drug discovery programs.
We also maintain an active service business, GenomeVisionTM Services, providing
drug discovery services to pharmaceutical and biotechnology companies and to the
National Human Genome Research Institute.
BioPharmaceutical Product Discovery and Development
---------------------------------------------------
We concentrate our product discovery and development efforts in two
principal areas: (i) infectious diseases caused by bacterial and fungal
pathogens and (ii) human diseases believed to have a significant genetic
component. In both of these fields we have built integrated discovery platforms
to discover genes and characterize their function. We use these platforms to
pursue the discovery of new products through strategic alliances with corporate
partners and through internal research programs.
We have long been a leader in the use of genomics to discover new drugs for
the treatment of bacterial and fungal infections. In October 2001, we
in-licensed the compound, Ramoplanin, and are developing it for the prevention
of bloodstream infections caused by vancomycin-resistant enterococci (VRE). We
have two ongoing discovery and development collaborations with Schering-Plough.
The first is focused on new treatments for drug resistant bacterial infections,
including Staph. aureus, and the second is focused on novel anti-fungals. We
have partnered with AstraZeneca to develop treatments for ulcers caused by H.
pylori and with bioM[eacute]rieux to develop diagnostics for bacterial
infections. We have formed a joint venture with ArQule, Inc. to discover and
develop new broad-spectrum antibiotics. In addition to these collaborations, we
have continued to invest in internal research programs in bacterial and fungal
infections.
In addition to drug discovery for bacterial and fungal infections, we are
leaders in the use of population genetics as a tool in discovering new therapies
for the treatment of chronic human diseases. We have formed an alliance with
Schering-Plough to discover new treatments for asthma and an alliance with
Wyeth-Ayerst for the treatment of osteoporosis. We also continue to invest in
the development of new therapies for the treatment of osteoporosis as well as
neurological and psychiatric diseases.
Scientific Background
Infectious Disease
The identification and characterization of the genes essential to the
survival of a pathogen may lead to the development of innovative drugs to combat
infection. We have sequenced the genomes of over 20 important pathogens and have
developed a database that includes proprietary and publicly available genetic
information from over thirty microbial organisms, including organisms
responsible for the most prevalent bacterial infections. Our researchers have
used this database to conduct cross-genome comparisons and identify genes
conserved in a large number of pathogens. Then, through a series of
technologies, we refer to as the PathoEssentialTM platform, we have been able to
identify conserved genes that are essential for survival of the organisms,
(known as essential targets). Screening assays are then developed to screen
compounds for activity against these conserved essential targets. In addition,
we have developed a suite of technologies that allow us to characterize,
profile, determine and/or confirm mechanism of action of compounds identified in
our primary high-throughput screening assays.
We have built a high-throughput screening capability. In 2001, our first
full year of operation, we generated over 2.2 million data points. We use
biochemical and cell-based assays internally. We also collaborate with a third
party, Cetek, to conduct affinity-based screening on targets of unknown
function. To capitalize on this screening capability, we have built a diverse
compound library from commercial sources of approximately 80,000 compounds
selected based on chemical diversity and other "drug-like" properties. We have
invested in our in vivo, pre-clinical capabilities and have commenced in vivo
testing on several compounds.
1
Chronic Human Diseases
A variety of factors cause human disease, including genetic defects,
pathogens and environmental factors, with many of the most common life
threatening and chronic diseases believed to have a genetic component.
Consequently, the identification and characterization of genes associated with
these chronic diseases may lead to new therapies and diagnostic tests.
The completion of the first draft of the human genome and additional
genomics initiatives such as the SNP consortium have resulted in the generation
of tremendous amounts of gene sequence and polymorphism information, but new
products based on this information are yet to be discovered. Identifying genes
that cause or are associated with a specific disease and determining how those
genes contribute to the disease is a formidable challenge. Therefore,
industrialized discovery technologies that can convert this large amount of
genomic data into actual drug candidates are critical to translate these
early-stage discoveries into actual treatments for human disease.
We have developed an integrated suite of technologies, tools and data
management and analysis capabilities to bridge this gap between genomics data
and drug candidates. We have developed sophisticated techniques for evaluating
population resources to identify genes associated with chronic disease or rare
genetic disorders. Our scientists carefully characterize human phenotypes and
develop linkage maps to discover genes associated with human disease. We have
designed an integrated platform of highly automated, industrial scale
technologies that permits us to rapidly analyze and draw conclusions from
genomic information. We believe our approach will allow our collaborators and us
to effectively use genomic information to identify and validate targets that can
be successfully developed into novel therapeutics and diagnostic products.
Our Drug Discovery and Development Strategy
Our strategy is to focus our drug discovery and development efforts on
bacterial and fungal infections and chronic human diseases. We employ three
pathways to discover and develop new products. Each path has a different level
of internal vs external funding and different economics. The table below sets
forth the typical funding and economic structure for the various pathways:
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Pathway Funding GENE Economics
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. License fees
Drug Discovery Alliances 100% funded by alliance partner . Milestone payments
. Sponsored research
. Royalties
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Joint Ventures 50-50 shared funding 50-50 profit split
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Internal Discovery Programs 100% funded by GENE 100% to GENE, net of 3rd
& In-Licensed Products party royalties
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Drug Discovery Alliances
We seek to form strategic alliances with major pharmaceutical companies to
maximize the probability of success in drug discovery and development. This is
particularly important for research programs that require the discovery and/or
development capabilities of a major pharmaceutical company to fully exploit or
that address market opportunities that would require a large, global sales and
marketing infrastructure. In these alliances, typically, the alliance partner
funds research efforts with us to discover genes, determine their function and
develop assays to test compounds against those genes. As we successfully
complete our portion of the program, the partner assumes responsibility for
downstream drug discovery and development. We believe, for example, that our
current alliances with Wyeth-Ayerst, Schering-Plough, AstraZeneca, and
bioMerieux, all industry leaders in their fields, are providing us with the best
opportunity to capitalize on our early genomics discoveries. We continue to meet
or exceed our development schedule with all of our alliance partners and seek to
extend or expand these alliances, when it is strategically beneficial to both
parties.
2
We will continue to seek additional alliances, particularly in chronic human
diseases. We believe that these diseases represent large commercial
opportunities that require the resources of a major pharmaceutical company. We
will seek partners that have franchises in the treatment of these major disease
indications. We believe companies that have major research efforts and/or
commercial products focused on a particular disease will continue to be
motivated to utilize genomic information to develop novel products that will
allow them to maintain or enhance their market leadership position.
Joint Ventures
In late 2000, we made the strategic decision to begin investing more heavily
in joint ventures and internally funded programs in infectious disease. Our goal
is to invest in a number of these ventures to take advantage of development
synergies that certain strategic partners can offer. This should allow us to
accelerate the process of drug discovery as well as capture a larger share of
the program value. Our joint venture with ArQule is an example of this kind of
program. This venture is funded equally by both companies and is focused on
discovering new broad-spectrum anti-bacterials. It combines our gene targets,
assay development, screening and anti-bacterial discovery technologies with the
extensive compound libraries and medicinal chemistry capabilities of our
partner.
Internal Discovery Programs
We continue to invest to expand our internal drug discovery capabilities in
bacterial and fungal infections. During the last two years, we have built a
high-throughput screening capability. In 2001, our first full year of operation,
we generated over 2.2 million data points. We have built a diverse compound
library of approximately 80,000 compounds derived from commercial sources. We
have invested in our in vivo, pre-clinical capabilities and have commenced in
vivo testing on several compounds. While we will seek to partner some of these
programs with larger companies, we will also seek to develop and commercialize
some of these discoveries ourselves for niche opportunities, such as
hospital-acquired infections or infections in immuno-compromised patients.
We continue to evaluate and invest in acquiring additional family resources
(families whose members suffer from diseases with a significant inherited
component) for new drug discovery programs in chronic human diseases.
Additionally, we continue to invest in our platform to rapidly discover and
characterize the function of genes associated with human disease. We plan to
partner these programs with major pharmaceutical companies for downstream
discovery, clinical development and commercialization.
In-licensed compounds for Clinical and Commercial Development
We seek to supplement our drug discovery efforts with an active in-licensing
program. We seek to in-license products in pre-clinical and/or clinical
development that will complement our internal drug discovery efforts for
infectious diseases. Our first such product candidate, Ramoplanin, is in Phase
III clinical trials for the prevention of bloodstream infections caused by VRE.
We will also explore additional indications for this product candidate,
potentially expanding and extending its value.
BioPharmaceutical and Diagnostic Programs
We have eight ongoing product development programs. Our lead product
candidate, Ramoplanin, is in Phase III clinical trials for the prevention of
bloodstream infections caused by VRE. We have six alliances with pharmaceutical
companies including Schering-Plough, AstraZeneca, Wyeth-Ayerst and bioMerieux,
and a joint venture with ArQule. In addition to these eight programs, we have a
portfolio of earlier stage internal drug discovery programs.
Ramoplanin
Bacteria are commonly classified into two categories: gram-positive and
gram-negative. Enterococci are a family of gram-positive bacteria that are part
of the normal flora of the gastrointestinal tract. While these organisms do not
normally cause infections in healthy people, they become a threat in patients
that have a compromised immune system and are frequently found in hospitalized
patients. Enterococci are now the second most common cause of bloodstream
infections acquired in the Intensive Care Units (ICUs) of hospitals in the
United States. Enterococcal bloodstream infections in the ICU have been
associated with a crude mortality of over 30%.
3
For thirty years, the antibiotic of last resort for enteroccal bloodstream
infections was vancomycin. However, the widespread use of vancomycin and other
antibiotics such as third generation cephalosporins has increased the prevalence
of resistant strains of enterococci, known as vancomycin-resistant enterococci
(VRE). In 1999, more than 25% of intensive care unit enterococci infections were
caused by VRE, a 47% increase from 1994.
Given its rapid spread and the difficulty in treating blood-borne
infections, VRE has received significant attention from both the medical and
public health communities. Most VRE is not only resistant to vancomycin, but
also to other common antibiotics. This provides VRE with a selective advantage
over other enterococcal isolates in the gut and enables resistant pathogens to
easily colonize the human gastrointestinal (GI) tract. The morbidity and
mortality associated with VRE bloodstream infections is substantially higher
than for enterococcal bloodstream infections caused by vancomycin-sensitive
strains of enterococci.
Given the high morbidity, mortality and cost of VRE bloodstream infections
and the limited treatment options for active infections, a great deal of focus
within the infectious disease community has been placed on infection control
practices within the hospital to prevent VRE infections. Infection control has
focused on screening to identify colonized patients and the use of barrier
methods to avoid the spread of colonization to other patients. Typically, these
require isolation of the patient in a room with negative air pressure and the
"gowning and gloving" of physicians and nursing staff. Such patients are often
not allowed to have family visitors.
The large quantity of VRE in the gut has motivated investigators to seek to
de-colonize the gut in an attempt to prevent VRE bloodstream infections.
However, attempts to prevent VRE bloodstream infections have been unsuccessful
in the past. Bacitracin has been tried in combination with or without gentamicin
or a tetracycline. Novobiocin has also been tried. It is believed that these
approaches have not been successful due to lack of potency or the inability of
the antibacterials to reach high enough levels in the gut to suppress VRE
effectively.
In October 2001, we in-licensed Ramoplanin, a product under development as a
novel antibiotic for the prevention of bloodstream infections caused by VRE,
from Biosearch Italia S.p.A (Biosearch). Ramoplanin is a novel
glycolipodepsipeptide antibiotic produced by fermentation of Actinoplanes
species, with activity against gram-positive aerobic and anaerobic
microorganisms. In preclinical studies Ramoplanin has been shown to be
bactericidal for most gram-positive species, including methicillin-resistant
staphylococci and VRE. Ramoplanin inhibits the bacterial cell wall peptidoglycan
biosynthesis with a mechanism different from that of vancomycin, teicoplanin or
other cell wall-synthesis inhibitors. No evidence of cross-resistance between
Ramoplanin and other glycopeptide antibiotics has been observed. Ramoplanin has
a unique profile (see Table 5) that may make it a particularly attractive
compound for killing bacteria in the gastrointestinal tract. This may make the
product a useful drug in the treatment of certain infections (C. Difficile) that
occur in the GI tract. It may also make the compound effective in the prevention
of bloodstream infections by gram positive organisms that are concentrated in
the GI tract, including VRE.
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Table 5: Ramoplanin Profile
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Characteristic Potential Advantage
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Novel class of antibiotic . No demonstrated cross-resistance with other
antibiotics.
. No demonstrated resistance
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Orally administered, but not . Concentrates and exerts its killing
absorbed into bloodstream effects in the GI tract
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Bactericidal . Rapid killing effect.
. Less likely to develop resistance
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Gram Positive Spectrum . Low potency against gram negative
anaerobes.
. Less likely to result in overgrowth
of other opportunistic organisms.
. Potential value vs C. Difficile
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In a Phase II, multicenter, double-blind, placebo-controlled trial, oral
Ramoplanin was well tolerated. In addition, after seven days of treatment, 90%
of patients who were colonized with VRE at the beginning of the study had no
detectable VRE in their gastrointestinal tract, while all of the placebo
patients had detectable VRE ) p*0.01). Ramoplanin has been granted Fast Track
status
4
by the FDA and is currently being tested in a Phase III clinical study. The
ongoing Phase III study is designed to demonstrate whether oral prophylaxis with
Ramoplanin reduces the incidence of VRE bloodstream infections in cancer
patients known to carry VRE bacteria in their intestines. More than one-third of
the planned 950 patients have been enrolled in the study at more than 40
clinical trial sites in the U.S. We expect to file a New Drug Application for
Ramoplanin in 2004.
The license agreement provides us with exclusive rights to develop and
market oral Ramoplanin in the U.S. and Canada. Biosearch will provide the bulk
material for the manufacture of the product. Under the terms of the agreement,
we paid Biosearch an initial consideration of $2 million. Thereafter, we will
make milestone payments of up to an additional $8 million in a combination of
cash and notes convertible into our stock if certain development milestones are
met. In addition to purchasing bulk material from Biosearch, we will fund the
completion of clinical trials and pay a royalty on product sales. The combined
total of bulk product purchases and royalties is expected to be 26% of our net
product sales.
The Company and Biosearch have established a joint committee to coordinate
global efforts for the ongoing clinical development and future commercialization
of Ramoplanin.
Drug Discovery Alliances
We form strategic alliances with major pharmaceutical companies to maximize
our success in product discovery and development. The following table summarizes
our existing product discovery and development partnerships:
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Bacterial and Fungal Infections Alliances
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Alliance Focus Partner Status of Alliance Proceeds Received as Potential Proceeds,
(Date of Agreement) of December 31, 2001 excluding royalties
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Contract research program completed;
Ulcers AstraZeneca Program transferred to AstraZeneca; $13.5 million $23.3 million
(September 1995) Currently in lead optimization.
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Contract research program
Drug Resistant Schering-Plough substantively completed; Validated $21.4 million $45.4 million
Bacterial Infections (December 1995) targets and screening assays
transferred to Schering-Plough;
Currently in high-throughput
screening.
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Fungal Infections Schering-Plough Contract research program $12.2 million $33.2 million
(September 1997) substantively completed; Validated
targets and screening assays
transferred to Schering-Plough;
Currently in high-throughput
screening.
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Infectious Disease BioMerieux PathoGenome Database delivered; $3.4 million $5.2 million
Diagnostics (September 1999) identification of gene markers
ongoing.
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Human Disease Alliances
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Alliance Focus Partner Status of Alliance Proceeds Received as Potential Proceeds,
(Date of Agreement) of December 31, 2001 excluding royalties
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Wyeth-Ayerst Identified specific gene mutation
Osteoporosis Division of that leads to increased bone mass; $8.1 million $118.0 million
American Contract research extended through
Home Products December 2002. Currently in high-
(December 1999) throughput screening
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Asthma Schering-Plough Two genes discovered. Identification $38.5 million $81.0 million
(December 1996) of candidate genes ongoing; Contract
research program extended to December
2002; Currently in high throughput
screening
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* Assumes receipt or payment of all license fees, funded research and
contingent payments for achieving milestones, after extensions
5
and/or reallocations; excludes potential royalties
Bacterial and Fungal Infection Alliances
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Ulcers
H. pylori infection affects an estimated 30% of the United States
population, causing more than 5 million cases of peptic ulcer disease per year.
Industry sources estimate that the market for ulcer disease products worldwide
to be $14.5 billion in 2001. The pathogen, H. pylori, is believed to be
responsible for 90% of duodenal ulcers, the most common type of ulcer, and
approximately 80% of gastric peptic ulcers. The World Health Organization has
estimated that H. pylori is responsible for 550,000 new cases of stomach cancer
per year worldwide. Using our sequencing technology, we completed the random
sequencing and finishing of the genome of H. pylori. We believe that drugs
targeted at genes essential to the survival of H. pylori will provide novel
treatments for peptic ulcers.
In September 1995, we formed an alliance with AstraZeneca to identify genes
critical to the survival of H. pylori and proteins on the surface of the
bacterium that we believe to be likely targets for drugs. AstraZeneca is a
leader in the field of products to treat peptic ulcer disease. Its anti-ulcer
drug, Prilosec(R) was the world's biggest selling prescription drug in 2000 with
sales of $6.2 billion. As of December 31, 2001, we had received payments of
$13.5 million under this alliance and have rights to receive, based on
attainment of milestones, an additional $9.8 million of payments in addition to
potential royalties. In August 1999, we had completed our research obligations
under this alliance and had turned over validated drug targets and assays to
AstraZeneca for pre-clinical testing. AstraZeneca recently announced that it had
begun a lead optimization program on a lead identified through the
high-throughput screening program conducted using one of these targets.
Drug Resistant Bacterial Infections
Infectious diseases remain the world's leading cause of premature death.
Each year approximately 2 million patients in the U.S. develop antibiotic
resistant infections while being treated in hospitals. Antibiotic resistant
organisms, many of which have multiple antibiotic resistances, cause these
infections. Industry sources estimate that the pharmaceutical market for
antibiotic products worldwide was more than $20 billion in 2000.
The pathogen Staph. Aureus is a common cause of skin, wound and blood
infections. Staph. aureus infections are typically treated with antibiotics. In
recent decades, the incidence of Staph. aureus infections that are resistant to
available antibiotic treatments has risen. Using our high-throughput sequencing
capabilities, we have sequenced the genome of antibiotic-resistant Staph.
aureus. We believe that drugs targeted at genes essential to the survival of
Staph. aureus will provide novel treatments for skin, wound and blood infections
contracted in hospitals.
In December 1995, we formed an alliance with Schering-Plough to identify and
validate gene targets for the development of drugs to treat Staph. aureus and
other pathogens that have become resistant to current antibiotics.
Schering-Plough is an established participant in the anti-infective market, and
a leader in the utilization of genomics to discover novel anti-infective
products. As of December 31, 2001, we had received payments of $21.4 million
under this alliance and have rights to receive, based on attainment of
milestones, an additional $24 million of payments as well as potential
royalties. As of December 31, 2001, we had substantively completed our research
obligations under this alliance and had turned over validated drug targets and
assays to Schering-Plough for high-throughput screening.
Fungal infections
The past twenty years have seen dramatic changes in the pattern of fungal
infections in humans. These pathogens have assumed a much greater importance
because of their increasing incidence in immunocompromised patients, such as
AIDS patients, transplant recipients, cancer patients and other groups of
immunocompromised individuals. Increased international travel and misuse of
antimicrobial agents have also contributed to this trend and the emerging
resistance to certain treatments. Industry sources estimate that the global
market for prescription antifungal drugs was approximately $4.8 billion in 1999,
with non-prescription fungal treatments adding significantly to overall market
size. Currently, there are a limited number of antifungals available for use
against hospital related fungal infections, and many of the products currently
on the market have serious side effects. We believe that drugs targeted at genes
that are essential to the survival of fungal pathogens will provide novel and
effective treatments for fungal infections.
In September 1997, we formed an alliance with Schering-Plough to use our
high-throughput sequencing capabilities and genomic
6
tools to identify new, validated fungal targets for the development of drugs to
treat fungal infections. Schering-Plough is a leader in the field of drugs
targeted against fungal infections, with market leading products such as the
Lotrimin AF(R) and Tinactin(R) lines of topical antifungals. As of December 31,
2001, we had received payments of $12.2 million under this alliance and have
rights to receive, based on attainment of milestones, an additional $21.0
million of payments in addition to potential royalties. As of December 31, 2001,
we had substantively completed our research obligations under this alliance and
had turned over validated drug targets and assays to Schering-Plough for
high-throughput screening.
Infectious disease diagnostics
The World Health Organization estimates that more than 13 million people die
of an infectious disease worldwide each year, with many of those infections
acquired in hospitals. There has been a global resurgence of infectious
diseases, including the identification of new pathogens, the re-emergence of old
infectious agents and the rapid spread of resistance to anti-infective agents.
The ability to rapidly identify the specific microorganisms involved in disease
is becoming increasingly important and complex, providing challenges and
opportunities for infectious disease testing. Highly sophisticated and versatile
methods are needed to identify a larger and more diverse list of pathogens,
including variants with drug resistant characteristics. It is anticipated that
nucleic acid tests incorporating such methods will be part of the fastest
growing segment of the $20 billion in vitro diagnostic global market.
In September 1999, we entered into a strategic alliance with bioMerieux to
develop, manufacture and sell in vitro pathogen diagnostics for human clinical
and industrial applications. A privately held company based in France,
bioMerieux is one of the top 10 diagnostics companies in the world and the
leader in the field of microbiology. The total amount of research and
development funding approximates $5.2 million for the four-year term of this
agreement. As of December 31, 2001, we had received payments of $3.4 million and
have rights to receive future milestone payments and royalties based upon
successful commercialization of diagnostic products.
Chronic Human Disease Alliances
-------------------------------
Osteoporosis
Osteoporosis is a major health problem characterized by low bone mass that
affects more than 200 million people worldwide and approximately one-third of
post-menopausal women. In the U.S. alone, osteoporosis contributes to more than
1.5 million bone fractures per year. Estimated direct expenditures in the United
States for osteoporosis and associated fractures are $13.8 billion. Twin and
family studies suggest a strong genetic component to the disease. Under a
collaboration with Creighton University of Omaha, Nebraska, we have gained
access to data from related individuals identified by Creighton who exhibit high
bone mass. We believe the identification of genes regulating bone density and
disease progression will lead to the discovery of novel drugs for treating
osteoporosis by increasing bone mass, as well as the development of diagnostic
tests.
In December 1999, we formed an alliance with Wyeth-Ayerst to develop drugs
to treat osteoporosis based on our genetic research. Wyeth-Ayerst is a leader in
the field of women's health with a broad array of products, including
Premarin(R), a leading estrogen replacement therapy. As of December 31, 2001, we
had received payments of $8.1 million under this alliance and have rights to
receive, subject to the achievement of milestones, up to a total of $118.0
million in license fees, milestone payments and research support, as well as
royalties on sales of any products developed. Under this alliance, we are
carrying out functional studies to confirm the identity of target genes. During
2001, the research phase of this alliance was extended through December 31,
2002. This program has recently entered high-throughput screening.
Asthma
Asthma affects over 155 million people worldwide according to the World
Health Organization and the incidence appears to be rising dramatically. In the
United States, the incidence has doubled over the past two decades and affects
approximately 4% to 10% of the United States population. The annual care
associated with the disease exceeds $15.0 billion in direct and indirect costs.
Published research suggests that multiple genetic factors as well as
environmental influences play a role in the disease. We believe that the asthma
genes that we have identified will facilitate the development of superior
diagnostics and novel drugs.
In December 1996, we formed an alliance with Schering-Plough to use our
disease gene identification strategies to identify genes involved in the
development of asthma. Schering-Plough has extended our alliance through
December 2002. Schering-Plough is a leader in the field of allergy and
respiratory care products, with products such as Afrin(R) nasal spray, the
leading product in the
7
branded nasal spray market, and the Claritin(R) line of antihistamines, which
generated $3.1 billion of sales in 2000. As of December 31, 2001, we had
received payments of $38.5 million under this alliance and have rights to
receive, based on attainment of milestones an additional $42.5 million of
payments as well as potential royalties. During 2001, we used our proprietary
genomics tools, bioinformatics and high-throughput sequencing to discover two
genes associated with asthma. These genes have been transferred to
Schering-Plough for further drug discovery efforts. This program has advanced
into high-throughput screening.
Arqule Joint Venture
In October, 2000, we formed a new joint venture with ArQule, Inc. The joint
venture, which replaced an earlier 1998 collaboration agreement, includes a
significantly increased commitment of shared, dedicated scientific and technical
resources from both companies and includes joint ownership rights to all lead
compounds and commercial outcomes that result from this effort. The joint
venture is focused on the discovery and development of novel, small molecule,
broad-spectrum antibacterials.
The venture combines our validated targets, assays and compound profiling
capabilities with ArQule's Parallel TrackTM Drug Discovery platform. Under the
terms of the agreement, we will contribute a number of proprietary validated
targets and ArQule will contribute its compound libraries and medicinal
chemistry capabilities. Both companies are involved in screening efforts. It is
anticipated that we will develop compounds through early clinical testing and
then make a decision on a potential partnership with a larger pharmaceutical
company.
To date, 12 targets have been screened, several chemical series are
undergoing further characterization and four (4) promising lead candidates from
two (2) chemoptypes have been tested in vivo.
Internal Drug Discovery
Bacterial and Fungal Infections
We continue to invest in developing targets and downstream discovery
capabilities in bacterial and fungal infections. These efforts are focused in
three program areas:
Essential Microbial Targets - We are seeking to discover both broad and narrow
---------------------------
spectrum anti-microbial agents. We are mining the sequence information contained
in our PathoGenomeTM Database to identify genes that are conserved in a broad or
narrow spectrum of pathogens. We concentrate on conserved microbial genes that
have low homology with human genes to decrease risk of toxicity in man. Using
our proprietary functional genomics technology, our scientists have been able to
discover among these conserved genes, genes that are essential for the survival
of pathogenic organisms. Thus, our gene discovery approach generates validated
essential microbial targets that possess both selectivity and specificity, which
are ideal attributes for drug intervention. These targets serve as the basis for
our internal drug discovery efforts. In this regard, we have drawn upon our
strengths in microbial genetics to develop both biochemical and cell based
assays for these targets for use in our high-throughput screening platform. In
addition, we continue to build internal capabilities through the acquisition of
novel compound libraries. We anticipate that these efforts will lead to the
further growth of our own infectious disease franchise. We may enter into
alliances with other companies to engage in the development, commercialization
and marketing of leads identified through this program.
Biofilms - A biofilm is a structured community of bacterial cells enclosed in a
--------
self-produced polymeric matrix and adherent to an inert or living surface.
Biofilms constitute a protected mode of growth that allow survival in a hostile
environment. The Centers for Disease Control has estimated that up to 65% of the
infections treated by physicians in the developed world are caused by organisms
growing in this protected mode of growth. Bacterial biofilms are inherently
resistant to antibiotics. Among the approximately 5 million Central Venous
Catheter (CVCs) and pulmonary arterial catheters (Swan-Ganz) placed in the US
per year, as many as 10% of these lines become infected, resulting in about
200,000 to 400,000 episodes of catheter-related bloodstream infections.
Discovering how biofilm formation and detachment are controlled may open the way
to new anti-microbial therapeutic strategies that may become more important than
agents designed to kill bacterial cells. We are applying our microbial genomics
and functional genomics platforms to identify genes involved in biofilm
formation, maturation and degradation. After further validation, genes will
progress to high-throughput screening to identify lead candidates for further
development.
Chronic Human Diseases
8
We have developed an integrated suite of technologies, tools and data
management and analysis capabilities to discover genes associated with human
disease. We have developed sophisticated techniques for evaluating families
whose members suffer from diseases with a significant inherited component. Our
scientists carefully characterize human phenotypes and develop linkage maps to
discover genes associated with human disease. Our human disease drug discovery
platform uses a well developed yeast-2 hybrid capability, bioinformatics and
microarrays to elucidate the protein pathways of the genes we discover. This
approach enables us to find multiple targets for screening. Our asthma alliance
advanced into high throughput screening during the last 12 months.
We plan to continue to invest in our human gene discovery program. We are
evaluating a number of families who are affected by chronic diseases with a
strong inherited component. By gaining access to these families and analyzing
their history and their genetics, we are able to discover disease-associated
genes. Additionally, we continue to invest in functional genomics technologies
to help determine gene function.
We plan to continue to partner all of our programs in human diseases with
major pharmaceutical companies. These companies have the biological and disease
expertise, the clinical development capabilities and the sales and marketing
infrastructure required to discover and develop new drugs in these areas.
GENOMEVISON(TM) SERVICES
------------------------
In addition to our drug discovery programs, we have built a successful
service business for genomics-based research that provides industrial scale,
high quality a) library construction; b) customized sequencing services; c)
confirmation sequencing; d) project finishing, assembly and annotation; e) SNP
discovery and screening; and, f) quality control testing & validation to
pharmaceutical companies, biotechnology companies, and research institutions on
a contract basis. Since the launch of these services in July 1999, we have
entered into many contracts with pharmaceutical and biotechnology companies and
other research institutions, in addition to our longstanding work in the United
States government's genomics programs.
We have extensive experience in high-throughput sequencing with a
substantial production staff and a highly automated sequencing center operating
twenty-four hours per day, seven days per week. The U.S. government recognized
the quality of our sequencing work by naming us as one of ten U.S. centers for
the Human Genome Project and one of two primary centers for the Rat Genome
Sequencing Program. We were the only commercial entity selected for the Human
Genome Project.
National Human Genome Research Institute
In July 1999, the U.S. government named us one of five NIH funded DNA
sequencing centers in the U.S. for the international Human Genome Project. The
government based the award on a peer review process that evaluated our
industrial scale sequencing facility for production capacity, cost effectiveness
and quality standards. We are the only commercial entity to have been chosen to
participate in the project. We will receive funding from the NHGRI of up to
$17.4 million through February 2003, of which all funds have been appropriated.
In October 1999, the U.S. government named us as one of ten initial centers
in the Mouse Genome Sequencing Network. The government based the award on a peer
review process that evaluated our industrial scale sequencing facility for
production capacity, cost effectiveness and quality standards. The NHGRI agreed
to provide us with funding of up to $13.4 million through February 2003, of
which all funds have been appropriated. In August 2000, we were named as one of
two primary centers for the Rat Genome Sequencing Program and agreed to switch
its research focus from the Mouse Program to the Rat Program. Remaining funds
from the Mouse Program, as well as a portion of the remaining funds from the
Human Genome Project, are being redirected to the Rat Genome Sequencing Program.
Under both these research contracts, the U.S. government has ownership
rights to the data, clones, genes and other material derived from material
furnished to us by the government. We have ownership rights in other inventions
that we develop on our own under the contracts.
PathoGenome(TM) Database
In 1997, we introduced to the market the PathoGenome Database, a database
consisting of proprietary and publicly available genetic information from over
thirty microbial organisms, including organisms responsible for the most
prevalent bacterial infections. The PathoGenome Database provides subscribers
with non-exclusive access to a large volume of highly organized and functionally
annotated sequence information related to some of the most medically important
microbial organisms and fungi. We initially designed
9
the PathoGenome Database to be accessed at the client site using our proprietary
bioinformatics software. It enables researchers to search for new genes among
multiple pathogens and cross-reference genomic information for the development
of new anti-infective products.
Our Technology
We have created an integrated high quality platform of drug discovery
technologies. This platform includes high quality, industrial scale gene
sequencing and sequence finishing, bioinformatics, functional genomics
technologies, assay development, high throughput screening and compound
profiling.
High-Throughput Gene Sequencing
We have developed a high-quality, industrial scale process for gene
sequencing. Our GenomeVision(TM) Services utilize a fully automated process that
makes use of DNA sequencing instruments and computers to sequence and analyze
genes. We maintain high quality standards for all steps of our sequencing
process by strictly controlling the quality of the raw data generated. Using our
technology, we have sequenced and continue to sequence the genomes of bacterial
and fungal pathogens and various regions of the human, rat and other genomes. We
were the only commercial company that participated in the Human Genome Project.
Sequence Finishing
Finishing is the final step to organizing the genomic data once the majority
of the sequence information has been generated. Finishing is necessary because
the individual clones sequenced contain small, randomly selected fragments of
the complete genome. We assemble these fragments using sophisticated proprietary
computer software that identifies overlapping regions and arranges the fragments
into large contiguous regions. We also employ a directed sequencing approach in
order to specifically target and obtain sequences for the missing regions to
facilitate completion of the full genome sequence. We have developed a
proprietary finishing platform that utilizes integrated computational and
biochemical approaches to specify the required quality of the end-product
sequence and then directs the process to achieve the desired quality level. As a
result of our emphasis on quality, we currently have a finished data accuracy of
99.99%.
Bioinformatics
Vast amounts of data result from DNA sequencing, finishing, microarray and
other genomic technologies that we employ. In order to determine the biological
significance and function of the genomic data that we compile, it must be
organized, managed, and analyzed. Bioinformatics involves the use of computers,
software, and databases to track, process, store, retrieve and analyze data
generated by genomic research. We were one of the first companies to develop a
significant bioinformatics capability due to our early work in large-scale
genetic linkage and sequence analysis. A central focus of our current
bioinformatics program is the development of an integrated genomic and
functional genomic data management platform to strengthen and accelerate our
gene and drug discovery programs. The objective of our bioinformatics program is
to accelerate the discovery of genes and the determination of their function.
Functional Genomics
Functional genomics is the process of assigning biochemical functions and
disease roles to genes. In the target discovery and validation stages of our
pharmaceutical and diagnostic programs, functional genomics confirms that
specific gene targets are appropriate for the development of pharmaceutical,
vaccine, or diagnostic products. We have developed a number of technologies to
accelerate the functional analysis of important disease genes, including gene
expression, micro arrays, protein-protein interaction technologies and gene
knockouts. When we combine our expertise in bioinformatics with these
technologies, we bridge the gap between gene discovery and drug discovery.
High Throughput Screening & Compound Libraries
We have built a high-throughput screening capability to test compounds
against validated targets. Our screening technologies allow us to develop
biochemical and cell-based screening assays and screen. The output of each
screen is captured in our central database using our chemoinformatics tools. We
have built a diverse compound library of over 80,000 compounds acquired from
commercial sources. We use cheminformatics to select compounds based on their
diversity and several "drug-like" properties. During
10
2001, our first full year of operation, we screened our libraries against
multiple targets generating over 2.2 million datapoints.
Patents and Proprietary Technology
Our ultimate commercial success depends in part on our ability to obtain
intellectual property protection on our methods, technologies and discoveries,
including genes, proteins encoded by genes, patentable human single nucleotide
polymorphisms (SNPs), haplotypes or products based on genes or our proprietary
gene technology. To that end, our policy is to protect our proprietary
technology primarily through patents, in spite of the fact that the current
criteria for obtaining patent protection for partially sequenced genes and for
genes are unclear. Our current strategy is to apply for patent protection upon
the identification of a novel gene or novel gene fragment and pursue claims to
these gene sequences as well as equivalent sequences, such as substantially
homologous or orthologous sequences. If at the time of filing a patent
application we have not characterized the biological function of a gene or gene
fragment we supplement our patent filing as soon as additional biological
function information about such gene or gene fragment becomes available.
We have filed patent applications and will continue to do so with respect to
a number of full-length genes and corresponding proteins and partial genes
resulting from our pathogens program. Along with our collaborators, we file
foreign counterparts of these U.S. applications within the appropriate time
frames. Our patent applications seek to protect these full length and partial
gene sequences and corresponding proteins, as well as equivalent sequences, and
products derived from and uses of these sequences.
There have been, and continue to be, intensive discussions on the scope of
patent protection for gene fragments, single nucleotide polymorphisms, and
full-length genes. In 1996, the U.S. Patent and Trademark Office issued
guidelines limiting the number of nucleic acid sequences that can be covered in
a single patent application. In addition, the U.S. courts continue to redefine
and narrow the enforceable scope of claims to genes, gene fragments, SNPs, and
proteins. The U.S. PTO also issued new Utility Guidelines that address the
requirements for demonstrating utility, particularly in inventions relating to
human therapeutics, and Written Description guidelines that address the amount
of disclosure required to support claims to nucleotide sequences. Consequently,
we continually must assess our patent applications to determine those that we
can support for prosecution.
While the guidelines do not require clinical efficacy data for issuance of
patents for human therapeutics, the guidelines have been in effect for only a
short period of time and it is possible that the U.S. PTO may interpret them in
a way that could delay or adversely affect our ability or the ability of our
collaborators to obtain patent protection. The biotechnology patent situation
outside the United States is even more uncertain and is currently undergoing
review and revision in many countries.
We are free to apply for patents on the results of our research conducted
with government funds. Under the government grants, subject to the limitations
described below, we have exclusive ownership rights to any commercial
applications of inventions that we first reduce to practice under the grants,
including all gene discoveries and technology improvements created or
discovered. We are under an obligation under some of the government grants to
submit sequencing data resulting from the research to public databases within 24
hours from the date we generate such data and materials. The governmental grants
also restrict us from applying for blanket patents on large numbers of human or
mouse genes. In addition, the government has a statutory right to practice or
permit others to practice inventions that we first reduce to practice under a
government grant or contract. In addition, under our government research
contracts, the government has ownership rights in the data, clones, genes and
other material derived from the material the government furnished to us.
The patent positions of biotechnology and pharmaceutical companies are
generally uncertain and involve complex legal and factual issues. No assurance
can be given that any patent issued to or licensed by us or our collaborators
will provide protection that has commercial significance. We cannot assure that:
. our patents will afford protection against competitors with similar
compounds or technologies
. our patent applications will issue
. others will not obtain patents having claims similar to the claims in our
patents or applications
. the patents of others will not have an adverse effect on our ability to do
business or
. the patents issued to or licensed by us will not be infringed, challenged,
opposed, narrowed, invalidated or circumvented
11
Moreover, we believe that obtaining foreign patents may, in some cases, be
more difficult than obtaining domestic patents because of differences in patent
laws. We also recognize that our patent position may generally be stronger in
the U.S. than abroad.
In particular, we are aware that companies have published patent
applications relating to nucleic acids encoding several H. pylori proteins and,
in other disease programs, relating to genes for which we have found mutations
of interest. If these companies are issued patents, their patents may limit our
ability and the ability of our collaborators to practice under any patents that
may be issued to us. Because of this, our collaborators or we may not be able to
obtain a patent with respect to the genes of H. pylori. Further, the value of
certain other patents issued to us or our collaborators that are the subject of
other collaborations may be limited. Also, even if a patent were issued to our
collaborators, or us, the scope of coverage or protection afforded to such
patent may be limited.
We also rely upon trademarks, unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain our competitive position. We generally protect this information with
confidentiality agreements that provide that all confidential information
developed or made known to others during the course of the employment,
consulting or business relationship shall be kept confidential except in
specified circumstances. Agreements with employees provide that all inventions
conceived by the individual while employed by us are our exclusive property. We
cannot guarantee, however, that these agreements will be honored, that we will
have adequate remedies for breach if they are not honored or that our trade
secrets will not otherwise become known or be independently discovered by
competitors.
Competition
The biotechnology industry generally, and our human genetics and pathogen
genetics and drug discovery and development programs specifically, are
characterized by rapidly evolving technology and intense competition. Our
competitors include pharmaceutical and biotechnology companies both in the
United States and abroad.
In addition, universities and other non-profit research institutions and
United States and foreign government-sponsored entities are conducting
significant research to identify and sequence genes. These entities are becoming
more aggressive in their pursuit of patent protections and licensing
arrangements. Many of these institutions and other consortia, such as the SNP
Consortium, are also working to make large amounts of genetic information
publicly available, shrinking the pool of information available for proprietary
protection.
Many of our competitors have greater research and product development
capabilities and financial, scientific, marketing and human resources than we
do, and some competitors' human genome programs are more advanced than our
program. Therefore, our competitors may succeed in identifying or sequencing
genes or developing products earlier, in obtaining authorization from the FDA
for products more rapidly and in developing products that are more effective
than those proposed by our collaborators or us. Any potential products based on
genes that we identify will face competition both from companies developing
gene-based products and from companies developing other forms of diagnosis or
treatment for the particular diseases.
Accordingly, competition with respect to our technologies and product
candidates is and will be based on, among other things:
. our ability to create and maintain advanced technology
. the speed with which we can identify and characterize the genes involved
in human diseases
. our ability to rapidly sequence the genomes of selected pathogens
. our ability and our partners' ability to develop and commercialize
therapeutic, vaccine and diagnostic products based upon our gene
discoveries
. our ability to attract and retain qualified personnel
. our ability to obtain patent protection
. our ability to develop proprietary technology or processes
. our ability to secure sufficient capital resources to fund our research
operations
. our ability to successfully manage the clinical development and
registration of our product
12
We also face increasing competition for strategic alliances with leading
pharmaceutical and biotechnology companies. We cannot be certain that we will be
able to obtain such strategic alliances in the future or that we will be able to
obtain them on terms comparable with existing alliances. Competition among
genetics companies is also increasing for access to unique data from related
individuals that we employ to identify genes for specific human diseases. We
also face increasing competition for in-licensing opportunities with leading
pharmaceutical and biotechnology companies. We cannot be certain that we will be
able to in-license product opportunities in the future.
Our competitive position will also depend upon our ability to attract and
retain qualified personnel, to obtain patent protection or otherwise develop
proprietary product or processes, and to secure sufficient capital resources for
the often-substantial period between technological conception and commercial
sales. Competitive disadvantages in any of these areas could materially harm our
business and financial condition.
Government Regulation
Regulation by governmental entities in the United States and other countries
will be a significant factor in the development, manufacturing and marketing of
any products that our collaborators or we develop. The extent to which such
regulation may apply to our collaborators or us will vary depending on the
nature of the product. Virtually all of our or our collaborators' pharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, the FDA in the United States and similar
health authorities in foreign countries subject human therapeutic and vaccine
products to rigorous preclinical and clinical testing and other approval
procedures. Various federal and, in some cases, state statutes and regulations
also govern or influence the manufacturing, safety, labeling, storage, record
keeping and marketing of human therapeutic and vaccine products. Obtaining these
approvals and complying with appropriate federal and foreign statutes and
regulations requires a substantial amount of time and financial resources.
The FDA regulates human therapeutic products in one of three broad
categories: drugs, biologics, or medical devices. Our most advanced product,
Ramoplanin, will be regulated by the Center for Drug Evaluation and Research
(CDER). Products discovered based on our technologies could potentially fall
into all three categories. The FDA generally requires the following steps for
pre-market approval of a new drug or biological product:
. preclinical laboratory and animal tests
. submission to the FDA of an investigational new drug application, or IND,
which must become effective before clinical trials may begin
. adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product for its intended indication
. submission to the FDA of a marketing application; a new drug application,
or NDA, if the FDA classifies the product as a new drug; or a biologics
license application, or BLA, if the FDA classifies the product as biologic
. FDA review of the marketing application and NDA or BLA in order to
determine, among other things, whether the product is safe and effective
for its intended uses
Our collaborators or we also may develop diagnostic products based upon the
human or pathogen genes that we identify. We believe that the FDA is likely to
regulate these diagnostic products as devices rather than drugs or biologics.
The nature of the FDA requirements applicable to diagnostic devices depends on
how the FDA classifies the diagnostic devices. The FDA most likely will classify
a diagnostic device that our collaborators or we develop as a Class III device,
requiring pre-market approval. Obtaining pre-market approval involves the
following process, which may be costly and time-consuming:
. conducting pre-clinical studies
. obtaining an investigational device exemption to conduct clinical tests
. conducting clinical trials
. filing a pre-market approval application
. attaining FDA approval
13
Products on the market are subject to continual review by the FDA;
therefore, subsequent discovery of previously unknown problems, or failure to
comply with the applicable regulatory requirements may result in restricted
marketing or withdrawal of the product from the market and possible civil or
criminal sanctions. The FDA also may subject biologic products to batch
certification and lot release requirements. To the extent that any of our
products involve recombinant DNA technology, additional layers of government
regulation and review are possible. Similarly, there are additional regulatory
requirements for products marketed outside the United States governing the
conduct of clinical trials, product licensing, pricing and reimbursement.
Manufacturing and Marketing
We do not expect to manufacture pharmaceutical products in the near term.
The terms of our agreement for Ramoplanin obligate the licensor, Biosearch
Italia SpA. to manufacture the bulk drug. We are responsible for the manufacture
of the finished dosage form for the United States and Canada. We currently use a
contract manufacturer to produce Ramoplanin for our clinical trial program. We
plan to also use a contract manufacturer to produce the final dosage to support
product sales. In the event we decide to establish a manufacturing facility of
our own, we will require substantial additional funds and will need to hire and
train significant additional personnel and will need to comply with the
extensive "good manufacturing practice" regulations applicable to such a
facility. In addition, if the FDA regulated any products produced at our
facility as biologics, we would need to file and obtain approval of an
Establishment License Application for our facility.
Our current plan is to market and sell Ramoplanin through our own sales and
marketing organization. We may, at a later date, determine that the commercial
success of Ramoplanin will benefit from the additional resources from a
pharmaceutical marketing partner would provide. We currently do not have the
resources to market by ourselves, but fully expect to assemble a sales and
marketing organization at the appropriate time.
Factors That May Affect Results
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements. Those factors include, without limitation, those set forth
throughout this Annual Report on Form 10-K, including the risks detailed in
Exhibit 99.1 to this Annual Report on Form 10-K.
Human Resources
As of December 31, 2001, we had 204 full-time equivalent employees; of which
167 of these employees engaged in research and development activities and 37 of
them conducted general and administrative functions. Forty-four of our employees
hold Ph.D. degrees and 50 more hold other advanced degrees.
None of our employees is covered by a collective bargaining agreement, and
we consider our relations with our employees to be good.
Facilities
Our executive offices and laboratories are located at 100 Beaver Street,
Waltham, Massachusetts. We lease approximately 80,000 square feet of space and
our lease expires on November 15, 2006 with options to extend for two
consecutive five-year periods. During 2001, we incurred aggregate rental costs,
excluding maintenance and utilities, for our facility of approximately
$1,007,000.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission Of Matters to a Vote of Security Holders
None.
14
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Our common stock is traded on the Nasdaq National Market System (ticker
symbol "GENE"). The table below sets forth the range of high and low quotations
for each fiscal quarter during 2001 and 2000 as furnished by the National
Association of Securities Dealers Quotation System.
2001 2000
---- ----
High Low High Low
------ ----- ------ -----
First Quarter................................................. $ 11.690 $ 4.750 $ 75.380 $12.880
Second Quarter................................................ 16.900 4.781 39.000 12.060
Third Quarter................................................. 15.450 4.010 34.500 18.130
Fourth Quarter................................................ 8.390 5.450 21.440 6.630
As of March 27, 2002, there were approximately 1,018 shareholders of record
of our common stock.
We have not paid any dividends since our inception and presently anticipate
that all earnings, if any, will be retained for development of our business and
that no dividends on our common stock will be declared in the foreseeable
future. Any future dividends will be subject to the discretion of our Board of
Directors and will depend upon, among other things, future earnings, the
operating and financial condition of the Company, our capital requirements and
general business conditions.
ITEM 6. Selected Consolidated Financial Data
For the Year Ended December 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
-------------- ------------- ------------- ------------- --------------
Revenues:
BioPharmaceutical $ 11,132,294 $ 18,135,038 $ 18,162,056 $ 11,851,091 $ 18,438,286
GenomeVision(TM) Services 3,300,881 3,913,376 6,665,529 13,594,143 17,302,239
-------------------------------------------------------------------------
Total revenues 14,433,175 22,048,414 24,827,585 25,445,234 35,740,525
Net loss................................ (16,031,795) (12,967,676) (3,940,075) (5,846,839) (10,090,302)
Net loss per common share............... (0.90) (0.71) (0.21) (0.27) (0.45)
Weighted average common shares outstanding 17,771,824 18,289,644 18,627,045 21,376,685 22,572,427
As of December 31,
-------------------------------------------------------------------------
Cash and cash equivalents,
restricted cash, warrant and long
and short-term investments............ $ 44,492,461 $ 30,816,859 $ 26,778,026 $ 73,009,887 $ 67,341,249
Working capital......................... 31,298,804 19,749,608 19,447,189 51,601,069 44,156,478
Total assets............................ 61,230,003 48,920,973 45,443,236 90,251,004 82,739,598
Shareholders' equity.................... 40,089,689 27,557,237 28,846,957 72,687,452 66,731,938
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
We are a biopharmaceutical company focused on the discovery and development
of pharmaceutical and diagnostic products. We have eight established product
development programs. Our lead product candidate, Ramoplanin, is in Phase III
clinical trials for the prevention of bloodstream infections caused by
vancomycin-resistant enterococci (VRE). We have six alliances with
pharmaceutical companies including Schering-Plough, AstraZeneca, Wyeth-Ayerst
and bioMerieux, and a joint venture with ArQule. In addition to these eight
projects, we have a portfolio of earlier stage internal drug discovery
programs. We also maintain an active service business, GenomeVision(TM)
Services, providing drug discovery services to pharmaceutical and biotechnology
companies and to the National Human Genome Research Institute.
We receive payments under our bioPharmaceutical business from our product
discovery alliances based on license fees, contract
15
research and milestone payments during the term of the alliance. We also
receive payments under our GenomeVision Services business from selling, as a
contract service business, high quality genomic sequencing information to our
customers, including pharmaceutical companies, biotechnology companies,
governmental agencies, and academic institutions. In addition, under our
GenomeVision Services business, subscribers to our PathoGenome(TM) Database pay
access fees for the information they obtain. We anticipate that our alliances
will result in the discovery and commercialization of novel pharmaceutical,
vaccine and diagnostic products. In order for a product to be commercialized
based on our research, it will be necessary for our product discovery partner
to conduct preclinical tests and clinical trials, obtain regulatory clearances,
manufacture, sell, and distribute the product. Accordingly, we do not expect to
receive royalties based upon product revenues for many years, if at all.
Our primary sources of revenue are from alliance agreements with
pharmaceutical company partners, subscription agreements to our PathoGenome
Database and government research grants and contracts. Currently, we have six
product discovery alliances and one joint venture, of which we currently receive
contract research funding from three of these alliances. In August 1995, we
entered into an alliance with AstraZeneca to develop pharmaceutical, vaccine and
diagnostic products effective against gastrointestinal infections or any other
disease caused by H. pylori. In August 1999, the contract research under the
alliance concluded and the program transitioned into AstraZeneca's pipeline. We
are entitled to receive additional milestone payments and royalties based upon
the development by AstraZeneca of any products from the research alliance. In
December 1995, we entered into an alliance with Schering-Plough. Under this
alliance, Schering-Plough can use our Staph. aureus genomic database to identify
new gene targets for the development of novel antibiotics. As of December 31,
2001, we had substantively completed our research obligations under this
alliance and had turned over validated drug targets and assays to
Schering-Plough for high-throughput screening. In December 1996, we entered into
our second research alliance with Schering-Plough to identify genes and
associated proteins that Schering-Plough can utilize to develop new
pharmaceuticals for treating asthma. In September 1997, we established our third
research alliance with Schering-Plough for the development of new pharmaceutical
products to treat fungal infections. As of December 31, 2001, we had
substantively completed our research obligations under this alliance and had
turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. In September 1999, we entered into a strategic
alliance with bioMerieux to develop, manufacture and sell in vitro pathogen
diagnostic products for human clinical and industrial applications. As part of
the strategic alliance, bioMerieux has purchased a subscription to our
PathoGenome Database and has made an equity investment. In December 1999, we
entered into a strategic alliance with Wyeth-Ayerst to develop drugs based on
our genetic research to treat osteoporosis. In September 2000, we entered into a
joint venture with ArQule, Inc. to identify novel anti-infective drug compounds.
In May 1997, we introduced our PathoGenome Database and sold our first
subscription. Since that date, we have continued to contract with subscribers
on a non-exclusive basis, and, as of December 31, 2001, we had seven
subscribers. Under our agreements, the subscribers receive non-exclusive
access to information relating to microbial organisms in our PathoGenome
Database. Subscriptions to the database generate revenue over the term of the
subscription with the potential for royalty payments to us from future product
sales. We do expect to see a revenue decline in subscription fees over the next
two years as subscribers substantially complete data mining of PathoGenome.
Since 1989, the United States government has awarded us a number of
research grants and contracts related to government genomics programs. The scope
of the research covered by grants and contracts encompasses technology
development, sequencing production, technology automation, and disease gene
identification. These programs strengthen our genomics technology base and
enhance the expertise of our scientific personnel. In July 1999, we were named
as one of the nationally funded DNA sequencing centers of the international
Human Genome Project. We are entitled to receive funding from the National Human
Genome Research Institute (NHGRI) of up to $17.4 million through February 2003,
of which all funds have been appropriated and $12.0 million had been received
through December 31, 2001. In October 1999, the NHGRI named us as a pilot center
to the Mouse Genome Sequencing Network. We are entitled to receive $13.4 million
in funding over forty-one months with respect to this agreement, of which all
funds have been appropriated and $10.4 million had been received through
December 31, 2001. In August 2000, we were named one of two primary centers for
the Rat Sequencing Program from NHGRI. As part of the agreement, we will use
remaining funding under the mouse award, as well as a portion of the remaining
funding under the human award, to participate in this rat genome initiative.
In October 2001, we acquired an exclusive license in the United States and
Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A
(Biosearch). We will assume responsibility for the product development in the
United States of Ramoplanin, currently in Phase III clinical trials. The
agreement provides us with exclusive rights to develop and market oral
Ramoplanin in the U.S. and Canada. Biosearch will retain all other rights to
market and sell Ramoplanin. In addition, we are obligated to purchase bulk
material from Biosearch and fund the completion of clinical trials, purchase
bulk material, and pay a royalty on product sales. The combined total of bulk
product purchases and royalties is expected to be approximately 26% of our net
product sales.
16
We have incurred significant operating losses since our inception. As of
December 31, 2001, we had an accumulated deficit of approximately $82.1
million. Our losses are primarily from costs associated with prior operating
businesses and research and development expenses. These costs have often
exceeded our revenues generated by our alliances, subscription agreements and
government grants. Our results of operations have fluctuated from period to
period and may continue to fluctuate in the future based upon the timing,
amount and type of funding. We expect to incur additional operating losses in
the future.
We are subject to risks common to companies in our industry including
unproven technology and business strategy, reliance upon collaborative partners
and others, uncertainty of regulatory approval, uncertainty of pharmaceutical
pricing, rapid technological change, history of operating losses, need for
future capital, competition, patent and proprietary rights, dependence on key
personnel, healthcare reform and related matters, availability of, and
competition for, unique family resources, and volatility of our stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible
Assets and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. SFAS No. 142 addresses
how intangible assets that are acquired should be accounted for in financial
statements upon their acquisition and also how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Beginning on January 1, 2002, with the adoption of SFAS
No. 142, goodwill and certain purchased intangibles existing on June 30, 2001,
will no longer be subject to amortization over their estimated useful life.
Rather, the goodwill and certain purchased intangibles will be subject to an
assessment for impairment based on fair value. The provisions of SFAS No. 142
are required to be applied starting with fiscal years beginning after December
15, 2001. SFAS No. 143 establishes accounting standards for the recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assets and requires recognition of a liability for an asset
retirement obligation in the period in which it is occurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The adotption of SFAS
No. 142 did not have a material impact on the Company's financial position or
results of operations. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supercedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Under this Statement, it is required that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early adoption permitted. The Company does not expect the adoption
of this Statement to have a material impact on its financial position or
results of operations.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that reporting companies discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one that is important to the portrayal of a
company's financial condition and operating results and requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
this and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements of this Annual Report on Form 10-K. The Company's
preparation of this Annual Report on Form 10-K requires it to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of its financial
statements, and assurance that actual results will not differ from those
estimates.
Revenue Recognition
BioPharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical
17
companies. GenomeVision Services are revenues from government grants, fees
received from custom gene sequencing and analysis services and subscription fees
from the PathoGenome Database. Revenues from contract research, government
grants, the PathoGenome Database subscription fees, and custom gene sequencing
and analysis services are recognized over the respective contract periods as the
services are provided. License fees and milestone payments are recognized as
earned in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition. Milestone payments will be recognized upon achievements of the
milestone as long as the milestone is deemed to be substantive and we have no
other performance obligations related to the milestone. Unbilled costs and fees
represent revenue recognized prior to billing. Deferred revenue represents
amounts received prior to revenue recognition.
Clinical Trial Estimates
Our clinical development trials related to Ramoplanin are primarily
performed by outside parties. It is not unusual at the end of each accounting
period to estimate both the total cost of the trials and the percent completed
as of that accounting date. We then need to adjust our estimates when final
invoices are received. To date, these adjustments have not been material to our
financial statements, and we believe that the estimates that we made as of
December 31, 2001 are reflective of the actual expenses incurred as of that
date. However, readers should be cautioned that the possibility exists that the
timing or cost of certain trials might be longer or shorter and cost more or
less than we have estimated and that the associated financial adjustments would
be reflected in future periods.
Results of Operations
Years Ended December 31, 2000 and 2001
Revenues
Total revenues increased 40% from $25,445,000 in 2000 to $35,741,000 in
2001. BioPharmaceutical revenue increased 56% from $11,851,000 in 2000 to
$18,438,000 in 2001 primarily due to increased milestone payments under our
product discovery alliances with Wyeth-Ayerst and Schering-Plough.
Revenue from GenomeVision Services increased 27% from $13,594,000 in 2000
to $17,302,000 in 2001 due to increased revenue recognized under our commercial
sequencing business of approximately $935,000, as well as increased revenue
recognized under our government grants with the National Human Genome Research
Institute to participate in the Human Genome and Mouse (Rat) Genome sequencing
projects of approximately $3,175,000.
Costs and Expenses
Total costs and expenses increased 45% from $33,780,000 in 2000 to
$48,978,000 in 2001. Cost of services increased 39% from $11,715,000 in 2000 to
$16,153,000 in 2001 primarily due to increased costs and expenses associated
with the increase in GenomeVision Services revenue, as mentioned above. The
increase consisted primarily of higher labor and material costs.
Research and development expenses include internal research and
development, research funded pursuant to arrangements with our strategic
alliance partners, as well as clinical development costs and expenses. Research
and development expenses increased 58% from $15,191,000 in 2000 to $24,058,000
to 2001. This planned increase was primarily due to the acquisition and clinical
development of Ramoplanin of approximately $5,549,000, as well as increased
investment in our internal drug discovery programs, specifically in the area of
anti-infectives and chronic human diseases of $4,138,000.
Selling, general and administrative expenses increased 28% from $6,875,000
in 2000 to $8,767,000 in 2001 reflecting an expansion in the areas of corporate
development, sales and marketing and clinical development administrative
expenses. The increase consisted of an increase in payroll and related expenses,
as well as recruiting and consulting expenses.
Interest Income and Expense
Interest income increased 15% from $3,331,000 in 2000 to $3,839,000 in 2001
reflecting an increase in funds available for investment as a result of (i)
proceeds received from the sale of common stock through a public offering in
2000 and 2001, (ii) proceeds received from the exercise of stock options, and
(iii) proceeds received from our employee stock purchase plan.
18
Interest expense decreased 18% from $843,000 in 2000 to $692,000 in 2001.
The decrease was due to a decrease in our outstanding balances under long-term
obligations from approximately $7.8 million at December 31, 2000 to $5.6
million at December 31, 2001.
Years Ended December 31, 1999 and 2000
Revenues
Total revenues increased slightly by 2% from $24,828,000 in 1999 to
$25,445,000 in 2000. BioPharmaceutical revenue decreased 35% from $18,162,000 in
1999 to $11,851,000 in 2000 primarily due to decreased contract research revenue
and milestone payments under our product discovery alliances.
Revenue from GenomeVision Services increased 104% from $6,665,000 in 1999
to $13,594,000 in 2000 primarily due to increased revenue recognized under our
commercial sequencing business of approximately $691,000, as well as increased
revenue recognized under our government grants with the National Human Genome
Research Institute to participate in the Human Genome and Mouse (Rat) Genome
sequencing projects of approximately $6,779,000.
Costs and Expenses
Total costs and expenses increased 15% from $29,389,000 in 1999 to
$33,780,000 in 2000. Cost of services increased 157% from $4,560,000 in 1999 to
$11,715,000 in 2000 primarily due to increased costs and expenses associated
with the increase in GenomeVision Services revenue, as mentioned above. The
increase consisted primarily of higher labor and material costs.
Research and development expenses include internal research and
development, research funded pursuant to arrangements with our strategic
alliance partners, as well as clinical development costs and expenses. Research
and development expenses decreased 25% from $20,376,000 in 1999 to $15,191,000
to 2000. This reduction in research and development expenses was primarily
attributable to a decline in our internal drug discovery programs and research
funded under our product discovery alliances during 2000.
Selling, general and administrative expenses increased 54% from $4,453,000
in 1999 to $6,875,000 in 2000 primarily due to increases in payroll and related
expenses, non-cash charges related to the issuance of stock options and
restricted stock awards, as well as increased shareholder communication expenses
caused by an expanded shareholder base.
Interest Income and Expense
Interest income increased 124% from $1,488,000 in 1999 to $3,331,000 in
2000 reflecting primarily an increase in funds available for investment as a
result of (i) proceeds received from the sale of common stock through a public
offering in 2000, (ii) proceeds received from the exercise of stock options, and
(iii) proceeds received from our employee stock purchase plan.
Interest expense decreased 3% from $867,000 in 1999 to $843,000 in 2000.
The decrease was due to a decrease in our outstanding balances under long-term
obligations from approximately $8.9 million at December 31, 1999 to $7.8 million
at December 31, 2000.
Liquidity and Capital Resources
Our primary sources of cash have been payments received from product
discovery alliances, subscription fees, government grants, borrowings under
equipment lending facilities and capital leases and proceeds from sale of equity
securities.
As of December 31, 2001, we had cash, cash equivalents, restricted cash and
short-term and long-term investments of approximately $67,341,000. In 2001, we
sold 127,500 shares of common stock in a series of transactions through the
Nasdaq National Market, resulting in proceeds received of approximately
$1,706,000, net of issuance costs. In 2001, we also issued 352,950 shares of
common stock related to the exercise of stock options and our employee stock
purchase plan, resulting in proceeds received of approximately $1,204,000. In
2000, we sold 1,500,000 shares of common stock in a series of transactions
through the Nasdaq National Market, resulting in proceeds received of
approximately $44,723,000, net of issuance costs. In 2000, we issued 1,288,943
shares of common stock related to the exercise of stock options and our employee
stock purchase plan, resulting in proceeds received of approximately $3,528,000.
19
In 1999, we also sold 678,610 shares of common stock to bioMerieux, a product
discovery partner, resulting in proceeds received of approximately $3,732,000,
net of issuance costs. In 1999, we also issued 472,459 shares of common stock
related to the exercise of stock options, resulting in proceeds received of
approximately $1,235,000.
We received payments of approximately $18,087,000, $17,399,000 and
$22,866,000 in 2001, 2000 and 1999, respectively, from our product discovery
partners consisting of up-front license fees, contract research funding,
subscription fee, milestone payments and expense reimbursement.
We had various arrangements under which we financed certain office and
laboratory equipment and leasehold improvements. We had an aggregate of
approximately $5,632,000 outstanding under our borrowing arrangements at
December 31, 2001. This amount is repayable over the next 34 months, of which
$3,572,000 is repayable over the next 12 months. Under these arrangements, we
are required to maintain certain financial ratios, including minimum levels of
tangible net worth, total indebtedness to tangible net worth, minimum cash
level, debt service coverage and minimum restricted cash balances. We had no
additional borrowing capacity under these capital lease agreements at December
31, 2001. In February 2002, we entered into an additional line of credit for
$3,500,000, of which $500,000 will be used to refinance a portion of the
existing line of credit and the remaining $3,000,0000 to be used to finance
office and laboratory equipment.
Our operating activities used cash of approximately $3,091,000 in 2001
primarily due to an increase in our net loss and prepaid expenses and other
assets, as well as a decrease in deferred revenue. These uses of cash were
partially offset by a decrease in interest receivable, accounts receivable and
unbilled costs and fees, as well as an increase in accounts payables and accrued
liabilities. Our operating activities provided cash of approximately $3,011,000
in 2000 and used cash of approximately $1,616,000 in 1999.
Our investing activities provided cash of approximately $20,017,000 in 2001
through the conversion of marketable securities to cash and cash equivalents,
partially offset by purchases of marketable securities, equipment and additions
to leasehold. Our investing activities used cash of approximately $45,568,000
and $2,467,000 in 2000 and 1999, respectively, to purchase marketable
securities, equipment and additions to leasehold, partially offset the
conversion of marketable securities to cash and cash equivalents.
Capital expenditures totaled $3,706,000 during 2001 consisting of leasehold
improvements and purchases of laboratory, computer, and office equipment. We
utilized existing capital lease and equipment financing arrangements to finance
the majority of these capital expenditures. We currently estimate that we will
acquire approximately $5,000,000 in capital equipment in 2002 consisting of
primarily computers, laboratory equipment, and additions to leasehold
improvement, which we intend to finance the majority of theses purchases under
new financing arrangements.
Financing activities used cash of approximately $2,217,000 and $205,000 in
2001 and 1999, respectively, primarily for payments of long-term obligations,
partially offset by proceeds received from the sale of equity securities,
exercise of stock options, and employee stock purchase plan. Financing
activities provided cash of approximately $43,636,000 in 2000 primarily from
proceeds received from the sale of equity securities, exercise of stock
options, and employee stock purchase plan, net of payments of long-term
obligations.
At December 31, 2001, we had net operating loss and tax credits (investment
and research) carryforwards of approximately $93,767,000 and $6,642,000,
respectively, available to reduce federal taxable income and federal income
taxes, respectively, if any. Net operating loss carryforwards are subject to
review and possible adjustment by the Internal Revenue Service and may be
limited, in the event of certain cumulative changes in ownership interests of
significant shareholders over a three-year period in excess of 50%.
Additionally, certain of these losses are expiring due to the limitations of
the carryforward period.
We believe that our existing capital resources are adequate for
approximately two years under our current rate of investment in research and
development. There is no assurance, however, that changes in our plans or events
affecting our operations will not result in accelerated, or unexpected
expenditures.
On March 6, 2002, we sold convertible debentures to two institutional
investors in a private placement transaction, raising $15 million in gross
proceeds. The debentures may be converted into shares of our common stock at the
option of the holder, at a price of $8.00 per share, subject to certain
adjustments. The maturity date of the debentures is December 31, 2004, provided,
that if any time on or after December 31, 2003 the Company maintains a net cash
balance (i.e., cash and cash equivalents less obligations for borrowed money
bearing interest) of less than $35 million, then the holders of the debentures
can require that all or any part of the outstanding principal balance of the
notes plus all accrued but unpaid interest be repaid. Interest on the debentures
accrues at 6% annually. The investors also received warrants to purchase up to
487,500 shares of common stock at an exercise price of $8.00 per share, subject
to certain adjustments. The warrants only become exercisable to the extent the
debentures are converted or if certain other redemptions or repayments of the
debentures occur.
We plan to continue to invest in our internal research and development
programs, including our lead candidate, Ramoplanin, currently in Phase III
clinical development. We expect to incur $15-20 million in Phase III clinical
development expenditures through the end of 2002.
We expect to seek additional funding in the future through public or
private financing. Additional financing may not be available when needed, or if
available, it may not be on terms acceptable to us. To the extent that we raise
additional capital by issuing equity or convertible debt securities, ownership
dilution to stockholders will result.
In 2000, we entered into two separate interest-rate-swap agreements with a
bank aggregating approximately $1,900,000. Under these agreements, we pay a
fixed rate of 8.78% and receives a variable rate tied to the one month LIBOR
rate. As of
20
December 31, 2001, the variable rate was 3.83%. These swap agreements meet the
required criteria, as defined in SFAS No. 133 to use special hedge accounting,
and we have recorded an unrealized loss of $30,830 at December 31, 2001, through
other comprehensive income, for the change in the fair value of the swap
agreements. At February 28, 2002, this debt had been paid off in its entirety
and the interest-rate-swap agreements expired.
We generally place our marketable security investments in high quality
credit instruments, as specified in our investment policy guidelines; the
policy also limits the amount of credit exposure to any one issue, issuer, and
type of instrument. We do not expect any material loss from our marketable
security investments and therefore believe that our potential interest rate
exposure is limited.
This Form 10-K and documents we have filed with the Securities and Exchange
Commission contain forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements represent our management's judgment regarding future
events. Forward-looking statements typically are identified by use of terms
such as "may," "will," "should," "plan," "expect," "intend," "anticipate,"
"estimate," and similar words, although some forward-looking statements are
expressed differently. All forward-looking statements, other than statements of
historical fact, included in this report regarding our financial position,
business strategy and plans or objectives for future operations are
forward-looking statements. We cannot guarantee the accuracy of the
forward-looking statements, nor do we plan to update these forward-looking
statements. You should be aware that our actual results could differ materially
from those contained in the forward looking statements due to a number of risks
affecting our business, including our ability and the ability of our alliance
partners to (i) successfully develop products based on the Company's genomics
information, (ii) obtain the necessary governmental approvals, (iii)
effectively commercialize any products developed before our competitors and
(iv) obtain and enforce intellectual property rights, as well as the risk
factors set forth in this Annual Report on Form 10-K and those set forth in
other filings that we may make with the Securities and Exchange commission from
time to time.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by Item 8 are set
forth at the pages indicated in Item 14(a) below.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None
PART III
Pursuant to General Instruction G(3) to Form 10K, the information required
for Part III (Items 10, 11, 12, and 13) is incorporated herein by reference
from the Company's proxy statement for the Annual Meeting of Shareholders to be
held on June 25, 2002.
21
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See
"Index to Consolidated Financial Statements and Financial Statement Schedules"
appearing on page F-1.
(3) Exhibits
Exhibit
No. Description
-------- -----------
3 Restated Articles of Organization and By laws /(1)/
3.1 Amendment dated January 5, 1982 to Restated Articles of Organization /(2)/
3.2 Amendment dated January 24, 1983 to Restated Articles of Organization /(3)/
3.3 Amendment dated January 17, 1984 to Restated Articles of Organization /(4)/
3.4 Amendment dated October 20, 1987 to the By-laws /(8)/
3.5 Amendment dated December 9, 1987 to Restated Articles of Organization /(9)/
3.6 Amendment dated October 16, 1989 to the By-law /(11)/
3.7 Amendment dated January 24, 1994 to Articles Restated Articles of Organization /(14)/
3.8 Amendment dated August 31, 1994 to Restated Articles of Organization /(14)/
3.9 Amendment dated March 15, 2001 to Restated Articles of Organization /(33)/
3.10 By-Laws of Genome Therapeutics Corp (as amended through July 24, 2001) /(34)/
4.2 Form of Note dated March 5, 2002 received by Smithfield Fiduciary LLC and the Tail Wind Fund, Ltd. /(35)/
4.3 Form of Warrant received by Smithfield Fiduciary LLC and The Tail Wind Fund, Ltd. /(35)/
10.4 Incentive Stock Option Plan and Form of Stock Option Certificate /(1)/
10.6 Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings Plan /(6)/
10.7 Amendment dated November 4, 1986 to the Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings
Plan dated March 1, 1985 /(7)/
10.14 1991 Stock Option Plan and Form of Stock Option Certificate /(12)/
10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts /(13)/
10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts /(13)/
10.19 Employment Agreement with Robert J. Hennessey /(13)/
10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA /(14)/
10.24 1993 Stock Option Plan and Form of Stock Option Certificate /(14)/
10.28 Agreement between the Company and AstraZeneca PLC (f/k/a Astra Hassle AB) dated August 31, 1995 /(16)/*
10.29 Collaboration and License Agreement between the Company, Schering Corporation and Schering-Plough Ltd., dated as of
December 6, 1995 /(18)/*
10.30 Form of director Stock Option Agreement and schedule of director options granted /(17)/
10.37 Lease amendment dated November 15, 1996 to certain property in Waltham, MA /(19)/
10.38 Collaboration and License Agreement between the Company, Schering Corporation and Schering-Plough Ltd., dated as of
December 20, 1996 /(20)/*
10.39 Credit agreement between the Company and Fleet National Bank dated February 28, 1997 /(21)/
10.40 Credit agreement between the Company and U S Trust (f/k/a Sumitomo Bank, Limited) dated July 31, 1997 /(22)/
10.41 Collaboration and License Agreement between the Company and Schering Corporation, dated September 22, 1997 /(23)/*
10.42 Collaboration and License Agreement between the Company and Schering-Plough Ltd. dated September 22, 1997 /(23)/*
10.43 Credit modification agreement between the Company and Fleet National Bank, dated March 9, 1998 /(24)/
22
10.44 1997 Directors' Deferred Stock Plan /(25)/
10.45 1997 Stock Option Plan /(25)/
10.46 Amended Employment Agreement with Robert J. Hennessey /(26)/
10.47 Collaboration and License Agreement between the Company and American Home Products, Inc., acting through its
Wyeth-Ayerst Division, dated December 20, 1999 /(27)/
10.49 Collaboration and License Agreement between Genome Therapeutics Corporation and bioMerieux Incorporated dated as of
September 30, 1999 /(29)/
10.50 Registration Rights Agreement between the Company and bioMerieux Alliance sa dated September 30, 1999 /(30)/
10.51 Compound Discovery Collaboration Agreement, dated October 17, 2000 between the Company and ArQule, Inc* /(31)/
10.52 2001 Incentive Plan /(32)/
10.53 Stock Option Agreements with Steven M. Rauscher /(32)/
10.55 Employment Letter with Steven M. Rauscher /(34)/
10.56 Employment Letter with Stephen Cohen /(34)/
10.57 Employment Letter with Richard Labaudinere PhD /(34)/
10.58 Purchase Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund, Ltd. and the Company
/(35)/
10.59 Registration Rights Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund, Ltd. and the
Company /(35)/
10.60 Employment Letter with Robert J. Hennessey /(36)/
10.61 License and Supply Agreement between the Company and Biosearch Italia, S.P.A., dated October 8, 2001 /(36)/*
23. Consent of Arthur Andersen LLP Independent Public Accounts /(36)/
99.1 Risk Factors /(36)/
99.2 Letter to Commission Pursuant to Temporary Note 3T /(36)/
----------
* Confidential treatment requested with respect to a portion of this Exhibit.
FOOTNOTES
/(1)/ Filed as exhibits to the Company's Registration Statement on Form S-1
(No. 2-75230) and incorporated herein by reference.
/(2)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 27, 1982 and incorporated herein by
reference.
/(3)/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 26, 1983 and incorporated herein by
reference.
/(4)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 25, 1984 and incorporated herein by
reference.
/(6)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1985 and incorporated herein by reference.
23
/(7)/ Filed as exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1986 and incorporated herein by
reference.
/(8)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended August 31, 1987 and incorporated herein by
reference.
/(9)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 28, 1987 and incorporated herein by
reference.
/(11)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1989 and incorporated herein by reference.
/(12)/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1992 and incorporated herein by reference.
/(13)/ Filed as exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 and incorporated herein by reference.
/(14)/ Filed as exhibits of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994 and incorporated herein by reference.
/(16)/ Filed as an exhibit to the Company's Annual Report on Form 10-K/A3 for
the year ended August 31, 1995 and incorporated herein by reference.
/(17)/ Filed as an exhibit to the Company Registration Statement on Forms S-8
(File No. 33-61191) and incorporated herein by reference.
/(18)/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 25, 1995 and incorporated herein by
reference.
/(19)/ Filed as an exhibit to the Company's 10-K for fiscal year ended August
31, 1996 and incorporated herein by reference.
/(20)/ Filed as an exhibit to the Company's 10-Q/A for the quarter ended March
1, 1997 and incorporated herein by reference.
/(21)/ Filed as an exhibit to the Company's 10-Q for the quarter ended May 31,
1997 and incorporated herein by reference.
/(22)/ Filed as an exhibit to the Company's 10-K for fiscal year ended August
31, 1997 and incorporated herein by reference.
/(23)/ Filed as exhibits to the Company's 10-Q for the quarter ended February
28, 1998 and incorporated herein by reference.
/(24)/ Filed as an exhibit to the Company's 10-Q for the quarter ended May 30,
1998 and incorporated herein by reference.
/(25)/ Filed as exhibits to the Company's Registration Statement on Forms S-8
(333-49069) and incorporated herein by reference.
/(26)/ Filed as an exhibit to the Company's 10-K for fiscal year ended August
31, 1998 and incorporated herein by reference.
/(27)/ Filed as an exhibit to the Company's 8-K filed on March 8, 2000 and
incorporated herein by reference.
/(29)/ Filed as an exhibit to the Company's 10-Q for the quarter ended
November 27, 1999 and incorporated herein by reference.
/(30)/ Filed as an exhibit to the Company's Registration Statement on Form S-3
(file No 333-32614) and incorporated herein by reference.
/(31)/ Filed as an exhibit to the Company's 10-Q for the quarter ended
November 25, 2000 and incorporated herein by reference.
/(32)/ Filed as exhibit to the Company's Registration Statement on Form S-8
(333-58274) and incorporated herein by reference..
24
/(33)/ Filed as an exhibit to the Company's 10-Q for the quarter ended
February 24, 2001 and incorporated herein by reference.
/(34)/ Filed as an exhibit to the Company's 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference.
/(35)/ Filed as an exhibit to the Company's 8-K filed on March 6, 2002 and
incorporated herein by reference.
/(36)/ Filed herewith.
25
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001.................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001...................... F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years
Ended December 31, 1999, 2000 and 2001....................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001...................... F-6
Notes to Consolidated Financial Statements...................................................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genome Therapeutics Corp.:
We have audited the accompanying consolidated balance sheets of Genome
Therapeutics Corp. and subsidiary (the Company) as of December 31, 2000 and
2001, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genome
Therapeutics Corp. and subsidiary as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 28, 2002
F-2
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
2000 2001
---------------------------------
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 10,095,817 $ 24,805,385
Short-term investments (held-to-maturity)................................. 51,743,917 29,961,540
Interest receivable....................................................... 1,466,808 1,074,726
Accounts receivable....................................................... 827,106 513,885
Unbilled costs and fees................................................... 796,072 164,465
Prepaid expenses and other current assets................................. 900,547 1,583,320
---------------------------------
Total current assets............................................... 65,830,267 58,103,321
=================================
Property and Equipment, at cost:
Laboratory and scientific equipment....................................... 18,823,063 20,918,535
Leasehold improvements.................................................... 8,302,308 8,798,842
Equipment and furniture................................................... 1,134,320 1,267,854
---------------------------------
28,259,691 30,985,231
Less--Accumulated depreciation............................................ 15,225,148 19,091,703
---------------------------------
13,034,543 11,893,528
Restricted Cash (Note 2).................................................... 200,000 200,000
Long-term Investments (held-to-maturity).................................... 10,970,153 11,839,045
Warrant (available-for-sale)................................................ -- 535,279
Other Assets................................................................ 216,041 168,425
---------------------------------
$ 90,251,004 $ 82,739,598
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............................... $ 4,499,696 $ 3,571,578
Accounts payable.......................................................... 1,296,511 2,092,593
Accrued expenses.......................................................... 3,712,757 4,832,713
Deferred revenue.......................................................... 4,720,234 3,449,959
---------------------------------
Total current liabilities.......................................... 14,229,198 13,946,843
Long-term Obligations, net of current maturities............................ 3,334,354 2,060,817
Commitments (Note 4)
Shareholders' Equity:
Common stock, $0.10 par value --
Authorized -- 50,000,000 shares
Issued and outstanding -- 22,288,658 and 22,772,170
shares at December 31, 2000 and 2001, respectively.................... 2,228,866 2,277,217
Additional paid-in capital................................................ 143,018,548 146,509,995
Accumulated deficit....................................................... (71,963,333) (82,053,635)
Deferred compensation and note receivable from officer (Note 6(e))........ (596,629) (506,088)
Accumulated other comprehensive income.................................... -- 504,449
---------------------------------
Total shareholders' equity......................................... 72,687,452 66,731,938
---------------------------------
$ 90,251,004 $ 82,739,598
=================================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
1999 2000 2001
--------------------------------------------
Revenues:
BioPharmaceutical........................................................ $ 18,162,056 $ 11,851,091 $ 18,438,286
GenomeVision(TM) services................................................ 6,665,529 13,594,143 17,302,239
--------------------------------------------
Total revenues 24,827,585 25,445,234 35,740,525
============================================
Costs and Expenses:
Cost of services......................................................... 4,559,588 11,714,955 16,152,707
Research and development................................................. 20,376,271 15,190,531 24,057,760
Selling, general and administrative...................................... 4,453,252 6,874,579 8,767,229
--------------------------------------------
Total costs and expenses......................................... 29,389,111 33,780,065 48,977,696
--------------------------------------------
Loss from operations...................................... (4,561,526) (8,334,831) (13,237,171)
============================================
Interest Income (Expense):
Interest income.......................................................... 1,488,250 3,330,625 3,839,260
Interest expense......................................................... (866,799) (842,633) (692,391)
--------------------------------------------
Net interest income.............................................. 621,451 2,487,992 3,146,869
--------------------------------------------
Net loss.................................................. $ (3,940,075) $ (5,846,839) $(10,090,302)
============================================
Net Loss per Common Share:
Basic and diluted........................................................ $ (0.21) $ (0.27) $ (0.45)
============================================
Weighted Average Common Shares
Outstanding:
Basic and diluted........................................................ 18,627,045 21,376,685 22,572,427
============================================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock Additional
$0.10 Paid-In Accumulated
Shares Par Value Capital Deficit
--------------------------------------------------------
Balance, December 31, 1998........... 18,348,646 $1,834,865 $88,029,084 $(62,176,419)
Sale of common stock, net of
issuance costs of $17,885........... 678,610 67,861 3,664,254 --
Exercise of stock options............ 472,459 47,245 1,187,509 --
Deferred compensation from grant of
stock options....................... -- -- 1,366,574 --
Amortization of deferred
compensation and other stock-based
compensation expense................ -- -- -- --
Reversal of deferred compensation
related to cancellation of stock
options............................. -- -- (119,494) --
Compensation expense related to
grant of stock options.............. -- -- 3,464 --
Net loss............................. -- -- -- (3,940,075)
--------------------------------------------------------
Balance, December 31, 1999........... 19,499,715 1,949,971 94,131,391 (66,116,494)
========================================================
Sale of common stock, net of
issuance costs of $718,066.......... 1,500,000 150,000 44,572,729 --
Exercise of stock options............ 1,280,612 128,062 3,184,327 --
Issuance of stock under employee
stock purchase plan................. 8,331 833 214,723 --
Deferred compensation from grant of
stock options....................... -- -- 1,377,161 --
Amortization of deferred
compensation and other stock-based
compensation expense................ -- -- -- --
Reversal of deferred compensation
related to cancellation of stock
options............................. -- -- (461,783) --
Net loss............................. -- -- -- (5,846,839)
--------------------------------------------------------
Balance, December 31, 2000........... 22,288,658 2,228,866 143,018,548 (71,963,333)
========================================================
Sale of common stock, net of issuance
costs of $44,622.................... 127,500 12,750 1,693,017 --
Exercise of stock options............ 251,354 25,135 736,584 --
Issuance of stock under employee
stock purchase plan................. 74,596 7,460 434,410 --
Issuance of restricted common stock
and loan to officer (Note 6e)....... 24,000 2,400 (2,400) --
Deferred compensation from grant of
stock options....................... -- -- 647,942 --
Issuance of stock under directors
deferred stock plan................. 6,062 606 (606) --
Amortization of deferred
compensation and other stock
based compensation expense.......... -- -- -- --
Reversal of deferred compensation
related to cancellation of stock
options............................. -- -- (17,500) --
Unrealized gain on long-term
investment (available for sale).....
Unrealized loss on derivative
instruments.........................
Net loss............................. -- -- -- (10,090,302)
--------------------------------------------------------
Balance, December 31, 2001........... 22,772,170 $ 2,277,217 $ 146,509,995 $ (82,053,635)
========================================================
Deferred
Compensation
&
Note Accumulated
Receivable Other Total
From Comprehensive Shareholders' Comprehensive
Officer Income Equity Income
-------------------------------------------------------------
Balance, December 31, 1998........... $ (130,293) -- $ 27,557,237
Sale of common stock, net of
issuance costs of $17,885........... -- -- 3,732,115
Exercise of stock options............ -- -- 1,234,754
Deferred compensation from grant of
stock options....................... (1,366,574) -- --
Amortization of deferred
compensation and other stock-based
compensation expense................ 259,462 -- 259,462
Reversal of deferred compensation
related to cancellation of stock
options............................. 119,494 -- --
Compensation expense related to
grant of stock options.............. -- -- 3,464
Net loss............................. -- -- (3,940,075) (3,940,075)
-------------------------------------------------------------
Balance, December 31, 1999........... (1,117,911) -- 28,846,957 (3,940,075)
=============================================================
Sale of common stock, net of
issuance costs of $718,066.......... -- -- 44,722,729
Exercise of stock options............ -- -- 3,312,389
Issuance of stock under employee
stock purchase plan................. -- 215,556
Deferred compensation from grant of
stock options....................... (1,377,161) -- --
Amortization of deferred
compensation and other stock-based
compensation expense................ 1,436,660 -- 1,436,660
Reversal of deferred compensation
related to cancellation of stock
options............................. 461,783 -- --
Net loss............................. -- -- (5,846,839) (5,846,839)
-------------------------------------------------------------
Balance, December 31, 2000........... (596,629) -- 72,687,452 (5,846,839)
=============================================================
Sale of common stock, net of issuance
costs of $44,622.................... -- -- 1,705,767
Exercise of stock options............ -- -- 761,719
Issuance of stock under employee
stock purchase plan................. -- -- 441,870
Issuance of restricted common stock
and loan to officer (Note 6e)....... (163,000) -- (163,000)
Deferred compensation from grant of
stock options....................... (647,942) -- --
Issuance of stock under directors
deferred stock plan................. -- -- --
Amortization of deferred
compensation and other stock
based compensation expense.......... 883,983 -- 883,983
Reversal of deferred compensation
related to cancellation of stock
options............................. 17,500 -- --
Unrealized gain on long-term
investment (available for sale)..... 535,279 535,279 535,279
Unrealized loss on derivative
instruments......................... (30,830) (30,830) (30,830)
Net loss............................. -- -- (10,090,302) $(10,090,302)
-------------------------------------------------------------
Balance, December 31, 2001........... $ (506,088) $ 504,449 $ 66,731,938 $ (9,585,853)
=============================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1999 2000 2001
------------- -------------- ---------------
Cash Flows from Operating Activities:
Net loss................................................................ $ (3,940,075) $(5,846,839) $(10,090,302)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities-
Depreciation and amortization......................................... 3,973,001 4,471,722 4,807,379
Loss on disposal of equipment and leasehold improvements.............. 362,534 665,207 39,355
Amortization of deferred compensation................................. 262,926 1,436,660 883,983
Changes in assets and liabilities-
Interest receivable................................................. (274,095) (612,005) 392,082
Accounts receivable................................................. (806,527) (10,787) 313,221
Unbilled costs and fees............................................. (317,216) 1,220,195 631,607
Prepaid expenses and other current assets........................... (34,174) (323,730) (682,773)
Accounts payable.................................................... 210,409 305,954 796,082
Accrued expenses.................................................... (46,230) 1,049,809 1,089,126
Deferred revenue.................................................... (1,006,212) 654,545 (1,270,275)
--------------------------------------------
Net cash (used in) provided by operating activities.............. (1,615,659) 3,010,731 (3,090,515)
--------------------------------------------
Cash Flows from Investing Activities:
Purchases of investments................................................ (23,129,394) (69,013,466) (47,526,465)
Proceeds from sale of investments....................................... 22,880,646 23,860,411 68,439,950
Purchases of property and equipment..................................... (2,514,394) (460,835) (944,278)
Decrease in other assets................................................ 296,372 46,167 47,616
--------------------------------------------
Net cash (used in) provided by investing activities.............. (2,466,770) (45,567,723) 20,016,823
--------------------------------------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock...................................... 3,732,115 44,722,729 1,705,767
Proceeds from exercise of stock options................................. 1,234,754 3,312,389 761,719
Proceeds from issuance of stock under the employee stock purchase plan.. -- 215,556 441,870
Note receivable from officer............................................ (120,000) 120,000 (163,000)
Payments on long-term obligations....................................... (5,052,021) (4,734,876) (4,963,096)
--------------------------------------------
Net cash (used in) provided by financing activities.............. (205,152) 43,635,798 (2,216,740)
--------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents...................... (4,287,581) 1,078,806 14,709,568
Cash and Cash Equivalents, beginning of year.............................. 13,304,592 9,017,011 10,095,817
--------------------------------------------
Cash and Cash Equivalents, end of year.................................... $9,017,011 $10,095,817 $24,805,385
--------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year........................................... $866,800 $842,633 $692,391
--------------------------------------------
Income taxes paid during the year....................................... $31,800 $8,231 $60,000
--------------------------------------------
Supplemental Disclosure of Noncash Investing and Financing Activities:
Equipment acquired under capital leases................................. $1,126,597 $3,691,840 $2,761,441
--------------------------------------------
Unrealized gain on warrant.............................................. -- -- $535,279
--------------------------------------------
Unrealized loss on derivative instruments............................... -- -- (30,830)
--------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GENOME THERAPEUTICS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Genome Therapeutics Corp. and subsidiary (the Company) is a
biopharmaceutical company focused on the discovery and development of
pharmaceutical and diagnostic products. The Company has eight established
product development programs. The Company's lead product candidate, Ramoplanin,
is in Phase III clinical trials for the prevention of bloodstream infections
caused by vancomycin-resistant enterococci (VRE). The Company has six alliances
with pharmaceutical companies including Schering-Plough, AstraZeneca,
Wyeth-Ayerst and bioMerieux, and a joint venture with ArQule. In addition to
these eight projects, the Company has a portfolio of earlier stage internal drug
discovery programs. The Company also maintains an active service business,
GenomeVision(TM) Services, providing drug discovery services to pharmaceutical
and biotechnology companies and to the National Human Genome Research Institute.
The accompanying consolidated financial statements reflect the application
of certain accounting policies, as described in this note and elsewhere in the
accompanying notes to the consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Collaborative Securities Corp. (a
Massachusetts Securities Corporation). All intercompany accounts and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
BioPharmaceutical revenues consist of license fees, contract research and
milestone payments from alliances with pharmaceutical companies. GenomeVision
Services are revenues from government grants, fees received from custom gene
sequencing and analysis services and subscription fees from the PathoGenome(TM)
Database. Revenues from contract research, government grants, the PathoGenome
Database subscription fees, and custom gene sequencing and analysis services are
recognized over the respective contract periods as the services are provided.
License fees and milestone payments are recognized as earned in accordance with
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments
will be recognized upon achievements of the milestone as long as the milestone
is deemed to be substantive and the Company has no other performance obligations
related to the milestone. Unbilled costs and fees represent revenue recognized
prior to billing. Deferred revenue represents amounts received prior to revenue
recognition.
(c) Property and Equipment
Property and equipment, including leasehold improvements, are depreciated
over their estimated useful lives using the straight-line method. The estimated
useful life for leasehold improvements is the lesser of the term of the lease or
the estimated useful life of the assets. The majority of the Company's equipment
and leasehold improvements are financed through bank lines of credit.
-------------------------------------------------------
Estimated
Useful Life
-------------------------------------------------------
Laboratory Equipment 5 Years
-------------------------------------------------------
Computer Equipment & Licenses 3 Years
-------------------------------------------------------
Office Equipment 5 Years
-------------------------------------------------------
Furniture & Fixtures 5 Years
-------------------------------------------------------
F-7
(d) Net Loss Per Share
Basic and diluted earnings per share were determined by dividing net loss
by the weighted average shares outstanding during the period. Diluted loss per
share is the same as basic loss per share for all periods presented, as the
effect of the potential common stock is antidilutive. Antidilutive securities
which consist of stock options, directors' deferred stock and unvested
restricted stock that are not included in diluted net loss per share were
3,762,856, 3,320,113 and 3,773,990 shares at December 31, 1999, 2000 and 2001,
respectively.
(e) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. At December 31, 2001, the Company had entered into two interest-
rate-swap agreements with a bank. The Company has no other off-balance-sheet or
concentrations of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company maintains its cash
and cash equivalents and investment balances with several nonaffiliated
institutions.
The Company maintains reserves for the potential write-off of accounts
receivable. To date, the Company has not written off any significant accounts.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and their aggregate percentage of
the Company's total revenues:
Number of Percentage of
Significant Total Revenues
Customers A B C
----------- ------ ------- -----
Year ended December 31,
1999..................... 1 71% 9% -
2000..................... 2 35% 36% -
2001..................... 3 31% 36% 18%
The following table summarizes the number of customers that individually
comprise greater than 10% of total accounts receivable and their aggregate
percentage of the Company's total accounts receivable:
Percentage of
Total Accounts Receivable
---------------------------------------
B D E F G H I
- - - - - - -
At December 31,
1999.................. - 11% 31% - - 35% 18%
2000.................. 87% - - - - - -
2001.................. - - - 37% 29% - -
(f) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Financial Instruments
The estimated fair value of the Company's financial instruments, which
includes cash and cash equivalents, short-term and long-term investments,
accounts receivable, accounts payable and long-term debt, approximates the
carrying values of these instruments.
(h) Derivative Instruments and Hedging Activities
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, in 2001. SFAS
F-8
No. 133 establishes standards for accounting and reporting derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. To manage the Company's exposure to
movements in interest rates on its variable rate debt, the Company entered into
two interest-rate-swap agreements. See Note 5 for further discussion.
(i) Reclassifications
The Company has reclassified certain prior-year information to conform with
the current year's presentation.
(j) Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires disclosure of all components of comprehensive income (loss) on
an annual and interim basis. Comprehensive income (loss) is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. At December 31, 2001, the
Company recorded approximately $535,000 to comprehensive income related to the
value of a warrant and ($35,000) to comprehensive loss related to two
interest-rate-swap agreements. See Notes 2 and 5 for further discussion.
(k) Segment Reporting
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making group, in
making decisions as to how to allocate resources and assess performance. The
Company's chief decision makers, as defined under SFAS No. 131, are the chief
executive officer and chief financial officer. To date, the Company has viewed
its operations and manages its business as principally two operating segments:
GenomeVision Services and BioPharmaceutical. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's two operating segments. All of the
Company's revenues are generated in the United States and all assets are located
in the United States.
GenomeVision(TM)
Services BioPharmaceutical Total
-----------------------------------------------------------------
1999
Revenues $ 6,665,529 $ 18,162,056 $ 24,827,585
Gross profit 2,105,941 7,083,332 9,189,273
Company-funded research & development -- 9,297,547 9,297,547
2000
Revenues $ 13,594,143 $ 11,851,091 $ 25,445,234
Gross profit 1,879,188 3,715,045 5,594,233
Company-funded research & development -- 7,054,485 7,054,485
2001
Revenues $ 17,302,239 $ 18,438,286 $ 35,740,525
Gross profit 1,149,532 11,122,807 12,272,339
Company-funded research & development -- 16,742,281 16,742,281
The Company does not allocate assets by its operating segments.
(l) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combination, SFAS No. 142, Goodwill and Other Intangible
Assets and SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. SFAS No. 142 addresses
how intangible assets that are acquired should be accounted for in financial
statements upon their acquisition and also how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
F-9
Beginning on January 1, 2002, with the adoption of SFAS No. 142, goodwill
and certain purchased intangibles existing on June 30, 2001, will no longer be
subject to amortization over their estimated useful life. Rather, the goodwill
and certain purchased intangibles will be subject to an assessment for
impairment based on fair value. The provisions of SFAS No. 142 are required to
be applied starting with fiscal years beginning after December 15, 2001. SFAS
No. 143 establishes accounting standards for the recognition and measurement of
legal obligations associated with the retirement of tangible long-lived assets
and requires recognition of a liability for an asset retirement obligation in
the period in which it is occurred. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 142 did not have a
material impact on the Company's financial position or results of operations.
The adoption of SFAS No. 143 is not expected to have a material impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under this
Statement, it is required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company does not expect the adoption of this Statement to have a material
impact on its financial position or results of operations.
(2) CASH EQUIVALENTS AND INVESTMENTS
The Company applies the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 2000 and 2001, the
Company's investments include short-term and long-term investments which are
classified as held-to-maturity, as the Company has the positive intent and
ability to hold these securities to maturity. Cash equivalents are short-term,
highly liquid investments with original maturities of 90 days or less. The
Company's short-term and long-term investments include marketable securities
with original maturities of greater than 90 days. Cash equivalents are carried
at cost, which approximates market value, and consist of debt securities.
Short-term and long-term investments are recorded at amortized cost, which
approximates market value and consist of commercial paper and U.S. government
debt securities. The average maturity of the Company's investments is
approximately 7.5 months at December 31, 2001. At December 31, 2001, the Company
had an unrealized gain of approximately $442,000, which is the difference
between the amortized cost and the market value of the held to maturity
investments.
The Company's investments also include a warrant to purchase 45,000 shares
of common stock from Versicor, Inc. which was received in connection with its
collaboration agreement with Versicor, Inc. dated March 10, 1997. The warrant
was immediately vested and is exercisable through March 10, 2002. The Company is
accounting for the warrant in accordance with SFAS No. 115 as an "available for
sale security" and as a result, the warrant is record at fair value. Upon
exercise, the shares received will be restricted and as a result the Company
will not be able to liquidate its position in the shares for at least one year.
At December 31, 2001, the Company had recorded an unrealized gain of $535,000 in
other comprehensive income in its consolidated statements of shareholders'
equity related to the appreciation in value of the warrant.
At December 31, 2000 and 2001, the Company's cash and cash equivalents and
investments consisted of the following:
2000 2001
--------------------------
Cash and Cash Equivalents:
Cash............................................ $ 9,245,817 $ 21,801,201
Debt securities................................. 850,000 3,004,184
--------------------------
Total cash and cash equivalents........ $ 10,095,817 $ 24,805,385
--------------------------
Investments:
Short-term investments ......................... $ 51,743,917 $ 29,961,540
Long-term investments .......................... $ 10,970,153 $ 11,839,045
Warrant -- 535,279
--------------------------
Total investments...................... $ 62,714,070 $ 42,335,864
--------------------------
The Company also has $200,000 in restricted cash at December 31, 2000 and
2001 in connection with certain capital lease obligations (see Note 5).
(3) INCOME TAXES
F-10
The Company applies SFAS No. 109, Accounting for Income Taxes, which
requires the Company to recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse. SFAS No.
109 requires deferred tax assets and liabilities to be adjusted when the tax
rates or other provisions of the income tax laws change.
At December 31, 2001, the Company had net operating loss and tax credit
carryforwards of approximately $93,767,000 and $6,642,000, respectively,
available to reduce federal taxable income and federal income taxes,
respectively, if any. Net operating loss and tax credit carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in the ownership
interest of significant shareholders over a three-year period in excess of 50%.
The net operating loss and tax credit carryforwards expire approximately as
follows:
Investment
Net Operating Research Tax Tax
Loss Credit Credit
Expiration Date Carryforwards Carryforwards Carryforwards
--------------- ------------- ------------- -------------
2002............... $ 2,254,000 $ -- $ --
2003............... 697,000 -- --
2004............... 2,702,000 -- --
2005............... 1,456,000 80,000 --
2006--2021......... 86,658,000 6,525,000 37,000
---------------------------------------------
$ 93,767,000 $ 6,605,000 $ 37,000
---------------------------------------------
The components of the Company's net deferred tax asset at the respective
dates are as follows:
December 31,
----------------------------
2000 2001
------------- -------------
Net operating loss carryforwards...... $ 36,538,000 $ 37,265,000
Research and development credits...... 5,816,000 6,605,000
Investment tax credits................ 37,000 37,000
Other, net............................ 4,018,000 4,233,000
-----------------------------
46,409,000 48,140,000
Valuation allowance................... (46,409,000) (48,140,000)
-----------------------------
$ -- $ --
-----------------------------
The valuation allowance has been provided due to the uncertainty surrounding
the realization of the deferred tax assets.
(4) COMMITMENTS
(a) Lease Commitments
At December 31, 2001, the Company has operating leases for office and
laboratory facilities, the last of which expires on November 15, 2006.
Approximate minimum lease payments and facilities charges under the operating
leases at December 31, 2001 are as follows:
Year ending December 31,
2002.......................................... $ 1,028,000
2003.......................................... 946,000
2004.......................................... 1,100,000
2005.......................................... 1,107,000
2006.......................................... 1,073,000
-----------
$ 5,254,000
===========
F-11
Rental expense under these operating leases was approximately $1,009,000,
$927,000 and $1,007,000 for the years ended December 31, 1999, 2000 and 2001,
respectively.
(b) Employment Agreements
The Company has employment agreements with its executive officers, which
provide for bonuses, as defined, and severance benefits upon termination of
employment, as defined.
(5) LONG-TERM OBLIGATIONS
In February 2000, the Company entered into an equipment line of credit
under which it may finance up to $4,000,000 of laboratory, computer and office
equipment. In December 2000, the Company increased the line of credit by
$2,712,000 to $6,712,000. The Company, at its discretion, can enter into either
operating or capital leases. The borrowings under operating leases are payable
in 24 monthly installments and capital leases are payable in 36 monthly
installments. As of December 31, 2001, the Company had entered into $256,000 in
operating leases and $6,456,000 in capital leases. The interest rates under the
capital leases range from 7.55% to 10.37%. The Company had no additional
borrowing capacity under this line of credit at December 31, 2001. There are no
covenants related to this agreement.
Over the last five years, the Company had entered into other lines of
credit or capital lease arrangements under which it financed approximately
$15,060,000 of laboratory, computer and office equipment, as well as facility
renovations. The borrowings under these arrangements are payable in 36 to 48
monthly installments from the date of initiation. Interest rates range from
7.63% to 10.28%. The Company is required to maintain certain restricted cash
balances, as defined. In addition, the Company is required to maintain certain
financial ratios pertaining to minimum cash balances, tangible net worth and
debt service coverage. As of December 31, 2001, the Company was in compliance
with all covenants. The Company had no additional borrowing capacity under these
other lines of credit or capital lease agreements at December 31, 2001.
In February 2002, the Company entered into an additional line of credit for
$3,500,000, of which $500,000 will be used to refinance a portion of an existing
line of credit. This line of credit is payable in twelve consecutive quarterly
payments at the prevailing LIBOR rate (2.08% at February 28, 2002) plus 1 1/2 %.
The Company is required to maintain certain financial ratios pertaining to
minimum cash balances. As of December 31, 2001, the Company was in compliance
with all covenants.
During 2000, the Company entered into two interest-rate-swap agreements
to manage its exposure to movements in the interest rates on its variable rate
debt. The swap agreements are cash flow hedges and are used to manage exposure
to interest rate movement by effectively converting the variable rate to a fixed
rate. Such instruments are matched with the underlying borrowings. SFAS No. 133
eliminates special hedge accounting if a swap agreement does not meet certain
criteria, thus requiring the Company to reflect all changes in the fair value of
the swap agreement in earnings in the period of change.
The Company entered into two separate interest-rate-swap agreements with a
bank aggregating approximately $1,900,000. Under these agreements, the Company
pays a fixed rate of 8.78% and receives a variable rate tied to the one month
LIBOR rate. As of December 31, 2001, the variable rate was 3.83%. These swap
agreements meet the required criteria, as defined in SFAS No. 133 to use special
hedge accounting, and the Company has recorded an unrealized loss of $30,830 at
December 31, 2001, through other comprehensive income, for the change in the
fair value of the swap agreements. At February 28, 2002, this debt had been paid
off in its entirety and the interest-rate-swap agreements expired.
Finance payments under long-term obligations at December 31, 2001 are as
follows:
Year ending December 31,
2002..................................................... $ 3,881,339
2003..................................................... 1,727,572
2004..................................................... 432,459
-------------
Total minimum lease payments........................ 6,041,370
Less--Amount representing interest............................ 408,975
-------------
Present value of total minimum lease payments............ 5,632,395
Less--Current portion......................................... 3,571,578
-------------
$ 2,060,817
-------------
(6) SHAREHOLDERS' EQUITY
F-12
(a) Stock Options
The Company has granted stock options to key employees and consultants under
its 1991, 1993, 1995 and 1997 Stock Option Plans, as well as the 2001 Incentive
Plan. The Stock Option and Compensation Committee of the Board of Directors
determines the purchase price and vesting schedule applicable to each option
grant. In addition, under separate agreements not covered by any plan, the
Company has granted certain key employees and directors of the Company, options
to purchase common stock.
The Company granted nonqualified stock options for the purchase of 65,000
and 10,000 shares of common stock to consultants during fiscal years 1997 and
1999, respectively. The options were granted with an exercise price equal to the
fair market value price at the date of grant and vest ratably over the contract
period, as defined. In accordance with Emerging Issues Task Force (EITF) No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services, the Company
will measure the fair value of the options as they vest using the Black-Scholes
option pricing model. The Company has charged $29,750, $281,636 and $3,160 to
operations for the years ended December 31, 1999, 2000 and 2001, respectively,
related to the grant of these options.
During 2000, the Company granted to certain employees the right to receive
154,616 shares of common stock. The employees received the common stock in two
equal installments on the anniversary of the grant date. The Company recorded
deferred compensation of $647,942 related to the grant of these rights to
receive the common stock, which will be amortized to expense over the period the
shares are earned. Since the inception of this program, employees who resigned
from the Company forfeited 62,915 shares of the restricted stock.
The Company records deferred compensation when stock options, restricted
stock and other stock-based awards are granted at an exercise price per share
that is less than the fair market value on the date of the grant. Deferred
compensation is recorded in an amount equal to the excess of the fair market
value per share over the exercise price times the number of options or shares
granted. Deferred compensation is being recognized as an expense over the
vesting period of the underlying options. During the years ended 1999, 2000 and
2001, the Company recorded $1,366,574, $1,377,161 and $647,942, respectively, of
deferred compensation. The Company recorded compensation expense of
approximately $262,926, $1,436,660 and $883,983 for the years ended December 31,
1999, 2000 and 2001, respectively. During 1999, 2000 and 2001, in connection
with the termination of several employees, the Company reversed $119,494,
$461,783 and $17,500, respectively, of unamortized deferred compensation due to
the cancellation of options.
There were 2,734,903 common shares available for future grant at December
31, 2001. The following is a summary of all stock option activity:
Number of Exercise Price Weighted
Shares Range Average Price
-----------------------------------------
Outstanding, December 31, 1998.......... 3,622,570 $0.20-14.50 $3.63
Granted............................... 1,121,479 0.00-9.25 3.60
Exercised............................. (472,459) 0.20-8.31 2.61
Cancelled............................. (632,232) 0.00-14.50 5.35
----------------------------------------
Outstanding, December 31, 1999.......... 3,639,358 0.00-14.50 3.45
Granted............................... 1,198,004 0.00-66.00 14.89
Exercised............................. (1,280,612) 0.00-14.72 2.59
Cancelled............................. (381,769) 0.00-66.00 4.44
----------------------------------------
Outstanding, December 31, 2000.......... 3,174,981 0.00-66.00 7.99
Granted............................... 865,640 1.80-16.08 7.87
Exercised............................. (251,354) 0.00-14.72 3.03
Cancelled............................. (143,403) 0.00-39.38 11.74
----------------------------------------
Outstanding, December 31, 2001.......... 3,645,864 $0.00-66.00 $8.15
----------------------------------------
Exercisable, December 31, 2001.......... 1,951,126 $0.10-66.00 $5.73
----------------------------------------
Exercisable, December 31, 2000.......... 1,607,085 $0.00-14.72 $4.10
----------------------------------------
F-13
-----------------------------------
Exercisable, December 31, 1999................................... 2,091,258 $1.56-14.50 $2.87
-----------------------------------
The range of exercise prices for options outstanding and options exercisable
at December 31, 2001 are as follows:
Weighted
Average
Remaining
Contractual Options Outstanding Options Exercisable
Life of ----------------------------- ---------------------------
Options Weighted Weighted
Range of Outstanding Average Average
Exercise Prices (In Years) Number Exercise Price Number Exercise Price
------------------ ------------ ----------- ---------------- ---------- ---------------
$0.00-3.38........................ 2.98 994,202 $ 1.95 841,161 $ 1.81
3.52-4.88....................... 7.34 464,290 4.35 430,184 4.34
5.05-7.50....................... 8.82 400,754 6.73 71,027 7.03
7.56-9.50....................... 6.02 495,956 8.65 321,133 8.88
9.80-14.72...................... 8.96 1,186,349 13.77 261,052 14.49
15.97-66.00..................... 8.56 104,313 23.20 26,569 24.15
------------------------------------------------------------------------
Total................... 6.69 3,645,864 $ 8.15 1,951,126 $ 5.73
(b) Sale of Common Stock
In September 1999, the Company sold 678,610 shares of its common stock to
bioMerieux as part of a strategic alliance agreement (see Note 8 (c)). The
Company received $3,732,115 in proceeds from the sale of common stock, net of
issuance costs of $17,885.
In June and July of 2000, the Company sold 1,500,000 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $31.01 per share resulting in proceeds of $44,722,729, net of
issuance costs of $718,066.
In June and July of 2001, the Company sold 127,500 shares of its common
stock in a series of transactions through the Nasdaq National Market at an
average price of $13.73 per share resulting in proceeds of $1,705,767, net of
issuance costs of $44,622.
(c) Pro Forma Disclosure of Stock-based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the consolidated statement of operations or, alternatively,
disclosed in the notes to consolidated financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees and nonemployee directors under APB Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company has computed the pro
forma disclosures required under SFAS No. 123 for stock options granted in 1999,
2000 and 2001 using the Black-Scholes option-pricing model. The weighted average
assumptions used for 1999, 2000 and 2001 and certain weighted average data are
as follows:
1999 2000 2001
--------------- -------------- --------------
Risk-free interest rate....................... 5.10%-6.38% 5.36%-6.71% 4.31%-5.24%
Expected dividend yield....................... -- -- --
Expected life................................. 5 years 5 years 5 years
Expected volatility........................... 72% 87% 87%
Weighted average fair market value at
grant date................................. $3.28 $11.45 $6.25
The pro forma effect of these option grants for the years ended December
31, 1999, 2000 and 2001 is as follows:
1999 As Reported Pro Forma
---- ------------- -------------
Net loss............................................................ $ (3,940,075) $ (4,498,680)
-------------- --------------
F-14
------------------------------
Net loss per share.................................................. $ (0.21) $ (0.24)
------------------------------
2000
----
Net loss............................................................ $ (5,846,839) $ (7,175,564)
------------------------------
Net loss per share.................................................. $ (0.27) $ (0.34)
------------------------------
2001
----
Net loss............................................................ $(10,090,302) $(16,700,952)
-----------------------------
Net loss per share.................................................. $ (0.45) $ (0.74)
-----------------------------
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years, as the pro forma expense may vary
based on the number of options granted. The Black-Scholes option-pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
(d) 1997 Directors' Deferred Stock Plan
In January 1998, the Company's stockholders approved the 1997 Directors'
Deferred Stock Plan (the 1997 Directors' Plan) covering 150,000 shares of common
stock. The shares will be granted as services are performed by members of the
Company's Board of Directors. As of December 31, 2001, the Company granted
39,012 shares of restricted common stock under the 1997 Directors' Plan. These
shares are issued at the end of the three-year period or earlier if the
individual ceases to serve as a member of the Company's Board of Directors. As
of December 31, 2001, 6,862 shares of restricted common stock were vested under
the 1997 Directors' Plan.
(e) Note Receivable from Officer
On March 28, 2001, the Company loaned $163,000 to an officer of the Company
to allow him to pay income tax liabilities associated with a restricted stock
grant of 24,000 shares. The loan bears interest at 4% and is payable in full on
December 31, 2004 and may be extended by either party to December 31, 2006. The
loan may also be extended beyond December 31, 2006 upon mutual consent. The
principal amount of the note is non-recourse as it is secured only by the 24,000
shares of restricted stock. The interest portion of the loan is full-recourse as
it is secured by the officer's assets. The Company issued these shares to the
officer for no consideration and as a result recorded deferred compensation of
approximately $347,000, which will be amortized over the vesting period of the
award, which is forty-eight months.
(f) Employee Stock Purchase Plan
On February 28, 2000, the Company adopted an Employee Stock Purchase Plan
under which eligible employees may contribute up to 15% of their earnings toward
the semi-annual purchase of the Company's common stock. The employees' purchase
price will be 85% of the fair market value of the common stock at the time of
grant of option or the time at which the option is deemed exercised, whichever
is less. No compensation expense will be recorded in connection with the plan.
As of December 31, 2001, the Company has issued 82,927 shares under this plan.
(7) INCENTIVE SAVINGS 401(K) PLAN
The Company maintains an incentive savings 401(k) plan (the Plan) for the
benefit of all employees. In February 2002, the Company changed its match to 50%
of the first 6% of salary from 100% of the first 2% of salary and 50% of the
next 2% of salary, limited to the first $100,000 of annual salary. The Company
contributed $229,732, $201,759 and $251,157 to the Plan for the years ended
December 31, 1999, 2000 and 2001, respectively.
(8) ALLIANCES - BIOPHARMACEUTICAL
(A) ASTRAZENECA
In August 1995, the Company entered into a strategic alliance with
AstraZeneca (Astra), formerly Astra Hassle AB, to develop
F-15
drugs, vaccines and diagnostic products effective against peptic ulcers or any
other disease caused by H. pylori. The Company granted Astra exclusive access
to the Company's H. pylori genomic sequence database and exclusive worldwide
rights to make, use and sell products based on the Company's H. pylori
technology. The agreement provided for a four-year research alliance (which
ended in August 1999) to further develop and annotate the Company's H. pylori
genomic sequence database, identify therapeutic and vaccine targets and develop
appropriate biological assays.
Under this agreement, Astra agreed to pay the Company, subject to the
achievement of certain product development milestones, up to $23.3 million (and
possibly a greater amount if more than one product is developed under the
agreement) in license fees, expense allowances, research funding and milestone
payments. The Company has received a total of $13.5 million in license fees,
expense allowances, milestone payments and research funding under the Astra
agreement through December 31, 2001.
The Company will also be entitled to receive royalties on Astra's sale of
products protected by the claims of patents licensed exclusively to Astra by the
Company pursuant to the agreement or the discovery of which was enabled in a
significant manner by the genomic database licensed to Astra by the Company. The
Company has the right, under certain circumstances, to convert Astra's license
to a nonexclusive license in the event that Astra is not actively pursuing
commercialization of the technology.
The Company recognized approximately $620,000, $6,000 and $0 in revenue
under the agreement during the years ended December 31, 1999, 2000 and 2001,
respectively.
(b) SCHERING-PLOUGH
In December 1995, the Company entered into a strategic alliance and license
agreement (the December 1995 agreement) with Schering Corporation and
Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by
Schering-Plough of the genomic sequence of Staph. aureus to identify and
validate new gene targets for development of drugs to target Staph. aureus and
other pathogens that have become resistant to current antibiotics. As part of
this agreement, the Company granted Schering-Plough exclusive access to the
Company's proprietary Staph. aureus genomic sequence database. The Company
agreed to undertake certain research efforts to identify bacteria-specific genes
essential to microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to identify
antibiotics with new mechanisms of action.
Under this agreement, Schering-Plough paid an initial license fee and agreed
to fund the research program through March 31, 2002. Under this agreement,
Schering-Plough agreed to pay the Company a minimum of $21.4 million in an
up-front license fee, research funding and milestone payments. Subject to the
achievement of additional product development milestones, Schering-Plough agreed
to pay the Company up to an additional $24 million in milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make,
use and sell pharmaceutical and vaccine products based on the genomic sequence
databases licensed to Schering-Plough and on the technology developed in the
course of the research program. The Company will be entitled to receive
royalties on Schering-Plough's sale of therapeutic products and vaccines
developed using the technology licensed. As of December 31, 2001, the Company
had substantively completed its research obligations under this alliance and had
turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. A total of $21.4 million has been received through
December 31, 2001.
Under the December 1995 agreement, the Company recognized approximately
$2,344,000, $1,887,000 and $1,570,000 in revenue during the years ended December
31, 1999, 2000 and 2001, respectively.
In December 1996, the Company entered into its second strategic alliance
and license agreement (the December 1996 agreement) with Schering-Plough. This
agreement calls for the use of genomics to discover new pharmaceutical products
for treating asthma. As part of the agreement, the Company will employ its
high-throughput disease gene identification, bioinformatics, and genomics
sequencing capabilities to identify genes and associated proteins that can be
utilized by Schering-Plough to develop pharmaceuticals and vaccines for treating
asthma. Under this agreement, the Company has granted Schering-Plough exclusive
access to (i) certain gene sequence databases made available under this research
program, (ii) information made available to the Company under certain
third-party research agreements, and (iii) an exclusive worldwide right and
license to make, use and sell pharmaceutical and vaccine products based on the
rights to develop and commercialize diagnostic products that may result from
this alliance.
Under this agreement (and subsequent extensions), Schering-Plough paid an
initial license fee and an expense allowance to the Company and agreed to fund
the research program through at least December 2002. In addition, upon
completion of certain scientific developments, Schering-Plough has made or will
make milestone payments, as well as pay royalties based upon sales of
therapeutics products developed from this collaboration. If all milestones are
met and the research program continues for its full term, total payments to the
Company will approximate $81.0 million, excluding royalties. Of the total
potential payments, approximately $36.5
F-16
million represents license fees and research payments, and $44.5 million
represent milestone payments based on achievement of research and product
development milestones. A total of $38.5 million has been received through
December 31, 2001.
Under the December 1996 agreement, the Company recognized approximately
$9,280,000, $4,711,000 and $8,084,000 in revenue during the years ended December
31, 1999, 2000 and 2001, respectively.
In September 1997, the Company entered into a third strategic alliance and
license agreement (the September 1997 agreement) with Schering-Plough to use
genomics to discover and develop new pharmaceutical products to treat fungal
infections.
Under this agreement, the Company will employ its bioinformatics,
high-throughput sequencing and functional genomics capabilities to identify and
validate genes and associated proteins as drug discovery targets that can be
utilized by Schering-Plough to develop novel antifungal treatments.
Schering-Plough will receive exclusive access to the genomic information
developed in the alliance related to two fungal pathogens, Candida albicans and
Aspergillus fumigatus. Schering-Plough will also receive exclusive worldwide
rights to make, use and sell products based on the technology developed during
the course of the research program. In return, Schering-Plough agreed to fund a
research program through March 31, 2002. If all milestones are met and the
research program continues for its full term, total payments to the Company will
approximate $33.2 million, excluding royalties. Of the total potential payments,
approximately $10.2 million represents contract research payments and $23.0
million represents milestone payments based on achievement of research and
product development milestones. As of December 31, 2001, the Company had
substantively completed its research obligations under this alliance and had
turned over validated drug targets and assays to Schering-Plough for
high-throughput screening. A total of $12.2 million has been received through
December 31, 2001.
Under the September 1997 agreement, the Company recognized approximately
$5,261,000, $1,912,000 and $1,137,000 in revenue for the years ended December
31, 1999, 2000 and 2001, respectively.
Under certain circumstances, the Company may have an obligation to give
Schering-Plough a right of first negotiation to develop with the Company certain
of its asthma and infectious disease related discoveries if it decides to seek a
third party collaborator to develop such discovery.
(c) BIOMERIEUX ALLIANCE
In September 1999, the Company entered into a strategic alliance with
bioMerieux to develop, manufacture and sell in vitro diagnostic products for
human clinical and industrial applications. As part of the alliance, bioMerieux
purchased a subscription to the Company's PathoGenome Database (see Note 9),
paid an up-front license fee, agreed to fund a research program for at least
four years and pay royalties on future products. In addition, bioMerieux
purchased $3.75 million of the Company's common stock. The total amount of
research and development funding, excluding subscription fees, approximates $5.2
million for the four-year term of this agreement. The research and development
funding will be recognized as the research services are performed over the
four-year term of the agreement. Approximately $3.4 million has been received
through December 31, 2001.
The Company recognized approximately $232,000, $1,469,000 and $1,173,000 in
revenue during the years ended December 31, 1999, 2000 and 2001, respectively,
which consisted of alliance research revenue and amortization of the up-front
license fees.
(d) WYETH-AYERST LABORATORIES
In December 1999, the Company entered into a strategic alliance with
Wyeth-Ayerst Laboratories to develop novel therapeutics for the prevention and
treatment of osteoporosis. The alliance will focus on developing therapeutics,
utilizing targets based on the characterization of a gene associated with a
unique high bone mass trait.
The agreement provides for the Company to employ its established
capabilities in positional cloning, bioinformatics and functional genomics in
conjunction with Wyeth-Ayerst's drug discovery capabilities and its expertise in
bone biology and the osteoporotic disease process to develop new
pharmaceuticals. Under the terms of the agreement, Wyeth-Ayerst paid the Company
an up-front license fee, and funded a multi-year research program, which
includes milestone payments and royalties on sales of therapeutics products
developed from this alliance. If the research program continues for its full
term and substantially all of the milestone payments are met, total payments to
the Company, excluding royalties, would exceed $118 million. Approximately $8.1
million has been received through December 31, 2001.
The Company recognized approximately $1,640,000 and $6,485,000 in revenue
during the years ended December 31, 2000 and 2001, respectively, which consisted
of alliance research revenue milestone payments and amortization of the up-front
license fees.
F-17
(9) GENOMEVISION(TM) SERVICES
GenomeVision(TM) services are revenues from government grants, fees received
from custom gene sequencing and analysis and subscription fees from
PathoGenome(TM) Database.
(A) DATABASE SUBSCRIPTIONS
The Company has entered into a number of PathoGenome Database
subscriptions. The database subscriptions provide nonexclusive access to the
Company's proprietary genome sequence database, PathoGenome Database, and
associated information relating to microbial organisms. These agreements call
for the Company to provide periodic data updates, analysis tools and software
support. Under the subscription agreements, the customer pays an annual
subscription fee and will pay royalties on any molecules developed as a result
of access to the information provided by the PathoGenome Database. The Company
retains all rights associated with protein therapeutic, diagnostic and vaccine
use of bacterial genes or gene products.
(B) NATIONAL HUMAN GENOME RESEARCH INSTITUTE
In July 1999, the Company was named as one of the nationally funded DNA
sequencing centers of the international Human Genome Project. The Company is
entitled to receive funding from the National Human Genome Research Institute
(NHGRI) of up to $17.4 million through February 2003, of which all funds have
been appropriated.
In October 1999, the NHGRI named the Company as a pilot center to the Mouse
Genome Sequencing Network. The Company is entitled to receive $13.4 million in
funding through February 2003 with respect to this agreement, of which all funds
have been appropriated. In August 2000, the Company was named one of two primary
centers for the Rat Sequencing Program from NHGRI. As part of the agreement, we
will use remaining funding under the mouse award, as well as a portion of the
remaining funding under the human award, to participate in this rat genome
initiative.
Funding under our government grants and research contracts is subject to
appropriation each year by the U.S. Congress and can be discontinued or reduced
at any time. In addition, we cannot be certain that we will receive additional
grants or contracts in the future.
(10) PRODUCT DEVELOPMENT
In October 2001, the Company acquired an exclusive license in the United
States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia
S.p.A (Biosearch Italia). The Company will assume responsibility for the product
development in the United States of Ramoplanin, currently in Phase III clinical
trials. The agreement provides the Company with exclusive rights to develop and
market oral Ramoplanin in the U.S. and Canada. Biosearch Italia will provide the
bulk material for manufacture of the product and will retain all other rights to
market and sell Ramoplanin.
Under the terms of this agreement, the Company paid Biosearch Italia an
initial license fee of $2 million and is obligated to make payments of up to $8
million in a combination of cash and notes convertible into Company stock upon
the achievement of specified milestones. In addition, the Company is obligated
to purchase bulk material from Biosearch Italia and fund the completion of
clinical trials and pay a royalty on product sales.
The Company expended approximately $5,549,000 and made cash payments of
approximately $4,263,000 under this agreement during the year ended December 31,
2001, which consisted of the initial license fee and clinical development
expenses.
(11) QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the eight quarters in the period ended December 31, 2001. In
the opinion of management, this information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this Form 10-K, and
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results of operations.
F-18
2000 Quarter One Quarter Two Quarter Three Quarter Four Year
Revenues:
BioPharmaceutical...................................... $3,341,373 $2,872,424 $2,783,478 $2,853,816 $11,851,091
GenomeVision(TM) Services.............................. 3,668,813 3,301,520 3,141,373 3,482,437 13,594,143
-------------------------------------------------------------------------
Total revenues 7,010,186 6,173,944 5,924,851 6,336,253 25,445,234
=========================================================================
Costs and Expenses:
Cost of services....................................... 2,937,332 2,671,538 2,750,809 3,355,276 11,714,955
Research and development............................... 3,638,769 3,522,553 3,754,546 4,274,663 15,190,531
Selling, general and administrative.................... 1,835,662 1,198,426 1,711,451 2,129,040 6,874,579
-------------------------------------------------------------------------
Total costs and expenses........................... 8,411,763 7,392,517 8,216,806 9,758,979 33,780,065
-------------------------------------------------------------------------
Loss from operations............................... (1,401,577) (1,218,573) (2,291,955) (3,422,726) (8,334,831)
=========================================================================
Interest Income (Expense):
Interest income....................................... 463,209 456,593 1,180,363 1,230,460 3,330,625
Interest expense...................................... (198,607) (217,749) (210,751) (215,526) (842,633)
-------------------------------------------------------------------------
Net interest income................................ 264,602 238,844 969,612 1,014,934 2,487,992
-------------------------------------------------------------------------
Net loss........................................... $(1,136,975) $(979,729) $(1,322,343) $(2,407,792) $(5,846,839)
=========================================================================
Net Loss per Common Share:
Basic and diluted..................................... $ (0.06) $ (0.05) $ (0.06) $ (0.11) $ (0.27)
=========================================================================
Weighted Average Common Shares Outstanding:
Basic and diluted..................................... 20,309,912 20,696,487 22,215,971 22,284,371 21,376,685
=========================================================================
2001 Quarter One Quarter Two Quarter Three Quarter Four Year
Revenues:
BioPharmaceutical...................................... $3,557,570 $7,459,478 $2,917,389 $4,503,849 $18,438,286
Genome Vision(TM) Services............................. 4,532,678 3,930,400 4,460,646 4,378,514 17,302,239
-------------------------------------------------------------------------
Total revenues 8,090,248 11,389,879 7,378,035 8,882,363 35,740,525
=========================================================================
Costs and Expenses:
Cost of services....................................... 3,680,816 3,430,803 4,633,058 4,408,030 16,152,707
Research and development............................... 3,822,329 4,438,822 5,247,912 10,548,697 24,057,760
Selling, general and administrative.................... 1,634,922 2,190,432 2,559,004 2,382,871 8,767,229
-------------------------------------------------------------------------
Total costs and expenses............................ 9,138,067 10,060,057 12,439,974 17,339,598 48,977,696
-------------------------------------------------------------------------
Loss from operations................................ (1,047,819) 1,329,822 (5,061,939) (8,457,235) (13,237,171)
=========================================================================
Interest Income (Expense):
Interest income........................................ 1,143,795 986,723 1,055,631 653,111 3,839,260
Interest expense....................................... (169,342) (212,123) (174,269) (136,657) (692,391)
-------------------------------------------------------------------------
Net interest income................................. 974,453 774,600 881,362 516,454 3,146,869
-------------------------------------------------------------------------
Net loss............................................ $(73,366) $2,104,422 $(4,180,577) $(7,940,781) $(10,090,302)
=========================================================================
Net Loss per Common Share:
Basic and diluted...................................... $(0.00) $0.09 $(0.18) $(0.35) $(0.45)
=========================================================================
Weighted Average Common Shares Outstanding:
Basic and diluted...................................... 22,409,501 22,451,753 22,685,660 22,742,794 22,572,427
=========================================================================
F-19
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
=======================
2000 2001
=======================
Payroll and related expenses.................. $1,717,108 $1,990,394
Facilities.................................... 466,678 463,279
Professional fees............................. 242,273 108,375
License and other fees........................ 435,434 183,724
Employee relocation........................... 146,936 224,543
Clinical development.......................... -- 1,286,324
Other......................................... 704,328 576,074
------------------------
$ 3,712,757 $4,832,713
========================
(13) SUBSEQUENT EVENT (UNAUDITED)
On March 6, 2002, the Company sold convertible debentures to two
institutional investors in a private placement transaction, which resulted in
$15 million in gross proceeds. The debentures may be converted into shares of
the Company's common stock at the option of the holder, at a price of $8.00 per
share, subject to certain adjustments. The maturity date of the debentures is
December 31, 2004; provided, that if any time on or after December 31, 2003 the
Company maintains a net cash balance (i.e., cash and cash equivalents less
obligations for borrowed money bearing interest) of less than $35 million, then
the holders of the notes can require that all or any part of the outstanding
principal balance of the notes plus all accrued but unpaid interest be repaid.
Interest on the debentures accrues at 6% annually. The investors also received
warrants to purchase up to 487,500 shares of common stock at an exercise price
of $8.00 per share, subject to certain adjustments. The warrants only become
exercisable to the extent the debentures are converted or if certain other
redemptions or repayments of the debentures occur. The warrant was valued using
the Black-Scholes Option Pricing Model and recorded as a discount to the debt in
accordance with EITF 00-27. The discount will be amortized as interest expense
over the term of the debt.
F-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
29, 2002.
GENOME THERAPEUTICS CORP.
/s/ STEVEN M. RAUSCHER
--------------------------------
Steven M. Rauscher
Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 29, 2002.
Signature Title
--------- -----
/s/ ROBERT J. HENNESSEY Director, Chairman of the Board
--------------------------------------
Robert J. Hennessey
/s/ STEVEN M. RAUSCHER Director, President and Chief Executive Officer
--------------------------------------
Steven M. Rauscher
/s/ STEPHEN COHEN Senior Vice President and Chief Financial Officer; Principal Financial Officer
--------------------------------------
Stephen Cohen
/s/ MARC GARNICK Director
--------------------------------------
Marc Garnick
/s/ PHILIP LEDER Director
--------------------------------------
Philip Leder
/s/ LAWRENCE LEVY Director
--------------------------------------
Lawrence Levy
/s/ DAVID STONE Director
--------------------------------------
David Stone
/s/ NORBERT RIEDEL Director
--------------------------------------
Norbert Riedel